Criteo S.A.

Good morning and welcome to CRETIO's third quarter 2024 earnings call. All participants will be in listen-only mode. Should you need assistance, please press the star followed by zero. After the prepared remarks, there will be an opportunity to ask questions. To ask a question, please press the star followed by the number one. To withdraw your question, please press the star followed by the number two. Please note this event is being recorded. I would now like to turn the conference over to Melanie D'Ambre. Vice President of Investor Relations, please go ahead.

Good morning, everyone, and welcome to Credo's third quarter 2020 for Earnings Court. Joining us on the court today, Chief Executive Officer Megan Plunkett and Chief Financial Officer Sarah Glickman are going to share some prepared remarks. Both persons, 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 preferred remarks and transcripts after the course. 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 energies on the as of today. Our actual results may differ materially from current expectations based on the 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 more 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 gross 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 all for joining us today. Two months ago, I announced my plan to retire from my role as CEO of Criteo. This was a tough decision for me, especially given the positive momentum of our journey and the enjoyment that I find in being part of this winning Criteo team, serving our clients, shareholders, and the industry. The new CEO will inherit the transformed, strong, and vibrant company with the biggest and brightest future ahead. The board is conducting a thorough search, which is progressing well. And meanwhile, I'm fired up and ready to bring you this quarter's update and results. Our ongoing momentum is a testament to our team's hard work, organizational alignment to the plan, and the trust that our clients place in us. I couldn't be prouder of our senior leadership team who continues to be the driving force behind the successful execution of our strategy. Together, we've turned Criteo into a commerce media powerhouse with retail media at the core. and cemented our position as a global leader in ad tech. Looking back on our company's transformation over the past five years, we've strategically repositioned ourselves for sustainable growth and margin expansion. We're set to achieve new heights as we're on track to deliver our third consecutive year of double digit growth. Over the years and throughout our transformation, We've demonstrated strong resilience and maintained a high say-do ratio. We no longer plan our business around the demise of third-party cookies. We've brought our commerce media platform vision to life, and we're now positioned at the forefront of the changes in our industry, capitalizing on the next wave of digital advertising. We are the leading independent ad tech company for commerce media, and the platform of choice for the buying and selling of commerce media, the fastest growing sector of advertising. We came into the sector for seeing the seismic shift in the digital landscape and the rise of commerce media, overtaking linear TV and now taking share from search and social media. The most recent quarterly sky data showed growth surging to 28% in retail media in Q3 while paid search growth slowed to 3% and social growth slowed to 5%. The future of commerce media is incredibly exciting. It's fueled by several key trends, the global growth of e-commerce and consumers engaging with more content and devices than ever before as they shop from discovery through to purchase and beyond. Retailers are looking to capitalize on this by selling advertising on their digital stores, while advertisers are focused on optimizing their spend to increase sales. Today, Pridio operates two growing global segments, retail media and performance media. Retail media facilitates the targeting of high-intent shoppers by brands primarily on retailer sites, and extending reach across the open web. Performance media focuses on targeting high intent shoppers for direct to consumer brands, primarily on the open web and social platforms. In other words, our solutions have a hyper focus on addressing or advertising to consumers who are on their buyer journey. Our commerce media platform represents the convergence of these opportunities that Criteo is uniquely positioned to address. With 19 years of commerce-driven AI and rich data from our supply and demand side relationships, we predict outcomes and deliver targeted ads throughout the buyer journey from discovery to purchase. Our vision and platform innovation center around a unified commerce experience Our goal is to empower advertisers to build full funnel strategies more efficiently, targeting commerce audiences with multi-channel reach, AI-driven optimization, and seamless first-party data integration to enhance personalization and improve ad performance. As our platform matures, we introduce capabilities that enhance efficiency and create growth opportunities. One such example is our latest work in automation tools and streamlined workflows to make client setup easier, enhance performance, and improve efficiency. We refer to this as Commerce Go. Our next-generation tool set allows advertisers to create and launch an optimally configured campaign in as few as five clicks. Clients have reported that setting up campaigns on other services can take 10 times longer than using Criteo's Commerce