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

Thank you, everyone, for joining. I'm Chris Nam, Head of Internet Investment Banking for UBS, and very happy to have today the team from Criteo. We have Megan Clarken, CEO; and Sarah Glickman, CFO.

We're going to start with -- I'm going to start with some questions. Just a quick reminder. You can submit your questions online, and they'll come into my iPad here. And if you look at the table tents, you'll have the QR code to be able to submit. So the first question is really for investors who are really new to the story, can you just give us a quick overview of where Criteo is today and what's the value proposition?

Sure. Criteo is an ad tech company, the pricing technology company. We specialize in commerce media. So for those who aren't familiar with commerce media, commerce media is said to be the next big wave in advertising. It's basically the advertising that appears on websites and apps that are attracting a commerce audience or somebody who's on their buyer journey or their shopper journey, they might be looking for a product, they might be comparing products, comparing prices, they might actually be purchasing. So that's commerce media and those audiences are what we specialize in. We buffer those audiences, if you like, and we make them available to the demand side to brands and agencies. So looking to buy advertising against a particular audience type, a commerce audience. And we sell those audiences so we have the retailers and the media [indiscernible] sell those audiences. We're an ad tech company, brokering the buying and selling, the supply and the demand side, hyper-focused on our commerce media and very valuable commerce audiences.

And Megan, you joined Criteo about 3 years ago when it was a very different company. I think, really focused on retargeting as a product. Can you walk us through how you've really transformed Criteo, where you are on that stage of the journey? And what do you think are the opportunities going ahead?

Yes. I came into -- so I'm almost on my 3-year anniversary last week, actually. I made 3 years -- and when I came into the company, the company was a retargeting company. So basically, it was advertising to you, and then when we see you again, we advertise you again, and we see you again, we advertise to you against the retargeting. Remind you of the ad that you once saw of a product that you were interested in to try to bring you back into the store so that you could transact. Retargeting has been a really big and powerful performance marketing tactic for marketers for some time. The issue with retargeting, of course, is that it relies on third-party cookies. And when I came into the company, basically the browsers and operating systems had made a declaration that they would stop supporting third-party cookies at a particular point in time, which had a direct effect on our retargeting business. So my job was to pivot the company or transform the company using the assets that it had to something else. And that's something else came in the form of retail media. Criteo had quite a company that specialized in retail media a couple of years before. Retail media was tips to be the next wave of advertising. And we were in the pole position to take the most advantage of that shift. So for us, it was the normal sort of business transformation. I replaced the leadership team with a new leadership team, a world-class leadership team, Sarah here, our CFO and others who could help pivot this company with me for me towards commerce media and retail media. We underwent a massive transformation in our commercial team to move them from selling retail media to selling -- sorry, selling retargeting to selling retail media. We changed the company from a point solution company just focused on retail media to a platform play focused on commerce media. And we retold our story to the market, including our investors in a way that's positioned us for long-term growth outlook, which we enjoy today. So it's been quite a journey. And I should say that the backdrop to all of this was Google basically announcing [indiscernible] after I started that they would take [indiscernible] third-party cookies in the pandemic and then the macro issues that came at us. The backdrop has been incredibly difficult, but we've been successful in transforming the company, and I'm really proud of what we've done and where we are today.

And then in terms of market opportunity, I think we all know that online advertising is a huge market. There are a lot of big players there. At your recent Investor Day, you talked about a total serviceable available market of about $110 billion commerce media and for retail media. How do you define and find the market and think about that opportunity of retail media versus commerce media?

