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

Good morning, everyone, and welcome to Day 4 of Morgan Stanley's TMT Conference. We're going to go ahead and get started. My name is Brenda Duverce, and I'm on Brian Nowak, Internet team here at MS. And today, we're pleased to be joined with Sarah Glickman, CFO of Criteo. Sarah comes to us with extensive experience working as acting CFO and operational CFO capacities, at number of companies for the past 30 years. So we're really excited to have you here with us to share the Criteo story. But before we jump into things, why don't I start with the disclosures. Please note that all important disclosures holdings, disclosures and Morgan Stanley's disclosures appear on Morgan Stanley's public website at www.morganstanley.com/researchdisclosures or at the registration desk. Some of the statements that Criteo will make today may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements that Criteo makes are based on assumptions as of today, and Criteo undertakes no obligation to update them. Please refer to Criteo's Form 10-K for a discussion of the risk factors that may affect its results.

So why don't we go ahead and get started here with some high-level questions. For those in the audience who may be newer to the Criteo story, can you give us a quick overview of Criteo and how the business has transformed over the past few years?

Yes, absolutely. Well, first of all, thank you for having me. It's great to finally meet people in person. Criteo has been an unbelievable transformation story. So over the past few years, we're really focused on how do we move from our classic and really robust retargeting platform and transition that to more of a platform play to what we're calling our Commerce Media platform. And the focus here and why we see kind of a lot of goodness and a lot of transformation is that we just have incredible breadth. So we see the consumers. We have 685 million daily active users. And those are users that we can really track on multiple devices globally and really seeing what they do, we know them, we also know what they buy. So we're able to access about $1 trillion of seeing what customers buy and activating about $40 billion of transactions. In terms of our transformation, it's really focused on how do we evolve with the market -- the digital marketing story. And we're front and center on that with -- especially around Retail Media. We've really -- that's the space where a lot of the dollars are going, a lot of trade marketing dollars are also transitioning to this digital -- we call it digital storefront. But it's really more than a storefront. It's also the services as well. And so that's where we're focused. We're focused on our first-party data on ensuring that we can see the customers. We know where they shop. We're able to access in many, many ways, how do we get to those customers with a very informed and curated story. And we're back to growth, which we're really thrilled about and we have a really fantastic journey and outlook ahead of us.

No, that's fantastic color. Why don't we shift gears a little bit and talk about your priorities for 2022? Talk us through your commerce media strategy and how will be your key driver for this year and as you scale to grow in double digits?

So our commerce media platform strategy is really focused on really taking 16 years of AI plus 22,000 marketers and taking all that information and really being able to use it in a platform. We talk a lot about the fatigue and the tech tax, if you will, between multiple DSPs, SSPs and way to market. What we're focused on is how can we give a curated platform and journey to our marketers and to our end consumers that feels kind of, if you will, contemporary and relevant and focused. And that's -- our commerce media platform is really building off the blocks of 16 years of experience, but taking especially our Retail Media assets, 100 retailers are now on our Retail Media platform. We have 1,500 brands on there and marrying that with this in-depth targeting and retargeting focus that we've had for many years and really focusing on how do we ensure that we deliver value to consumers, to retailers and ultimately to the Internet as well for the future.

I want to dig a little bit deeper on Commerce Media, particularly in Retail Media more broadly. So you have a robust Retail Media footprint, as you mentioned. How do you see the competitive environment evolving in this fast-growing space and what differentiates curtail from some of the other competitors out there?

