Criteo S.A. Q3 FY2020 Earnings Call

Good morning and welcome to Criteo's Third Quarter 2020 Earnings Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Edouard Lassalle, SVP, Market Relations and Capital Markets. Please go ahead.

Thank you. Good morning, everyone, and welcome to Criteo's third quarter 2020 earnings call. We hope you're all keeping healthy and safe. With us today are CEO, Megan Clarken; Chief Product Officer, Todd Parsons; and CFO Sarah Glickman. Please note that we may extend our call by a little bit today to look at questions, as Megan and Todd will provide an update on our strategy and roadmap. I will point you to a slide presentation that is available on our website. Also please note that we're all joining from different locations due to ongoing restrictions and may face unwanted technical challenges. During this call, management will make forward-looking statements. These statements reflect Criteo's judgment and analysis only as of today, and actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. At this time, the global COVID-19 pandemic is still having a meaningful impact on the global economy and the business of our clients, including their supply chain as well as in Criteo's business and may further impact Criteo's financial condition, results of operations, and cash flow in the future. There are significant uncertainties about the global economy and the duration and extent of the pandemic. The dynamic nature of the circumstances means that what is said on this call today could still materially change at any time. For more information, please refer to the risk factors discussed in our earnings release as well as our most recent Form 10-K and Form 10-Q filed with the SEC. We do not undertake any obligation to do any forward-looking statements discussed today except as required by law. In addition, we'll also discuss non-GAAP measures of our performance. Definitions and the reconciliation to the most directly comparable GAAP metrics are included in the earnings release published on our website earlier today. Finally, unless otherwise stated, growth comparisons made during this call are all against the same period in the prior year. With that, it's my pleasure to now hand it over to Megan.