Well, firstly, the difference between the serviceable market and the total market, of course, is -- we start with the total market, and we take out the things that we can't access. So in the commerce media space, the things that we can't access are typically the big Chinese market was in the big Chinese retailers, that space is available to us. And of course, we can't access the market share that Amazon has. So we take Amazon and the Chinese retailers out. And what we have is a market that's available to us or a serviceable marketplace. If you start at retail media, which is really the foundation of commerce media, this retailers that are lighting up advertising on their own is digital stores, we have a massive foothold in that space already. And so for us, it's about continuing to light up capabilities for those retailers and service retailers and create a really sticky foundation, a long-term partnership strategy between us and those retailers. Now those retailers give us access to what I call before commerce audiences to start with Retail Media and now you've got access to retailers, commerce audiences since their audiences that are coming to retailer sites to actually buy incredibly valuable audiences. When you have access to commerce audiences, you can expand the relationship with the retailer and the retailers' brands beyond just the retailer's digital store and out across the open Internet. So let me just play this one [indiscernible]. If you go into Best Buy today, the store, bricks and mortars, you'll see that Sony advertise in-store in the Best Buy store. As Best Buy have to create a digital store as well, so they're expanding their footprint from physical into digital. They have to offer the same sort of promotion placement advertising capability to Sony as they did in the physical store. So now you've got Sony as an advertiser on bestbuy.com, which is supported by Criteo technology. What happens then as Best Buy says, I can't service you with just the traffic coming to bestbuy.com. It's not enough traffic. So we're going to have to go and partnership out to the open Internet. And so you'll see Sony and Best Buy team up to place ads on, I'm going to make this up, New York Times or other open Internet sites even onto Facebook on to Google, but other Internet sites beyond the bestbuy.com. What we do fuel all of that. So we drive with the ad tech that underpins all of that capability. And so for us, we start with inside the store, then we go outside of the store. All of this creates our ability to understand shipments and commerce audiences, people who are shopping. We see them off Best Buy, we set them on Best Buy. We didn't serve them up for agencies. Agencies have been able to buy commerce audiences through the Criteo platform, and they do that on behalf of their brands. So we've just gone from retail media to commerce media just by virtue of being the partner of choice for retailers and our ability to find commerce audiences on retailer sites and on the open Internet and serve them up to retailers to have -- sorry, to agencies, I'm sorry, to buy those commerce audiences on behalf of their brands. It's there that enables us to have full position in commerce media. It's that capability that puts us there. And we're the only ones in that right now, and we're right in the center of what's going to become the biggest wave in advertising that we've seen social in the mid-2000s.

Okay. To follow up on that, it sounds like you're in full position. Part of it is capabilities you have, the relationships with these retailers. It seems like a very attractive opportunity. How do you think about competitors, other ad tech players and your remote or differentiation [indiscernible]?

Let me talk about competitors and then Sarah can speak about how modes are differentiated. So today, retail media is only serviced by a couple of players. Today, it's Criteo. The ones that we come across when we're going to tender with 3, 4 retailers. Criteo is [indiscernible]. We're in a great position there. We come from a background, as I said before, of being performance marketers, being performance-led because of our retargeting route. And what they're looking for, first and foremost, the retailers performance. So we stand up a high-performing machine. On top of that, what we do is we integrate deeply into their data sets. So retail media [indiscernible] you actually have to integrate into the catalog data and to the SKU level data into the loyalty card data. And to all of the data sets that the retailers have, you have to be in the middle because you're not just surfacing up an ad, you're surfacing up a promo ad that you need to know whether the stock is available, whether the discount is available for that person in that location, you need to be able to predict the consumer's behavior. There's all of the stuff that you have to do on the retailer's digital store is over and above what DSP or SSP provider would do on the open and this is [indiscernible] for the digital store. And you have to know how to do that. And so those that know how to do that is few and far between, and we don't ever see Microsoft [indiscernible] in this space in terms of our differentiators.

Yes, I mean the key comes back to the differentiation that we have is, first of all, we've been doing it for a long time. So we bought logic over 6 years ago. We [indiscernible] on a platform that really does enable everything that CMO in the retail media space is looking to do. So this our customers and continuing to -- in terms of how do we do this? We have the capabilities, including new capabilities with Iponweb acquisition, where we've been able to bring kind of move towards a commerce DSP. We're independent. So we have the ability to partner with the [indiscernible] as well as with the brands. And we continue to grow the number of programs. We have over 1,600 brands, and we're able to have a conversation with those brands not only one-to-one advertiser for one retailer, but actually, how do we enable retail media for that brand and agency strategy. Those are key areas, including as well measurement and closed-loop measurement is a massive differentiator to be able to see that the advertising products are being spent well and performance matters. So this is a true P&L or we from top line down to linearize highly profitable and being able to share which brands are advertising [indiscernible] day after day with a huge commerce audience on the other side as things come on and being able to find valuable commerce audiences for acquisition.