I mean I would say we're very focused on our go-to-market strategy within Retail Media, but more broadly in the context of Commerce Media as well. Our focus is on ensuring that we deliver and have really rich conversations with those retailers. So we just recently signed, for example, Nordstrom and Michaels. And our strategy is to grow with them and to transition with them to the digital store front. That's the focus, and it's 2 things. One is continuing to expand the number of stores that we -- or retailers and services that we deliver on to our Commerce Media Platform and Retail Media focus as well as ensuring that we continue to grow the brand. So it's kind of new store sales, if you will, new openings as well as the existing store. It's an incredibly sticky relationship, especially in this time when we are transitioning through a kind of new digital marketing journey. And so that's -- our focus is to ensure we continue to grow. We continue to ensure we deliver value to them. And it's all measurable. We're focused on being able to show them the closed loop of what consumers are buying and being able to measure that. And that's -- and also being able to just activate at scale and being able to deliver value. And that, of course, is what the retailers are looking for but ultimately, enables a better shopping experience as well.

Yes, absolutely. And switching to like Marketing Solutions. I'm often asked by investors, why will marketers choose your marketing solution versus other DSPs. We know that you all saw a 6% growth in '21, but most impressive is the 112% growth in omnichannel solutions and 50% growth in non-retargeting marketing. I have 2 questions here. Can you tell us why are customers choosing your solutions versus others? And my second question is what will be the key drivers for growth this year?

So for us, first of all, we have an incredibly resilient retargeting business, and it's just been phenomenal for us. And of course, it's just incredibly effective. So we're building off a really strong base. And so our targeting solutions are grounded on that. The reason that there's a lot of growth there. First of all, we focus on omnichannel and through COVID, everything was kind of more online. And then as customers came back or consumers came back into stores, is the ability to be able to marry that online experience with the consumer experience within the store and taking those data sets, very rich data set, first-party data sets and being able to draw through the customer journey. That's why not only omnichannel, but also targeting itself is really delivering, I would say, not necessarily a phenomenal consumer experience, but a continuing and evolving consumer experience that's curated not only to what the retailer is looking to deliver, but also very relevant to the customer, knowing where they are, seeing how they shop and actually having that close loop back to measurement as well. And that's what we think is resonating. There's also a shift from point solutions to platform. And for us, it's really enabling this kind of always-on approach. So we're less focused on the point solution or the format. We're much more focused on how do we ensure that we deliver at scale, a differentiated and measurable journey to those retailers.

Since we're still on the topic of Commerce Media, I did want to touch on IPONWEB. I know a lot of us saw you all filed a Form 8-K last week regarding the acquisition, one, I wanted to see if you all can provide us an update there for investors to hear. And what does -- how does this impact your vision long term?

So first of all, our Commerce Media strategy has not changed. That's the first thing to say. Second, we've been working with IPONWEB for many years and especially kind of hand in hand, if you will, for the last year. Given the very unfortunate current circumstances, we were unable to close that transaction as we had anticipated in its current form. And we're, of course, working through how -- what does that look like and what we can do. So there's multiple work streams here. I would say last week was an incredibly busy week for all of us. But really, it's ensuring that we, first of all, deliver the Commerce Media Platform strategy. We do anticipate that we will continue, of course, to have our commercial arrangements with IPONWEB and we're looking for the path to resolve some of those challenges and continue forward. So on all fronts, we always have robust plans and we continue to focus on delivering those as well.

Yes. That's helpful color. Switching gears a bit, just speaking about the macro ad environment that's going on. Can you speak to us about some of the early spending trends you're seeing in the advertising environment today? Also, just given the unfortunate conflict happening with Ukraine and Russia. Any updates that you're seeing in the business as it relates to what's going on there that you would like to share with us?

Yes. I mean this is, as you say, it's evolving. So we do have a robust business globally. 2% of our business is kind of focus on Ukraine and Russia. And of course, that's been impacted. I would say on the broader macro, whereas in the past, we've seen, maybe there's kind of been more robust growth in certain sectors, especially running up to the holidays in Q4. Q1 has been a little bit more the singles and doubles versus the home runs, and that's what we've seen. And I would say the macro data kind of supports that. So more focused on grocery versus, say, apparel, those types of trends we're seeing. We do anticipate being at the low end of our range for Q1, and that is more due to the evolving circumstances, especially with inflation. And also, I would say, February and January were quieter in terms of Retail in pockets. That being said, Retail Media and in some ways, also our broader business because we focus on different sectors, travel is growing, the brands that tend to advertise may be different in Q4 versus Q1, but we're seeing continued growth there. So we feel good about our overall outlook for the year. We do anticipate quite, I would say, Q1, and I would expect that would be in line with other companies as well.