Thank you, Edouard, and good morning, everyone, and thank you for joining us today. I hope everyone is staying safe and well. With me today is our new CFO, Sarah Glickman; and new Chief Product Officer, Todd Parsons. I'm delighted to welcome Todd and Sarah to Criteo, two seasoned industry leaders, who bring exactly the right skill sets that Criteo needs today. The fact that they've joined our team over the past few months is a testament to the enormous potential of Criteo's business. They've joined us at an important time for our company. Since starting at Criteo a year ago, I've led the company's transformation and as part of this, I've run a comprehensive evaluation of our business and our markets to identify a turnaround path for sustainable growth. On today's call, in addition to discussing our better-than-expected Q3 earnings, we'll provide you with an overview of that evaluation and initial insight into our disciplined strategy to move our business forward. We have unparalleled assets, including commerce data, our fast-growing retail media business, our industry-leading technology, our 15 years of media-buying expertise, and a huge network that this has created for us, our great people, and our strong financial position. We're turning our assets into what we call our commerce media platform, a world-leading media activation platform for global brands, agencies, and retailers to optimize their sales and digital advertising returns. We'll capitalize on the white space opportunities opened up by the dynamic changes in e-commerce and digital marketing to best position Criteo for significant long-term success. And I'll explain this further shortly. Together with Todd and Sarah, we'll discuss four key topics on our call today. First, the refinement of our strategy and the opportunity that we're focused on. Second, how we execute on our roadmap, expand our capabilities, and respond to the identity landscape. Third, our continued execution along our four strategic pillars. And fourth, how we're optimizing our organization and aligning our cost structure in total allocation to best support our strategy. The digital marketplace is experiencing fast-moving trends in e-commerce and digital marketing, opening up massive opportunities in the short and long-term for us. We know that by using our differentiated assets, refocusing our business, executing with discipline, and pursuing targeted reinvestment, we have a great path to create growth for ourselves, for the clients that we serve, and generate shareholder returns. Criteo operates at the intersection of e-commerce, advertising, and media, and we see enormous opportunities to expand our business much deeper into e-commerce and to continue to extend advertising reach for brands and retailers with a focus outside of the walled gardens that we call the open Internet. We'll call this opportunity commerce media. Our ambition is to be the world's leading platform for commerce-based advertising and marketing, offering capabilities to our clients that we believe nobody else can. I want to spend a few minutes to discuss why we're focused on the commerce media opportunity and how we'll leverage our unique assets to build new capabilities to deliver against this opportunity and what this means for our total addressable market going forward. So I focus on commerce. We're seeing incredible changes across the commerce landscape that both challenge our clients that Criteo is uniquely positioned to solve. We see interesting changes happening in the way consumers look for products, interact with ads, and ultimately shop online. We also see shifts in the way brands use marketing dollars to engage consumers directly where they shop online. First, consumer shopping behavior is rapidly evolving to e-commerce, which is booming from 16% of global sales today to an estimated 23% by 2023. During this boom, brands and retailers are transforming their e-commerce presence, gaining share from giants over the past months. Importantly, we expect this trend to continue. For example, during COVID lockdown, U.S. online track searches on retailer websites on the open Internet has increased 21 points to close to 30% of total share, while Amazon's share declined 23 points. Also, 81% of e-commerce buyers who tried a new retailer indicate that they expect to continue to use them in the future, creating a shift in brand loyalty towards open Internet retailers, which now represent about 40% of global e-commerce sales. Second, to take advantage of the surge in e-commerce, brands accelerate the online shift of their trade marketing budgets, and we expect digital trade marketing will exceed $23 billion in global spend in 2020 after growing an average of 82% each year since 2016. And last but not least, ad tech becomes even more important. We know that in the new identity world, publishers and media owners will depend even more on ad tech partners to monetize their audiences. Retailers and brands will continue to depend on digital marketing to drive sales and loyalty in an effective and measurable way. This is our sweet spot. As large online retailers have emerged as the new media moguls, they too need the expertise of ad tech partners to optimize the yield of their inventory. Despite these changes in the e-commerce landscape, when we look at the needs of marketers, they remain remarkably consistent. Ultimately, they're looking to understand their consumers on the path to purchase, to target and retarget consumers at scale and relevant brand-safe environments, to drive customer lifetime value and impact across the entire marketing funnel, and to measure the impact of their campaigns to optimize against real business outcomes like product sales, making sure that they have accountability for every dollar that they spend. Solving these needs has always been easier said than done. The erosion of the third-party cookie, the rise of privacy restrictions like GDPR and CCPA, and the increasing power of walled gardens make it harder for marketers to target, measure, and optimize campaigns with the transparency and control that they expect. At Criteo, we have the unique opportunity to meet the needs of marketers in a rapidly evolving commerce landscape. On past calls, I talked about becoming a full spec DSP for commerce. Having DSP capabilities is important to us, but it's not an end state. These capabilities are building blocks for our broader vision that we now refer to as our commerce media platform. We want to enable brands and retailers growth through commerce media. This means driving more valuable outcomes for our clients by activating our commerce data, previously tied only to our retail media business, to do this across all stages of the marketing funnel through audience-based targeting across the platforms that clients' consumers spend their time on, like CTV. This means leveraging our privacy-focused network of first-party data to maximize return on ad spend for our marketers and drive better monetization of ad space for our retailers and publishers across the open Internet. This also means providing differentiated real-time commerce insights and measurement to marketers. To be clear, retail media will become a central piece of our commerce media platform contributing differentiated ad inventory, first-party audience data, and insights to the platform. We've already started down this path with our scaled retail media business and the launch of our latest retail media release, enabling flexible self-service branding and targeted advertising on the e-commerce properties of top retailers across the globe. Added to this, our investment and new focus on our audience targeting solutions, which leverage our best-in-class machine learning and buying together with our shopper data, will deliver full funnel advertising needs. With our Commerce Media Platform, we will extend and expand these capabilities to address marketer needs across an even broader set of inventory and use cases. We believe the Commerce Media opportunity is ours to grab: strong, favorable market trends support our vision and we have the assets to execute on it. Let’s talk about these assets. We believe Criteo is unrivaled in its ability to seize the market opportunity of leading Commerce Media. We have valuable assets that differentiate us and uniquely position us to solve marketers’ needs by connecting brands, retailers, and their agencies, with the right shopper, the right message, and the right media to drive the greatest returns. We’ll fully utilize our assets to drive growth and shareholder value. First of all, our data remains king for data-driven marketing. Our clients need the highest quality data to reduce waste and bring optimal returns. Our Commerce Media Platform will be driven by the highest available shopper behavior and transactional data there is. No other company in AdTech has access to the types of data that we have. We have incredible technology to manage commerce data at massive scale, ingesting over $2 billion worth of daily transactional data across 4 billion product SKUs and thousands of product categories. We have direct access to this data via our integrations with our retailer clients. These privileged relationships enable for first-party, cookieless audience targeting across our Commerce Media ecosystem. Moreover, we extend these shopper targeting capabilities across the open Internet through our leading, privacy-focused ID Graph, with over 2.5 billion user IDs. We’re actively participating with industry bodies and regulators to enable cohort-based audience targeting solutions. And we’re pleased to have joined forces with The Trade Desk on unifying our identity solutions for the post-cookie world. This exciting and promising collaboration is a great step forward for the industry to develop a long-term, open-source identifier, grounded on consumer choice, to safeguard advertising on the open Internet. On Reach, we have privileged access to highly attractive ad inventory. Through our Retail Media ecosystem, we enable access to exclusive retailer ad inventory and insights that are only growing in relevance as trade dollars move online and consumer brands’ media budgets seek to better drive sales outcomes. On top of this, we have preferred access to over 5,000 premium publishers, enabling massive reach and scale for advertisers. Importantly, all of this reach can be addressable without third-party cookies. On Retail Media, we provide consumer brands with unique opportunities to advertise and promote their products directly on retailers’ media, something no traditional DSP on the market can do today. Our Retail Media Platform enables brands to engage shoppers with relevant commerce-native advertising and drive product sales across many of the world’s leading retailers, while at the same time helping these retailers generate high-margin advertising revenues. On Measurement, we provide the ability for advertisers to measure against the outcomes that matter most – product sales. We measure and optimize at the transaction-level for both online and offline sales for consumer brands; we measure outcomes down to the product SKU level. Additionally, we’re investing in insights capabilities that bring together organic shopping data with paid media metrics to help marketers better plan, optimize, and measure their investments. On global footprint, across 100 plus markets, we’re a partner of choice to support many of the largest and most global brands in virtually every market. Marketers want consistency across their digital marketing spend and a single partner who has that capacity. Finally, our strong margins, cash flow, and solid balance sheet provide the financial capacity to execute on our strategy. We’re already well advanced on our journey to execute against our Commerce Media Platform vision. From our past as the global leader in retargeting, we’ve begun expanding our portfolio to bring new fast-growth areas, while evolving and adding many capabilities to our core offering, fitting nicely with our strategy. Our new solutions already represent close to 20% of our business, and so far growing 53% in 2020. In 2020 to date, Retail Media has grown above 60% and Audience Targeting around 50%. These terrific high growth rates validate our strategy and the direction which we’re heading in, catching the wave of the market trends. While we’ve long had a globally scaled mobile offering, we’re doubling down on further areas such as video and CTV. In all fairness, while we’ve made good progress on our journey towards our full platform vision, we have more work to do. This is why we intend to execute with discipline and focus and invest now to further strengthen our offering. Looking ahead, we intend to complete our Commerce Media Platform by doing four things: number one, expand our Audience Targeting capabilities across both the marketing funnel and Omnichannel to offer the full range of targeting and retargeting strategies for commerce. Number two, extend brand reach across our large media network on the open Internet leveraging the combination of retail media and core business retargeting and measurement capabilities. Number three, strengthen our deep commerce analytics and insights capabilities to inform brands intelligence about their position on the digital shelf in every step of the buyer journey and use this as a customer service for retention. And fourth, further expand our privacy-focused first-party media network, growing our ability to access and activate against first-party identity and increased reach for marketers. Privacy and identity are part of the broader ecosystem and we're actively embracing and addressing them as an integral part of our strategy. Our commerce media platform will rely on a privacy-focused and transparent first-party media network, with brands, retailers, and publishers all contributing new first-party data to our shopper graph commerce data as they do today. And Criteo becomes the matchmaker between the advertiser, the product, and the consumer. This creates a massive, massive network that we consider no other ad tech can match for commerce-specific purposes, and Todd will talk more about this shortly. Now helping you with our total addressable market, we believe our strategy opens up a $61 billion TAM across brands, retailers, and classifieds. To summarize, our commerce media platform is a combination of our retail media and our marketing solutions assets to provide a full suite of media planning and selling services, bringing publishers' and retailers' data together, creating a huge ecosystem to connect the right person to the right products and the right media, and connect brands and retailers to people based on their shopper preferences. This is across the breadth of the Criteo network reaching a potential three billion consumers globally. Let me emphasize, nobody else has this sort of reach outside of walled gardens. We're making and will continue to make investments in our growth areas. We're leveraging our cash and strong financial position to fund for these investments, and we've also strictly managed our cost base in the core business through various operational excellence initiatives. Why do we believe we'll win with this strategy? It's because we have global reach with 20,000 advertisers across 100 markets. We have extensive shopper data and a first-party media network. Our new growth engines already supporting our strategy and today representing 20% of our business growing at over 50%, a solid product roadmap that tackles the challenges of identity, massive e-commerce tailwinds, and increasing TAM and superior commerce marketing assets. And finally, a strong balance sheet and reinvestment strategy to further transform our business. We think that our strategy of creating the world's leading commerce media platform and executing against our transformation plan positions Criteo for a healthy future and sustainable growth. With this, I'm glad to turn it over to Todd to take you through our product priorities to address the proposition of our commerce media platform.

