Criteo S.A. (CRTO) Q4 2020 Earnings Call Transcript

Thanks, Jason. Good morning everyone and welcome to Criteo's fourth quarter and fiscal year 2020 earnings call. We hope you’re all keeping safe and well. Joining me on the call today are CEO Megan Clarken; Chief Product Officer, Todd Parsons; and CFO, Sarah Glickman. For everyone’s convenience, you’ll find our investor deck on our website. Before we get started, I’d like to remind everyone that our remarks today will include 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. 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 update any forward-looking statements discussed today, except as required by law. We'll also discuss non-GAAP measures of our performance on the call. Definitions and reconciliations to the most directly comparable GAAP metrics are included in our earnings release published today. Finally, unless otherwise stated, all growth comparisons made during this call are against the same period in the prior year. With that, it’s my pleasure to now hand it over to Megan.

Thanks, Ed, and good morning, everyone. And thank you for joining us today. I hope everybody is staying safe and well. Closing on this past year, you’ll all agree that 2020 was an unprecedented year by any standard. Yet, despite an extraordinary backdrop, I couldn’t be prouder of how much we’ve achieved as a company through my first year of leading the company’s transformation. We kept our people safe through an efficient work-from-home model. We increased our focus on e-commerce across our entire business. We helped our clients achieve their marketing and monetization objectives by providing the campaign performance and strong ROI we’re known for. And we accelerated Criteo’s transformation plan to return the company to sustainable growth. Executing with grit and conviction, we delivered 97% of our original top-line guidance set before the pandemic and 100% of our original profitability target. I’m hugely grateful and encouraged by our amazing team for their strong and focused performance. Together with Todd and Sarah, we’ll discuss four key topics on our call today: First, the multiple changes we’ve made across Criteo to set us up for sustainable growth; Second, how our Commerce Media Platform strategy positions us for success; Third, what our product areas of focus are for 2021; And fourth, how our solid execution allowed us to overperform in 2020 and what this means for our 2021 growth momentum, organization, and capital allocation as we continue to transform ourselves. Starting with a quick look back at 2020. Not only did we achieve a lot, we also made multiple structural changes that set Criteo up for profitable growth ahead. We’ve embraced a client-first focus, putting our customer needs for marketing and monetization at the center of the organization and moving all of our teams in lockstep to support them. We refined our company vision, product strategy, and transformation plan to expand much deeper into e-commerce and return to sustainable growth. We increased our focus and investment in e-commerce through Retail Media, which is now positioned as a central piece of our Commerce Media Platform strategy. We reshaped the entire C-level leadership and created a Transformation Office to ensure the smooth execution of our plans. We strengthened our roadmap to deliver new products including our focus on extending our leading first-party data assets and unique identity capabilities into a competitive moat. We adopted a much more open approach to partnering with the industry and signed more partnerships in 2020 than in any other year before. We reignited a culture of innovation, performance, and accountability to drive growth and execute against growth opportunities that take full advantage of our unique assets. The Commerce Media opportunity for us is based on Criteo’s front row position operating at the intersection of e-commerce, marketing, and media monetization. This intersection means that we shepherd the buying and selling of advertising and promotions of goods and services with a strong focus on e-commerce across a massive network using first-party identity and commerce data. During the Q4 holiday season, our clients knew very well how important this shopping season would be after an incredibly challenging year. The new dynamics of more people shopping from home introduced uncertainty into a shopping season that needed to be optimized for their long-term survival. Ahead of the holiday season, a large New York-based retailer came to us with a double challenge for their marketing and monetization. With their marketing, they needed to address new shopping behavior and move potential shoppers down the funnel to close the conversion loop. We designed a full funnel audience strategy for them to drive consideration from non-buyers and engage previous buyers, leveraging online and offline data to drive more conversions to their e-commerce site. For their ad monetization, this same client wanted to capitalize on growing e-commerce traffic to support their focus on yielding strong ad revenues. They used our Retail Media solutions for that goal. We helped onboard and train their media team through a series of education training sessions across operations, analytics, and sales. Overall, our engagement with them across marketing and monetization helped this client achieve tremendous results in Q4, contributing $9 million in revenue ex-TAC to our results, up 40% year-over-year. Now as the old Criteo, a retargeting-only company, we would not have been able to offer what I just described. This is our new direction. For 2021, we have ambitious plans to further expand our relationship with this client drawing on growing capabilities across our Commerce Media Platform. Expanding their portfolio in a busy ecosystem was key for them to stand out from their competitors and bring more value to their customer base while growing it. As the travel audience is less receptive to more traditional media, especially during the pandemic, we suggested a broad-based video campaign. We targeted high-quality audiences showing travel intent via video and helped them achieve their brand awareness objective with a top-of-mind uplift while driving strong traffic on their new travel services. This campaign brought an awareness uplift of more than 30% for the client. We know that consumers, their likes, dislikes, and purchases inform a dataset that keeps growing. In 2020 alone, our vast client relationships and processing power allowed us to ingest over $2.5 billion of daily transactions from over 21,000 commerce clients, across 4 billion product SKUs and 3,500 product categories. Our first-party data remains central for mapping and understanding every step of the consumer journey. This data is established through direct integrations with our retailer clients enabling cookie-less targeting across our Commerce Media ecosystem. Only Criteo has this commerce data at scale in the independent ad tech landscape. During the peak of the holiday season, our technology supported 445 billion bid requests on a single day, a 13% increase year-over-year. Our AI engine evaluated over 64 million campaigns per second and gets faster and smarter with each additional data point it learns from. We believe we’ve barely scratched the surface of what we can do here. Our Commerce Media strategy has just begun to uncover what’s possible and Todd will talk to you about our progress there. We believe our data will propel us past the identity challenges that will soon affect the rest of the market. In partnership with our clients, the constant and safe protection of first-party data is the foundation of our identity strategy. As first-party cookies disappear, we’ll continue to offer our clients the services they need. This would essentially have us leapfrog the competition, and we believe we’re in great shape outside of what will be otherwise a market storm. Our work ahead is to continue to take advantage of our unique assets through our Commerce Media strategy, return to sustainable growth and drive value for our shareholders. Looking at what this means for our priorities, the team and I are laser-focused on three key things for 2021. First, growth; focusing on strong secular trends in e-commerce, making the right thoughtful decisions, and attracting and retaining the best talent; Second, execution in everything we do; And finally, first-party data: using our unique and protected first-party data assets to strengthen our competitive moat.

