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

Yes. But I don't want to get -- it's all mechanics. So we serve [ ads ]. There's hundreds of thousands a second. It's not something that we sit there and do any kind of booking against or try to make something work like that. It is the technology, and most recently, it is the AI that we're using, to really make those decisions for us to drive the best results for our clients. Most recently, for instance, we added Meta as one of our supply partners. Supply, meaning this is a real estate that we can place an ad on. And our AI, our technology is able to say, hey, I'm going to put this out in these different places using this different tactic. And if Meta doesn't suit that campaign, if we don't think it's going to get on the machine, I say, wait, the machine doesn't think it's going to get the result, then we won't put the campaign on Meta. But it just so happens that when we do put it across Meta, what our clients are seeing is an average of 20% increase in returns. So again, it's all of the algorithms and AI that manage all of that for us, and our clients come back to us because we're good at it.

Okay. Your largest Retail Media client is shifting to more of a direct sales model during 2Q. Maybe you could talk about, kind of for those less familiar, talk about why they're making this shift, what some of the implications are and just how you're thinking about financials?

Yes. Well, the first thing to know is that about 80% of our clients or client revenue on Retail Media are from clients that already do it that way. So it's not a trend to go in this direction. It's that they are followers. And this particular client has been with us for a long time and is now looking to extend their sales capability into their existing brands where they have a relationship. So it shouldn't be a surprise that -- it would be a surprise if somebody wasn't doing this. In other words, if you are a retailer, you have a relationship with a brand because you're doing deals with them to advertise and store all day, every day. So what happens is you just extend that relationship or that conversation with them to extend that ad to your digital store. It's just sort of as basic as that. For us, we still service parts of that activation, if you like. And we certainly provide -- continue to provide the platform in order to do the ad serving and the ad placement capability and all of the integrations into the data sets in order to do a good job there. So that tech platform is not going away. They are not -- they're still paying for that and they pay a fee for that. We also help them on the demand side when it comes to getting demand from agencies because typically, a retailer, while they may have a direct relationship with a brand, don't have a direct relationship with an agency. And so in order for more demand or more dollars to come to them, we help them source that through our relationships with agencies. And this is really critical. The AdTech environment is complex. What needs to be in place to be able to do that buying and do that selling is more than what so many can stomach. They won't go there or they may try to go there and then go, "I can't do it. Can you keep doing it for me?" And that's the dynamic that happens in retail media in terms of the switches that come. But more or less, our clients are very stable in the way that they work with us. And this was just one change to a client relationship last year.

Okay. Commerce audiences has been another bright spot, certainly, for the company. I think now around 20% of overall contribution ex-TAC. Maybe you can just talk about the strategy there, what's been so successful in the type of clients that you're seeing really leverage this solution?

Yes, this is really exciting. So last quarter, we saw a 54% growth in commerce audiences, and it's just been consistently performing. As I said before, it's basically advertising, not 1:1, but 1:2 cohorts or interest groups, call them, interest groups. It uses first-party data that we have access to. And in particular, it uses SKU or product data. Now this is really important because when we think about advertising going forward, less and less advertising will be based on a URL. In other words, I'm going to advertise to new moms, and therefore, here's 5 URLs that I'm going to go to, babies.com, just the typical sort of flat advertising that you've seen before. We believe in the future and commerce audiences is about this, is that it will start by advertiser by knowing the product and knowing what people buy the product and what people we have access to through first-party consent data and what supply we have that actually does match to that first-party consent data. And therefore, through an interest group, while it's not sort of 1:1 and retargeted, it is definitely a 1 to many but very targeted, which is proving to be an incredible return on investment for our clients, which is why we've seen so many going there. So we think this is a really big play for us. And this, combined with the tactic of retargeting, is where we think performance across the Internet will go.

Okay. Let's talk about retargeting a little bit. Cookie deprecation certainly, it has been frequently discussed. It will continue to be -- hopefully less at some point...

Yes, it can go away.

Being prolonged. How far along are marketers in building out contingency strategies here? And what are you seeing in terms of marketers testing out new solutions and any changes just as you think about this, the Google delay that's been announced?

Well, look, I think, we think that marketers rely on tech players to fix it for them. We think that -- and so they should. They want to spend the money. They want to give it to an AdTech platform that sources an audience and sources an ROI for them and gets the job done. And there should be continuity between today and post-cookie deprecation. That's what marketers are sort of all about. I don't -- I think that they definitely are watching the space because they understand that, that might not be the case, but that's where they're at. I think that the interest here comes to the readiness of the publishers and the readiness of the AdTech players. Now we've been at this for a long time. So it's the other thing I should have said, when I came on board was -- I think it was like 2 weeks after I came on board at Criteo and the announcement came out that cookies would be deprecated on Chrome and our stock price went from $22 to $4, second week in the job. So of course, it was front and center to try to fix that problem and make sure that, that didn't hit us. And so we've been working on this for over 4 years to make sure that we are in the best position, and we are. We know exactly how much of our business is at risk. It, today, is at 10%. We've been very transparent about that. And every day that goes by where Google push this can down the road, we get better and better and better. So the 10% becomes less over time. And our highest growing areas of our business don't use cookies at all. This is just a retargeting issue. So I think the thing to watch out for, if you're watching the space, is really the readiness of the ecosystem. So don't worry about us, we're fine, John. We're okay. But if you look at the ecosystem, there is a lot to make sure that is in place before they switch off cookie support. And the CMA, which is the industry body out of the U.K. that are sort of monitoring this, are taking in the results right now of a 1% test that Google put in place. And I think those will be due in by about June, and they will take a look at those results to see whether there's an appetite to go forward or to continue to push it. For us, for Criteo, we're long in the tooth here. We just keep going down our path. We feel good about where we are. But we have to make sure that when Google do make this decision, that the actual entire ecosystem is in some sort of state of readiness because that could have limiting or it could have a problem to the entire Internet as opposed to where we are today.

