Criteo S.A.

Good morning and welcome to the Criteo second quarter 2020 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After the prepared remarks, there will be an opportunity to ask questions. To ask a question, please press star then one. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Edward LaSalle, VP, head of investor and analyst relations.

Please go ahead. Thank you, Cole. Good morning, everyone, and welcome to Curio's second quarter 2020 earnings call. We hope you're all safe and healthy wherever you are. With us today are CEO Megan Clarkin and CFO Dave Anderson. Please note that because of ongoing restrictions, we're all joining this call from different locations today and as a result may face unwanted technical challenges. In the course of our call, management will make forward-looking statements. These statements reflect Credo's judgment and analysis only as of today. And actual results may differ materially from current expectations based on a number of factors affecting Credo's business. Importantly, at this time, the global COVID-19 pandemic is still having a meaningful impact on the global economy, on the business of our clients, as well as on Credo's business, and may further impact Credo's financial condition, results of operations, and cash flows in the future. There are significant uncertainties around the duration and extent of the pandemic. The dynamic nature of these 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 update any forward-looking statements discussed today, except as required by law. In addition, during this call, we'll also discuss non-GAAP measures of our performance. Definitions of such metrics and the reconciliation to the most directly comparable GAAP financial measures are included in the earnings release published on our website earlier today. Finally, unless otherwise stated, all growth comparisons during this call are against the same barriers in the prior year. With that, it's my pleasure to now hand it over to Megan. Thank you, Edouard.

Good morning, everybody. It's a great pleasure to be with all of you for our third call together. Once again, I'm joining you from the safety of my house in upstate New York, and I hope everyone is staying safe as well. On our call today, I'm going to cover five key topics. Number one, the current business context and our learnings from it. Number two, our better than expected results in Q2. Number three, a brief recap of our strategy, including executing on our four strategic pillars. Number four, our progress on online identification. Number five, our operational priorities going forward. Now let's start with the current business context. In the unusual times that we're living in, the world's changing fast and some really interesting trends are shaping up. Global retailer sales are shifting to e-commerce. Based on e-marketed data, e-commerce is predicted to grow from 16% of total retail sales today to 23% in 2023, heavily influenced by COVID consumption trends. In the United States, the growth is partly driven by an increase in click and collect, allowing consumers to make immediate contactless purchases. This strong growth benefits many non-large platform retailers and direct-to-consumer brands, in particular in the mid-market. For example, according to a survey, 81% of e-commerce purchases who have tried new retailers during COVID expect to continue to use them in the future. And marketers are making moves to redirect the sizable amount of their trade budget to media and advertising, injecting ad spend into the market and towards lower funnel campaigns, meaning targeting and retargeting. All of this clearly is very encouraging for our business on all fronts. So let's move to quarter two in our performance. Revenue X-TAC of $180 million and adjusted EBITDA of $39 million were respectively 21% and $30 million above the high end of our initial guidance at Constant Currency. We achieved these solid results thanks to the contribution of all Criteos who have not missed a beat during our lockdown and work from home situation. I'm really proud, incredibly proud of the team and our performance. In line with the Q1 trend, our mid-market business remains resilient and continues to grow. especially in retail, thanks to healthy online retailers and direct-to-consumer brands. While a number of large customers in travel, classifieds, and brick-and-mortar retail remain deeply affected by COVID, we continue to sign new accounts in both large and mid-market segments and expect growing contribution from new business in the second half. As the economic aftermath of the pandemic progressively unfolds, We believe direct response and targeted marketing remain key to help all clients weather the pandemic and accelerate their recovery. For our retail media business specifically, same client revenue XTAC growth was up close to 60% in Q2, a strong acceleration from prior quarters. In Q2, we also signed a new agreement with one of the very top U.S. retailers, While higher e-commerce usage triggered by COVID was a clear positive for retail media in Q2, accelerating the move of brand dollars online, we believe this tailwind is going to continue, albeit at a slower pace than Q3 and beyond, as online consumption moves beyond the lockdown-driven period peak. I want to say a few words about COVID. The net impact of COVID on our business was lower than expected in Q2 and proved to be positive in retail media and mid-market. Yet, the pandemic continues to be dynamic and