And then if you look at Commerce Media and Retail Media and the size of the TAM and your position is, how quickly do you expect Criteo to grow going forward?

Yes, we're growing already. But we did an Investor Day at the end of October, and we put out our ambition. Our ambition is that we continue to grow, and we are kind of looking at the retail media space in the next kind of 3 years. We're looking at taking 40% of that kind of opposite business to continue to grow off-site. So we're in a really good position. We're also focused on our commerce audience area and that also expanding kind of year-on-year. So even steady over the last few years, and we continue to ramp that up with our Iponweb capabilities, launching Commerce Max on the retail media space and then launching our commerce growth opportunities and capabilities [indiscernible] space.

You talked before about the SAM for Commerce Media and for retail media and just I think those numbers are. The total addressable marketplace for Commerce Media, the total by 2025 is to be about $270 billion by 2025. Just to give -- put that into some light. Search is to be by 2025, about $350 billion and so about $190 billion. And when you think that commerce media is only just starting now that these numbers are coming at us over the next 3 years compared to search, which started in '97/'98, social 2005, this is an extraordinary story. Right now, we're growing faster [indiscernible] for our products that are servicing commerce media. And if we stay in that position, we're in good shape.

I would also add, if we look at Amazon, which is just the best example, able to think 5% of their gross merchandise value in advertising, where most of our retailers were 0.5%, 1%. And there's just the natural tailwinds as the retail media suite becomes more sophisticated, there's new retailers ramping up, and then there's new geographies and capabilities. So lots of reasons to be excited for growth.

Got it. Makes sense. And then, you mentioned Commerce Max. So you launched that, which is your new DSP just pretty recently. How do you -- like what is the pitch and why do brands and agencies, -- why would they pick Commerce Max versus other DSPs where you are well established there?

Well, Commerce Max focuses on retail and retail media. And what it does is it serves up a retail media marketplace, if you like, for agencies. So agencies at the moment, if you'll know how they work, and there they have different software at their desktops. They also have different standards in terms of [indiscernible] Amazon there. We always have Meta there. We always have Google there. None of those are bringing the life from these audiences. If you're just using those inputs, it's fantastic for rate. No doubt about that. I see everybody, but previously that statistic person or a group of people who are Best Buy customers have bought a CineTV screen, bought it in the last 12 months, paid between this and this for it. Do they see them -- those audience to that granular level? No. So for us, we want to represent our retailers by making sure that they appear in a DSP that's seen by the agencies. So the agencies can see the view of those audiences so that the agencies or the brand can actually buy those audiences and those dollars can flow through to the retailers. So this is a unique proposition by any scale in terms of what we bring to the agencies that does and the agencies are really delighted by it.

Okay. We have a few questions from the audience, maybe we can take a couple of those now. And just a reminder, if you have any more questions to put them in. So the first question is, how does Iponweb accelerate your strategy? So -- and maybe it would be great to talk a little bit more about what Iponweb is and also how's the integration going?

