We invest substantial resources in research and development to conduct fundamental research on artificial intelligence, machine-learning models, enhance the algorithms in Criteo AI Engine, develop new features and solutions, conduct quality assurance testing, improve our core technology and enhance our technology infrastructure. Our engineering group is primarily located in research and development centers in Paris, France;France, Grenoble, France; Palo Alto, California (until early 2020)France and Ann Arbor, Michigan. With the expected acquisition of IPONWEB, we will expand our R&D engineering centers to include Berlin, Germany, and Moscow, Russia. We expect to continue to expand capabilities of our technology in the future and to invest significantly in continued research and development and new solutions efforts. We had close to 700682 employees primarily engaged Research and Development and Product as of December 31, 2019.2021. Research and development expenses, including expenses related to the Product group, totaled $173.9$151.8 million, $179.3$132.5 million and $172.6 million for 2017, 20182021, 2020 and 2019, respectively.
Our intellectual property rights are a key component of our success. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. We generally require employees, consultants, clients, publishers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.
Intellectual property laws, together with our efforts to protect our proprietary rights, provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. The laws of certain countries do not protect proprietary rights to the same extent as the laws of France and the United StatesU.S. and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology.
Agreements with our employees and consultants may also be breached, and we may not have adequate remedies to address any breach. Further, to the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights to know-how and inventions relating thereto or resulting therefrom. Finally, our trade secrets may otherwise become known or be independently discovered by competitors and unauthorized parties may attempt to copy aspects of the Criteo Commerce Media Platform or obtain and use information that we regard as proprietary.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the technology industry have extensive patent portfolios. From time to time, third parties, including certain of these leading companies, have asserted and may assert patent, copyright, trademark and other intellectual property rights against us, our clients or our publishers. Litigation and associated expenses may be necessary to enforce our proprietary rights.
Privacy and data protection laws play a significant role in our business. The regulatory environment for the collection and use of consumer data by advertising networks, advertisers and publishers is frequently evolving in the United States,U.S., Europe and elsewhere. The United StatesU.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share non-identifyingpersonal data, such as by regulating the level of consumer notice and consent required before a company can utilize cookies or other tracking technologies.
In the European Union, the two main pillars of the data protection legal framework are the E-Privacy Directive (Directive on Privacy and Electronic Communications) and the General Data Protection Regulation (GDPR), which was implemented in May 2018.
We believe that the regulation has no material impact on our business or the way our technologies operate. However, GDPR is still a relatively recent regulation with no established case law. Therefore interpretations of the GDPR may vary, especially with respect to the articulation between GDPR (lex generali) and E-Privacy Directive (lex speciali) and the conditions for the collection of a valid "cookie" consent, and thus there can be no assurance that this will not have any particular impact on our business, technologies or practices in the medium to long term.
As we continue to expand into other foreign jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
In addition to complying with extensive government regulations, we voluntarily and actively participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct relating to targeted advertising. For example, the Internet Advertising Bureau EU & US, the Network Advertising Initiative, the European Digital Advertising Alliance and the Digital Advertising Alliance have developed and implemented guidance for companies to provide notice and choice to users regarding targeted advertising.
Criteo became one of the first companies to broadly include an "Ad Choices" link in all the advertisements we deliver, which gives users access to clear, transparent, detailed and user-friendly information about personalized advertisements and the data practices associated with the advertisements they receive. In addition, we provide consumers with an easy-to-use and easy-to-access mechanism to control their advertising experience and opt out of receiving targeted advertisements we deliver, either for all campaigns or for a specific client or specific period of time.deliver.
We believe that this transparent consumer-centric approach to privacy empowers consumers to make better-informed decisions about our use of their data. We also actively encourage our clients and publishers to provide information to consumers about our collection and use of data relating to the advertisements we deliver and monitor.
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available, free of charge on our website, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). These documents may be accessed through our website at www.criteo.com under "Investors." Information contained on, or that can be accessed through, our website does not constitute a part of this Form 10-K. We have included our website address in this Form 10-K solely as an inactive textual reference.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as Criteo, that file electronically with the SEC. With respect to references made in this Form 10-K to any contract or other document of Criteo, such references are not necessarily complete and you should refer to the exhibits attached or incorporated by reference to this Form 10-K for copies of the actual contract or document.