Thank you, Megan, and hello everyone from San Francisco. On our Q3 call, I touched on the importance of several Criteo assets I’d like to reinforce, our direct access to vast amounts of first-party identity and commerce data, the AI we apply to make predictions about consumer needs that drive commerce outcomes, and the vast reach of our direct retailer and publisher network. As Megan said, our combination of assets makes Criteo completely unique amongst independent ad tech companies. Since our last call, our delivery of new product has come into sharp focus, and we’ve made tangible progress with what we’re building. I’m going to walk you through some of our product investments in more detail. But before doing so, I want to share the two objectives that drive our 2021 product plan: First, returning Criteo to sustainable growth; and second, future proofing our business for the benefit of marketers, publishers, and the consumers they collectively serve. Using these objectives as our compass, we’ve built our product roadmap around six key initiatives. Three of these focus on returning Criteo to sustainable growth. First, we’re expanding our performance audience offerings to address the full consumer journey, from discovery to purchase. During the Q3 call, I shared our vision of building a completely differentiated contextual marketing solution. We’re shipping the MVP of that product in late Q1, and have secured notable brands for our testing. What makes our approach to contextual truly different is that we’re using first-party data to add a commerce signature to the content consumers are reading and watching across the Open Internet. Since our last call, we’ve also graduated our investment in Google’s Privacy Sandbox, shifting focus and resources towards testing the efficacy and impact of cohort advertising on our ecosystem. While we do this, we’re also making solid progress in testing cookie-less advertising channels like CTV through our active partnerships. Our second growth initiative is focused on bringing new advertising dollars into Criteo’s network. Here, we’ve taken a big step forward by launching our API partner program into general availability. Criteo APIs pave the way for brands, retailers, agencies, and partners to directly leverage the world’s leading Commerce Media Platform, and to build customized solutions that produce more value using our core assets. Finally, our third growth initiative is to drive new stakeholder monetization, unlocking value in audiences and advertising inventory in new ways. In addition to the incredible progress we’re making with our Retail Media partners, we’re actively working to drive more value to our network of 5,000 direct publishers. Our investment here is very important as it strikes a balance between publisher and advertiser needs and will ensure the entire ecosystem around our Commerce Media Platform thrives. Now that I’ve covered our new growth products in some detail, I’d like to illustrate their potential using an example of a large retailer in the home improvement sector here in the U.S. This retailer currently spends $180 million a year on digital, $60 million of which goes directly to the Open Internet, where our most immediate opportunity lies. Of this $60 million opportunity, we’ve captured $7 million in annual conversion spend just on retargeting. By future proofing our business using first-party data, we’ll not only preserve this retargeting spend but be able to grow it over time. In addition, we believe we can quickly triple their spend with us to bring our share of wallet to 36%. It’s an imperative for us to enable this growth by simplifying the interoperability of first-party data between partners. Powering safe and secure multi-party interaction around first-party data is not only what Criteo does incredibly well, it’s simply the future of media on the Open Internet.