Go. Our advanced AI streamlines campaign creation and management and automates decisions and audiences, targeting and ad formats to maximize results. Our recently completed beta testing has shown lower cost to serve, lower client churn, and most importantly, and increase in activated media spend with stronger performance. For example, fashion brand Zarina achieved a 23% increase in ROAS at comparable spending, while also benefiting from streamlined campaign setup and activation through Commerce Go. We're excited to keep moving on this path. Now turning to Q3 results, I'm pleased to report that we delivered a strong quarter with robust top-line growth despite tougher year-over-year comparisons, showing our ability to achieve operating leverage as we grow. Starting with retail media, we delivered strong growth in the third quarter and continued to gain market share. We've successfully doubled both our brand count and activated media spend over the past two years. Our brands have increased to 3,100, and our activated media spend reached $1.5 billion on a trailing 12-month basis. We're seeing continued adoption of Commerce Max by our agencies. Now, as a reminder, this is our commerce media demand site platform. We achieved another record quarter with over $130 million and agency spend going through Commerce Max in the U.S., sorry, in the U.S., in the U.S. Holco agency spend growth accelerated in Q3 compared to Q2, exceeding 60%, with three Holcos experiencing triple-digit growth in the U.S. This continued increase in demand from brands and agencies remains a critical element of the Criteo flywheel and we're confident in maintaining this growth momentum. We recently secured significant new retailer partnerships worldwide. In the U.S., we're thrilled to team up with large retailers like JCPenney, expanding our footprint in fashion department stores. We're also thrilled to welcome Office Depot and ODP Business Solutions, broadening our presence in the office supply category. In Europe, we're proud to work with Metro AG, Flash and Post, and Rolex. And we added two new retailers in the APAC region. These retailers choose Criteo for our global reach, rapid scalability, comprehensive offering, AI-powered performance, and unparalleled sales and product expertise. We're also expanding our lead in the commerce media more broadly we're excited to partner with United Airlines. We chose Criteo to help power and scale its offsite monetization. Our Commerce Grid SSP allows connected media by United Airlines to curate its first party audiences and make them available for broad access through any DSP. Costco is another client partnering with Criteo for offsite monetization. Costco has recently deepened its partnership with us, enabling Criteo to leverage its data to reach existing potential consumers across the open web. And while this tactic has been slow in gaining traction in the U.S., it's still very early days, and we do see more off-site interest ahead and in other markets. We almost doubled our retail media off-site campaigns in APAC, and we're seeing top brand expansion and significant growth in retailers in India. More broadly, our existing retailers continue to trust Criteo with more ad formats and first party data than ever before. Among others, we've more than doubled our number of retailers leveraging our onsite display offering in North America compared to a year ago. Using Criteo's display format, these retailers are attracting strong demand, as brands typically see a 30% average lift in share of sales within two weeks of starting on-site display. Incrementality results show a revenue lift per user of 135% from our on-site display campaigns. We're obsessively focused on performance. and we increasingly leverage in-store data to enrich our retail media strategies. We've seen a five-fold increase in retailers sharing their in-store sales data with us. We match offline customer conversion data with the customer behavior and ad exposure that we see online. This contributes to more relevant targeting, better campaign performance, and a seamless shopping experience. And we see this move as an important catalyst to the growth of commerce media, bringing alignment between online and in-store advertising performance with closed-loop measurement. We also equip brands to fully leverage our measurements and insights to boost sales growth. For instance, in partnership with Flywheel, Denone's Oikos brand, achieved a 21% increase in product page visits, an 18% boost in daily sales, and a 13% overall sales lift on Albertsons. Turning to Microsoft, we continue to map out our exciting strategic collaboration with Microsoft Advertising, which we'll talk about during our Retail Media Investor Update on November 18th. We already expect to transition several retailers to our stack in 2025 across regions, and RFPs for other Microsoft advertising retail media clients are well underway. The design of our demand integration and AI collaboration are all progressing, and more to come. Lastly, we're proud of our work and that our leadership in retail media continues to be recognized, including the most recently by market intelligence firm IDC, which has named us as a leader in worldwide retail media network service providers. Turning to performance media, our momentum remains driven by commerce audiences up 30% as we leverage our large-scale commerce data and AI-powered audience modeling technology to find in-market shoppers. Today, 80% of our media spend is from clients using both commerce audiences and retargeting to