Investing in our ADSs involves a high degree of risk. You should carefully consider the following risks and all other information contained in this Form 10-K, including our consolidated financial statements and the related notes thereto, before investing in our ADSs. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our ADSs could decline, and you may lose some or all of your investment.
We face intense and increasing competition for employee talent, and if we do not retain and continue to attract highly skilled talent or retain our senior management team and other key employees, we may not be able to sustain our growth or achieve our business objectives.
Our future success also depends on the continued service of our senior management team. OurAs a global team heading a global company, our management team has beenmust operate and may again be spreadcollaborate across multiple physical locations and geographies, which can strain the organization and make coordinated management more challenging.
The market in which we participate is intensely competitive, and we may not be able to compete successfully with our current or future competitors.
In addition to competing for advertising spend, we compete with many companies for advertising inventory, some of whom also operate their own advertising networks or exchanges from which we buy advertising inventory. Some of thesethe companies that we compete with, either for advertising spend or for advertising inventory, may also be our clients or affiliated with our clients or important sources of advertising inventory. Competitive pressure may incentivize such companies to cease to be our clients or cease to provide us with access to their advertising inventory. If this were to occur, our ability to place advertisements would be significantly impaired and our results of operations would be adversely affected.
Competition could also hinder the success of new advertising solutions that we offer in the future.
If we fail to access a consistent supply of advertising inventory and expand our access to such inventory, our business and results of operations could be harmed.
Since many widely used aggregators of advertising inventory are owned by companies that may compete with us for clients, competitive pressure may incentivize these companies to limit our access to advertising inventory available through their platforms. For example, in SeptemberOctober 2019 we filed a complaint with the French Competition Authority against Meta Platforms (formerly Facebook), regarding practices which we believe impair the conditions of access to advertising inventories and to data concerning ad campaigns on Facebook due to Facebook’s gradual exclusionunder conditions that are not transparent or objective as well as "denigration" actions and difference of companies including Criteo from the Facebook platform.treatment. The fact that advertising inventory available within "walled-garden" publisher environments which may restrict our ability to use such inventory effectively and in an optimized way for advertisers, tends to grow faster than other advertising inventory available on the market may limit the growth of our access to advertising inventory or our mere access to it overall. In addition, industry or technological changes may affect our access to inventory or the price we pay for inventory.
Similarly, our ability to continue to purchase inventory from many of the publishers and large retailers with whom we have direct relationships depends in part on our ability to consistently pay sufficiently competitive CPMs for their advertising inventory, or in the case of some Criteo Retail Media solutions, to generate sufficient advertising revenue for retailers, as well as our ability to offer advertisements from high quality companies. As more companies compete for advertising impressions on advertising exchange platforms and other platforms that aggregate supply of advertising inventory, advertising inventory may become more expensive, which may adversely affect our ability to acquire it and to deliver internet display advertisements on a profitable basis. We may in the future have to increasingly rely on direct relationships with strong publisher partners in order to maintain the necessary access to quality advertising inventory, and we may not be able to do so on terms that are favorable to us. In addition, to support the growth of our solutions for the Awarenesscustomer acquisition and Consideration marketing goals—aimed at generating brand awareness for clients and driving new visitors or prospective customers for clients—marketing goals, we will need to expand our access to online video and Connected TV inventory, both in the web, and in mobile applications, and on connected devices, the price of which may not be available on terms that are favorable to us.
Additionally, we are party to certain agreements with partners that provide us with preferred access to inventory. If the terms of those agreements change and we lose our preferred access, then our financial results could be adversely affected.
The failure by Criteo AI Engine to accurately predict engagement by users could result in significant costs to us, lost revenue and diminished advertising inventory.business opportunities.
In addition, as we have increased the number of clients and publishers that use our offerings on a global basis, we have experienced significant growth in the amount and complexity of data processed by Criteo AI Engine and the number of advertising impressions we deliver.
