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

Great. I think we are live. Thank you all for being here. I'm Nick Jones, Internet analyst here at Citi. If you need my disclosures, please e-mail me directly or our corporate access team, we'll get those to you right away. [Operator Instructions] We're excited to have Criteo here and CFO, Sarah Glickman as well, who joins us for a fireside chat. So Sarah, thanks for being here.

And maybe to kick things off here, let's just kind of jump into the impact of the pandemic and trends you've seen. Last year -- the last kind of 1.5 years have been pretty interesting. Ad spend rapidly halted in 2Q '20, they kind of saw a big resurgence and everyone's focused on performance marketing now as people want to really kind of get the benefit of their ad spend. So can you touch on the trends you're seeing across the various end markets you're exposed to? And what trends you think are here to stay as advertisers and marketers navigate the pandemic?

No, no, absolutely. Well, thank you. It's terrific to be here. I just celebrated my first anniversary at Criteo. And I think my first investor meeting was this conference last year. So hopefully, I'm a lot better informed this year. So thank you. Yes, we have seen, I mean, a huge impact, obviously, from COVID. So what we've seen is, of course, the whole online digital space just massively expanding with terrific growth rates. And all of us kind of being at home and being glued to the computer and buying many random purchases. In terms of the longer-term kind of view of the secular trend, the secular trend is, of course, online commerce and digital marketing is here to stay. So for us, we see that as a huge win. What we have -- we are taking a very close eye on, and I would say, especially going into Q4 and the holiday season is the ramp-up of the store, the High Street versus the kind of online. So online is here to stay. The question is how do peoples' shopping behaviors change over the next -- I think that's the next 6 months. So we're really going to be focused on that, along with many others. What do we see for us, we serve both. So we serve the marketing of kind of the High Street stores as well as the online stores. And also, we've seen that big shift within those large enterprises or those large department stores for them, themselves to move more to online commerce as well. So those are the trends we're focused on. Country by country or region by region, of course, the U.S. and Europe, Western Europe are very much kind of ahead and that we see a huge kind of continued move to online commerce, Asia Pac as well. Retail Media is incredibly hot in both U.S. and in Europe. So with all the top retailers really focused on that kind of digital shelf. And I would say there, Asia Pac, we need -- is kind of catching up to that new trend. So the dynamics are all good. The secular trends are good, definitely seen that blend of online to High Street, and we're seeing that shift in digital in marketing spend much more to the trade marketing and digital marketing kind of space than we've seen in the future. So a good place to be.

Great. So maybe just on the same topic here, which categories continue to see strength, which ones, I mean, I guess, maybe like travel are still seeing some challenges? And then could you also touch on, are there differences by geography in terms of how the pandemic is impacting how advertisers are spending?

Yes. We don't see -- I mean, I think, just kind of state where we clearly see an impact on travel. I mean for us, that was almost $100 million of our kind of RexT ahead of in 2019. That was a high point. Everyone was traveling everywhere, and everyone was thinking about their next vacation. We are seeing that pick up, of course, but it's still -- we think about 60% down kind of versus 2019 highs. And there's kind of a few reasons for that. One is search usually comes first. And two is -- and this applies to some other sectors. There really isn't -- people know where they want to go. The people have had a long time to think about where do they want to go on vacation. So there's a lot of money kind of coming in from tourist boards, from government. So tourist -- so I would say, tourism and travel, we're seeing slightly less. Classifieds is doing well, but obviously impacted by shutdowns. So we certainly see, for example, Japan. There is still an -- is an increase, and it's more robust than it was, but it's not up to the growth levels. And retail is growing. Retail for us, online retail is growing across the board. So a 19% increase kind of from 2019 to 2021. Obviously, there's -- because that area has been strong in Q3 to Q4, kind of those growth rates become smaller over time. But certainly, we're seeing that and we're seeing that globally. So all regions -- so yes. We feel pretty good about the overall kind of environment and shutdowns do have an impact and supply chain issues. I would say that's the area we've seen. So for example, a major car manufacturers shut down all their marketing across the board. There was -- there's no marketing spend with Criteo, with others because they don't have cars to sell. We saw that with consumer electronics a year back. And we think some of those trends will continue.