Thank you, Megan, and good morning everyone from San Francisco. I'm delighted to be here for my first call with you today and to walk you through some of the very exciting plans we're working on from a product perspective. First, let me go back to some of the unique Criteo assets that Megan mentioned. There are a key reason that I decided to join the company and what makes me both confident and excited about our future. I firmly believe that in an advertising world where consumer privacy and data security are front and center, winners will be minted by their access and rights to first-party data, and we anticipate this to be truer in the post-cookie world. Very importantly, I don't believe we talk enough about the depth and breadth of the first-party data co-controlled by Criteo. What makes Criteo's data incredibly unique is that it is both commerce-focused and available in real-time. Our network collects more stream commerce data than any other independent ad tech company. Every day our platform ingests over $2 billion of transaction data across a catalog of four billion SKUs, 3,500 product categories in 13 languages. This paired with the 500 million daily active users we see today, half of whom are identifiable through hashed email or other offline identity, creates commerce-focused audiences to drive performance for our advertising clients. With our collection of first-party data, we are very well-positioned to innovate post-cookie advertising solutions that perform. And through this performance, we will further expand our market and grow revenue. We don't speak enough also about our technology, the machine learning we do over our data network that makes predictive bidding, product recommendations, and dynamic creative come together to ensure the greatest impact of each ad delivered. Our technology enables us to understand patterns and buying journeys across billions of products and consumer touchpoints in our network, so the ad experiences we deliver can be timed and sequenced to make them even more potent. And it's important to point out that consumer identity is a feature that isn’t always needed to facilitate the correct advertising decisions on behalf of brand and retail partners. Ultimately, what’s making our data and tech so valuable is the incredible reach of our network. With deep integrations across 20,000 customers and 5,000 publishers, and exclusive access to inventory on over 100 of the world’s top retail websites, Criteo operates on much more first-party data to facilitate greater monetization for marketers and supply partners alike. As a business, we’ve created a flywheel that grows this data, marketing outcomes, and reach in turn. And we believe that opening Criteo as a platform – that’s making our data, tech, and reach available to power new partners across the commerce space - will produce network effects in each of these three areas to propel our growth. Now let me take a moment to elaborate on how we’re using these assets, today and in the post-cookie world, over three areas of product focus. We believe we can create network effects to succeed, almost irrespective of where the industry is heading on matters of identity and privacy. To start, our network of first-party data guarantees a huge amount of ad inventory can remain addressable in privacy-compliant ways. This allows us, and our partners, to bid on individual users with an overlay of commerce data. As Megan shared, we’re truly excited about our partnership with The Trade Desk to provide the industry with an open-source unified ID. In addition to partnering with identity providers like Liveramp, we believe the Trade Desk partnership sets the stage for creating a scaled market standard for consumers to control their ad experiences and to replace cookies and other platform identifiers. It has long been overdue for ad tech to address consumers directly and to provide an improved value exchange. We see our effort opening up very big opportunities for the company. As we build an industry-wide identity solution, also look for us to experiment with Private Marketplaces and to provide key demand partners with bidding access to our preferred commerce audience supply. Second, we’re very active with industry groups to create a new paradigm for effective commerce advertising without platform identifiers. Criteo has been a leader in these discussions, and in parallel, we’re testing new audience products that use cohort signals and interest groups to deliver superior performance to our clients. Our SPARROW initiative recently influenced Google’s Dovekey proposal for cohort-based advertising, and we see this as a testament to the value of partnering with platforms to navigate consumer privacy challenges. A third product focus is to transform traditional contextual advertising into performance for our brand and retail marketers. By applying our machine learning at the intersection of content, commerce, and user signals, we believe we can create a wholly unique advertising solution that has incredible scale and doesn’t rely on third-party cookies. In summary, our goal is to provide customers with a variety of advertising solutions that operate together for scale and can stand alone in the post-cookie world. And while driving outcomes for marketers and yield for media owners remains job one, bringing trusted ad experiences to every consumer is now baked into our mindset. Again, our product roadmap will ensure we continue to succeed, almost irrespective of where the industry changes are taking us. Looking forward, we have an exciting product roadmap for 2021 to position Criteo as the world’s leading Commerce Media Platform and to secure our status as Network Operator of the Buyer Match for all commerce. Here’s a quick look, in 2021, we’ll improve our base by doing two things on Commerce Media: first, we’ll begin to make our assets more accessible to key technology partners that also serve marketers, retailers, and publishers. We want to make technology partners more successful, and in turn drive third-party demand, enable measurement across the entire buyer journey, and drive yield to our respective partners. Very importantly, we’ve just launched the Criteo Developer Portal to make this possible and have several other initiatives underway. I look forward to updating you as we advance. Second, we’ve begun to fully cover the marketing funnel with our product solutions. In 2021, this will include investments to ensure user identity remains available, a focus on performance at the midpoint of the buyer journey, and to connect the dots between awareness advertising and in-store experiences. We believe in 2021 we’ll continue to demonstrate superiority in delivering outcomes across the funnel – but we’ll also take pride in enabling partner applications to have better impact on commerce. An exciting example of this work is beginning with measurement partners to connect CTV household advertising with commerce outcomes. From a product perspective, this is the time to lock in the most important commerce use cases across the funnel for marketers, and to support partner use cases enabled by our API offerings. Prior to turning it over to Sarah, I just want to reiterate my excitement to be part of this team and the company, and for our opportunity we have ahead. With that, I’ll now turn it over to Sarah, our CFO, for a discussion of financial and operational performance.