As the amount of data and number of variables processed by Criteo AI Engine increase, and the calculations that the algorithms must compute become increasingly complex, the risk of errors in the type of data collected, stored, generated or accessed also increases. In addition, the calculations that the algorithms must compute become increasingly complex and the likelihood of any defects or errors increases.
lower conversion rates;
lower profitability per impression, up to and including negative margins;
faulty inventory purchase decisions for which we may need to bear the cost;
lower return on advertising spend for our clients;
lower price for the advertising inventory we are able to offer to publishers;
delivery of advertisements that are less relevant or irrelevant to users;
liability for damages or regulatory inquiries or lawsuits; and
harm to our reputation.
Furthermore, the ability of Criteo AI Engine to accurately predict engagement by a user depends in part on our ability to continuously innovate and improve the algorithms underlying Criteo AI Engine in order to deliver positive results for our clients and publishers that can be clearly attributed to the services we provide. The failure to do so could result in delivering poor performance for our clients and a reduced ability to secure advertising inventory from publishers.
If failures in Criteo AI Engine or our inability to innovate and improve the algorithms underlying Criteo AI Engine result in our clients and publishers ceasing to partner with us, we cannot guarantee that we will be able to replace, in a timely or effective manner, departing clients with new clients that generate comparable revenue or departing publishers with new publishers that offer similar internet advertising inventory.
As a result, the failure by Criteo AI Engine to accurately predict engagement of users and to continue to do so over time could result in significant costs to us, lost revenue and diminished advertising inventory.
The proper functioning of Criteo AI Engine may be impaired by fraudulent or malicious activity, including non-human traffic.
Fraudulent or malicious activity, including non-human traffic, could also impair the proper functioning of Criteo AI Engine. For example, the use of bots or other automated or manual mechanisms to generate fraudulent clicks or misattribute clicks on advertisements we deliver could overstate the performance of our advertising. PreventingDue to the higher CPM paid for online video and combating fraud requires constant vigilance,connected TV advertisements, the risk of fraudulent traffic may increase as we increase our purchasing of online video and connected TV inventory.
If we may not always be successful in our effortswere to do so. It may be difficult to detectexperience significant errors, defects, or fraudulent or malicious activity particularly becausein Criteo AI Engine, our solution could be impaired or stop working altogether, which could prevent us from purchasing any advertising inventory and generating any revenue until the perpetrators of such activity, which may include foreign governments, may have significant resources at their disposal, may frequently change their tactics and may become more sophisticated, requiring us to improve our processes for detecting and controlling such activity. Sucherrors, defects or fraudulent or malicious activity could result inwere detected and corrected. Other negative publicity and reputational harm and requireconsequences from significant additional management time and attention.
Further, if we fail to detecterrors, defects or prevent fraudulent or malicious activity in Criteo AI Engine could include:
•a loss of clients and publishers or a decrease in inventory purchased by clients;
•fewer consumer visits to our clientsclient websites or mobile applications;
•lower click-through rates or conversion rates;
•lower profitability per impression, up to and including negative margins;
•faulty inventory purchase decisions for which we may experience or perceive a reducedneed to bear the cost;
•lower return on their investmentadvertising spend for our clients;
•lower price for the advertising inventory we are able to offer to publishers;
•delivery of advertisements that are less relevant or heightened risk associated with the use of our solutions, resulting in irrelevant to users;
•refusals to pay, demands for refunds, loss of confidence, withdrawal of future business and potential legal claims. Dueliability for damages or regulatory inquiries or lawsuits; and
•negative publicity or harm to our reputation.
As a result, the higher CPM paid for video advertisements, the risk of fraudulent traffic may increase as we increase our purchasing of video inventory.
If we show advertising or inventory that is fraudulent, we may lose the trust of our clients, which would harm our brand and reputation. If potential clients perceive thatfailure by Criteo AI Engine is vulnerable to bots or similar non-human traffic, fraudulent clicks or other malicious activity, we may not be ableaccurately predict engagement of users and to maintain our existing clients or attract new clients. As acontinue to do so over time could result ourin significant costs to us, lost revenue and diminished business could suffer and our results of operations could be materially impacted.opportunities.
Regulatory, legislative or self-regulatory developments regarding internet privacyor online matters could adversely affect our ability to conduct our business.
