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

Great. Good morning, everybody. Thanks for joining. I'm Doug Anmuth, Internet Analyst at JPMorgan. It's our pleasure to have with us today, Criteo's CEO, Megan Clarken. Criteo operates at the intersection of e-commerce, digital marketing and media monetization. It enables brands' and retailers' growth. The vision is to build the world's leading commerce media platform by leveraging its network of more than 5,000 premium publishers, 21,000 commerce clients and 2.5 billion users globally. Criteo derives about 80% of its $800 million-plus revenue base from core remarketing services, with the remaining 20% coming from new solutions, which is growing rapidly, and we'll talk more about that. Megan joined as CEO about 1.5 years ago. She previously spent 15 years in various positions at Nielsen and was most recently Chief Commercial Officer of Nielsen Global Media. So welcome, Megan.

Hi, Doug. Thanks for having me.

Absolutely. One thing I just want to mention before we start for everybody. You can hit the blue Q&A button if you'd like to submit questions during the session, and I will try to work those into the conversation as best I can.

So let's start out perhaps a little high level. You joined in late 2019. The world was a little different then. And clearly, it's been a transformative year, a challenging year in lots of ways. Just curious if you can talk about some of your key learnings now that you've had 18 months on the job and really how your vision for the company has evolved during that time.

Yes. Gosh, it was a different time, end of 2019. I think I was onboard for 2 months before it all started to become very interesting and be -- and this is my first run as CEO, as you know, Doug. Two things I'll talk about in terms of lessons. One is around Chrome, which hit us on my second month on the job. And what I've learned during the course of the year is that we should have and now we are got well ahead of what's going on with Chrome. I feel very good about where we are right now. But at the time, it really hit us hard. And one of the things that I've learned around this, so the major thing that I've learned is this is an entire industry effort. We can and are doing our piece but this is entire industry effort. So work to make sure that we socialize this across everybody, and particularly the open Internet, is critical. The second thing I learned, which hit me after, I think, month 3, is COVID and what happened through the pandemic. And here's the thing that has hit me the most is that I sent 2,800 people home across 27 countries. And I got to tell you, at first, I thought I'll -- the average age of a Criteo is 30 years old. And I'm old. And I thought, wow, okay, this is Netflix and pajamas. But the absolute opposite happened. And we have a team of 2,800 people working from home, in some cases, struggling but doing a really, really good job leaning into it. And the thing that I'm now focused on is making sure that they get time -- downtime, that they're able to pull themselves away from their screens. So it's been a fascinating year, I would say, not just for me as a new CEO, but for everybody.

For sure. So you've made a number of changes across the management team. Most of the leadership group has been with Criteo now for less than 2 years. Just curious if you could talk a little bit about the vetting process there for building the team essentially from scratch? And what were some of the specific qualities you were looking for in key leaders just given some of the transition and challenges you know are coming in the industry?

Well, that's a great question. When I came in, there was -- with due respect to what happened before me, there was very little structure. So this notion of sort of a traditional C-suite, where somebody is accountable for products, somebody is accountable for sales, somebody is accountable for the next thing, just didn't exist. There was a sort of -- it was a very difficult to understand structure. And so what I did was create that structure from scratch and create accountability for roles and then bring the right people in, the best people I could find. And that's tough, the best people, because you're competing against, in most cases, Google and Facebook. You're competing at a time when because of Chrome our stock had plummeted. So attracting the best talents was challenging, but we did it. I think that the bench strength that we have and the C-suite that we have is second to none. And they all have their accountabilities. The company is a French company, don't forget. So one of the considerations had to be able to work and understand and be part of the French culture. I'm incredibly proud of the fact the company is French. And so it was a real factor in picking the right people is that they could adapt and be proud as well as being a part of a French company. And that the Criteo culture is really special. And so in order to be productive and get worked down and be able to have relationships with this team of Criteos was a really important part and the need to fit. Now I think that what we've built are -- I know that what we've built up, as I said, is best-of-breed. And as you get access to some of those people, you'll see it. I know that on our earnings calls, you've heard a couple of times from Todd Parson, who is our CPO. I've never seen anything like that. So we feel so lucky that we attract this sort of talent to the team, and it's just going to project the team into another dimension -- the business into another dimension.