Thanks Todd and good morning everyone. I'm excited to be part of the Criteo team. I'll go over our Q3 results, our commitment to operational excellence, our cash position, and our outlook for Q4. To start with the key figures, our revenue for the quarter was $470 million, and revenue excluding TAC was $186 million. Adjusted EBITDA exceeded $49 million, leading to an adjusted diluted EPS of $0.40. These figures show a year-over-year decline largely due to the expected negative impact from COVID, but they turned out better than we anticipated at the start of Q3. We generated $38 million in free cash flow during the quarter, bringing our year-to-date total to just under $100 million. Revenue ex-TAC declined 16% at constant currency. We estimate the negative impact of COVID was $33 million, accounting for a negative 15-point year-over-year change, with 60% due to travel, 30% from classifieds, and 10% from retail. This decline is less severe since July compared to Q2. We estimate we lost about $10 million due to privacy regulations during the quarter, particularly related to explicit consent in Europe. Year-to-date, COVID has negatively affected revenue ex-TAC by $80 million, or 12 points. Excluding the pandemic's anticipated impact, revenue ex-TAC decreased about 2%, while overall revenue increased by 4%. This indicates that the fundamentals of our business remain solid. We performed well around Labor Day in the U.S. We added 206 new clients during the quarter, ending Q3 with 20,600 clients, which is a 3% year-over-year growth. Our client retention rate stood strong at 88%, a significant improvement from Q2 as clients resumed their campaigns. In this quarter, we signed our first multiyear MSA contracts with large clients, which we expect to expand into other customer relationships. Our retargeting business declined by 24% at constant currency in Q3, with COVID accounting for 17 points. Our large customer segment improved by 10 points from Q2, reflecting healthy spending in the U.S. from mid-market and direct-to-consumer brands. New solutions grew by 43% in Q3, contributing 19% of our total business in terms of revenue ex-TAC. This growth was largely driven by Retail Media, which saw strong adoption among brands and retailers and grew nearly 60%, led by demand from CPGs, highlighting its increasing strategic importance. In Q3, Retail Media launched over 150 new brands and activated $200 million in media spending over the first nine months of 2020. We expect this positive trend to continue. Our omnichannel business grew 120% in the quarter, albeit from a small base. Additionally, we have exciting CTV campaigns in collaboration with various industry players, and we are rapidly scaling our capabilities. Regarding our cost structure, we have made significant strides in maintaining focus and discipline. Our non-GAAP operating expenses, excluding bad debt, decreased by $25 million or 18% in Q3 and $92 million or 21% over the first nine months. We achieved meaningful cost savings through headcount management and reducing our real estate footprint. As detailed in our non-GAAP reconciliation, we incurred $12 million in pre-tax restructuring costs this quarter, mainly involving the closure of our Palo Alto R&D center and related real estate actions. In examining our income statement, our depreciation and amortization expenses fell by 3% compared to last year. Financial expenses were $0.5 million in the quarter, down from $0.9 million a year ago. Our GAAP effective tax rate stands at 30%. Adjusted diluted EPS was $0.40. The cash flow for the quarter of $38 million demonstrates good collections and lower capital expenditures. Our balance sheet and cash position remain robust, and we anticipate repaying the $150 million revolver drawdown in November. I will now provide our guidance and outlook through the end of 2020, reflecting our current expectations as of today, October 28. It is important to note that many assumptions underlie this guidance, as the situation remains fluid and uncertain. At present, we continue to see impacts on our business and our clients’ businesses due to the pandemic. We expect the holiday season to be more subdued and extended compared to traditional seasonal patterns, but anticipate that retail media will continue performing well with solid budget allocations on our platform. Considering all factors, we are guiding revenue ex-TAC for Q4 to be between $223 million and $230 million, which corresponds to a year-over-year decline of 15% at constant currency, including $17 million attributed to privacy regulations related to the extended browser restrictions in iOS14. In terms of profitability, we project Q4 adjusted EBITDA to range from $81 million to $88 million, demonstrating a 37% adjusted EBITDA margin. We have adjusted cost run rates across all spending categories, factoring in our restructuring actions, and we expect to use some of these savings to reinvest in growth opportunities. Our annual effective tax rate is still expected to be 30%. In closing, my top priorities are fostering profitable growth and operational excellence throughout Criteo. As CFO, I am particularly focused on ensuring proper resource and investment allocation towards our priority growth areas. Megan and Todd's vision is compelling, and we are all working swiftly to execute against it. On the commercial side, we are collaborating with sales to increase share of wallet with agencies. In terms of operational excellence, we are implementing significant changes to our fixed cost base, including our data centers. Enhancing organizational efficiency will be key as our business model evolves. Finally, in terms of cash and capital deployment, we plan to redeploy resources to the highest value uses while investing in growth and maintaining flexibility. We aim to keep our share count stable. These are busy times, and I am personally thrilled to be part of the Criteo leadership team. I will now turn it back to Megan for her closing remarks.