The United States and foreign governments
Governmental authorities around the world have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by EU institutions in 2016 and came into effect after a two year transition period on May 25, 2018, updated and modernized the principles of the 1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance.
In the European Union, the two main pillars of the data protection legal framework are the E-Privacy Directive (Directive on Privacy and Electronic Communications)Communications (E-Privacy Directive) and the General Data Protection Regulation.
GDPR. The E-Privacy Directive was amendeddirects EU member states to ensure that accessing information on an Internet user’s computer, such as through a cookie and other similar technologies, is allowed only if the Internet user has been informed about such access and given his or her consent. A recent ruling by the Court of Justice of the European Union clarified that such consent must be reflected by an affirmative act of the user, and European regulators are increasingly agitating for more robust forms of consent. These developments result in November 2009 by Directive 2009/136/EC (the E-Privacy Directive Amendment)decreased reliance on implied consent mechanisms that have been used to introduce newmeet requirements for EU companies like ours, along with advertisers and publishers, to present users with an information notice and obtain their consent prior to placing cookies or other tracking technologies for targeted advertising purposes. As there were different transpositions of the E-Privacy Directive Amendment in domestic lawssome markets. A replacement by an e-privacy regulation for the E-Privacy Directive is currently under discussion by EU member states to complement and bring electronic communication services in line with the GDPR and force a harmonized approach across EU member states. It is possible that the EU Member States, there are currently different interpretationsproposed e-privacy regulation could further impede the use of what constitutes valid consent (e.g. explicit versus implied consent) acrosscookies and the EU, posingfines and penalties for breach could be significant.
Under GDPR, data protection authorities have the power to impose administrative fines of up to a riskmaximum of regulatory divergence€20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year. Similarly, the e-privacy regulation, once enacted, could result in new rules and creating legal uncertaintymechanisms for businesses."cookie" consent.
To illustrate this risk of different interpretations by the competent authorities, the Spanish Data Protection Authority (Agencia Espanola de Proteccion de Datos) recently published updated guidance in which it is stated that continuing to browse a website could constitute consent of a user for cookie tracking, whileFurther, on October 1, 2020, the French Data Protection Authority (Commissiondata protection authority (Commission Nationale de l'Informatique et des Libertés, or CNIL) and UK Data Protection Authority (Information Commissioner's Office) are listing stricter requirements in their own updated guidance and seem to impose a very clear and specific statement"CNIL") issued the final version of consent.
On January 14, 2020, CNIL published its draft recommendationsguidelines on the use of cookies and other tracking technologies.trackers and its final recommendations on modalities for obtaining users’ consent to store or read non-essential cookies and similar technologies on their devices. The draft recommendations provide that, when required, consent must be indicated by a clear and positive action of the data subject, such as by clicking on an “accept all” button on the first layer of the consent management platform. CNIL also noted that it should be as easy to refuse consent to the use of cookies as it is to accept consent, and a “refuse all” button should be present on the first layer of the consent management platform, equivalent to the “accept all” button in terms of size, position and color. Further, the ability to withdraw consent must be readily available at all times. The recommendations are not binding, nor are they intended to be prescriptive and exhaustive. The recommendations were openCompanies had until March 2021 to public consultation until February 25, 2020. We expect that a final version of the recommendations will be submitted for adoption soon thereafter.ensure compliance with these guidelines, and CNIL is currently auditing many websites in France to verify if they comply with its guidelines.
Data Protection Authorities will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year. Similarly, the E-Privacy Regulation, which drafting was launched by the European Parliament in October 2016, could result in, once new regulation is enacted, new rules and mechanisms for "cookie" consent.
In addition, the interpretation and application of data protection laws in the United States, Europe and elsewhere are often uncertain and in flux. For example, on October 6, 2015, the European Court of Justice invalidated the EU-US Safe Harbor framework, which we relied on to operate our data transfers both internally (for HR, CRM and other back-office data processing) and with several U.S.-based partners (notably RTB platforms). Following the Safe Harbor invalidation, in July 2016, the European Commission announced the formal adoption of the "EU-US Privacy Shield." We elected to rely on the Standard Contractual Clauses of the European Commission to secure our data transfers, but we cannot anticipate whether this legal scheme will be compromised in the future. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations, which could reduce the amount of data we can collect or process and, as a result, significantly impact our business.