Great. Switching gears now to the transition at the business transition to Criteo that's been going on for several quarters now, particularly as you switch to a full stack DSP. Can you expand on what you've learned so far through this transition? And maybe which new solutions between retail media and targeting you're most excited about maybe near term and then longer term?

So I mean we're very excited about our strategy. This has been -- we've been communicating our new strategy since October of last year. So it's almost a year. And obviously, Megan coming in November '19. She started communicating on this a while back. COVID didn't help, but we're on track. For us, the most exciting thing is the full consumer experience that our solutions are now offering. So from a -- moving from that traditional retargeting space, obviously, having massive growth in the retail media space and that really being cemented and actually being able to have the top 50 -- sorry, the -- yes, top 50% of our top 25 retailers in the U.S. and the same in Europe. So very grounded in those trends. From a DSP perspective, what we're looking at as well is just being able to do the full solution from brand recognition to really capturing audiences all the way to what continues to be a fantastic business for us in reperformance -- sorry, in performance marketing and retargeting. So we feel good about our strategy. It's the right strategy. It enables us to have a much more holistic conversation with our CMOs. And that is a trend that will continue. That's a big focus for us around our enterprise selling, especially for the large accounts and having a different conversation kind of moving up the chain, if you will, from the performance marketers to that more holistic, how can we serve overall needs. So that's what we've seen. That was our strategy, and that certainly, played out with some really good wins across the board. Omni channel for us is a big area of focus. So we are seeing the benefit of having first-party data and being able to access audiences and the strength that we have from our measurement systems is something that our customers are really looking for, and our ability to be able to use that information in a privacy safe way. But being able to really give -- show them the measurement of their own marketing dollars and be very transparent on what that means for them and how we can drive their own marketing outcomes is seen as a big win. I think the other area is, of course, when we look at the walled gardens, there's a massive white space between us or the -- and the walled gardens. And what we're seeing is that our offerings as a full-service DSP really does enable us to go after that space as well from an open garden perspective.

How should investors think about the kind of core business or the retargeting business over time? Regulation and technology changes made it a little more challenging to kind of maintain visibility. Will some of the first-party data that Criteo has and maybe in combination with things like Unified ID 2.0 help kind of make retargeting more effective from here?

I mean that's our strategy. So the cookies are not here to stay, they will go away. So our focus is very much on first-party data. We have 3 priorities for our whole organization this year: growth, execution and first-party data. Everyone in the organization knows what that means and what that is, and how do we ensure that when we contract with our customers and we have our relationships with our customers, we are focused on effectively translating that to a more first-party data -- resilient data stream. So that's a huge focus for us. It's taking time. And there are, as you say, many obstacles kind of thrown in the way. But that's our end goal. Our end goal is to continue to deliver to 20,000 customers that are very used to this high-performing retargeting business, and be able to enable that with the tools that we have today as long as those are available to us as well from a cookie perspective. And then being able to also transition that to kind of a new way of doing things in a cookie resilient world. So that's our focus. We feel very good about the strategy. People don't change until they have to change. And I guess the good news for us is that, that means that retargeting business are really delivering value to our customers and driving huge performance is enabling us to actually keep the time lines kind of with both. So being able to continue to get revenues from retargeting translate that into first-data relationships going forward. And we see that, that will be a resilient business now and through the future, but clearly looking incredibly different a few years down the line than it does now.

Great. Maybe now zeroing in a little bit on Retail Media. This business continues to see strong growth. Can you kind of, one, remind us how big this opportunity really is? And where do you see the budget coming from? Is it largely trade marketing budgets that are shifting from in-store to online?

Yes. I mean this is a $20 billion-plus term. And we see that our growth rate is growing at about 20% CAGR over that period. We see our own growth rate. This year we'll be over 50%. Year-to-date, we're at 49%. So we feel very good about the positioning of this business. It is competitive. So I will say that large opportunities with large growth rates tend to attract competition. What we are -- we see that we're winning is actually around execution. So it's both the move in the transition to the digital store shelf for the large retailers, their own transformation from moving from a classic kind of department store with some online business to this kind of customer experience with click and collect as well as online. That's massively benefiting this sector and the brand spend. So many of our customers are the brand and how do they themselves become effective, not only with their own websites, but also the drive-through of spend through those large retailers. So that's what we're focused on. It's a fantastic business. They're long-term contracts, many are exclusive contracts as well, especially with the larger players. And they're looking for value. They're looking for just massive ability to be able to drive the traffic to the right place and to be able to deliver strong performance. So it's a win-win. The other area that we're focused on is on kind of the off-site opportunity there, too. That's relatively new, and will continue to be a huge focus for us. And then, of course, the next wave for Retail Media will be those -- Asia Pac, for example, will be an area of focus there as well. So U.S. is in the lead here; others very, very rapidly catching up.

