Criteo S.A. Q1 FY2024 Earnings Call

Good morning, and welcome to Criteo's First Quarter 2024 Earnings Call. Please note, this event is being recorded. I would now like to turn the conference over to Melanie Dambre, Vice President of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to Criteo's First Quarter 2024 Earnings Call. Joining us on the call today is Chief Executive Officer, Megan Clarken; and Chief Financial Officer, Sarah Glickman, who are going to share some prepared remarks. Todd Parsons, our Chief Product Officer, will join us for the Q&A session. As usual, you will find our investor presentation on our IR website now, as well as our prepared remarks and transcript after the call. Before we get started, I would like to remind you that our remarks will include forward-looking statements which reflect Criteo's judgments, assumptions and analysis only as of today. Our actual results may differ materially from current expectations based on a number of factors affecting Criteo's business. Except as required by law, we do not undertake any obligation to update any forward-looking statements discussed today. For your information, please refer to the risk factors discussed in our earnings release as well as our most recent Forms 10-K and 10-Q filed with the SEC. We will also discuss non-GAAP measures of our performance. 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, let me now hand it over to Megan.

Thanks, Melanie, and good morning, everyone. Thank you for joining us today. We're off to a great start in 2024. We continue to transform our company into a Commerce Media powerhouse, and we're gaining more and more momentum. We delivered double-digit organic growth for the second consecutive quarter and achieved record top line results in Q1 while nearly doubling our adjusted EBITDA from the same period last year. I'm very proud of the incredible work from our teams. These results are testament to our laser-focused and steadfast execution. As we continue to make progress on our plan, we're even more excited about our future and confident that we have the right strategy to capitalize on the next wave of digital advertising and deliver value for our shareholders. We've built the only unified platform that directly connects advertisers with retailers and publishers, and we believe we've repositioned our business to be the leading AdTech player in Retail Media and the platform of choice for performance-based advertising. Starting with Retail Media, we continue to gain market share with 38% year-over-year growth in activated media spend, outpacing the market. We have a leading and growing market footprint with close to 225 retailers and 2,700 brands globally. This is now miles ahead of any competitor with our scaled network of retailers becoming the obvious complement to Amazon when buying Retail Media. Our global presence, ability to scale quickly, our end-to-end capabilities, simple-to-use products, AI-driven performance and world-leading sales and product expertise remain key differentiators. We continue to expand our coverage. We're delighted to have extended our partnership with Walmart Connect in Guatemala, Costa Rica, Nicaragua, Honduras and El Salvador, further broadening our Retail Media presence in LatAm. In the U.S., we're proud to add new retail partners, including a leading retail department store chain and a TV and online shopping platform. We also continue to win new retailers in APAC, including David Jones in Australia and drugstore chain, Welcia in Japan. We're quickly ramping up our newly signed partnerships, including Albertsons and expanding our reach into adjacent commerce verticals as exemplified by the recent addition of Ticketmaster to our platform, the world's leading ticket marketplace. We also look forward to expanding our partnership with Uber Eats, as we work with them to go into new categories and add new ad formats. With our relentless focus on driving demand or, said differently, attracting advertising spend to our retailers' sites, our access to unique and premium Retail Media inventory at scale has been instrumental in achieving this. We added over 100 new brands in Q1 and saw continued strong growth through our agency partners by making Retail Media easily accessible to them via Commerce Max. In the U.S. alone, agency spend reached about $100 million for the first time this quarter, with 40% coming from three agency Holdcos growing by triple digits in Q1. We expect sustained momentum as our multi-year partnerships with leading agencies and brands represent hundreds of millions of dollars of spend anticipated to come through our platform in 2024 and beyond. Evidence of this can be seen with our largest brands, who are now advertising on 50% more retailer sites than they were last year. The Commerce Max drives demand to both retailers' own inventory and to off-site campaigns using retailer data assets to extend their reach across open Internet inventory. Fresh Direct is one of the latest retailers to participate in off-site campaigns with our Commerce Max DSP. Further to enabling demand through direct channels via Commerce Max, we're also focused on indirect demand channels. While still early days, opening more channels creates further opportunities to scale. Our Commerce Grid SSP gives brands a further way to access our retailer audiences for off-site campaigns run through third-party DSPs. This means more channels for retailers to attract additional demand and more revenue opportunities. Nobody else offers such flexibility and optionality to reach the most valuable audiences and connect supply so efficiently with demand. In advertising, results are supported by measurement. Measurement is critical to buying and selling and helping brands and agencies understand the effectiveness of their Retail Media spend. In February, we gained our first MRC accreditation for Retail Media measurement. This is an important step forward as we help to unify the ecosystem. MRC accreditation of our Retail Media measurement means that the data provided by Criteo is certified to the level of the currency data used in buying and selling traditional media and digital display and therefore, is comparable. Our measurement can be used to make decisions across platforms and media buyers. This accreditation underscores our reliable and advanced measurement capabilities for both on-site sponsored products and on-site display ads and represents a significant step forward to drive larger brand investments in Retail Media. We're also working with key third-party verification leaders like Integral Ad Science and DoubleVerify to enable viewability and invalid traffic measurement across our network of retailers. Overall, we expect significantly more dollars to continue to shift to Retail Media because it helps brands take advantage of retailers' increasingly valuable first-party data to connect with consumers. 