business conditions remain incredibly fluid, in particular in the United States. Our current view is that the pace of recovery may be much slower than originally anticipated, in particular for the travel and classified verticals. As a result, we may not see full recovery before sometime in 2021 at the earliest. And Dave will talk more about this later. Now, moving to the third point, our strategy. As we've discussed in the past, our mission is to power the world's marketers with trusted and impactful advertising. In order to leverage the key trends I spoke about, our strategy is to build and operate a world-class, demand-side platform or DSP specifically for e-commerce. With this, we want to earn additional marketing budgets from existing clients and win new customers in the consumer brand and commerce space. To succeed with this strategy, we're drawing on our strong and differentiated assets, our deep relationships with commerce clients and retailers, our rich commerce data and large ID graphs, and our fast-growing retail media platforms for brands and retailers. Given the short and long-term growth of e-commerce and what we believe the long-lasting effects of COVID could be, a position in this space provides an exciting opportunity. Executing on this path, we focus on four strategic pillars. Firstly, strengthen the core. Second, expand the portfolio. Third, explore strategic game-changers. And last but not least, drive tech and operational excellence. With respect to strengthening the core, we continue to build our platform and to release DSP features as they become available. So for example, we now offer enhanced commerce audience targeting, allowing marketers to connect more product categories and brands into powerful additional audience segments. Our new reporting dashboards now provide marketers with additional transparency on the performance and measurement of their campaigns. Transparency is a critical requirement for marketers. Responding to our clients' retargeting needs while pushing up funnel to increase our capabilities beyond retargeting is our focus here. As a matter of fact, global research firm IDC recently named Criteo the number one independent ad tech company for 2019. With respect to our second pillar, expanding our portfolio, I'm pleased to report that our new solutions now represent 20% of our business on a revenue extract basis, growing 67%. In particular, the momentum around retail media accelerated to plus 84%, growing more than twice as fast as in Q1. Retail media, as you know, helps brands to reach critical target consumers on retailers' websites and apps. In June, we launched our unified retail media platform in the US. This platform combines our various retail media offerings, including sponsored products and other rich ad formats, and provides self-service transparency and control that they need as they manage and monitor their marketing campaigns. We plan to launch the platform in Europe in Q4, We talked about recently we hired the prior CEO of Triad Retail Media, Sherry Smith, to join our team and lead our U.S. retail media business. And Sherry is a terrific addition to our team. Some of our other new solutions continue to perform strongly. For example, our omni-channel business, helping clients target and engage their offline or in-store customers online, grew more than 120%. We expect this to continue to grow nicely even after we get out of the pandemic. And our app consideration solutions continue to grow very nicely as lockdown restrictions drive more user time on apps, driving more installs, more traffic, and more customer acquisition on apps for our clients. With regards to exploring strategic game changes, we continue to grow our partner network Partnering with Yahoo Japan since 2012, we've extended our agreement to now include our consideration solutions, including web traffic and app install, enabling marketers to display ads for additional marketing objectives on Yahoo Japan's inventory. We also just signed a partnership with customer data platform Zaius to strengthen our custom audience capabilities for online and in-store targeting. We also broadened our partnership with Lengar to strengthen retailers' targeting of offline customers with more relevant product recommendations based on what's available in local stores. We expect those two partnerships will further enhance our audience targeting success and support our focus towards e-commerce. And last but not least, with regards to driving tech operational excellence, As discussed earlier, we're enhancing our platform with new DSP features. We're also working on strengthening our contextual targeting capabilities, building on our partnership with Oracle Data Cloud, and enriching the Criteo engine to enable bidding on contextual signals. We continue to invest in our identity solutions. I'll speak more about this in a second. I'm also thrilled by the new talent that we're bringing into Criteo. strengthening the caliber of our leadership team. Most recently, we announced Dave Anderson's arrival. Those who know Dave know that he brings experience, transparency, and integrity with him. He's a hardworking, trusted partner to me, and I'm thrilled to have him on board. David Fox officially extended his role to Chief Commercial Officer. David is working tirelessly bringing sales operations, excellence and accountability and structure to our commercial teams. And I'm delighted to announce that we've just now hired a world-class chief product officer in Todd