In 2018, the State of California adopted the California Consumer Privacy Act of 2018, or the CCPA. The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the U.S. because its scope, and a number of the key provisions, resemble the GDPR.
The CCPA establishes a new privacy framework for covered businesses by, among other requirements, creating an expanded definition of personal information, establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of personal data from minors, creating new notice obligations and new limits on the sale of personal information, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. As currently enacted, we and partners in our industry have been required to comply with these requirements since January 1, 2020, when the CCPA became effective. As with GDPR, the advertising technology marketplace may have to adapt to operating under the CCPA where it applies. Our advertising or publishing partners may impose new CCPA restrictions with which we must adapt and comply. In November 2020, voters in California voted to pass the California Privacy Rights Act (“CPRA”), which both amends and expands the scope of the CCPA. The CPRA will become effective on January 1, 2023, with a look back period to January 1, 2022. The CPRA creates new criteria by which businesses can be regulated, expands the definition of “personal information” to more closely match European regulations, a new audit requirement, and the creation of an agency to oversee enforcement of the CPRA. The CPRA also explicitly provides an opt-out right for cross-contextual behavioral advertising. We cannot predict the timing or outcome of this adaptation or the effect on our business. Adapting our business to the CCPA and the forthcoming new requirements under the CPRA could involve substantial resources and expense, and may cause us to divert resources from other aspects of our business, all of which may adversely affect our business.
Similarly, clarifications
In addition, other states in the U.S. are quickly adopting state enacted privacy laws. Recently Virginia and Colorado passed privacy laws that differ slightly from the CPRA. If other states follow suit, it could lead to a varied and complex regulatory landscape, which could result in material costs.
Clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results.
Such changes can also delay or impede the development of new solutions, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability.
Finally, our legal and financial exposure often depends in part on our clients’ or other third parties' adherence to and compliance with privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations.
If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients and publisher partners may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.
In 2016, the Commission Nationale de l'Informatique et des Libertés ("CNIL") commenced an inquiry into our compliance with French data privacy laws. The inquiry is now closed. At this stage, there can be no assurance that there will not be further inquiries with respect to our compliance with privacy laws from CNIL or regulatory bodies in other jurisdictions.
Similarly, inIn November 2018, Privacy International filed a complaint with relevant data protection authorities against Criteo and a number of other similarly situated advertising technology companies, arguing that certain of these companies' practices do not comply with the GDPR. In January 2020, CNIL opened a formal investigation into Criteo in response to this complaint.complaint, which is still ongoing as per CNIL’s notification to Criteo dated June 23, 2021, which notified the Company of the appointment of an investigator (rapporteur). Their investigation also covers another complaint against Criteo received by the CNIL from European Center for Digital Rights (NOYB). There can be no assurance that actionactions by the Company will not be required as a result.result of the investigation.
Our business depends on our ability to maintain the quality of content for our clients and publishers.
Our clients' satisfaction depends on our ability to place advertisements with publisher content that is well-suited to the client's product or service. If we are unable to keep our clients’ advertisements from being placed in unlawful or inappropriate content, our reputation and business may suffer. In particular, we could be treated as a spammer and blocked by internet service providers or regulators. In addition, if we place advertisements on websites containing content that is not permitted under the terms of the applicable agreements with a client, we may be unable to charge the client for impressions or clicks generated on those sites, the client may terminate their campaign, the client may require us to indemnify them for any resulting third party claims, or the client may allege breach of contract. Further, our publishers and exchange partners rely upon us not to place advertisements with inappropriate or unlawful content on their websites, the content of which is unlawful or inappropriate.websites. As we grow our business to serve a larger number of smaller clients using self-service tools with less intervention by us, it could become more challenging to train and support such clients to use such tools and to prevent inappropriate or unlawful advertisements from being shown. If we are unable to maintain the quality of our client and publisher content as the number of clients and publishers we work with continues to grow, our reputation and business may suffer and we may not be able to retain or secure additional clients or publisher relationships.
Our success depends on our ability to implement our business transformation and achieve our global business strategies.