Yes. So you recently announced the partnership with GroupM. Does that imply any exclusivity? More broadly, can you talk about how you see your relationships with agencies involving in the future?

Well, first of all, I mean, agencies are incredibly important to our journey. So we have a very strong -- first of all, we have a lot of business going through agencies already. The GroupM relationship really enables us to focus on Retail Media. So that was the focus of that relationship. That being said, we're continuing to partner with all the holdcos and looking to sign other large deals this year. One area that will help us to do that is that we're bringing in our new Chief Revenue Officer, Brian Gleason, and we're thrilled that he's going to be joining our team. And that really speaks to the upgrades we're doing not only in terms of focusing on enterprise sales, but also on that broader strategy, especially including the agency partners as well. So more to come here, but we feel very excited about the continued relationships with the agencies and really bringing that back up to that platform focus. So the Commerce Media platform just enables a much better conversation, a much easier conversation around how do we ensure that we can activate multiple ways to market through one platform versus the point solutions.

Activated Media Spend has become an important KPI for your business. Can you unpack what that means?

So for us, Activated Media Spend, I mean, it kind of is what it says, which is how do we ensure -- how do we measure how much of the media spend we're able to activate for our customers. And we have different types of revenue. So for us, when we look at Activated Media Spend in the retargeting space, that's kind of equivalent to our revenue. When we look across other types of media, it tends to be in more of a net kind of revenue arrangement. But we've grown 50% -- sorry, 20% in terms of Activated Media Spend this year. And our focus is to move that up from $2.7 billion to $4.5 billion. That's our focus is to continue to just grow that, how do we activate that spend through our platform, enabling our customers.

Any -- just digging a bit deeper there, any 2 to 3 drivers or actions you all will take to grow that?

I mean this comes back to the platform. So the platform play enables us to match the DSP capability and the SSP capability and to connect those dots. That's the focus on having one platform and really being able to active it in one way and an incredibly, I would say, efficient way but also a measured way, being able to look at that closed loop. That's where we are focused on. And that will enable us to see how can we, at scale, move our solutions to be able to kind of shift to that platform.

Shifting topics to privacy changes. I mean that's been a core topic in this environment on the ad tech space for a while. How should we think about Google's recent announcement of Topics in the privacy sandbox for Android and the impact for Criteo? And my second question there is, can you speak to how Criteo is preparing to navigate this new world and what the long-term strategy is moving forward?

I mean our long-term strategy is all around first-party data. So the Commerce Media platform is built on first-party data. The Retail Media is all first-party data. The omnichannel is first-party data. So that's our focus. The way that we do retargeting today is being able to find in a very -- in an incredibly efficient as well as targeted way, if you excuse the pun, how do we ensure that we meet those customers. And that is using every form that we have. So we have 685 million daily active users and we're able to find those through multiple browsers and multiple ways. So yes, we have an impact or have had an impact on privacy. We've known that for more than 2 years. We, of course, have seen that reflected in our business as well as in our strategy. So our focus is to become resilient to the changes outside of our control and to control them. And that does come back to how do we ensure that we have the best mousetrap around first-party data and around enabling the future of ad tech for the next 10 years. As we go through the journey, and we've gone through the journey and all of you have experiences with us, there's some bumps in the road. There's some ebbs and there's flows. But in terms of the underlying strategy that has not changed in terms of how do we find consumers and enable them to have a rich experience. That's all focused on first-party data. From a regulatory standpoint, it always has to be privacy first. That's front and center for us. It has to be brand safe, that's front and center for us. And so we're really working very strong, both with regulators as well as with retailers and marketers to do that the right way. That conversation continues to shift as the journey continues to shift with identity. In terms of Google, we, of course, are a partner with Google, and we have partnered with them over their past with the privacy sandbox. We will continue to partner with them on Topics. We do have some I guess, observations in terms of what we think that may or may not bring. But we're focused on our strategy. And our strategy is around audience-first solutions, it's around contextual, it's around first-party data.