Thanks, Todd. It’s an exciting time for Criteo. Good morning, everyone. I will discuss how our solid execution across our strategic pillars drove our overperformance in Q4 and in 2020. Let me start with the headline numbers. Revenue grew 1% in Q4 to $661 million and was $2.1 billion in 2020, down 8% for the year. As you can see, we beat guidance for revenue ex-TAC and adjusted EBITDA, largely due to an extended Cyber-30 for our U.S. and European e-commerce customers. On a non-GAAP basis, revenue ex-TAC was $253 million in Q4 and $825 million for 2020, or $25 million above our expectation. Revenue ex-TAC was down 6% at constant currency versus Q4 2019 and down 13% for the year. Q4 adjusted EBITDA of $103 million drove a 41% margin, translating into $251 million for the year. This resulted in an adjusted diluted EPS of $2.17 in 2020. Free cash flow of $120 million represented a 48% conversion of adjusted EBITDA in 2020, the highest level since 2014. Revenue ex-TAC decline represented a 10 percentage point improvement versus Q3. We estimate the negative impact of COVID was $26 million in Q4, or about 10 points of year-over-year impact, with 95% of this impact from lower spend in Travel and Classifieds. In fiscal 2020, we estimate the overall COVID impact on revenue ex-TAC at $106 million, or 11 points year-over-year. 60% of this impact was in Travel, 35% in Classifieds, and 5% related to Retail. Excluding the estimated COVID impact from these vertical customers, our revenue grew 10% in Q4 and 3% in the year. Our revenue ex-TAC margin was 40% in 2020, a reduction of 2 points of revenue, in line with expectations due to the evolving product mix of our business. Let me now walk you through how our solid execution related to our four strategic pillars that drove our overperformance in Q4 and the fiscal year. Our strong performance in retargeting across all regions, in particular in the Americas and EMEA, was the largest driver of overachievement in Q4. We added about 900 net new clients in Q4, the highest level for the past 13 quarters. While distributed across our entire business, over 70% of these client additions related to retargeting, with a large part upsold to targeting campaigns as well. Same-client revenue ex-TAC growth of minus 1% in Q4 improved 10 points relative to Q3, and was a positive 10% excluding the estimated COVID impact. With respect to our second pillar, we continue to work with industry partners to strengthen our Commerce Media Platform. We are investing in our transformation and Commerce Media Platform growth initiatives in 2021, including in Retail Media, first-party data, contextual advertising, video, and Commerce Insights. These growth investments are funded for the most part through productivity and cost savings, enabling top-line leverage as we commercialize new products and capabilities. Our balance sheet continues to be strong and we closed 2020 with $530 million in cash and marketable securities, after repaying the revolver drawdown of $164 million in November. We will look to maintain flexibility in our capital allocation to pursue organic and potentially inorganic investments. I’ll now provide our guidance and business outlook for 2021 which reflects our expectations as of today, February 10. Importantly, a key assumption for this guidance is that we’re in a new normal, with continued impact from the pandemic driving higher e-commerce, a backdrop of muted global economic growth, and continued challenges for the Travel and Classified verticals.

The first question is from Sarah Simon from Berenberg.

I've actually got three questions if I may. First one, Sarah, you gave an assumption about the COVID and the impact through '21. When are you thinking Travel starts to come back in terms of spending and are you seeing any sign of that yet? Second one kind of general question. Can you talk about the difference between your Retail Media product and Amazon? I think a lot of people still don't really understand what it is that you're doing. And maybe Amazon is a good benchmark to start with. And then the third one, in terms of CTV, I'm assuming it's very small in the mix of revenues today. Do you think that is a product that you'll be using for more for retargeting or more for upper funnel products?

Sarah, take the first one and then I'll take the second and third.

Yes. Hello, Sarah. Yes, so Travel, we're seeing that we're about 75% to 80% down year-on-year still. We have a more aggressive assumption throughout the year and obviously all of us are hoping to start taking some trips. And so, we're still seeing it's pretty muted and challenging, but we're ready for when it comes back.