Our business has recently undergone, and continues to undergo, a significant transformation, partially in response to major changes in the advertising technology industry driven by, but not limited to, regulations such as the GDPR and restrictions on data collection and use, including those implemented by large technology companies. The components of our transformation include diversification of our services as we shift away from third-party cookies, focus on growth and investment, and certain organization adjustments and cost optimization opportunities. Our future performance and growth depends on the success of this transformation and our new business strategies, including our management team’s ability to successfully implement them.
Our ongoing transformation has resulted and may continue to result in changes to business priorities and operations, capital allocation priorities, operational and organizational structure, and increased demands on management. Such changes could result in short-term and one-time costs, lost customers, reduced sales volume, higher than expected restructuring costs, loss of key personnel and other negative impacts on our business. We may also become subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives.
Completion of our business transformation may take longer than anticipated, and, once implemented, we may not realize, in full or in part, the anticipated benefits or such benefits may be realized more slowly than anticipated. The failure to realize benefits or savings, which may be due to our inability to execute plans, delays in the implementation of the transformation, global or local economic conditions, competition, changes in the advertising technology industry and the other risks described herein, could have a material adverse effect on our business, financial condition and results of operations, as well as the trading price of our securities.
We may not be able to effectively integrate the businesses we acquire, which may adversely affect our ability to achieve our growth and business objectives.
Over the past five years, we have acquired Manage.com Group, Inc., Storetail SA, HookLogic, Monsieur Drive SAS and three other businesses.
We may seek to acquireexplore, on an ongoing basis, potential acquisitions of additional businesses, products, solutions, technologies or teams in the future.teams. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms and/or financing of the acquisition, and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product, solution or technology, including issues related to intellectual property, product quality or architecture, employees or clients, regulatory compliance, including tax compliance, practices or revenue recognition or other accounting practices.
Any acquisition or investment, including the contemplated IPONWEB Acquisition, may require us to use significant amounts of cash, incur debt, issue potentially dilutive equity securities or incur debt, contingent liabilities or amortization of expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results. The Company has incurred and will incur significant transaction and acquisition-related costs in connection with its acquisitions, including legal, accounting, financial advisory, regulatory and other expenses. The payment of such transaction costs could have an adverse effect on our financial condition, results of operations or cash flows. In addition, acquisitions, including our recent acquisitions such as the contemplated IPONWEB Acquisition and the Mabaya Acquisition, involve numerous risks, any of which could harm our business, including:
•difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency;competency and market;
•the need to integrate operations across different geographies, cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
•cultural challenges associated with integrating employees from the acquired company into our organization;
•ineffectiveness, lack of scalability, or incompatibility of acquired technologies or services;
•potential loss of key employees of acquired businesses;
•inability to maintain the key business relationships and the reputation of acquired businesses;
•failure to successfully further develop the acquired technology in order to recoup our investment;
•unfavorable reputation and perception of the acquired product or technology by the general public;
•diversion of management’s attention from other business concerns;
•liability or litigation for activities of the acquired business, including claims from terminated employees, clients, former shareholders or other third parties;
•implementation or remediation of controls, practices, procedures and policies at acquired businesses, including the costs necessary to establish and maintain effective internal controls; and
•increased fixed costs.
There can be no assurance that we will be able to successfully integrate the businesses that we acquire or that we will be able to leverage the acquired commercial relationships, products, technologies or technologiesteams in the manner we anticipate. If we are unable to successfully integrate the businesses we have acquired or any business, product, solution, technology or technologyteam we acquire in the future, our business and results of operations could suffer, and we may not be able to achieve our business and growth objectives.
Failure to complete the IPONWEB Acquisition could have an adverse effect on our business, financial condition and results of operations and could negatively impact our stock price.
The IPONWEB Acquisition is subject to certain customary conditions to closing that must be satisfied or waived (to the extent permissible), in each case prior to the completion of the acquisition. These conditions to the completion of the acquisition, some of which are beyond our control and that of IPONWEB, may not be satisfied or waived in a timely manner or at all, and, accordingly, the acquisition may be delayed or not completed. Any failure of the pending IPONWEB Acquisition to be completed could have an adverse effect on our business, financial condition and results of operations and could negatively impact our stock price. The current market price of our stock may reflect an assumption that the pending acquisition will occur and failure to complete the acquisition could result in a decline in our stock price.
