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

All right. Good morning, everyone. Welcome to day 3 of the Morgan Stanley TMT Conference. My name is Matt Cost from the U.S. Internet team. Very excited today to be joined by Megan Clarken, the CEO of Criteo. Thank you so much for being here.

Pleasure. My pleasure.

I just have to quickly run through disclosures. For important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Great. And with that, maybe we can jump right in. So you had some very exciting news come out yesterday. So maybe we can combine that with a little bit of a zoomed-out view, and then we can talk about Brandcrush. So maybe for those in the audience who are less familiar with Criteo, you can tell us a little bit about where it fits into the advertising landscape, what differentiates what you're doing and how Brandcrush is going to reinforce your leadership in the retail media space?

Sure. So if I zoom out, what Criteo does is we're a commerce media platform. And so we manage -- we underpin the buying and selling of advertising across commerce media. And commerce media is defined by content where -- that attracts audiences who are on their buyer journey, so content like where you would be comparing pricing of products or researching products or, in fact, buying products. And so the biggest players there are retailers. And so you often hear it referred to as retail media. But if you expand beyond retailers, there is a lot of commerce activity that's happening across other types of publications that's attracting commerce audiences or audiences on their buyer journey. And Criteo is right at the heart of enabling that area and providing a platform for those publishers, including retailers, to provide supply for advertising. So we sit at the center of that. It is the fastest-growing digital advertising area right now. The TAM for Commerce Media is at about $110 billion, so it's huge. It is said to be somewhere -- it's set to overtake social before -- by about 2025. And we are right in the sweet spot because we are the leader in the space right now. So we are hyper-focused on commerce audiences, so not audiences that are searching or looking for information. That's the domain of search media; not audiences that are interacting or socializing, that's the domain of social media; but audiences and valuable audiences that are shopping. That's the domain of commerce media. So that's where we sit. To be in pole position there is to attract and be the supplier or the ad platform, if you like, to retailers. And what we found over the time that we've been doing this is that retailers are getting more and more into the space. They're getting more educated in the space. They are going hard after this opportunity. And they're wanting to bridge the gap for the media buying and planning between their off-line assets, their stores and their online assets, their e-commerce sites. That's called omniture -- oh, sorry, that's called omnichannel. And so they're looking for the ability to -- for their brands to buy campaigns, so in-cat campaigns or signage inside of stores and expand that buy to also include the digital assets as well. So this omnichannel presence is growing. So when we go into RFPs with retailers, they are looking for a way to be able to bridge this gap. We saw an opportunity in Brandcrush, and we went after it. It's a really small tuck-in acquisition. It's a start-up company out of Australia. But they're doing fantastic things around the buying and planning, the billing and optimization of workflow between off-line and online advertising. For us, being really close to the retailer and responding to their needs to be at the table with them when they're doing their strategic planning to actually bring propositions and platforms to them at the right time, is critical to the place that we are in and what we need to do to continue to expand our relationships with retailers. So this is an opportunity for us to shape the future for them as they start to get better and better towards this area, and we're really excited by this acquisition. It also brings some fantastic talent. Again, I said it's small. It's about 20 people. The CEO is a fantastic female lead, and we're really excited to bring them into the portfolio. It's exactly what our retailers are looking for, and it's a response -- a direct response to that.

Great. Maybe one more zoomed-out question before we get into some of the specifics. But obviously, there's a lot of uncertainty in the macro advertising markets right now. And I guess, are there any pockets of strength or weakness that you would call out? And what is top of mind for your customers right now as they're thinking through their budgets and their planning for 2023?

It's a really interesting one. We stand by the comments that we made at our last earnings call. It's an uncertain environment, and we're still seeing a lot of uncertainty. In fact, a stat I read last week was that about 63% of planners out there are now reforecasting for their spend every month, which is an unusual thing to see. It's just because of the uncertainty and making sure that they're very precise around the buys that they make, looking at the data, the return on investment data, looking at the performance before they continue to make a buy or reposition themselves for the following month. So it's an environment that is sort of laser-focused on trying to do the right thing with the money that's being spent. If you look at the ad spend figures at the moment, they vary between -- sorry, growth of 6% at the top, the GroupM figure, and a decline of 8% at the bottom from Arete. So this is sort of a vast array of views on what's happening overall in ad spend. So what I can tell you is that consistent across all of the data that you see are the standout places to be placing your ad spend and to be a provider in those spaces right now. They continue to be search. They do continue to be social. They kind of bump -- but it's still a fantastic environment to be advertising in. It is anything around performance. It is absolutely standout Retail Media and Commerce Media. And it's CTV while the linear TV dollars are still moving across. So if you're in those spaces, you're in the right space right now during the uncertainty of the macro environment. And we find ourselves in the performance space in this growing Retail Media or Commerce Media space. And of course, we have access to the channel of CTV. So we're in a fantastic space right now. We see evidence in that in the growth figures that we have that are performing or outperforming the market. Retail Media last year, performing at about 33%. Our Commerce Audience drive our focus on targeting and retargeting to people who are on their buy journey is growing at about 17% last year, so really outperforming the marketplace. And so we're right in the sweet spot of where we need to be as we pivot our company towards this area from where we were about 3 years ago. And then in terms of categories that are really lighting up, it's fashion, it's home. We see a turnaround in travel. It's all of consumer electronics. It's all of the usual suspects that are lighting up, particularly in these areas. So under sort of the veil of uncertainty, there's still that very evident increase in advertising into areas that are making a difference where the return on investment is seen in a very short period of time.