CTV has been a core topic of discussion for many marketers over the past 18 months. Tell us about some of the latest trends you're seeing within CTV or video? And what do you think will need to change for CTV to be a larger go-to place for ad dollars in the medium term?

So of course, we see the growth in CTV, and we've actually grown pretty -- I mean, from a small base, but we've grown in that space. We really also focused on online video as well. That's our key focus. That's a bigger TAM, and we see that's really where the consumers are. We worry less about the format, and we worry more about what's the right way to market to our consumers. So we do have a strategy around video. We have certainly a focus first in terms of creative and in terms of investment as well. But I would say we're more focused on where the growth is, where the TAM is and where the consumers are moving to. And we see that more in the online video space.

Yes. Many of the companies you spoke to this year as being a heavy investment year just given the competitive environment around hiring. So I was wondering if you can share with us your OpEx outlook for 2022, you've implied you are investing to accelerate in 2023. Can you walk us through what the priority -- priorities are and what you might expect in terms of EBITDA margin run rate going forward?

Sure. So first of all, people are what run our company. And I mean, just to pause on the culture of our company for 1 minute, it's all about the people and about ensuring we have the right team and they're thrilled to come to work every day. And that could, of course, be virtually in it's, of course, across the global lens and bring their best. And so those kind of activating sparks between our team members is really what we focus on first. What we're investing in is ensuring that not only do we continue to invest in the team that we have but also bring in new skill sets. And that's really it from the top down. So Megan has focused on her own team. Obviously, we're bringing in Brian Gleason as the Chief Revenue Officer. We're also focused on our go-to-market team, and we see there's been a massive shift from the, if you will, the old kind of I/O cell to the enterprise play. It's a very -- it's a different skill set, and it's one where we're good at and we're continuing to focus in. That's where the investment is. The investment is also in product, for us to get to the leading Commerce Media platform that will enable the next 10 years of ad tech, that really requires us to have a very disciplined and focus approach. And it's inclusive. So it is commercial with product, with R&D, with enabling the back office functions so we can deliver that platform capability at scale. Globally, not only to enterprise customers, but also to core clients. The investments are deliberate, they're needed, they're disciplined. It's post COVID. So there's also an investment in people there. There's also an investment in events as well. So meeting our customers again, spending time with our teams again. That's also very deliberately included. In terms of the growth to 2023, we are a scaled business, and that's the focus. So being able to scale once as media spend, which comes back to media spend as that continues to grow, as that -- we ensure that we bring the contribution ex-TAC from that spend that really enables us to have not only a robust contribution ex-TAC, but also a robust EBITDA line. And 35% last year was a little bit of an anomaly. We did -- everyone experienced some hiring challenges. We're actually now totally up to speed with hiring. But we had some, if you will, some break there. We didn't have T&E, we didn't have marketing. But there's a little bit of a rightsizing from the 35% from '21 to the 32% now. But very deliberate, very muted. And I would say my team do -- my finance team do a phenomenal job of ensuring that we stay on track and deliver not only at the top line but also at the bottom line as well.

Still focusing on the model. You generated record free cash flow in 2021, which was roughly $168 million. Can you comment on your capital allocation strategy?