reach consumers across the entire buyer journey. Our AI innovation is driving our growth and setting the stage for future success. We've unlocked additional budgets across our entire portfolio thanks to our continuous AI-driven performance enhancements. We're also leveraging GenAI creative technology to enhance product images with AI-generated backgrounds, and tests are showing promising increases in click-through rates. Our advertisers are also seeing benefits when they plan, buy, and optimize across multiple channels, including open web and social. For example, Electrolux achieved a close to three-fold increase in revenue when including Facebook and Instagram for their retargeting campaigns. They saw a 100% plus increase in click-through rates and were able to lower their cost of sales by 17% within only a month after the activation. For us, this is just the beginning and part of our strategy to bring commerce recommendations into any environment where consumers are. To that end, we plan to integrate with more social environments and to continuously make sure that our supply sources are providing access to relevant in-market consumers. This comes at a time when we continue to move full steam ahead to shape the future of digital advertising. We believe our AI optimizes across several addressability solutions and the many signals we have access to along the buyer journey. As part of our transformation, our focus has shifted from people-based signals to unlocking the full potential of commerce and product-related data. Commerce and shopping experiences are truly everywhere across every environment and format, and we believe we're able to recognize shopping intent without relying on identity. Our deep learning models are taking advantage of product intent signals to recognize patterns across shopper types, stopping journeys and touch points. This approach sets us apart and is more relevant than ever before to drive superior performance in any environment. To conclude, with confidence in continuing our positive momentum and we remain laser focused on the execution of our strategy to create the world's leading commerce media platform and drive shareholder values, With that, I'll hand the call over to Sarah, who'll provide more details on our financial results and our outlook. Thank you, Megan, and good morning, everyone. We delivered strong Q3 results with operating leverage enabled by top-line growth and disciplined cost management again this quarter. Revenue was $459 million, and contribution extracts increased to $266 million, including year-over-year headwinds from foreign currencies of $1 million. At constant currency, Q3 contribution excess grew by 9%, on top of 8% organic growth in Q3 2023. This was driven by strong performance in retail media, up 23%, and continued growth in performance media, up 5%. During the back-to-school season, we observed a year-over-year increase in advertising spend across all categories. Notably, there was significant growth in an unconventional back-to-school category. Animals and pet supplies increased by over 200% year-over-year, followed by strong gains in apparel and health and beauty. Overall, we continue to shift and rebalance our top-line mix with our new solution representing 53% of our business in Q3. Starting with retail media, revenue was $61 million. Contribution X tax grew 23% at constant currency to $60 million, on top of 29% in Q3 last year. Our Q3 growth was primarily driven by our client base in the US, Germany, and the UK. Growth from existing clients remains strong, with same retailer contribution extract retention at 120%, and we've benefited from the ramp-up of newly signed retailers. As previously communicated, our Q3 results also include the expected transition of our largest retailer client to their direct sales model. On the supply sales side, we have global scale strong client retention, and we continue to expand our footprint. We are on track to start transitioning some Microsoft advertising on-site retailers to our monetization technology stack in early 2025. On the demand side, we now partner with 3,100 global brands after onboarding about 200 new brands this quarter. In the third quarter, our activated media spend grew 29% year-over-year worldwide, outpacing the market. We saw strong growth from our agency partners and robust brand booking, mainly in CPG, as retail media continued to gain share from other channels. In performance media, revenue was $398 million and contribution extract was $207 million. up 5% at constant currency. We continue to see strong growth in commerce audience targeting, up 30% year on year, on top of 31% growth in the same quarter last year. Retargeting grew for the third consecutive quarter, up 2%. We are pleased to see that the combination of multiple tactics typically drives better performance, and larger budgets. Our latest AI-driven performance optimization also drove a contribution X-tech uplift in the double-digit million range again this quarter. This is despite lapping the benefits of our initial AI-driven performance enhancement from the integration of our deep learning algorithm and advanced vector database technology into our recommendation engine a year ago. Strong growth in commerce audiences and increased demand for retargeting were partially offset by lower ad tech services and supply, down 16%, primarily due to lower spend from one large ad tech client in our media trading marketplace. We exited the quarter with stabilized trends. Travel remains our fastest growing vertical, up 31%. followed