83% of agencies rate the performance of Retail Media spend as more effective than other channels in terms of sales impact, according to our recent ecosystem survey. Today, more than half of brands and agencies in all regions are investing in retail media, both on-site and off-site. Lastly, we remain at the forefront of Retail Media innovation by integrating generative AI into our global platform. We're testing sponsored ads in conversational environments, as consumers progressively use chatbots on retailer websites as part of their shopping experience. Now turning to Performance Media, which includes our targeting capabilities, Commerce Audiences, and our supply and AdTech services from our IPONWEB acquisition. Again, this quarter, our growth was led by Commerce Audiences, up an impressive 54% year-over-year. Commerce Audiences are a set of precision targeting tactics that leverage the largest commerce dataset on the open Internet and best-in-class AI to help advertisers acquire and retain customers. Our strong momentum is driven by the accelerated adoption of first-party data-driven solutions, successful cross-selling efforts, incremental third-party demand through our Commerce Grid SSP, and AI-driven performance enhancements. Firstly, we're seeing notable success with our first-party data-driven Commerce Audiences as we captured both new budgets and budget shifts from Retargeting. With privileged access to first-party data, our various targeting tactics enable advertisers to reach relevant consumers everywhere. For example, we're activating advertisers' first-party audiences through integrations with about 40 customer data and data collaboration platforms to reengage existing customers and turn them into loyal shoppers. Secondly, we're actively capitalizing on cross-selling opportunities for our clients because our clients value having one partner to help them engage with consumers across their buying journey. Almost all of our top clients in each region buy Commerce Audiences. In fact, 75% of our Performance Media revenue, excluding supply and AdTech services, comes from clients using Commerce Audiences in addition to Retargeting. Third, we're attracting more demand through our Commerce Grid SSP. Our SSP gives agencies and brands access to our Commerce Audiences packaged with publisher inventory to run highly targeted campaigns through third-party DSPs, including Google's Display & Video 360. This means distribution at scale. Finally, AI-driven performance enhancements drove an increase in Contribution ex-TAC in the double-digit million range in Q1. Our cutting-edge AI is front and center in our ability to differentiate through superior performance. Just two weeks ago, we received the 2024 SBR Technology Excellence Award in the AI advertising category for our DeepKNN technology. This acknowledges the groundbreaking innovation we're bringing to market, transforming the way marketers engage consumers through personalized and impactful advertising. In addition, Retargeting remains an important tactic valued by marketers. Retargeting grew slightly in Q1, including the activation of Meta's large-scale inventory in combination with open Internet inventory. We saw a meaningful increase in the number of Facebook and Instagram campaigns in Q1 compared to last quarter, and we expect continued traction as we progress through the year. This is part of our next-generation addressability strategy and is one of our addressability pillars, bringing resilience to our Retargeting business going forward. As you know, Google announced that they won't deprecate third-party cookies until early 2025. This is just a few months delay, and we continue to advance our comprehensive multi-pronged addressability strategy to future-proof our clients' advertising performance. This delay means upside to our business in 2024. Regardless of any scenario, we believe our next-gen addressability strategy gives us an edge in the market. We already bring AI-driven performance to our clients in cookieless environments today, and we continue to expand our capabilities to drive the best outcomes for our clients without third-party identifiers. Our stable testing of the Privacy Sandbox APIs involving 1% of Chrome's traffic without third-party cookies is still ongoing, and we'll report that back to the U.K. CMA when completed. Building on our differentiation, we continue to innovate and prove that our commerce-focused AI helps advertisers engage privacy-first commerce audiences throughout each step of the consumer journey as user signals disappear. By leveraging our deep learning models at the intersection of proprietary interest groups, commerce data, and media data across retailer sites, social media platforms, and the open Internet, we're pioneering the future of post-cookie advertising. We're confident in continuing our positive momentum. And our recently announced investor update in the fall will be an opportunity to provide a broader update on our Retail Media business and opportunities. Stay tuned for more details on that. To conclude, I'd like to take a moment to thank all of our shareholders for their valuable feedback over the past couple of months. We remain open and will continue to consider all opportunities to create further value for shareholders. We're confident in our business strategy and financial strength. And we are laser-focused on executing our Commerce Media powerhouse vision. We believe we're best positioned to lead the market with Retail Media being the fastest-growing segment of advertising and Performance Media, bringing the most valuable Commerce Audiences to global advertisers. With that, I'll hand the call to Sarah, who will provide more details on our financial results and our outlook.