Okay. Great. So let's dive into the ad landscape. Curious to get you -- just on the current state of online advertising, we've seen the market rebound, it feels like pretty strongly to us, and that's even as certain verticals still feel impacted and certainly below pre-pandemic levels. But what's the state of mind of advertisers and marketers right now in terms of what they're looking for?

Yes. What's interesting is that they're moving their dollars sort of up and down the funnel. So while we see a growth in ad spends, it may be being focused on different parts of the funnel related to their strategies. Here is a really good example is through the pandemic, the long tail, if you like, are small and midsized brand owners. We're using the bottom of the funnel, retargeting bottom of the funnel because they could get to clients, consumers very, very quickly, offer more targeted approaches because consumers were using -- the e-commerce boom brought more consumers to the Internet to spend. And they were -- they had access to many more brands than they would have inside of maybe a large brick-and-mortar, and they were reliant on the ability to get things delivered. What we found is that, that behavior did not stop or hasn't slowed down and said, well, now you have sort of this affinity to a smaller brand or one that you might not have seen before, you have it now. And so those brands are continuing to use those levers, whereas the larger brands are going more upper funnel because they have to recreate this identity with their brand. They have to steal back the sort of observation that consumers are using niche products. And so the spend is going up and down the funnel. It's a good opportunity for us because our commerce media platform strategy and the way in which we're building up our services,from retargeting to upper funnel services and our retail media business on top is really taking advantage of the boom in e-commerce. The thing that is counter to that, which you mentioned, is that some industries have not bounced back. So travel for us has not bounced back. And while in the U.S., you may start seeing aeroplanes at a full, a lot of our travel clients are EMEA based or Europe based, which is obviously not following the same path. So for us, we predict that, that will bounce back. We've made some assumptions around the 2021 response in 2022. But we're -- that's an area of advertising that's been significantly impacted. So yes, so different strategies, this real focus on e-commerce, driving brand awareness and then getting direct response to those that are feeling that it's been really successful for them.

Okay. And how do you think about leveraging your relationships? It's really been, I think, over the years, one of the strongest parts of the company, it's just the relationships with publishers, with your marketing clients, various customers, of course. Just how do you see those relationships evolving over time and as they look to buy more broadly across your suite of services?

Yes. Look, we're already seeing those relationships tighten. And that's just because of that, it's because they see that the tighter relationship that they have with us, the more that they share their data with us, the better their results are. So the commerce media platform brings together that suite of services that start to sort of tell a story for our clients. And they need to be able to move through that story as they move through their marketing or advertising objectives. The bigger the data set around first-party data is better for them. And they know now that, that's because in our third-party -- where third-party cookies will go away is the strength of having access to that first-party data by a Criteo is just critical. Otherwise doing business is incredibly hard. So the tight relationship with us is critical as well as our media relationships. So as you said, 5,000 media clients, they know that if they have access to that data, the market as data, then they're going to have -- especially in a post-cookie world, they're going to have much more ability to get the right message, the right target at the right time. The more they can share, the more they can partner, the more they can lean in, will be advantageous to them. So look, it is a world of partnerships, whether that be across our clients, the work that we do with agencies. And increasingly, particularly at this time, the work that we do to other -- with other ad tech organizations like the Trade Desk -- we've talked about the work that we're doing there. And partners like Nielsen are just critical to sort of binding the ad tech community together and making the results better for our clients, and therefore, better for Criteo.

Okay. So if we think about 1Q revenue ex TAC, flat year-over-year on a constant currency basis. And I think largely due to the resilience in core retargeting or remarketing. But there's also just some uncertainty here, just given ongoing privacy changes. Just how do you think about the outlook for this business, which has really been at the core of Criteo for many years?