When we think about some of the growth drivers of Retail Media, is it more kind of proving out effectiveness and winning more ad spend within the current retail partners? Or is it more kind of getting more retail partners to adopt to Retail Media solution or a bit of both?

Yes, it's actually very much both. So what we see is -- and this is a relatively complex -- I wouldn't say complex, that sounds -- but it's a big in-store, right, with a retail partner. So once they're on the platform, it's then kind of country by country, brand by brand, really building upon that. So we do see a kind of, if you will, same-store sales increasing. That's very much the outreach with the brands as well. So it continue to expand kind of share of wallet with those brands on the Retail Media space. We also are signing new clients. So it's really both that we're experiencing. And the growth in that area is just -- especially for the larger players. For them, this is -- I mean, if you read any of the large retailers, this is where all that growth is coming from, and, I mean, very much fueled by our Retail Media platform.

Great. So I'd love to switch to maybe focusing on the targeting solution. As Criteo aims to move to be a full size DSP, how should we think about its competitive positioning and it -- Criteo's ability to gain share from other large DSPs that are out there today?

We see we're in a good position. I mean I think we have some secret weapons. I'll include our Chief Product Officer, Todd Parsons, in that. So our thought leadership positioning here in terms of talking to our customers, about how they themselves transition to being more focused on targeting and a full kind of -- full DSP is one of the significant discussions we have daily. I mean, literally, every time I talk to Todd and the commercial team, they've just spoken to another well-known name who they're looking for leadership and advice and kind of repushing them to what needs to -- what is the right way to think about this. So the focus on first-party data is huge. And then the focus on the solutions that we can offer is big, too. They're looking for us to help them to kind of lead the way on to how do they move from this retargeting focus or from a High Street focus to be in a much more holistic targeting focus. We -- we're winning. I mean our focus is singles to doubles. If we had $1 million spend, that's -- translate that to $2 million spend. If we had a retargeting client, that's transition that to not only keep the retargeting but also to have the conversations in the other areas. There are huge growth areas for those clients. That's what we're doing. It's client by client, but we have large enterprises, and we do have a lot of CMO relationships with those large enterprises. And it is getting on the Zoom. We'd love to -- now we're starting to get in person having the thought leadership discussion and then being able to help to show them how we deliver value from new brand recognition to building audiences, which is our bread and butter and our measurement and the kind of the footprint that we have. And then also with them knowing the backdrop that we continue to drive performance, not only with the retargeting but also with the other new products that we deliver. And we're doing a lot of trials with them as well. We're spending a lot of time showing them how do we prove ourselves on incrementality, how do we give them the measurement that they need. And we're listening to their feedback on our products. I think that's one of the things that we're bringing to the table is really listening and evolving. The good news we're transforming is the -- you have a very active view of what is the market doing, where do we want to be and where can we find that white space to go win. And those are the conversations that we're having.

Great. So maybe looking at other ad format, how should investors think about Criteo's kind of view of Connected TV, the opportunity there and Criteo's ability to kind of access that inventory at scale to provide those types of solutions to its clients?

Yes. So for us, I mean, CTV is clearly a big space. We have included what we call the household dimension into our identity graph. So we're able to demonstrate that we kind of have very relevant and efficient kind of targeting focus. We actually see the online video space, which is about 6x larger than CTV, CTV being kind of big space of how do we kind of go after that. And that's really our focus. It's more focused on the formats that we are -- we're good at. That doesn't mean we're ignoring CTV, but we see that our focus is -- and our strength is much more in kind of in line -- sorry, online video. And then also in the OTT space, just really driving that $43 billion term that we're seeing for video. That's been our focus. So we see it's much more holistic, and we see it's capturing audiences as opposed to channels. That's been the focus that we have.