A lot of great stats in there. I guess, as you think about 2023 in this kind of uncertain environment where you just went to a lot of great detail, as I said, what do you see as your top priorities now? I mean talk us through Commerce Media, other areas that you're focused and what you see as the key drivers this year as you move towards your $1.4 billion contribution target in '25.

Look, I would say retailers, retailers and retailers. The strength of what we do is around our relationships with the retailers and helping them on their journey. So retailers are always #1 priority for us. They are both suppliers of advertising real estate, but also they're demand partners to us as well. So let's start with what we're doing around retailers. The work that we do in Retail Media is critical to the pull position that we have right now in Retail Media and our ability to accelerate even further away from the competition. And so what we've done this year is pivot a big chunk of our R&D resources into this area. So we've more than doubled the size of the team in Retail Media to accelerate the deployment of the products, the features, the functions that our retailers are looking for. So the closer we can get to the retailers, the more integrated we can get into the retailers' environment. The more performance or yield that we can provide to the retailers, the better it is for us and the better it is for Retail Media and Commerce Media generally. So we're laser-focused on doing that, growing our retailer base. What's really exciting about our retailer base right now is we have nearly 180 retailers and some of the largest retailers in the world on the platform, and it's early days. And if you think of traditional Criteo, we have 22,000 clients, of which 86% of them or 19,000 of them are retailers. So we have this massive sort of white space or pipeline, if you like, to move retailers into really focusing on their own assets or e-commerce stores to be a publisher, if you like, and sell advertising. So we have this ability to have this -- to move this pipeline across to the product. So all of this is front and center in what we're doing as retailers are at the core. And then what attracts retailers is the fact that we have access to buyers. So the lighting up of our DSP for the agencies and the brands is second-biggest priority. So having that -- we call it Commerce Max, having that available whereby agencies can buy across retailers' inventory or brands is another pillar that attracts retailers. They like us for that. So that's a second priority for us, is just making sure that, that inventory is front and center in the buying process for agencies. And the third big pillar for us is what underpins Criteo's value, full stop, is our performance: our ability to get a return on investment for our clients, wherever they are, be brands, be agencies, be retailers, be publishers. And our focus on performance is at the core of everything that we do. That's why we're selected is that we get a return on investment for all of the constituents that we're servicing. And so our focus on AI is really important in that area. And so that's a big one for us this year. 2023 is a year for us to not just hold our pole position but double down to accelerate away from everybody else. And that's the plan for the year.

You touched on a couple of things from a product perspective in there, but I guess kind of as a follow-up to that, when you think about the products themselves, you mentioned Commerce Max. You got Commerce Audiences is something you've been speaking about recently, what are the key products you're most focused on executing on in '23 to help achieve the goals you just outlined?

Yes. So you'll hear us talking about commerce a lot because we're in the Commerce Media space. So to separate our value proposition from search and from social is to say, we're all about audiences who are on their shopper journey. So all of our products always have a commerce preface, and you'll hear us refer to it as C: so C Max, C Yield, C Growth. We have four main product areas. Now we've tried to consolidate and make it as simple as possible. Remember, we're on the supply side and the demand side of the advertising space. On the supply side, we're enabling the retailers to be a supplier so -- to light up their advertising assets through what we call Commerce Yield, and that's what most people know as Retail Media. And we're doubling down in this area because as I said, this area is the core of everything that we do is to get integrated into the retailers to enable them to sell their advertising assets. The whole bunch of work going on there around functions and features that we'll respond to for the retailers to bring more and more and more to their plates to help them to really compete in the space. So that's Commerce Yield. The other side of supply is our big publisher suppliers, of which we have thousands and thousands of not just retail suppliers but also New York Times, for instance, are supplier. And for us, here, we've integrated the acquisition of IPONWEB last year into helping us create an environment for suppliers that we can get more deeply integrated with those suppliers. For instance, one reason to do that is to access first-party data from them to help us to identify people in a world without cookies. On the demand side, the focus for us is around Commerce Max. We talked about that or the DSP that has Criteo on the buying platforms of the agencies, where we can showcase all of the supply that we have, starting with the retailers; and then all of the other publications that we have access to Commerce Audiences and that's C Max, and that's the third or demand-side product. And then the fourth product that we have, which is another demand-side product, is what we call Commerce Growth. And that is our traditional retargeting, targeting -- and targeting or acquisition components of our business. So that's about finding the right audiences at the right time wherever they are, focusing on Commerce Audiences again because they're the most valuable and getting to them enough times for them to convert for our clients. So four products inside the product spread on the demand side and on the supply side and a whole lot of activity going across it.