Thank you, Megan, and good morning, everyone. Our first quarter performance was outstanding execution and strong cost discipline. Revenue was $450 million and Contribution ex-TAC increased to $254 million. This includes the year-over-year headwind from foreign currencies of $4 million. At constant currency, Q1 Contribution ex-TAC grew by 17%, up sequentially compared to a growth of 10% in Q4 with strong performance across the board. As part of information, we continue to shift and rebalance our top-line mix, and our new solutions represented slightly more than half of our business in Q1. Client retention remains high at close to 90%, and about 40% of our clients are using more than one of our solutions. Clients who engage with multiple products, typically our largest clients, have a 7x higher Customer Lifetime Value than those who only use one product. As previously communicated, we updated our segment reporting structure beginning in Q1 2024, and we now have two segments: Retail Media and Performance Media. Both segments delivered strong growth in Q1. Our Retail Media segment encompasses revenue generated from brands, agencies, and retailers for the purchase and sale of Retail Media inventory audiences and services. Our Performance Media segment encompasses revenue generated from our targeting capabilities and supply and AdTech services. Starting with Retail Media, revenue was $51 million, and Contribution ex-TAC grew 34% at constant currency to $50 million. Our growth was primarily driven by our client base in the U.S., Germany, and the U.K., and our retailer marketplaces. We benefited from the contribution of newly signed retailers, and growth from existing clients remains strong, with same retailer Contribution ex-TAC retention at 136%. During the first quarter, we also benefited from new licensing and service fees with our largest retailer clients while they started to transition to their direct sales model and an earlier Easter compared to last year. It's important to highlight that we benefit from a robust and expanding base of clients in Retail Media and that we continue to experience strong client retention. Many of our retailer partners, including our largest client, have been successfully growing with us for many years. At the same time, we have been expanding our client roster, and we are seeing growth in every annual retailer cohort. Notably, in our research cohort, Contribution ex-TAC for our retailers in their second year doubled year-over-year in Q1, and our cohort of retailers in their third year grew over 50% in the same period. Remember, this growth comes from retailers already selling directly to their largest brands, which we call retailer-sold demand. On the demand side, we continue to see significant expansion with CPG brands, and we have onboarded 100 brands again this quarter. We have momentum with our client partners, and we are pleased to see our 2,700 global brands prioritizing Retail Media as a key channel for their investment. This is a trend we expect to continue as first-party data becomes increasingly valuable, and brands are looking to reach large global audiences of shoppers. In Performance Media, revenue was $399 million, and Contribution ex-TAC was $204 million, up 13% at constant currency. Again, this quarter, we saw impressive growth in Commerce Audiences targeting, up 54% year-on-year and representing 20% of our overall Contribution ex-TAC, as we leverage our large-scale commerce data and AI-powered audience modeling technology to find in-market shoppers. Retargeting was up 4%, and Supply and AdTech services was up 8%. We benefited from our latest AI-driven performance optimization. Our platform is built on best-in-class AI, and our Criteo AI Lab has 140 R&D and product experts who drive continuous innovation to deliver unparalleled performance for our clients. We delivered solid growth across all regions and had tailwinds in all our verticals. Travel remains robust, and we saw improving Retail and Classified trends compared to last quarter. We delivered adjusted EBITDA of $71 million in Q1 2024, up 83% year-over-year, largely driven by operational leverage from top-line growth and cost discipline. Non-GAAP operating expenses were flat year-over-year, reflecting continued rigor on resource allocation. We invest in our growth areas and enable our transformation through realigning our organization and optimizing our operating model to enable scale and