Thank you, Sarah. Yes. In closing, I'll say a few words about how I feel about the future of Criteo. I’ve joined Citeo approximately a year ago, a little under, and I'm proud of some of the key milestones we've achieved together as a team. We've taken a claims-first focus across the company. We have refined our company vision and strategic roadmap to return to sustainable growth. We've strengthened the product roadmap to revive growth and address identity challenges. We've expanded our exposure to e-commerce through retail media and positioned it to be a central piece of our future strategy. We've reshaped our C-level leadership team and created a transformation office. And we've kept our people safe through a solid work-from-home model while overachieving expectations despite COVID-19, including on top-line profitability and cash flow in Q3. And we're developing a culture of innovation, performance, and accountability. Overall, our business performance shows resilience in 2020 to date, despite industry headwinds and the impact of COVID-19. This is a testament to the talent, strengths, and dedication of our great people. This is also a testament to our relentless focus on execution, while staying nimble as the landscape unfolds and new trends emerge. While we're pleased with our positive accomplishments, we're focused on the future to fully realize the strength of the business and the promising vision for Criteo. We're planning against our commerce media platform strategy, both organically and via partnerships. We're defining our product roadmap, fully embracing identity. We're executing with discipline and focus. We're implementing an organization and cost structure that supports our strategic plan. And we're investing in significant opportunities for growth to address a TAM of more than $60 billion. Within this context, we have a compelling future ahead to create sustainable revenue for our shareholders—sorry, to sustain the core value for our shareholders. Todd, Sarah, and I will be speaking at multiple investor and industry analyst events over the next few weeks. With that, I'd like to open the floor up to your questions.