Maybe expanding a little bit on kind of online video. Can you touch on the opportunity within shoppable video format? Is that -- where is that in terms of adoption by advertisers? And what is the opportunity within this type of format, which is, I think, relatively new?

I mean our focus is to really capture the entire kind of shopper experience and journey. So what we see here is that, obviously, shoppable ads is an area that is kind of very much a good fit with marketed strategies now. Yes. This is a relatively new area for us, although well, well known to the industry and also well known to our teams. And so when we look at how much time people spend online and how we can focus on providing relevant -- again, back to audiences, relevant audiences, we're seeing that shoppable video is just one area that gives the ability to be able to convert that customer to give them a good experience. This is one area, I would say, where the product road map and the fact that we're, let's say, earlier in that than maybe others, gives us the opportunity to not only observe the market at large, but also to be able to be proactive in how do we make it better. So it's a new area for us. It's got a lot of traction and we are learning a ton, and we're in a learning mode. That's really where we are. We're not -- we've got to win here. It's a huge focus for Todd and the team. And we've got to show the case studies, case study after case study. And when we look at the shoppable ads, it's a format people really like, and we have some really neat functionality there that we continue to expand and to get better at. So this is a -- this will get bigger for us over time. We're starting small. We have a large, I would say, kind of, I won't quote it backlog, but a large number of customers starting to test that with us. Those are small campaigns, and we're very much focused on the feedback from our commercial teams, the feedback from our customers, the overall market where they're moving, and how do we continue to drive really big impactful changes into our product to get what they need and to show the outcomes.

Great. That's really helpful. Maybe switching gears a little bit to talk about some of the technology changes and some of the tech majors like Apple and Google are making. The IDFA within the iOS, the iPhone has been a hot topic across digital advertising for a while now. Can you kind of remind us or give an update on the anticipated impact of IDFA on Criteo and then maybe more broadly to the ecosystem?

Well, first of all, it's real, right? So it definitely had an impact and will continue to have an impact I mean just numbers-wise, for us, this year, it's going to be a drag of about $55 million overall for privacy, kind of year-on-year negative impact. And that erodes a lot of that positivity of the secular trend in retail. What we've seen is that there's been -- that's more accelerated into the back end of the year. So as the Apples and others have become -- Apple specially has become more aggressive, that is having an impact. I mean I think just broadly, we will, of course, at some point here, that will kind of wrap over. But we see explicit consent. Our customers are getting much smarter about how to do that. The industry is smarter about how to kind of focus on regulating that. And so that impact has been slightly less as people have learned how to deal -- how to kind of deal with that impact. On IDFA and Apple, it is a big impact. It is also a walled garden. And so what we have seen here is some movement. And I would say not enough movement from Apple to other ways of advertising. So for us, we're able to move some of those dollars across. We don't have a big app or kind of gaming type business. So this has, obviously, had a much bigger impact on where people kind of spend their life on their phone and on apps. So that, for us, is less of challenge. But $55 million overall is a big chunk of that is Apple and the changes they're making. The Google move to -- to move their deadline, that's certainly good for consumers, good for advertisers, good for us. We were -- for the last 2 years, we've known this is coming. This was a huge kind of big, I would say, Megan's big push when she first came in to really make sure we had a plan. So we have a plan. The move of the date really does help us to have a more structured approach to how do we transition to this full-service DSP/SSP. So time is always a gift, but it runs out as well, and we're very conscious of that. So our focus is on the first-party data, looking at the cookie kind of resilient solutions and knowing that we will have a privacy impact this year for iOS, that will continue into next year. IOS 15, we see as being another kind of push that will impact likely the beginning of 2022. And then longer term, of course, the Chrome changes will come. And those months keep ticking by, but we have a plan. We have a strong focus on transition our customers to first-party data, and we need some acceleration on that path with -- largely with customers and with publishers. What we have seen is we think about 25%, there's been less -- like 25% of customers have kind of paused and stopped at what they were doing because Chrome is still there. And so we actually see the fact that we've kind of continued to move forward, that will be a benefit. And especially with that thought leadership role that we see that we're playing, we see that will enable us kind of in the future to be a winner on the first-party data side of the house.

Great. So I guess it sounds like there's a solid plan in place in preparation for the eventual deprecation of third-party cookies. How do you see the risk of maybe Android devices following kind of Apple and IDFA? And is that kind of a looming impact? Or if that happens, will kind of the ecosystem be prepared because of IDFA and third-party cookies? Or is that a potential another hurdle that's ahead?