Talking about the competitive environment for a second. Obviously, with Brandcrush, you're now going into off-line more now. What is the competitive landscape looking like as you're pushing more aggressively into Commerce Media? And what are you seeing as the differentiating factors that you want to bring across to clients in '23 as you work to try and win new business in that environment?

Yes. It's an interesting environment. We still see the same two players, really. If I continue to showcase Retail Media as kind of the core and everything comes from there, the two players that we are always watching a Microsoft and Publicis. We go -- in the world of Retail Media, when you go to pitch for business, it's an RFP. So you know what you're competing against, you know what the client is looking for, and you usually know how you stack up against everybody else. So we have a lot of insight into what those two players are doing. What we're finding -- what we found over the last couple of years is that where it used to be Criteo -- or Criteo, Publicis -- or CitrusAd was the business that they acquired and then Microsoft, it seems to have flipped. It's us then Microsoft and Publicis and taking a pragmatic view of it. We think it's because on the Microsoft side -- and they're a powerful player, make no mistake. They're a powerful player and they're a great partner to us on certain parts of our business. They are also distracted by the Netflix deal that they won, and they're really focused on making sure that they can service Netflix through the DSP side of Microsoft advertising. They've got a lot of focus on there, which means that across on the PromoteIQ side, which is the Retail Media side, there's -- I wouldn't say a slowdown, but there's not -- there's reasons for them not to be focused on that so much at the moment. On the CitrusAd side or the Publicis side, they're always limited by the fact that Publicis is one of the big holding companies -- agency holding companies. And therefore, they're sort of a little stuck or it's hard for them to attract business from clients who are serviced by the other holding companies, the other big agencies, WPT, for instance. So we find them sort of in a channel doing what they can and working for Publicis as opposed to sort of doing more groundbreaking things and responding to retailers in a more agnostic way. For us, the reasons that we win are pretty simple. The first one is performance, performance, performance, performance. So I talked about that as a priority for us, and it always has been through the AI work we've been doing for years and years and years. And because we get better return on investment, we drive revenue for retailers, they like us because of performance. Secondly, we win because we bring demand. So we've lent heavily into the agencies over the last 3 years, and now about 2/3 of our business is driven through agencies because they bring brand dollars to retailers. And retailers love the fact that they have a partner in us who can actually drive demand to their platforms. Secondly is that we provide fantastic reporting and features and functions that have additional reporting like Brandcrush. So we're always providing things for them to very quickly see the return on the investment that they're making. And fourthly, we work side-by-side with the retailers. Our product road map is all driven by the retailers. We're developing on the fly. We have a seat at their strategy sessions, and our road map is in direct response to that, not anything else but that. And we stay laser-focused on getting them what they want. And we're just nice to do business with. We just -- we give them nothing less and nothing more, but what they need right now to get them ahead. And that's a winning combination. Those deep integrations and that partnership that we have with our retailers is what's going to set us up to succeed. And it is what's driving that success right now.

You talked about some of the agency relationships. We can stay on that. I think you mentioned that earnings that agencies drove about 2/3 of media spend growth in '22, excluding IPONWEB. Can you talk about how your relationships with the agencies has changed and how important you see them going forward?