The first question is from Lloyd Walmsley with Deutsche Bank. Please go ahead.

Thank you for taking the question. I have a couple if I can. First, could you provide an overview of how growth has progressed throughout the quarter and into October? It appears that your guidance suggests limited improvement in the fourth quarter, and I'm curious about how much of that might be conservative. Specifically, you mentioned a longer holiday season, which I would expect to be beneficial for advertising; I would like to understand that better. More broadly speaking, considering the increase in e-commerce due to the pandemic, shouldn't we anticipate a significant rise in online advertising to meet this growing demand? Putting aside travel and classified ads, shouldn't we expect a strong holiday season for the core retail sector? Any insights you could share would be appreciated.

Yeah. Hi, Lloyd, it's Sarah Glickman. Can you hear me?

I can, yeah. Loud and clear.

We are cautiously optimistic about Q4, but we must recognize that the pandemic continues to affect us in waves. We are observing solid growth in retail spending globally, particularly in the Asia Pacific region. However, Europe is re-entering lockdowns, and there are macroeconomic challenges in the U.S. That said, we have strong performers, especially among traditional retailers who have transitioned successfully to e-commerce, which is showing great results. We also maintain a substantial brick-and-mortar presence, which varies by business and country. While we are optimistic about current trends and the increase in customer demand, we remain cautious. It's also important to note that this year's holiday peak will be different; there won’t be the usual rush to stores on Black Friday. We expect this peak to be more subdued, spread out, and likely lighter than last year. Those are my main points, and I'm not sure if I addressed your second question.

Yeah. I think that's helpful color I guess around your people, the peak is going to be more muted. I guess, sort of, unrelated would just be on the call you all talked about making your technology available to other players in this space. Curious if you figured out an economic model around this idea and just help us understand the revenue opportunity there?

Yeah. I mean, I can quickly address that. I mean we're obviously looking more to longer-term contracting with our customers. And we have a couple of nice MSAs that we've just signed, and retail media is also a longer-term business. So we're also seeing some really good moves there, I would say. So those would be the key comments I would make.

Okay. Thanks.

You're welcome. Thank you.

Thanks very much. Our team here has, I guess, several questions. The first one I guess is, we're really struggling to reconcile some of the claims Megan that you made, very strong claims about your ID graph and first-party data the 0.5 billion DAUs and with the need for partnerships with LiveRamp and the trade desk. And I guess our questions would be, are you going to be getting paid by them to access this terrific ID graph that you have, or was there more a push from your advertising clients to get together with rivals? And then maybe a separate question for Todd in a different direction. With the growing number of publisher integrations, are you further cutting SSP and exchange fees and becoming your own SSP? And how much more room is there for you to become a more efficient player and get an edge for those publisher integrations in a post-cookie post-IDFA world? Maybe those are two to start with. Thanks.

Thank you. Let me just kick it off and then I will pass it across to Todd to give a little more depth in detail. The notion of LiveRamp has always been a partner of ours. I mean, we use their ID matches as part of our shopper graph. And part of our data set. So nothing changes there. And the same is with The Trade Desk. I mean we're sort of helping each other or clients to each other or open-source to each other to ultimately get to identity. And so there's no model change there whatsoever. It's how we're now starting to work more closely with them. I think that has changed over the last few months. And the announcement of our collaboration with Trade Desk is a perfect example of one and maybe one of more to come. So I'll throw a little bit more color on that one, I'll pass it through to Todd.