Parsons, joining from OpenX. The chief product officer role is a critical role for us, and Todd brings a proven track record as a product leader and with deep expertise in advertising technology. I'm energized by the team we've built in a short time. They're fired up and they're ready to go. With regards to our cost containment program, we exceeded our plan in Q2 and remain well on track with the targets that we shared with you. As we said in our Q1 call, we intend to implement further cost control and organizational measures to right-size the business while maintaining investment and growth areas. It gets me to my fourth topic, our focus on identity. We see changes to online identity presenting a step forward for consumer privacy. However, we stress the importance of industry collaboration and thinking through the implications of some of the proposed changes in the wider ecosystem and the consumer experience. Remember, privacy challenges, including changes to Chrome, affect the entire ecosystem, whether that be ad targeting, supply monetization, measurement, attribution, and others. For our part, we see this moment as an opportunity for us to apply our unique assets and work for the open Internet, the advertisers, and ultimately the consumers. We believe we have assets that no other tech company has, and we're stepping up to use them. As our CTO recently put it, online identity may go dark at some point, but we have a powerful flashlight. A powerful flashlight is built at scale on three capabilities. First, our ability to do contextual and cohort-based advertising based on user profiles built on context and affinity. Secondly, one-to-one advertising based on consumer identification data coming from first-party integrations with over 20,000 advertisers and 4,700 direct publishers. And thirdly, And adding to those first two capabilities, our massive ID graph with 2.5 billion unique users globally, of which 98% have persistent identifiers beyond cookies, a critical asset for online identification that nobody else has. Enabling marketers to deliver the right message to the right person at the right time and on the right device, whether an app, CTV, you name it, is predicated on our ability to be the best at knowing anonymized consumer identification and their shopping interests. Our three capabilities combined provide a massive headline and will continue to set us apart as we move forward. It's with our expertise and confidence that we created our response to Google's privacy sandbox on behalf of the industry. We call this Sparrow. or secure private advertising remotely run on web server. Criteo is the only ad tech company alongside Facebook to have progressed its proposal to Google Chrome from a W3C group to a more formal group called Web Platform Incubator Community. We propose methods related to consumer experience control and continuity of the ecosystem while improving performance for advertisers. This work is ongoing and we recently published an extension to our original proposal to add near real-term reporting capabilities with positive industry feedback. In fact, the CTO of a large, well-respected supply-side platform recently praised Sparrow and called out Criteo for creating good harmony across the working group. Most recently, Adweek called Criteo, the number one retargeting company within the 15 most innovative and relevant companies in ad tech and martech. Overall, our work around identity is deep and wide, building both inside and outside the sandbox and extends beyond Criteo to the industry and consumer experience. As you probably recall, Apple announced that with iOS 14 expected later in Q3, all apps will need to obtain user permission before leveraging its anonymized identifier for advertising. We believe it's a move in the right direction based on respect of user choice and control, yet we also believe this can be a big industry issue. This unilateral decision with no... consultation and little time to adapt will create troubles with deep implications for the advertising ecosystem, especially on the supply side. Both advertisers and publishers are looking to us to help address the change. And here again, we believe we have a powerful flashlight. As I said in the last earnings call, we're building a revocable identification system, allowing users to build their own privacy profile and easily adapt it as their preferences evolve. This personal profile would be available across all web and app environments and not be owned by any commercial entity, nor limited to a software operating system or device. We're working with the industry to make a widespread use of the ID solution. This is very promising, and of course, we'll update you down the road. That leads me to my last key topic for the day, We remain focused on the five priorities for the short and mid-term that we indicated in our Q1 earnings. First, to ensure employee safety and business continuity. Second, support our clients with direct response marketing through their business recovery. Third, further align our organization around cost structure to support our strategic plan while also investing for growth. Fourth, develop enduring relationships industry-leading solutions for online identification and execute against our full-stack DSP strategy, both organically and via partnerships, while staying nimble as the landscape unfolds and new trends emerge. And with that, I'll hand it over to Dave to go over our Q2 performance and our financial outlooks. Thanks a lot, Dave.