operational efficiencies. We continue to streamline our processes to work better and faster, and we continue to enable efficiency by investing in AI-driven tools this year. Moving down the P&L, depreciation and amortization decreased by 2% in Q1 2024 to $25 million. Share-based compensation expenses were $27 million including $10 million related to shares granted to IPONWEB's founder as part of the acquisition. Our income from operations was $10 million, and our net income was $9 million in Q1 2024. Our weighted average diluted share count was 59.3 million, resulting in diluted earnings per share of $0.12. Our adjusted diluted EPS was $0.80 in Q1 2024, up 60% year-over-year. We continue to benefit from a strong financial position and robust balance sheet with solid cash generation and no long-term debt. We had about $805 million in total liquidity at the end of March, giving us significant financial flexibility to execute our growth strategy and disciplined and balanced capital allocation. As expected, operating cash flow was $14 million, and free cash flow was $1 million in Q1, reflecting seasonality and lower CapEx. Our priorities are to invest in high ROI organic investments and value-enhancing acquisitions and to return capital to shareholders via our share buyback program. We are confident in our business strategy and are committed to driving shareholder value. We have a long-standing track record of returning significant capital to shareholders and intend to repurchase $150 million of stock in 2024, including $62 million already deployed in Q1. This includes 2 million shares repurchased at an average cost of $31.10 per share, and we also canceled 2 million shares in early Q2. Turning to our financial outlook, we have updated our guidance for the year based on our expectations as of today, May 2, 2024. For 2024, we now expect Contribution ex-TAC to grow in the high single digits year-over-year at constant currency with growth in both segments. This is an acceleration compared to our organic growth of 4% in 2023. Our updated full-year guidance reflects our Q1 outperformance and Google's delay of third-party deprecation until early next year. As a reminder, comparisons to the prior year become tougher as we progress through the year. In Retail Media, while we are still early in the year, given our Q1 performance, we are confident in our ability to deliver Contribution ex-TAC growth of 20% at constant currency in 2024. This is from a scaled $200 million revenue base, with the impact of our largest client transitioning demand for large brands to a direct sales model as previously communicated. As a reminder, we also have tougher comparisons for Q3 and Q4, with Q4 being our largest quarter. Importantly, we continue to expect our activated media spend to grow 30% year-over-year, faster than GroupM's estimated market growth of 12% as we anticipate sustained momentum across our client base and future share gains. In the fall, we intend to provide an update on the exciting opportunities we believe we have to drive profitable growth and enhance our position as the leading Retail Media AdTech provider. In Performance Media, given our strong performance in Q1, we now expect to grow mid- to high single digits in 2024. Our outlook assumes no material signal loss impact this year. We now anticipate an adjusted EBITDA margin of approximately 31% for 2024. This reflects our operational leverage and the transformation and optimization of our operating model while investing in areas of growth. For 2024, we now expect an annualized tax rate of 26% to 30%. We expect CapEx to be slightly below $100 million and we expect free cash flow conversion rate at about 45% adjusted EBITDA before any nonrecurring items. For Q2 2024, we expect Contribution ex-TAC of $261 million to $265 million, growing by 10% to 12% at constant currency. We estimate foreign exchange changes to drive a negative year-over-year impact of about $2 million to $4 million on Contribution ex-TAC in Q2. We expect adjusted EBITDA between $70 million and $74 million reflecting year-over-year margin improvement in a seasonally low quarter. In closing, we have strong conviction in our strategy and business model. We are well positioned for continued success, and we are committed to maximizing shareholder value. The future is wide open for Criteo.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from the line of Mark Zgutowicz from Benchmark Company.