Yes, I think it's another hurdle. I think all of these are hurdles. I mean I think we -- it's almost part of our language now, right, knowing that there are these impacts. And the question then becomes what do you do short term versus kind of being much more focused on that long-term transformation. The benefit we have, and especially with the secular trends and the fact that this is a growing market, is we're able to kind of ride the storm, right? So we're able to benefit from the acceleration of new ways of doing things, but it will have an impact. And yes, we're not measuring. You can't measure for something you don't know. But we do have underlying information that we look at often with their engineers, really focused on the IDs, the ways of marketing and very much looking at how do we transition to first-party data. That's one of our kind of KPIs, if you will, to really focus on. And it's low, and it will have to get higher, and that comes back to adoption. And so yes, it will have an impact. Everything that's being done on privacy, will have an impact. But in some ways, the impact is incredibly positive in that you know there's a new way that things will be being done. And we feel very confident that our solutions will ensure that we're in a winning position kind of in that new world of first-party data. So that's our focus. But I don't think we're under any illusion that there's not more to come here.

Maybe switching to the regulators. GDPR has rolled out, CCPA in California, I think, other states are looking at different versions in the U.S. Do you think regulators' view on privacy has changed over the years? And what do you think the focus is today? And how that may impact the ecosystem?

Well, I think -- I mean, privacy -- marketing being done in a privacy safe way is a discussion that has been ongoing for the last few years. We have a very strong role in that as well in terms of being that thought leader. We have -- we just hired Joshua, I can't remember his last name, sorry, into our team, who's also seen as a thought leader in this area. So we are being asked for our kind of viewpoint from the regulators. We do see that the regulations, there's a kind of very clear view on consumer first. And what we have focused on is the benefit for the open Internet and the benefit for consumers. So that's very much where we play a role. And that's really their focus is. Let's do this the right way. For us, it's not so -- I mean I come from regulated businesses that have many heavy regulations. This is a new -- the new world that we live in, and it's a positive. Overall, we have to move from something that was very antiquated and very convenient and very powerful, but recognizing that consumers do want to have marketing that addresses the way that they shop. And what we see that we have -- the benefit we have and kind of going back is that we can -- not only we get consent from everyone for all the data that we use, which is huge, well, is needed, of course, but we're able to then use that information using incredible AI, a measurement with our customers to be able to give back that value, again, to the marketers and then ultimately, of course, to the consumers as well. But the regulatory stamp -- for us, the regulatory framework is here, and we feel very much part of that ecosystem. We're on the roundtables. We're asked for our opinion, and we feel pretty good about the role that we play there.

Well, maybe the last question around regulation and even technology changes at Apple and Google. What do you see as a key solution to kind of maintain the ecosystem? Does first-party data become kind of a currency that's exchangeable across a lot of publishers and ad tech providers or solution providers? And if that's the case, does technology really become the most important piece? Or is it going to be a company's ability to kind of curate first-party data in a unique way for the advertisers and publishers?

Yes, I think it's probably the latter. I think it's the ability to be able to use the information in a curated way that really delivers value. I think at the end of the -- ultimately, the advertising has to work and it has to be -- it has to be seen that it's working well. Like in other words, people want returns for their ad spend. And that's a huge focus is giving the value. So the ability to not only have a massive amount of first-party data have audience sets that are broader than the walled gardens. So for example, we have more daily active users in the U.S. than on Facebook. So I think that just that massive reach on a global scale and very much being able to curate that or to connect those dots in a way that are advertisers are going to be asking for. So the benefits that we have in that kind of backbone of the identity graph and the focus that we have on knowing who the audience are, that's kind of a real winning formula for the future. And it's -- we see that as a must-have. So that's -- the volume of first-party data becomes critical -- another kind of critical KPI, but also the -- how do we put those information sources together. We serve broader audiences across the world than really any walled garden. And this is a win-win. The secular trend is kind of moving in the right direction. But what we do need to do is show our advertisers that the benefit to them of being on the kind of in the open garden, if you will, is that they get broader reach to their audiences. And that's the focus for us. So the technology has to enable that, but underneath that is also the ability to curate and the ability to have just the massive kind of relationships, both on the customer standpoint, the retainer standpoint, but also -- and the consumer standpoint, but also the publishers. So that's really the focus is how do you triangulate those data sources to be able to deliver value back. And we see that we are in a pretty unique position to do that.