Yes. Look, it's -- what we love about this is that where, I call it, we're seeing grass shoots coming through. Now when I came into the role, you'll probably remember that the problem statement was that the retargeting business was in decline. And the strategy was to move the new solutions as fast as possible to fill in that gap -- that gap of decline. And while we have continued to build up those new solutions to really good growth rates, the retargeting business has actually started to show green shoots, which is incredibly exciting for us and a really good add-on to our strategy that we weren't expecting to happen. We're bringing new clients. And so in quarter 1, retargeting actually was accountable for 75% of our new clients. And that's because they see the importance of retargeting to the business, going back to the strategy that I called out before. The commerce media platform strategy means that retargeting is part -- a critical part of the funnel as they work through their objectives to try to close the gap with direct response marketing and upper funnel marketing. So look, we see the future as being bright for retargeting. We've put a lot of focus in on the story that we tell, the caliber of the team that we wrap around it. And the headwind for retargeting is still prone. And so we've been very open and transparent around the effects of Chrome -- the potential effects of Chrome on our retargeting business and that we had some good responses to as well in terms of how we mitigate against what Google are going to do when they phase out third-party cookies.

So let's talk about that more. Just as you double down on first-party data, can you walk us through the single sign-on process as a consumer? And then just discuss how you're going to leverage UID2.0.

Yes. So we have -- the single sign-on process or the interface, I guess, as the more simple way of putting it is -- has been built by us. It's called OpenPass, and it works with UID2. And it's come out of a conversation in a partnership that we struck with the Trade Desk last year, third quarter, I think, of last year. From a consumer's perspective, it's not dissimilar to what you see in terms of the cookie pop-ups that you get. It gives you a couple of options about the way in which you want your first-party data used, whether you want to see an ad or you don't want to see an ad. And it educates you on the implications of those decisions. It may sound invasive. But like the third-party cookie pop-up that you see today, it -- I think that phase will pass. I think you'll get used to it. You'll see it once, and it will dwindle over time in terms of how often it pops up. It is so critical that the marketplace adopts it because the knock-on effect of not adopting it is that for a media owner, they have no idea with their audiences that they're reaching. And therefore, they can't effectively sell their media space to marketers. The marketers, they have no idea who they're targeting and where to target them. For consumers, the experience degrades, gets worse and worse and worse. And the open Internet -- and it sounds very dramatic, but Jeff Green will say the same thing, is it starts to crumble because those dollars go somewhere else. Where do those dollars go? They go back into search. They go into social. They even go back into trade marketing because there's not a performance across the open Internet, which has started to deteriorate. So it is absolutely critical that the entire marketplace get around this, to my very first point in terms of my lessons over the last year, is that this is an all-out effort. Now we have the methodology, but the adoption of an OpenPass and a UID is critical to getting ahead.

Okay. And then maybe you could just talk a little bit more about the timing there. And then also, if you can explain a little bit more on the Google side in terms of FLoC and FLEDGE. And if you have any updated time line there in terms of, I guess, when you'll really be able to test those offerings.

Yes, that's a good question. So let me start about adoption of OpenPass. It's in test phase at the moment. Now remember, this is a consumer-facing interface, if you like, port or whatever you want to call it, to get consent. So it's got to be right. If we pass you something and paid it and you don't want to use it, and -- that's the wrong approach. So we've been testing this over the last 6 months. It starts to get rolled out from pretty much now, second half of the year. And we expect to get adoption over 12 months, over a 12-month period. So all systems go there. We'll make a very big marketplace push to get this out and adopted across both marketers and publishers. Marketers are leaning into it hard because they can see the implications of not getting access to consumers. And so they're pushing very, very hard. FLoC and FLEDGE. So firstly, just stepping back a little bit to Nielsen's solutions here to get around this crime issue is that we have a layered approach. We have a number of methodologies that layer on top of and complement each other. The first one is our privilege to our first-party data, which has identity inside of it. The second is our ability to create a contextual look alike, if you like. That you look like -- I'm not going to say you look like me, you look somebody who has the same behavior and does have the same shopping behavior in order for us to create effectively a cohort in which we target to. The third is the use of Google solution. In the retargeting space or -- yes, in the retargeting space, performance advertising space, they have proposed something called FLEDGE. They've said that it will be 95% accurate as compared to today. This is yet to be seen. It's not being tested. We haven't -- certainly, the industry haven't seen it. And their second solution is something that they call FLoC, which is cohorts based -- for the use of targeting, cohorts that they've been able to pull together from their own observations. This has not been made available. So given that Google, if they stick to their timeline, this timeline is looming. I won't step on my soap box for our fireside chat. But this is difficult for the entire industry to find ourselves in a position where we haven't been able to test these solutions, which ultimately are supposed to overcome a legacy methodology for capturing and measuring and serving ads to consumers on the Internet. So while we're creating an alternative to it, and we feel very good about where we are, the Google position and what they're offering to that alternative for us and anybody else has not come yet.