A couple of questions. I was curious how much cookie deprecation being pushed into '25 is impacting your annual guidance? And if you could possibly break out the benefit that you anticipate from Retargeting this year and perhaps maybe offset the Commerce Audiences. And then perhaps a question for Todd. Based on what you perceive the CMA is looking for, just curious how you would handicap the timing of '25 deprecation in terms of the first quarter versus second quarter of next year or even in the second half?

Actually, let me just start, Mark. Good to hear from you on great questions, that are sort of top of mind at the moment. I just want to say that we do see a benefit from cookie deprecation being pushed out to '24. And I'll get Sarah to talk to what that looks like for us as much as we can going into next year. But what I think Todd will also talk to is the work that we've been doing to leapfrog having to use third-party cookies or use third-party cookies in our Retargeting business through the work that he's doing with our next-generation model here. The longer this goes on, the more traction we gain on that next-generation model. The longer this goes on, the smaller the impact is on Criteo's overall portfolio because the Retargeting business as compared to the high-growth areas gets smaller. So I'll sort of start off framing that, and then I'll pass it across to Sarah to talk about Privacy Sandbox.

Yes, Mark, first of all, in terms of the delay of the Privacy Sandbox, for 2024, you could model assuming about $35 million of impact. We have previously communicated a $30 million to $40 million impact in 2024. In terms of next year's impact, kind of similar modeling to what we've said before, which is the Retargeting is now less than 50% of our overall Contribution ex-TAC. Chrome is approximately 50% of that. Our assumption today obviously could get better and retain about 60% of that. Overall, we would have about a 10% impact on overall Contribution ex-TAC depending on how the signal loss takes place next year. In terms of Retargeting for the year, as you know, it's a very effective, resilient tactic that's loved by our clients. So we were very pleased to see the growth in Q1. We have benefited from two things: first of all, the AI and continued enhancements in AI, and secondly, the extension with Meta that we have on Retargeting. So we would assume that, given there's no Privacy Sandbox impact and the continued performance that we're seeing, Retargeting would remain resilient. Just to clarify, the 10% would be of the Contribution ex-TAC for 2025 impact, if you're thinking for modeling purposes.

I can jump in on the last part, Mark. How are you? I think there's two dimensions that are important to point out as we look at the delay. The first is really the benefit of industry readiness as it relates to the delay. Obviously, more participants across the industry make for more trading in a functioning market on the supply side. We see that as upside for Criteo. The second thing is, of course, the additional time for us helps us focus our performance pipeline, which was entirely built around Privacy Sandbox. It affords us time to continue to develop and innovate that which is in our control. So there are two things that we look at as positives with the delay out into the beginning of the year. In terms of handicapping anything further, we don't. We're prepared for any scenario. And as Megan pointed out, because we've been planning for Privacy Sandbox for two years and developing on it, and because we have a multi-pronged strategy for post-cookie addressability, we're prepared for anything, and we're well ahead. So time is time, we'll take and do what we can with it, but we're happy to see the way things are unfolding currently.

Your next question comes from the line of Tim Nollen from Macquarie.

I'd just like to pick up on the Retargeting line. I know it's obviously not your most important business line anymore, and that's great. But if I look back and if I have my numbers right, this is the first time it was in positive growth since Q3 of '21, I think. And I just wonder if you can give a bit more color as to why that swung so nicely positive in the quarter?