Great. So maybe switching gears here a little bit. Criteo acquired Mabaya back in May. How should investors think about Criteo's pipeline of opportunities from here? And really, what kind of deals Criteo is looking for? Is it kind of transformative deals? Is that -- are those out there? Is it more tuck-in deals, which bolster tech and talent? Or is that maybe not a priority and mix of both? Any color there on how you're thinking about M&A would be great.

Yes. So our focus is -- I mean, we look at builds by M partner. And so that actually -- I mean, we -- it's interesting, the discussion on open has kind of changed over the year from being talking about a very open view to how do we put those components together especially with partners, to how do we then accelerate to move to the open garden that's really our ambition. There are many things on our product road map that take time. So we -- anything that we can do to accelerate the time line to get us to the commerce media platform is our focus. Mabaya is a great example where we knew we needed an offering on marketplaces. It was very clear. We had that product need. We identified that to build that. It takes time. And Mabaya has something ready to go with revenues already. They're doing a successful job. To put that with our platform and with our consumer base, that's a win-win. We don't -- so that's really the focus we have. That was, I would say, kind of a fairly obvious tuck-in for Retail Media, but an important one. In terms of more transformative acquisitions, we have -- we, certainly, have an aggressive time line for how do we want to deliver to our customers and how do we want to ensure that we can move to a first-party data resilient world. So we have wide net that we focus on, how do we get better formats and shoppable ads. How do we look at smarter ways to do things from a technology standpoint? Where should we be building versus buying? So it's -- but it's disciplined. And I think that's -- we're not looking to buy revenue. We have really no interest in that. We're looking for acceleration of our road map.

Got it. And we -- I think, we have time for a -- one more question that came in and maybe it's about the kind of broader digital ad trends. Advertising is maybe being the new rent, so to speak, as the phrase you've heard. And I guess, do you subscribe to that notion? Where do you see kind of the level of engagement going from here? Do your ad rates kind of structurally move higher and stay higher? Or do they moderate?

Yes, it's an interesting question. We actually just got asked this by an investor just about the cost of supply and in some areas, I mean, I think, there's 2 things. One is, clearly, the walled gardens have their own supply. So in some ways, it's a little bit arbitrary to say that things are not becoming more expensive. There's kind of the -- the way that we see it is that we're not the middleman. We actually see that this kind of direct relationship we have with our publishers and with our consumers and to show value is where we can make a difference. So I don't -- we don't see it as a rent. We actually see it as a value play that we are providing. We continue to provide value. And I think the benefit that we have is given our 5,000-plus publishers and the relationships that we have, we're able to show value. I think demand and supply, I'm an economics major from years back, right? They always kind of normalize over not necessarily the long term. So we do anticipate seeing there'll be some short-term challenges in some areas. It will be interesting to see how the holiday season does play out and whether that is more where is the demand and where is the supply coming from. But we see ourselves as adding value. We never have the discussion about advertising as a rent internally. So maybe we wouldn't but it's certainly not feedback we've heard from our customers either. So we're aware of the dynamics, we're aware that we have to continue to show value and we also have to continue to drive to drive value to our customers. I mean what I will -- I mean, I think, it's pretty obvious to say, but we do anticipate that media spend and the take rates kind of on media spend will also kind of normalize as well. But it does come back to the value we drive. So some of the new solutions and Retail Media has a lower take rate than retargeting. And there's other areas -- other products that we will be delivering as part of the Commerce Media Platform that there's kind of a natural pricing that comes from the market, and then what we deliver on top of that is the execution and the value of our data. And we do anticipate being paid for that, what that fair share is, will be determined by our customers and will be a win-win and fair, and that's our focus. We want to drive a big business, and we want to make sure the value chain across the board makes sense. So it's a sustainable revenue model going forward.

Great. Well, this was really great, Sarah. Thank you so much for being here today. We really appreciate it. And that concludes the fireside chat.

All right. Thank you very much. Great to see you or maybe next year we'll be in person. Take care. Buh-bye.

Yes. Hopefully, hopefully. Take care, everybody.

Buh-bye.