Yes. Well, it's changed a lot. So Criteo -- I've been with Criteo since the tail end of 2019. And Criteo, prior to me, didn't -- they didn't work with agencies. In fact, they had a philosophy that perhaps they competed against them. And I come out of Nielsen. And Nielsen, the heritage -- agencies sit in the center of that universe between the buyers and the sellers. So you have to have a relationship with agencies. It's incredibly powerful. And we've built that extremely quickly, and we'll continue to do that because they are the drivers of demand. They're really very interested right now in -- they're always time for. They're interested in something that gets them to their end state as fast and as inexpensively as possible. So where they see Criteo lighting up abilities for them to quickly offer retailers' audiences to their brands in one place as opposed to the brands or the agencies having to go to Amazon, Walmart, XYZ to try to buy retail audiences. If they can find it in one place, they're in. And so it's been, again, leaning into the agency, understanding what they're looking for and then delivering high safety ratio, delivering against what they're looking for, has been our way to build relationships with those agencies that are really strong. And in a short period of time, when you think that -- for a lot of companies, to even get a meeting top to top with an agency is really hard because they are time-poor, they're on a mission. For us -- I sat across from one of the CEOs of -- or the CEO of one of the biggest telcos only two weeks ago. And he was so leading into Commerce Media because he realizes that this is the fastest-growing area of digital ad spend, and they're not there yet. They have pockets of teams around the world that are sort of doing pieces, cobbling them together. But to have one supplier, one partner who can build with them, listen to them and bring things to the table that they can use immediately is absolutely key for them. It's key for them. It's key for us. It's key for our clients, and it's key for the ecosystem. So they're a big part of our play. And just watch for those numbers to continue to grow as we get even closer to agencies because it's only 3 years then at changing that strategy, and it's really working.

So there's a lot of really important work going on right now, really as many corporate on diversity equity and inclusion. And given the occasion today of International Women's Day, I did want to ask you about the initiatives you're working on at Criteo and the progress you've made there.

Well, thank you for asking that, and happy International Women's Day today. Gosh, 42% of Criteo's are female. We're working so hard on a number of initiatives. Let me talk about pay parity for a second. So we brought pay parity and have had it in since 2021. It took me a year to get there because it takes time to get there. But there's no excuse for not getting there. It takes time every year to make sure that you stay on track because you can easily get off track. But it's critical for the world that companies move to a place of pay parity, no excuses. And so what we have now is pay parity in place. I'm very proud of it. And we won't -- under my watch, we won't move away from that. We also have a commitment to increase the presence of women in tech. So we have an R&D team that has not enough women in it but a good population, and we've committed to increasing the population in tech by 2% every single year. If you come visit us in our room over the next day, you'll see that there'll be -- you walk in, there'll be four women in there. Our CFO is a female; Head of IR, female; Head of our finance area is female; myself. It's an unusual mix in terms of a conference like this and walking into a room full of women, but it's fantastic. And we're going to continue down this path, making sure that we do the right thing for women and continue to celebrate the successes that we make in this area and really promote, making sure that there's diversity inclusion in place across all corporations around the world.

Great to hear. I guess on the financial front, thinking about margins, how are you thinking about the puts and takes around leverage? As you think about your investment priorities, what KPIs are you most focused on? And how should we think about OpEx longer term? And do you see more efficiency coming over time in '23, '24, beyond?

Yes. We are really strategic about how we think about our investments and, of course, how we manage our operating model. Firstly, investments. We focus on organic first. We always look to build, buy or partner. And you can see over the portfolio over the last couple of years has been a mix of all of those things. So for us, it's organic build first and an investment in that area. And we're in a position right now where we're so agile that we can move existing resources in different areas very quickly. For instance, I talked about doubling the size of our Retail Media team. We did it like that. And you don't notice inside of the organization where that's come from. But to be agile like that is just critical and I think is a real strategic advantage for us. The second is in M&A. And we'll look for acquisitions or tuck-in acquisitions to complement what we do and provide strategic differentiation for us ongoing. And we're always very careful about the acquisitions that we make. And thirdly, we'll always maintain or execute against our share buyback schemes as well and the things that we need to do to better invest the cash that we have, so continuing to make sure that we're monitoring and balancing the way that we use our cash in the right direction. In terms of -- our cost model is important to us, especially right now, is making sure that we're prudent around that balance sheet. We have and are executing right now against a cost strategy, which will see us reduce our cost by about 10% over the next year, about $60 million. And then on a more long-term basis, as we transition from old Criteo to promise Media Criteo, is rightsizing that organization as we make that move. And we have a number of initiatives in place right now to make sure that our structure, our organizational model is a model that is for the future and that we don't just sort of knee-jerk towards that and break anything, but we slowly move ourselves into a model of the future. And that's work that's going on right now as well. And then there's just prudent hiring things that we're putting in place to make sure that we're not over-indexing and hiring the way that we replace levers, just the normal day-to-day stuff that you have to do to make sure that you're staying on track. All of those things are top of mind.

Great. That's excellent. I think we're right out of time. We can close there. Thank you so much for being here.

Great. Thank you. Thank you. Thanks, Matt.