Let me just say it's important to know it's always been an important product in our portfolio because it addresses the need of advertisers who want to reach the same consumer multiple times to get their attention. And so we continue to see advertisers coming to us for that tactic in retargeting. So we're delighted to see the turnaround there. It's been based on a whole range of work that has gone into the product itself, whether that be using AI technology for performance or extending out into closed environments. In this case, right now, the Meta environment where we see an uptick. The power of this cross-sell activity that's going on to help advertisers use the right tactic and get access to their ad spend to move it between Retargeting and Commerce Audiences to get the right results has led to some positive progress for us, and we're thrilled about that.

Let me just add, it helps that we don't have the impact of signal loss, and we were able to use our AI to enhance our clients' experiences and get higher ROAS. So last year, Q1, Q2, we had signal loss of about $4 million per quarter. And obviously, in 2022, we had an incremental signal loss of about $60 million. So teams are able to take that AI to a different level to not only refine signals but to continue to extend that signal. We're very happy with the Retargeting team.

Your next question comes from the line of Ygal Arounian from Citigroup.

Certainly nice to see strength coming across all three lines here, I guess, now two segments, but really all three business lines. I guess with the questions on Retargeting and Commerce Audiences, I'll focus on Retail Media for a bit. Maybe specifically on the agency side because it seems like you're gaining more traction there. It sounds like that's coming at least a bit off Commerce Max, and you mentioned all the new CPG brands that are coming onboard as well. Can you just elaborate on the agency channel, where we are with that opportunity? And if you can point to how much of the growth is coming from there directly? Just what else we can understand from there?

Yes, I'll start. Sarah can talk about the growth. Look, agencies have access to national media budgets, as you know. The unlock, I guess, for Retail Media is the flow of those national media budgets into Retail Media. Most of the dollars in Retail Media are coming from trade marketing budgets spent on advertising in-store. That's unique to Retail Media because those budgets don't flow into other media. The unlock is when Retail Media gets access to the national media budget that comes through the agencies. And it was interesting listening to the dialogue at Shoptalk this year about how many retailers and brands are trying to work out how to unlock this. Brands are leaning in, looking for more holistic spend, wanting an easier way to place their advertising dollars without deciding between trade marketing and national media budgets. As that unlocks, we see more and more flow through the agencies. The second part is to make it easy for agencies to make those choices by giving them a platform that’s easy to use, providing access to the amount of retailers we have in the network to enable them to spend those national media budgets. The third part is the power of measurement to prove the success of it and compare it to other mediums where they place their advertising dollars. All of these moving parts are powerful, ultimately driving unlocks into Retail Media, and it is still early days. Our relationships with agencies are incredibly powerful and exactly where we want them to be right now.

Just a reminder, the three Holdcos grew triple digits. In terms of just the take-up of the agencies with the brands, we are seeing that traction and we expect that to continue. We've signed contracts with all the key Holdcos, not just in the U.S. but globally, and obviously, that's a huge part of our strategy.

And then just a broader question. As we get through earnings here, this really seems like one of the strongest ad markets we've seen in quite some time. Pretty much everyone we've been paying attention to has reported results ahead of expectations. Can you just help us characterize what you're seeing from the ad market? I know, Sarah, you gave some color, but maybe just more broadly, are you seeing things improve? What’s the tone you’re hearing from advertisers and anything else to help paint the picture there?

Yes. I mean we saw traction coming from Q4, which was a very healthy quarter coming into Q1. I would say we're seeing that continued robust demand. We're also seeing, especially, if you look year-on-year, big changes in terms of the retail specialty department stores, fashion, and travel continues to be robust. Classified trends are improving compared to last quarter. We delivered solid growth across all regions.

Your next question comes from the line of Mark Kelley.

My first question is just on the competitive dynamics in Retail Media, especially on the supply side. Curious to get your thoughts there, if anything has changed given you guys continue to gain share? And then the second question is just on the updated guidance for the full year. When I look at the incremental revenue to EBITDA flow-through, it looks like you're reinvesting some of that incremental revenue ex-TAC back into the business; am I right? And where are those investments?