And do you think that, that has an impact on the timing ultimately from Google? So it seems like that part is still kind of up in the air. I guess people wonder if it will get pushed further as a result.

Yes. Look, there's lots of speculation around that. I'm not one to speculate around things like that. My experience with Google has been that they do what they say they're going to do. And this one is incredibly important to them, as evidenced by the fact that their advertising business has and will be affected by it, and they are just like blink is on, get this done for obvious reasons. So if I was going to put a bet on this, I would say they won't move the date, and my bet tells me that Criteo should not slow down. That we should not speculate around them moving a date that would be misguided and foolhardy of us. And so we won't and we're not. So if they move it, they move it. We're in good shape.

Okay. Good. All right. So let's shift gears, talk about new solutions, which grew about 60% year-over-year in 1Q, and it's now 21% of revenue ex TAC. Can you just help unpack the growth in this business, in particular, the doubling for retail media and what you're most excited about here?

Yes. Look, all of them are performing incredibly well. Let's park retail media for one second. We had growth across solutions like our audience-based targeting, which we ramped up through last year. Our omnichannel product and our omnichannel product is our ability to be able to monitor and provide analytics on what consumers are doing offline. And as they come online, and that grew by 160% or over 160%. And again, our retargeting performed really well in Q1. Our retail media business, it grew over -- or no, it grew 122% in Q1. Now it came off -- it's hard to comp to Q1 last year. But it continues to just go gangbusters for us. The reason why is because retail media in itself is becoming more and more attractive to retailers. Now we saw Amazon come through as probably the first large online retailer that extended themselves into a media property. And other retailers have followed suit. And now this has become -- this is growing in size every single day. This means that what retailers do is they take their online content and create a media property around it and then attract brands on to their retailer presence, if you like. And so we -- again, we see this growing. We're unique in what we can do there because of the size of our customer base and the data that they have available to them and the size of our media network and the promise of us moving from on-site retail brand advertising on retailer sites to offsite. So in other words, retailers able to extend what they do to media properties outside of their own. And so it's a big area. It's the one that we've called out a number of times since our strategy came to life. And we announced it in quarter 3, and we'll talk about it at our Investor Day. The TAM there is huge. It's white space, especially when it comes to the open Internet. And we don't see this breadth of competitors. We see smaller players trying to get into this space. We see a very big player trying to get into the space, but not focused on it with the experience that we have. And we have sort of this unique opportunity to really win and take over in this uniquely growing space. And so that's why you see the growth patterns that you see today. And our -- clearly, our vision is to continue to have that grow with it being sort of a cornerstone to our strategy.

And when you think about, obviously, what Amazon is doing in that business well into the $20 billions-plus, maybe even closer to $30 billion for this year in terms of total ad dollars, but also seeing a lot of the big retailers certainly get a lot smarter here as well. What are the things that Criteo needs to do to continue to improve the program and really get more of those big retailers on board.

Well, from an Amazon perspective, this one's a little easier to answer the question. And that said, the retailers they're looking for independence. They -- and I say this with respect to Amazon's business, but they don't necessarily want to share their data with Amazon. Well, they don't necessarily want to give Amazon leverage by them being a client of Amazon's. So Criteo is in a unique position of being in the center and agnostic and in the right place for the open Internet. So not the walled gardens to be able to attract their business. In other cases, where the retailer is moving into this area, they don't necessarily have the tech. They certainly don't have a data asset that spans the open Internet. They have their own data assets, so they can understand their own clients. But when it comes to attracting new clients, they don't have access to that broad data set of over 2 billion or 2.5 billion consumers that you talked about before. And so the notion of working with us to bring them technology, expertise and access to that sort of capability, that reach is critical. I think that they are pretty easy ways of telling the story.