Yes. Thanks, Megan. I think the key message here is that we're not in the identity business and we're not in the data business. We've always been in the performance advertising business and the outcomes business and we're very much going to stick to our knitting there. The idea of making our audiences that have the benefit of the ID graph and the overlays of commerce data and our machine learning that makes sense at the intersection of those things is something that we want to provide to our partners, more so than we have as an output or a result. So that's important clarity. The idea of opening our APIs is much more about getting to the right audience and delivering a better experience not to open up data stores or components of the identity graph. That's the current thinking.

And I guess maybe one just quick follow-up with that. I mean on the first-party cookie list solution, can you help us understand a little bit more how it works with targeting segments especially within new solutions? And what it means for sort of one-to-one targeting on the retargeting side because there's clearly going to be a lot of pressure in how that evolves?

Yes. As I mentioned in my prepared remarks, there are three key components to this. They are all linked to the extensive source data we possess, and how we integrate that data to strengthen our syndication capability, which can stem from universal IDs such as the Trade Desk UID2 and our collaboration with partners like LiveRamp IdentityLink. To summarize, the three components I previously mentioned are: First, we aim to enhance our ability to integrate data at the source, improving our position as an SSP. I believe you inquired about our SSP capabilities, and we are already established as a pure-side SSP in retail media. There is much to learn from this model regarding how we gather, aggregate, and deliver more effective advertising, which we can extend to the open Internet and our SSP partners. While I would like to discuss the mechanics of these processes in a separate meeting, the three avenues we are exploring include: first, augmenting our efforts to integrate first-party data into a fully addressable network that extends beyond site-specific targeting; second, leveraging our identity graph as a reliable reference for validating cohort-based or interest-based advertising and contextual ads. When it comes to contextual advertising, this is particularly relevant, given its current availability. The synergy of semantic signals from URLs, along with commerce signals from purchased SKUs and associated transactions, as well as user traffic data, creates a robust targeting framework. This is not identity-driven targeting but rather contextual targeting, and I am eager to keep this group updated on our developments. Our company has a strong history of utilizing machine learning and applied analytics for remarketing, including retargeting. These skills are directly applicable to the audience solutions we are discussing at a high level. We would like to schedule a briefing in the next couple of months for a more detailed overview, and I believe Megan can elaborate on our plans.

Okay. Thanks very much.

You are welcome. Thank you.

Hey good morning everyone. First for Megan and welcome to Todd. Just some follow-ups on the identity questions, I guess we also saw Trade Desk tie up more tightly with LiveRamp yesterday. I guess the big question here is, is this type of federated approach necessary in a post-cookie, post-mobile ID world where the walled gardens have some obvious advantages? And how could you see that playing out even further? We've been fairly impressively on the level of partnerships you've already talked about today, but maybe help tease out where that goes further? And then second, welcome to Sarah. You mentioned that the fourth quarter guidance embeds the impact of the browser changes going on across iOS right now. Your predecessor was nice enough to quantify those sort of things for us at times, if you're willing to do that. And then just any big picture comments in particular on what you hope to bring to the position, maybe in particular, your views on uses of free cash flow?

Yes. I'll begin with the identity question. It's an important topic, and we're seeing significant developments following the Chrome announcement. The industry is looking for new ways to manage identity that safeguard consumer privacy, provide options, and can be utilized across the entire Internet as a substitute for outdated methods like third-party cookies. In our last earnings call, we discussed an internal initiative that was similar to the work being done by Trade Desk. Jeff and I concluded that it would be more effective to collaborate as an open-source effort given our extensive reach and our ability to influence the open Internet. This collaboration made perfect sense. Considering the number of publishers we partner with and the consumers we engage, joining forces to work towards global adoption is essential. While we were ready to pursue this independently, more collaboration can only enhance the effort. With support from organizations like W3C and IAB, and others who want to participate, this represents an exciting shift for the industry. Now, I’ll hand it over to Todd for any additional thoughts on this topic.

Yes. Thanks, Megan. Great to reconnect, Dan. I mean, the only thing I would add to that is first to reinforce Megan's point that it absolutely is a partnership world in terms of what we need to do to ensure a thriving open Internet outside of the walled gardens. But there are distinctions and partners that I think are going to be important to talk about. So I found it interesting that in some ways, our identity graph gets compared to what a LiveRamp might have. But we look at it quite differently. And we look at our commerce assets and first-party data much more so and identity as a way to translate those into a stronger buyer match as we're calling out and to distribute that match across the network, using the rails of identity, something that Scott, how might say, or Jeff Green might reinforce with the open-source UID, too. So those are important partnerships and initiatives for us to get better syndication for a buyer match. And that's where identity is important to partner around, but I think each party brings something very unique to the table and just that mention of three companies. And ours, of course, is very grounded in direct commerce data. And we're going to be developing our products with that in mind every day.