I'll start by discussing the competitive landscape. As I mentioned earlier, we are significantly differentiated and ahead in terms of scale and market presence, and this gap continues to grow. The competitive environment remains quite fragmented. For instance, in France, there are many small players, alongside a few larger ones, but they still pale in comparison to our position in the market. We previously had concerns about certain competitors, but our advancements have alleviated those worries. Clients appreciate our network effect; as we invest in developing the services and features they seek, they increasingly engage with us, leading to greater momentum in market share. Our primary focus is on servicing our existing clients to capture more share.

Yes, I can talk about the guidance question. So in terms of 2024 guidance, we did update it to reflect the Q1 outperformance. We added back the privacy sandbox pushback as well. The guidance is now high single-digit growth that we're anticipating. In terms of how that flows through to the margin, we've banked the overperformance in the Q1 EBITDA. So that's been banked. The PSP pushback is about 50-50. Fifty percent is to look at reinvestments to accelerate as we've discussed, and then we get about 50% operational leverage from that. It really is about smart investments. We continue to receive requests from the business, and I would say most of that makes sense. As we saw from the Q1 results here, we're delivering. So that's our focus. It's all relatively incremental. We expect the flow-through to come to the EBITDA line, and we would continue to anticipate that. There is some FX drag impacting the EBITDA as well.

Your next question comes from the line of Doug Anmuth from JPMorgan.

This is Katy for Doug. I wanted to dive in a little bit more on the cookie deprecation. I guess I'm curious from your perspective, what is giving them the most pause to drive the delay? Do you think it's that Google Solutions needs some more work? The industry needs some better solutions? Marketers need more time? Just trying to understand from your perspective where the biggest gaps exist today. That's one. And then two, as you look out to 2025, you mentioned the 10% impact on Contribution ex-TAC. I know you're not providing a formal outlook at this time, but can you just walk through the puts and takes and how we should think about that flow-through to profitability on the adjusted EBITDA line?

Let me pass the first question to Todd.

Yes. Katy, how are you doing? I think it’s mostly straightforward on your question about what's driving the delay. One can assume that the delay, if you're reading and following the CMA outlook on this, is really tied to industry readiness and participation towards a functioning market. As I mentioned, our view of the delay is we'll use whatever time we have to continue building our advantage in the tech pipelines we've built. We're working actively with Google to debug the Privacy Sandbox with the Chrome and GAM teams. For us, we're in a great position, and there are folks that we're helping bring along to get ready to participate in the process.

We are not providing guidance for 2025, and that was the intention when discussing the impact of the Privacy Sandbox delay. However, we are observing operational leverage reflected in our EBITDA, which is essential for us. We expect to maintain a balance between our top line and EBITDA, while also reinvesting in growth areas. For modeling purposes, I suggest assuming we will continue to achieve a high EBITDA margin due to the operational leverage from our transformation, while also ensuring we operate effectively and intelligently with modern skills integrated into our operating model.

Your next question comes from the line of Tom White from Davidson.

Just on the Retargeting commentary and the growth that you guys saw there in the quarter. I'm curious whether you're seeing any advertisers that have opted to push ahead with increased commitment to Retargeting spend since we’ve gotten the news about the Google delay. I realize that Retargeting is more of a set-it-and-forget-it type product, but just curious whether that news is bringing any customers back in the near term to capitalize here over the next few months. And then, sorry if I missed it, but any way you can quantify the impact of the cross-selling to that uplift in Retargeting that you discussed?

Customers largely expect their AdTech provider to handle their needs. They require strategies and want us to effectively communicate messages to consumers on multiple occasions. Their perspective hasn't shifted due to Google's actions; they want to utilize available resources and maintain access. Ultimately, they look to their AdTech provider for solutions, which highlights our success in the Performance Media business. Our clients trust us, knowing they are in capable hands. We have made significant progress in ensuring continuity in their strategies, especially after cookie deprecation, with our next-generation addressability model. In response to your question, client behavior hasn’t changed. We are simply delivering enhanced performance and results for our clients, which is evident in the current outcomes.