by classified and retail. We saw lower spend in fashion and department stores in the U.S. late in the quarter, notably from two U.S. enterprise clients reframing their business strategies and reducing their marketing budget. We have a broad and diversified client base, and client retention remains high at close to 90%. In recent months, we have intentionally expanded our roster of performance media reseller partners in select small regions to combine local market knowledge with operational efficiencies. This resulted in a lower client count. We delivered adjusted EBITDA of $82 million in Q3 2024, up 20% year-over-year, resulting in adjusted EBITDA margin of 31%, up 300 basis points year-over-year. Our top-line growth resulted in strong operational leverage. We also benefited from some hiring shifts from Q3 to Q4 and lower bad debt expense. Non-GAAP operating expenses increased 7% year-over-year, reflecting planned targeted growth investments partially offset by continued rigor on resource allocation. As we've said before, we are driving our transformation by investing in growth areas and optimizing our operating model for scalability and efficiency. We are also enhancing our operational effectiveness with streamlined processes and the deployment of AI-powered productivity tools. Moving down the P&L, depreciation and amortization was $26 million in Q3 2024. Share-based compensation expense was $35 million, including $16 million related to shares granted to IPOM Web's founder as part of the acquisition. Our income from operations was $10 million, and our net income amounted to $6 million in Q3 2024. Our weighted average diluted share count was 58.4 million, which resulted in diluted items per share of 11 cents per share. Our adjusted diluted EPS was 96 cents in Q3 2024, up 35% 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 $711 million in total liquidity at the end of September, which gives us significant financial flexibility to execute our growth strategy and disciplines and balance capital allocation. Operating cash flow was $58 million and free cash flow was $39 million in Q3, reflecting seasonality and planned CapEx investments. We are confident in our strategy and financial strength. Our key priority is to continue to invest in our commerce media platform to enable sustainable organic growth alongside value-enhancing acquisitions and to continue to return capital to shareholders via our share buyback program. We have a long-standing record of returning significant capital to our shareholders, and we have already repurchased $157 million of stock in the first nine months of 2024. including $55 million deployed in Q3. We now intend to repurchase about $180 million in 2024, underscoring our conviction in the long term of opportunities ahead and our commitment to delivering shareholder value. At the end of September, we had $111 million remaining in our board share buyback authorizations. Turning to our financial outlook, which reflects our expectations as of today, October 30th, 2024. Despite the macroeconomic uncertainties, we enter the holiday season with confidence to deliver double-digit growth and margin expansion for this year. For 2024, we tightened our guidance range, and we now expect contribution X tax to grow 10% to 11% year over year at constant currency, with growth in both segments. This is a meaningful acceleration compared to our organic growth of 4% in 2023. In retail media, given our year-to-date performance and ongoing strong momentum, we are now confident in our ability to grow contribution ex-tech towards the high end of our 20% to 22% range at constant currency in 2024. And as a reminder, we have tough comparisons in Q4, which is our largest quarter. In performance media, we now expect to grow mid to high single digits in 2024. Our projected adjusted EBITDA margin for 2024 has been increased to a range of 32% to 33%. This reflects our confidence in operating leverage from top-line growth strong expense discipline, and the transformation of our operating model as we continue to invest in areas of growth. For 2024, we expect a normalized tax rate of 25% to 30%. Our overall capex is now expected to be between $80 million and $100 million as we continue to invest and optimize our leading AI infrastructure. Lastly, we expect a free cash flow conversion rate of approximately 45% of adjusted EBITDA before any non-recurring items. The Q4 2024, our last and largest quarter of the year, we expect contribution extract of $327 million to $333 million, growing by 3% to 5% at constant stock currency. as we continue to drive superior performance for advertisers across our product portfolio. As you know, we have tougher comparisons in Q4, and we have a shorter holiday season this year. It is also important to note that Criteo, as a commerce media platform, has no political advertising spend. Our team is ready for our clients to deliver during cyber week and the holiday season. We estimate forex changes to have a minimal year-over-year impact on contribution at tax in Q4. We expect adjusted EBITDA between $114 million and $120 million. This includes planned investments and the timing shift of certain hires from the third quarter to the fourth quarter. In closing, we have strong conviction in our strategy and a resilient business model. We are well positioned for continued success and we are committed to maximizing shareholder value. We look forward to our retail media investor update on November 18th and meeting with many of you on the road and at conferences this quarter.