Sure. So First of all, cash is king or queen, International Women's week this week, so. That's -- we want to ensure that we have the right operational focus on cash. What do we do with that cash? First of all, of course, we're looking to invest in our own business. And you've seen that through the -- not only the OpEx but also some of the CapEx with the data center refreshes and other things. When we look at capital allocation, we really focus on the build, partner or buy model. So as you can see with the IPONWEB, potential acquisition, that has -- that's a use of our funds. We're also incredibly aware of shareholder value. And there's been a big focus on our share buyback program, and that will continue. So given the fact that we have now restarted that program just this week to ensure that we continue to deliver -- to allocate capital, not only to our internal needs, but also back to shareholders. And we are very focused on ensuring that we allocate in a disciplined way, but also in a way that creates value to our shareholders and to our long-term view of where this company -- where Criteo can go. And we feel that the future is wide open, and there's a lot of growth that we're focused on to ensure that we do that in the right way.

Switching gears to ESG and IND more broadly. You published your 2021 sustainability report. Is there anything you would like to highlight there? For those investors focused on ESG and IND. Can you share with us how you think about both terms philosophically?

So first of all, I would say all of our -- 100% of our data centers are -- we focus on renewable sources. So that's front and center. In terms of our people and our focus on International Women's week, it's focus on parity. And I actually just came off a webcast with a women's network and our parent's network talking about benefits as well as just culture in our company. That's a focus for us. It's front and center when you have a CEO like Megan Clarken, it's an everyday conversation. And we always care about the people first. We care about our obligation as a company, as an ethical company to ensure we're doing the right thing. So it goes -- it comes from regulatory focus to sustainability and its grassroots. We have more than half of our company are involved in our community groups. And they will tell us, and they're very active in telling us what we can do better. And we listen to that and we act on that. So -- more to come on ESG. It's a big topic for us and something that we're incredibly passionate about. And we want to be on the right side of it, and we feel that we are.

Absolutely. I think we have time for one question from the audience. Does anyone have a question they would like to ask her?

Can you just elaborate again on why Q1 is soft? I think you mentioned big picture in inflation. Can you just kind of go over that? And then also, if you may, generic scenarios and how you might be able to do something more material with IPONWEB beyond your current arrangement. If there's anything you can shed there, it would be helpful.

Okay. I think the first question was on inflation and macro.

Well, you talked about a softer Q1.

Sure, yes. Okay. So first of all, yes, we had -- our guidance was 5% to 7%. And at the time, that was before, I would say, what's happening now. But also it was before the very high inflation that we're now seeing. So we've got some great wins, but we're likely to be towards the 5%. And there's a few reasons for that. One, I mean, we can pick on a few. France had a poor sales season this January. Some retailers have just had poorer sales. And so when we look at an index, we tend to look at kind of -- the way I look at it, it's plus or minus the 100%. Q4, you're kind of weigh on the plus of the norm. We're kind of slightly below or at that norm. That being said, there's pockets where there's phenomenal growth. So when we put it all together, we feel that it's closer to the 5%, that's largely due to macro in our opinion. And then on top of that, we have suspended our operations in Russia. And so that will be another impact there that was very unfortunate, but it's something we felt we needed to do. In terms of the IPONWEB question, of course, we're working on many scenarios there, along with our IPONWEB partners. And we do have strong commercial arrangements that were already in place, and those will continue. So more to come there, but we feel very good about where we are delivering the value, continuing to focus on our race to ensure that we do deliver growth this year, and that's our focus. It's the other 98%. So how do we take what we have and grow that 98% to the 150%. Retail Media is doing incredibly well. But what we see is a shift in the buckets of spend. So for us, because we're able to move from one brand to another or from one -- if you will, one type of spend to another, that's where we can see that we have more robust growth. However, consumer electronics is muted, overall macro, a little bit muted, apparel, I know some of our colleagues are in the other room talking about retail trends, that's being muted. So it's really the mixed basket. But we're very focused on ensuring we deliver growth, and we're very focused on ensuring that we delight our shareholders as well.

Well, I know we can do this all day. Thank you, Sarah, for your time. This has been great. I hope everyone enjoys the rest of the day of the conference.

Thank you.