I'll start. So Iponweb is a company that's been around for a long time and basically has been -- they're a tech company and they are the tech that drives a lot of the ad tech. So chances are that if you're an ad tech and you have a DSP or even an SSP, you've probably got Iponweb code in that. In fact, the CEO of Iponweb, probably got [indiscernible] Internet as a company as it stands for ad tech. They also have a really strong capability whereby they can act as a routing for sort of low-cost widespread ad buys across the entire Internet, which is really -- it's a fantastic business that they've built over a number of years and serves some of the biggest media companies on the planet. But what we liked about Iponweb as we're building up our Commerce Media strategy is a few things. Number one, to be where we want to be in retail media and in commerce media, we wanted to make sure we are on the stack, both the DSP side and the SSP side. So the demand side and the supply side to create a platform which would become a one-stop shop. So in other words, we hear from our clients day in and day out that they have platform fatigue who want to take that away. We also know that there is so much tech packs around in buying and selling advertising that we wanted to take that away. So we wanted to provide this one-stop shop between the 2. And while we had pieces of DSP and pieces of SSP, we wanted to cement it and have both sides. In having both sides means you have an integration as a DSP with the buy side with the demand side. And you have an integration as an SSP with the supply side, that gives you access to first-party data. Now the reason why that's critical is because we believe the latest dates from Google by the end of '24, Internet will lose its memory. And if you don't have first-party data integration, if you don't have a network that is built on first-party data, you lose your memory and your ability to do your job. So what we did in the acquisition of Iponweb is create [indiscernible] greatly enhances our ability to drive our business forward beyond, using third-party data across the network that we built -- we've built. The third thing is that they have tech talent. And in the ad tech that's very, very hard to find. We've probably swapped off most of the tech talent that's left by the acquisition of Iponweb. And they have a CEO or a former founder CEO, Dr. Morris who is known as the godfather of the ad tech space and this management, he's come on board as our Chief Architect, and he's doing an amazing job at helping us hear our way through the lodges ahead. So a ton of different reasons why we acquired Iponweb, it took us some time to find the right acquisition, and this one is right point and where we want to go. The integration is going really well.

Yes. I mean just to add a couple of data points to that. We gave -- we bring in another $1 billion of spend. And between the supply, the publishers [indiscernible] for many years, along with our own trusted publisher network. There's a huge scale impact there. And we see a real win-win in terms of the relationships that Iponweb has built along with our own capabilities, being able to scale that up on the opening in a trusted way is just a massive enabler for us. And then there's just continued added benefits as we look at their capability. They have [indiscernible] they have video capabilities, they have user experience capabilities, they've listened to customers for many, many years. And they understand how at work and they are partnering with us with our capabilities around solutions selling, we see a huge win. This has been a fantastic position to actually the cultural teams are already working together with partnering together, and we're very excited about the table, and we've seen in action ready.

And then a follow-up question for me is, I mean, you have a strong balance sheet. You have liquidity. How are you thinking about future M&A in this environment?

Well, we're very -- we have a pragmatic approach to it. We're very thoughtful about it, which, hopefully, our investors saw through the Iponweb acquisition, we built a stack of due diligence for obvious reasons and we're incredibly careful. But we sort of take a build by power approach to anything that we do, particularly around our product road map. And so where we identify gaps that require either build by partner, then we'll just do that assessment. For us, we have a really healthy M&A pipeline that we review on almost a weekly basis at the moment because the market is so interesting in terms of valuations. And as we see something there that makes sense given what we're focused on for the year ahead, then we'll look to see whether or not there's an opportunity for us. But it's just a very diligent approach. It's very focused. We know what we need, and we know what's out there for the most part and we go through the process.

Okay. Next question from the audience is, can you describe the unit economics of Criteo for $100 of asset? I think this may be different by product, but...

Yes, it is different by product. So in our retargeting space where as we focus on performance. And so we're basically serving ads where we target and then we get a moment, I would say, a take rate of around 40%. That business is across 20,000 clients. And so those range from enterprise players to smaller players. And there, it's all about return on ad spend and the capabilities that we have. In terms of targeting, it's more closer to 30%, and that has 2 reasons for that. One is you're looking at typically acquisition and new audience base. And then the third area is in retail media and retail media right now, our take rate is around about 18%, but it really varies from client to client to client from effectively a supply side fee or a kind of white label type all the way through to what's being able to do everything for that customer, lighting up their retail media network across our network and we basically having a performance fee for that as well.

Okay. So for the last one, the 18% is kind of a blended?

It will blend.

Next audience question is a macro question. So how would a deep recession affect? I hope it's not deep recession in fact, demand for retail media. I guess I'll add on to it. Like how are you positioning for that potential?