Yes. And just in terms of Commerce Audiences, about 75% of our clients are buying both Retargeting and Commerce Audiences. The impact on Retargeting and the shift from Retargeting to Commerce Audiences was actually quite small for the quarter, smaller than we saw in Q4. We also see that AI enhancements across all the tactics we do are driving growth in both the Retargeting and Commerce Audiences areas.

Your next question comes from the line of Brian Fitzgerald from Wells Fargo.

We wanted to ask about the overall activity levels in the programmatic market that you're observing through IPONWEB. The Google network reported double-digit declines in impressions last week. Are you seeing weakness in volumes or any trends you can discuss there? We've heard there were some headwinds around social media algorithms and traffic referrals out into the IPONWEB, but wanted to ask what you're seeing.

I can take that one, Brian. First of all, we don't delve into the details of what we see between trading pairs and trading partners. It goes without saying that different trading pairs and different partners will change their traffic patterns based on the strategies they tune over time. That’s nothing new in programmatic. Everybody is moving towards the most efficient supply path, and they’re doing whatever traffic shaping they need to get that to happen. We see this all the time; people change and they move around. Ultimately, we’re just trying to connect the two parties and have them trade more on whichever supply path optimization strategy they deploy.

Your next question comes from the line of Richard Kramer from Arete Research.

Megan, you spoke a lot about the completeness of your offering, spanning the retailer, publishers, and advertisers and agencies. You've also talked in the past about how some competitors were point solutions and mentioned being the alternative to Amazon. So my question for you is, what would mark success for Criteo in becoming the sort of de facto or industry alternative or standard? And what are the proof points of that? Are you seeing now higher win rates in direct pitches? Can you get agencies to secure preferred relationships despite some of their own investments? What are the couple of things you're looking forward to say we've really put the complete distance between ourselves and rivals? And then one other question for Sarah. An issue that's been raised over the past year or so is the volatility in some of the forecasts since Investor Day, and you've now had several quarters where you're able to meet or exceed expectations. What do you attribute that to? Is it that Retail Media is becoming more mature, that you're getting more clarity in the sales pipeline? Or are there other factors that are making you more confident in being able to forecast and hit those?

Hi, Richard. That's a good question, and I believe it's a simple one. We aspire to reach Amazon's level in terms of advertising volume; however, I want to clarify that we are neutral in this space. As an AdTech provider, our role is to connect different sides. With that in mind, we aim to be as significant or a complementary option for purchases on Amazon or Walmart, or through Criteo's Retail Media network. The main focus for us is unlocking those national budgets. As an agency, when allocating funds, you're distributing them among social and retail channels. For retail, this often means purchasing from Amazon, Walmart, or definitely Criteo. Our retailers should receive their fair share of the spending in Retail Media, and this share will increase as our performance is demonstrated through measurement. It operates as a performance vehicle because it effectively targets consumers near the point of sale using first-party data. Therefore, it’s critical that we serve our clients by unlocking that spending while delivering solid performance and results. All the investments we make for our clients and our expansion in Retail Media are what will enable us to progress toward our goal of being a leading alternative in the industry.

Yes, if I address the other part of your question, we feel very good about the performance delivered in 2023, and we’re beginning Q1 '24 positively while guiding for the year. The whole industry was impacted by the advertising recession starting just after our earnings day in late 2022. However, we feel very good about our business. Our strategy remains intact, enabling top and bottom line performance. Of note, we have a scaled base of $200 million in Retail Media, and we're the only independent AdTech platform showing Retail Media numbers. Our expansion efforts are fruitful across all sectors, from our largest clients to new signings. Overall, we're feeling quite positive.

There are no further questions. Please go ahead.

Yes. Thank you. Thank you, everyone. Thanks, Megan, Sarah, and Todd. This now concludes our call for today. The Investor Relations team is available for any additional questions. Have a great day.

Thank you.

Thank you. Bye-bye.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.