And anything to call out just in terms of how the Google Privacy Sandbox has evolved here in recent months?

Look, we work very closely with them and have done, as I said, from the day that it was announced that they were going to form something. And just to make sure everyone understands is the Privacy Sandbox is designed to make sure that retargeting continues to happen after cookies deprecated. So all the work there, amongst other things, but all the work there is about putting in place things that enable for third-party cookies to continue to do their job in some other way, shape or form. And so it just -- that work continues. And the only evidence I could give you that -- of where it's at, at the moment is that they have pushed the can down the road another 3 months. So they clearly got work to do. And I know my team is with them today. So they've got work that they continue to push on.

Got it. Okay. Let's shift gears. Just thinking about your costs and investments you pulled back somewhat last year. Maybe you can just talk about key investment areas this year, and I mean it seems a little funny to ask you about AI because I feel like Criteo has been focused on this for so many years. But curious to understand what kind of efficiencies perhaps you're seeing internally in your business around coding and engineering? And then if there's anything to call out in terms of how it's really adding to the business now like on a revenue front and being really incremental?

Well, in terms of sort of capital allocation, Yes, 1 of the 3 things that we focus on is internal investments. And we're a small shop, but we're [indiscernible], and we're pushing in areas of -- three different areas. One is AI, which we continue to enhance, our AI capability. We won a big award last month actually in AI out of Singapore for the work that we do on advertising. So we're proud of our position there. The second is in performance and anything that we can do to increase performance. We have a team of people working on those algorithms of which AI and performance are tightly linked us internally. And the third is in retail media. As you can imagine, we have to make sure that we continue to invest in retail media and close any gap that our clients see and want us to invest in. But AI actually is a little different for us because -- I hear a lot of AI stories around investment in or plans to or it will. But for us, in the last quarter and in the quarter before, the biggest single contributor to our revenue performance, which in the last quarter was our best revenue performance since early 2021. So we're on at this role. The biggest contributor was AI. It's actually making top line for us. And it's because of the way in which it's improved and become very intuitive around our targeting business. And so we -- clearly, we love that. And so there's increased investment in that area. But we stay very targeted on our approach. Don't forget, we're still in a transformation phase. So the thing that I talked about as when we started talking is a transformation that's happened over a period of time, and this balance between our investment and our savings is critical to us, which is why we maintain our margins. And it's like a synchronized swimming. It's just the way in which we do it. We roll forward, we pull back. We make sure we have the right talent, which means that at times, we have to take out the talent that no longer suits the portfolio going forward. And all of these things are an investment, but also a critical savings for us as well. Internally, AI is working on product enhancements, some cool things that we're doing around ad formats for instance. But we have teams of people that are now using those tools to improve the operations and look for opportunities to improve operations.

Okay. Great. Just looking ahead to the fall, I think you've talked about planning an investor update, specifically on the Retail Media business. Anything kind of specific or anything that we should be thinking about there?

I think it will be a great opportunity, I think, to sort of relay out the Retail Media landscape. We haven't spoken to an Investor Day now since 2022. And this is a very fast-moving environment. So it's easy to lose track of what's going on in this environment. I talked about the size of that prize before. It's really important to say here is here it is, and here's what makes it up and here's what we're doing to chase that down. So it's really designed at taking a couple of steps back. And then also looking for ways to find sort of proof points or KPIs that you can see our progress may be a little cleaner going forward. It's -- we've always been transparent. We want to continue to be transparent. We're in a marketplace where -- we're standing there alone when it comes to competitors. There's nobody else to look at and say, well, you're doing a better job than this other person because we're at -- we have 6 of the top 10 retailers in the U.S. And we can say that out loud, but we really need to, I think, just continue to tell that story and show while they're using us and what they think of us and how they intend to use us for many years to come. So I'm hoping that it just reignites what we're doing.

Okay. Great. Maybe one last question on the macro backdrop. You deal with obviously a very wide range of advertisers across all kinds of commerce and travel. If I look back at 1Q earnings, it really felt like online advertising was pretty strong, and we saw this from a lot of different companies. What's your view on macro and just where your customers' kind of heads are now?

Yes. Well, I think it's certainly better than last year. And people feel more optimistic than what they did this time last year, that's for sure. And we see our results, we're thrilled with our results. We see good positive results coming out of the agencies who are dealing with the ad spends. We watch their numbers pretty closely to get an indication. We've got some interesting -- between the Olympics and the U.S. election this year, there's some interesting dynamics that may have -- we're not sure what the effect will be, could be a positive effect, could be a negative effect, not quite sure. But there are dynamics to watch out for. But the market feels pretty good. And for Criteo, we have multiple lines of business. We have a platform play as opposed to just relying on one product. And we have diversity in the categories that we service. So it's great for us that one of those categories may be having a bad year, another has a great year, and we benefit from that.

Okay. All right. We're going to leave it there.

Thank you.

Thanks very much.