Well, look, we -- firstly, we're pretty well diversified across our portfolio in a number of different ways. We have strong retail media discipline, we have a strong targeting discipline, if you like, we have the ability to cover from upper funnel the lower funnel, we specialize in lower funnel, which tends to be where dollars flow through. And during a recession, they come out of the big brand budgets and they fall mostly to the performance budgets. We have diversification in our client base, everything from the travel vertical through to [indiscernible] recession. We're all the way through. We've got coverage. And we're incredibly resilient. I would say over the coming years, you'd want to be in 4 places. This is how I'd say. You want to be in 4 places. You want to be in performance because that's where the budgets will flow if they're going away from brand advertising, they want to know that they're going to drive us sale. You want to be in performance. You want to be in CTV for a time until that dries up. You want to be in search. And you want to be in retail media or commerce media because the value of those audiences will just play out over and above advertising to anybody. And the thing about Criteo is we're in 2 of those. We're in 2 of those 4. So we're -- we've got our basis well and truly covered -- we're also, as I said, very resilient, we've been through 3 years of craziness as most other people have. And we've come out the other side. We have a really strong balance sheet, and we've got a world-class and dedicated leadership team. So I feel very good about the position that we're in as a business in terms of being able to block and tackle anything that's going to commit us over the next 12 months, 24 months.

Okay. Next question is, can you talk a bit about how conversations with new and existing advertisers have evolved this year? And how do you think about revenue growth in '23 coming from new versus existing advertisers?

I mean most of our revenue comes from existing customers. So we have a huge base of like to tens of thousands of customers. So that's where most of the revenue comes from. In terms of our new business machine, that was working incredibly well. And so those tend to be the longer-tail clients. We pretty much have most -- I mean, we have 50% of the top 25 retailers in the U.S. and Europe. We're growing in our retail media. We're growing our retail media business in Asia Pacific as well. So first there will be some ramp-up of new customers and new names that we've already signed there. In the Marketing Solutions side, it's more in the longer tail. So we have a relationship with Shopify. We see the continued new business largely in those new customers, those new marketers coming through. And those, I think, will then ramp up into larger customers for us across the network. So the good news is that those relationships have been in place for decades. And we have a 90% retention on both sides of the house, so Marketing Solutions and Retail Media and we'll continue to focus on servicing our customers as well as we can working with them as they weather the storms, and help them to drive the performance on their return on ad spend. And then on the other side, also with our publishers, we're really focusing with them, how do we enable them to line up audiences with -- that we have given kind of where we go with both sides of the house, we're in a really good place, and we already have very established client relationships that really have served us well across the years. And what we're doing is we're adding new capabilities for those customers. So Commerce Max on the enterprise side, commerce growth on the growth customer side. And then Media Grid as well, Commerce Grid, which will be taking Iponweb capabilities and continuing to expand. So that's our focus, and that will enable both existing and new customer growth.

Okay. Next audience question, it's a little bit of a longer one. But the Wall Street Journal reported today that the EU data privacy regulators have said that publishers should not be able to require users to agree to personalize ads in terms of service even for first-party data. What kind of impact would you see broadly in the industry like Criteo and if this regulation comes into effect and you cannot personalize ads as part of terms of service? I'm not sure if you've seen this.

I haven't actually. When did this come in?

I don't know. Just reading this article. I think you've obviously seen a lot of different privacy regulations and things come out over time and you got it, but yes.