Den, this is Sarah, just to react to your other question. In terms of Q4, we're assuming around $17 million on privacy headwind. We had about $10 million in Q3. And I would say COVID impact, we're assuming around $34 million in our current models. And then in terms of cash and what we're doing with the cash, obviously, we're going to reinvest some of that. We have a pretty compelling roadmap here. We're excited that our cash flow looks good, and it's obviously a big focus to make sure that continues to look good. We're going to be repaying the revolver back. I mean, that was more a cautionary measure in any event. And we're going to repay that back. But we are very conscious of the expectations on capital allocation, and we're going to be very smart about that. And as and when we see the right things to do, we will, of course, let you guys know.

Got it. Thank you everyone.

The next question is from Matthew Thornton with Truist Securities. Please go ahead.

Hey, good morning, everybody. Thanks for taking the question. Maybe one around the transition to kind of self-serve to some degree. I don't know if this one's for Megan. First, maybe on the DSP side, can you give us just kind of an update on either the number of clients using it on a self-serve basis or as a percentage of revenue is currently coming from self-serve or whether it's maybe still should we talking about beta clients or whatever the right metric is there. Similarly, on the retail media side, just any color what that is in terms of a percentage of the non-retargeting businesses? And again what percentage of retail media right now is being used on a self-serve versus full-serve basis? And then just third and also related, when we think about the cost base long-term, as this kind of continues to transition. How can we think about your cost base as the product model kind of evolves here? Just any high-level thinking there would be helpful. Thanks everyone.

Hi. It's Sarah. I think I can answer some of those. Not sure, I have all the detail on self-service versus managed service. Retail media we feel very good about. Obviously, it jumped to 60%. And we're feeling good about the continued traction there. Clearly, it is a more integrated model with our retailers. So those are more of a self-service component to that. However, I would say we stay very closely connected with those customers. So there's kind of a difference between self-service and managed service. And obviously we kind of move between those two depending on the customer and then depending on our solution. So that would be my guess, my key answer on that one. Clearly, self-service is one of the areas we continue to invest in, and we work with our partners and our customers to ensure that we're doing that in a way that works for them. But we also are very much appreciated for the managed service that we give and now our customers see value with that. So I don't have particular stats on that, but I would say both are working well and we see continued investment and usage in self-service and obviously is a continued focus for the road map as well. Was there any other question there? Sorry, I don't know if I unpacked everything you asked?

Yes. Hi, I've got a couple of questions. First one would be whether you are seeing any sign of the Walled Gardens being more accommodating in the context of the antitrust investigations that are being opened up. The second one, in terms of classifieds, are you seeing any distinction between the kind of classified sites? I think the big weak spot for you is in the jobs area, if you could correct me if I'm wrong, because obviously we're seeing strong numbers coming out of classified sites in kind of other areas. Third one would just be, can you comment on the revenue ex TAC margin. It's obviously coming down sequentially. Is that just a function of mix in terms of retail media becoming a bigger and bigger part of the total revenue? Thanks.

Okay. I can…

Let me address the first point. I'll discuss the Walled Gardens briefly and then Hand it over to you for the classifieds commentary and margins. Regarding the Walled Gardens, there hasn't been a significant change. Google continues to move forward with their timeline for the Chrome upgrade to eliminate third-party cookies, and I haven't observed any pushback. As I mentioned previously, we are committed to moving away from this reliance; we aren't depending on the possibility of them changing their minds. We believe it's time to pursue a different direction. Therefore, our products, roadmap, and partnerships are all designed to be independent of third-party cookies. To answer your question, there has not been a change in Google's mindset. However, we understand they are under considerable pressure to avoid being deemed anti-competitive. This has not altered our cooperation with Google, which remains strong, as demonstrated by our collaboration on the SPARROW project. Would you like to take the classified margins discussion?

We're seeing positive developments in classifieds, particularly in the job market and real estate, with encouraging signs from Asia as well. While there has been significant change compared to last year, especially in the travel sector, the trends are improving, and we've incorporated this into our guidance. Regarding margins, this quarter we're expecting more expensive inventory than our previous low point in Q2, but we are actively managing our cost base. Overall, our margins are stable, and we're not facing major concerns. Our focus remains on maintaining a healthy cost structure, and our headcount run rate is progressing positively. Discretionary spending is low, and our inventory acquisition costs fluctuate with the market, but we believe we're making smart purchases. Overall, margins are in line with our expectations, and we don't anticipate any significant changes in our modeling.

Okay. Thank you, Sarah. Thanks Megan and Todd, and thanks everyone for joining. This now concludes our call for today. Your IR team is available for any additional requests. Have a good rest, update, and please stay safe. Thank you.

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