Okay. Let's shift gears for a minute. So maybe just -- look, IDFA and the ATT prompts are just on everybody's mind right now. Just curious if you can talk about what you're seeing in terms of early impact, if you have any comment on early opt-in rates. And then we've heard certainly some anecdotes about pricing going up a decent amount for opt-in inventory. Just curious on your thoughts there.

Well, look, first thing, IDFA or what Apple are doing -- to some extent, Chrome is one thing, at least they gave the marketplace a couple of years to -- heads up to do something. Amazon -- sorry, Apple had being less generous with time. So I'll start with that. Criteo is less involved in app -- mobile app. It's not a big area for us. And so this doesn't affect us as much, although we have, again, been transparent and called out the headwinds against the business that we do have here. I would say that if you were a mobile app-first business, then this would be very concerning. Having said that, the test case, I guess, the sample that they've used to test is very, very small. It's really small. So if I put my Nielsen hat on, any -- doesn't give you a lot of data to play with. So -- and usually, those sort of first movers in that testing process are a little bit more around the fringe than the population. And so again, it's really hard to tell what's going to happen. We saw these sorts of things come about through ad blocking and the cookie acceptance on your web experience. And it's just incredibly difficult to tell if consumers actually want to get access to the content, and therefore, they just opt in, they don't read the message; or if they really are concerned about privacy and block access to it. Hopefully, an education process, which is critical right now across the industry, is going to help consumers understand the importance of making sure that with the right education and the right understanding of the use of their identity is going to help the cause.

Okay. Let's just talk about the 2021 guide. So you took down the privacy impacts, I think, last quarter by about $5 million. And your revenue ex TAC guidance remains for low single-digit to mid-single-digit growth for the year. What are you embedding in your guidance from the travel vertical? And it sounds like your comments kind of saying that it's recovering slower than you initially anticipated. How do you think about any kind of pickup there as we kind of go through the course of the year?

Well, look, firstly -- sorry, Doug. Our Q1 results were really solid. So we're pleased with the momentum that we're building. And we are -- we do what we say we're going to do. So we called it out, we performed. Our Q2 outlook looks good for us. H2, second half, is a little bit tougher for us given the anticipated incremental privacy and identity impacts, which includes that $11 million that you're talking about. And that was really related to iOS. So I said we've been transparent around the iOS impacts, and this is really around the fact that they shifted from last year into this year. And so we reduced our guidance. It's just a slight reduction to $55 million for -- as a negative impact versus 2020. We -- in terms of travel, we are cautiously optimistic. And so the guidance that you've seen so far in the quarters to date, they take into account what we think will happen across the travel industry. And again, it's -- like all things, it's a little bit running in the dark, but it's the best we can do. Remember that for our business -- I might have said it already, I apologize if I had, but we are more impacted. Our exposure is across EMEA and APAC as opposed to the U.S. So where we may see things bounce back or we have a perception that they're bouncing back in the U.S. because of our experience here. And despite my accent, I'm based here in the U.S. It's not the case in Europe, and it's not the case in APAC either. We do think that travel is a sleeping giant because we don't know again what is going to happen. But -- and we do -- what we have called out is we expect that travel will still be down by over 60% as we exit 2021. So that's as much as we can kind of call right now.

Okay. And we're pretty much out of time. Just maybe for a quick answer. You have an Investor Day next week, is pretty exciting. Any quick sneak peek for us or what we should be thinking about?

Yes. So 4 things I want to get done. Firstly, I want to level set everybody as to what commerce media platform is and the strategy. We've done our best to explain it, but simple is not easy so I just want to land it. Second is I want to bust a couple of things that keep coming up for me in discussions. But if I can do it there once, then hopefully, we'll be able to move them to one side. I want to showcase our bench strength, the people. I talked about the talent before, so you can see a few of them in action and hear from them. And then I really want to get across this notion of the new Criteo. We're not the Criteo of all, very different beast. Hopefully, you've seen that. And it's -- yes, thank you. And we're all about growth. We're all about execution. And we're all about making sure that we're right there solving the Chrome problem, third-party cookie problem. So that's what I can promise you.

Excellent. All right. Well, we look forward to that next week. So we'll wrap up. Thank you, Megan. Appreciate it. Thanks, everybody.

Thanks, Doug. Cheers. Bye.