Yes, we've seen a lot. And . And then Europe has got its complications because countries that have different levers of -- and so it's hard to sometimes ascertain what belongs to one and what belongs to the other and at what stage of implementation. But look, what I will say is that for Criteo, we're in interesting position because we sit in our head offices in Paris. So we're a French company, and so we see a lot of the GDPR stuff and the explicit content stuff before it comes to the U.S. So we're kind of prepared for the worst because it's often what's going on in Europe is going to come here or not. I mean explicit content for some decree seems to be isolated and has changed a little bit over the last couple of years. But these things will continue to happen. And as a business, you have to be resilient enough to make sure that you can service your clients and our clients are the publishers and the publishers need to be -- they need to make sure that they understand the implications or when they get themselves set up to continue to run businesses when more and more restrictions becoming like. I think the ad tech, ad tech has been exposed to things that [indiscernible] will be basically telling consumers that they can't -- they all have to opt out of providing any kind of first-party data about themselves because it just starts to get very ridiculous after a while. The beauty of the Internet has been its ability to have a one-to-one conversation with you and tailor and experience for you and clean up an experience that you might not want in favor of one that actually speaks to you and gives you the access to the things that you want to have that. That's what digital is. That's what the technology should do, not continue to be restricted. But that's me on my slot, so then I can get off that, just one second and acknowledge that these restrictions come down to try to solve issues that happened in isolated places. And we see those things. They'll continue to happen. I hope that at some point in time, they start to dry up across ad tech world and be more pointed to some other areas that are exposed to exposing consumers at the moment that you all probably use every day that work you don't realize it. For Criteo, we've always done the right thing. We follow GDPR provisions. We've adapted to the third-party [indiscernible] issues. We've done everything that we possibly can to make sure that we can ultimately serve our clients and ultimately serve consumers who want to have great experience and great advertising experience. And we'll continue to do that.

And another audience question is really around any changes that you're seeing in advertiser behavior in Q4 as well as any change -- you have a lot of first-party data. So any changes in consumer health trends?

Yes. I mean I say we said during our Q3 update that we had seen a lower online traffic. So that -- that's, I would say, a trend that's across the retailers have met traffic, and that's less advertising. So -- we see that for the Black Friday and the Cyber Week, it was as we expected. So the uptick in online sales was I think around 12%. The U.S. is performing well [indiscernible] countries performing lower than year-on-year. But that's not a big Black Friday region. And in Asia Pac, we see the 11/11 was, I think, mostly just waiting for the market as a whole. So we are seeing, I would say, what everyone else is seeing. So met demand overall, but that doesn't necessarily translate into lower advertising budgets in the performance space, and it really varies by market to market. So what we haven't seen is the -- we were high and businesses are high this time last year, and we're all in the same place. However, when you're in performance marketing driving commerce, and it comes back to the online traffic being able to get a return on that spend and where they -- whether it's not the being planned. And I would say that as we expect it's not us yet. It's a tough market to sell, but they're still there, and they're focused on return on ad spend.

What we did see, which is interesting is that there was an increase in traffic to stores. So people are actually going and researching and we think we're going to do the best discounting, et cetera, et cetera, was higher than in previous years. Those people are commerce audiences -- but we did see this decrease in commerce audiences and potential audiences for advertisers to monetize from and that's compelling, that is the commerce media story.

And another audience question, which is about market share. So what is the market share between the 3 players you mentioned in retail media? I think that was Criteo, Microsoft, Amazon?

Yes. So we're in a pole position as compared to the other 2. I mean the biggest players in retail media right now is Amazon. So those who are doing it themselves. It's Amazon and then -- for those who are being service provider like us, we're in the pole position there. And then when we go into RFPs [indiscernible] Microsoft and Publicis in that order. Microsoft strong [indiscernible] acquisition and Publicis with Epsilon. A couple of things to note. I know we're out of time. A couple of things on this one. Microsoft, they haven't yet integrated in what we can see promote -- so the 2 things seem to still be working alongside not deeply integrated, which they still need to do and they haven't done it yet. And they know that they're pretty distracted through Netflix, a fantastic one of Microsoft or vendors to get the Netflix deal. And then on the Publicis side, they are an agency. They want to the holdcos. And so they're limited to retailers who are represented by them and brands that are represented by them. So they are a slither as opposed to Criteo, who has no -- on any media. We don't -- we're not a retailer. We are completely agnostic and some across the bottom of all of it.

Okay. Great. Thank you, Megan. Thank you, Sarah.

Perfect. Thank you.

Thank you very much.