Let me take the second one and thank you for asking it, Sarah. It's important I think to lay out the differences between the two. We've been clear of our ambition about to become the Amazon advertising on the Open Internet. The e-commerce landscape is massive and it's predicted to grow at about nearly $7 trillion by 2023. So, it certainly has room for both of us there. It's an extremely healthy place for us to be focused specifically on the assets that we’ve got. We’re focused on the Open Internet, whereas Amazon is focused on its own platform; and secondly, to get their advertising out to the Open Internet, which takes up about 38% of that total gross merchant price value that I talked about before. So inside of that $6.8 trillion or $7 trillion, 38% of that is actually the total of the Open Internet, and that's the area that we play. We have huge e-commerce scale. We process about $900 billion a year in online sales, which is bigger than Amazon. The big differentiator for us is around the Open Internet and our first-party network, which gives us a clear advantage. In Amazon's case, they know who their consumer is if they're a registered user. Once they get outside of that domain, they have to connect their registered user to the same person off their domain using third-party data. When third-party cookies disappear, they face a challenge. We believe that we have a massive advantage because of where we sit in terms of what we do for the Open Internet today and the massive amount of data that we have. Our strategy is based on first-party access to data. I think as Todd mentioned, the future of media on the Open Internet is about first-party data and not third. So they have a challenge in front of them. In summary, we do believe in our goal of becoming Amazon advertising on the Open Internet; we have access to 38% of that $6.8 trillion pie in that regard.

The next question is from Matthew Thornton from Truist.

I also have three, and I'll drive me quick here. I guess just first, maybe for Megan or Todd. If we think about the Retail Media business, is there any way to help us think about how it stands right now, maybe kind of SSP revenue versus DSP revenue, self-serve versus full serve or managed serve. And again, when we think about the self-serve unit economics of that product, is there any reason that they're dissimilar to what we'd see from other publicly traded types of DSPs and SSPs? Why don't I start with that one, and then I'll come back with my second question?

Todd, are you good to take that one?

Yes. I can take this one. The emergence of that business, and the change in the profile of retailers, means that we are doing much more in terms of being an SSP to those partners. At the same time, we are servicing many of them with our DSP offering. We're seeing that fuller basket is driving more interest in demand from those parties. The fact that we can bring customers in and provide monetization at the same time signals a very important difference in our marketplace. We are adding quite a bit to the native media monetization products of Retail Media, and we have a very healthy pipeline there. We're also looking as partners to monetize their data through first-party audience information. So I would just say we're not traditional as an SSP. We’re doing things that are much deeper, retailer stack than providing an advertising or media solution, and we're very data-focused. We have had self-service capabilities on both sides of our business. You can expect that these surfaces will merge as we move forward.

That's very helpful. And then just the two other ones. First one is probably for either Todd or Megan and maybe the last one is for Megan. Obviously, Google touted their Flock solution for cohort advertising recently and talked about the effectiveness there. Curious if that, in any way, changes how you think your core retargeting business will look on the other side of those Chrome changes?

Let me take this. We've been working with Google since the beginning of what I call the bird proposals. The 95% number that came out a couple of weeks ago is pretty impressive, but it's not external to Google. We're all invested in that partnership to see how Flock plays out and how cohort advertising impacts the ecosystem. At the same time, we are focused on preserving the opportunity for the company by bridging first-party data between all of our stakeholders. We continue to invest heavily in retargeting solutions while exploring other non-cookie solutions. So we’ve got various approaches that ensure our customers are well covered.

When you think about the two sides of the business, if you look at the valuations out there around ad tech that have re-rated recently, how do you think about Criteo as a potential M&A target? How do you fend off M&A? We're focused on executing against our strategy. My job has been to run a transformation across the business to return to sustainable growth, and that's what I'm focused on. We're going in the right direction, and I will ensure if we consider M&A, it would be something that delivers against our strategy and provides shareholder value.

I guess there are two. I just wanted to ask on net new clients reached the highest level since I think 3Q of '17. Can you just talk about some of the drivers of those client net adds? And then would you characterize them as more kind of resurrected clients or totally new to the Criteo platform?

Yes, most of these are new clients. We see, especially with the Open Internet, a lot of new players coming in, and they need our services. Most of it is on the new sales side and 70% of these client additions related to retargeting as well.

In terms of privacy impacts, it's about two-thirds from browsers and about one-third from explicit consents. While we continue to monitor and update on that, it is lower than we were anticipating a few months back.

Well, we're just about to close, I apologize for interrupting. Thanks, everyone, for joining the call today. This concludes the call. Thanks, everyone, and your IR team is available for any follow-ups.