Our international operations and expansion expose us to several risks.
As of December 31, 2019,2021, we had a direct operating presence through 29 offices located in 1915 countries and did business in 10396 countries. Our primary research and development operations are located in France and the United States. In addition, we currently have international offices outside of France and the United States, which focus primarily on selling and implementing our offerings in those regions. In the future, we may expand to other international locations. Our current global operations and future initiatives involve a variety of risks, including:including, in addition to risks described elsewhere in this section:
•operational and execution risk, including localization of the product interface and systems, including translation into foreign languages, and adaptation for local practices;practices, adequate coordination of timing to onboard local clients and publishers, difficulty of maintaining our corporate culture, challenges inherent to hiring and efficiently managing an increased number of employees over large geographic distances, and the increasing complexity of the organizational structure required to support expansion and operations into multiple geographies and regulatory systems;
•insufficient, or insufficiently coordinated, demand for and supply of advertising inventory in specific geographic markets processed through Criteo AI Engine, which could impair its ability to accurately predict user engagement in that market;
•compliance with (and liability for failure to comply with) applicable local laws and regulations, including, among other things, laws and regulations with respect to data protection (including requirements that user data be stored locally in a given country) and user privacy, tax and withholding, labor regulations, anti-corruption, environment, consumer protection, spam and content, which laws and regulations may be inconsistent across jurisdictions;
more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;
taxation in a variety of jurisdictions with increasingly complex tax laws, the application of which can be uncertain;
•intensity of local competition for digital advertising budgets and internet display inventory;
unexpected changes in laws and regulatory requirements, trade laws, tariffs, export quotas, customs duties or other trade restrictions;
labor regulations and labor laws that can be interpreted as more advantageous to employees than those in the United States, including with respect to deemed hourly wage and overtime regulations;
•changes in a specific country’s or region’s political or economic conditions;
challenges inherent•risks related to hiringtariffs and efficiently managing an increased numbertrade barriers, pricing structure, payment and currency, including aligning our pricing model and payment terms with local norms, higher levels of employees over large geographic distances, including the need to implement appropriate systems, policies, benefitscredit risk and compliance programs,payment fraud, difficulties in invoicing and the increasing complexity of the organizational structure required to support expansion into multiple geographies;
the difficulty of maintaining our corporate culture of rapid innovationcollecting in foreign currencies and teamwork that has been central to our growth in the face of an increasingly geographically diverse workforce;
risks resulting from changes inassociated foreign currency exchange rates and the implementation of exchange controls, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other similar trade protection regulations and measures in the United States or in other jurisdictions;
reduced ability to timely collect amounts owed to us by our clients in countries where our recourse may be more limited;
limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of our operations in other countries
exposure, restrictions on foreign ownership and investments;investments, and difficulties in repatriating or transferring funds from or converting currencies; and
•limited or unfavorable intellectual property protection;
exposure to liabilities under anti-money laundering laws, international and international sanction requirements and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and
restrictions on repatriation of earnings.
We have one U.K. subsidiary, some of our operations are in the U.K., and some of our customers and partners pay us in British Pounds and Euros. It is unclear what impact Brexit will have on our business in the U.K., EU and elsewhere globally. Brexit may adversely affect economic conditions in the U.K., EU and elsewhere across the globe, and could contribute to volatility in foreign exchange markets with respect to the British Pound and Euro, which we may not be able to effectively manage, and our financial results could be adversely affected. Further, Brexit may add additional complexity to our European operations, which are headquartered in Paris, France. Accordingly, we cannot predict the additional expense, impact on revenue, or other business impact that may stem from Brexit.
We have established operations in geographies such as China, India, Brazil and Russia, and may establish operations in additional geographies in the near future, where we may face more complex regulatory environments and market conditions than those we have experienced in markets where we currently operate. If we invest substantial time and resources to expand our international operations and are unable to execute successfully or in a timely manner, our business and results of operations could suffer, and we may not be able to achieve our business and growth objectives.
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenue or profitability.
Our
Because our functional currency is the euro, while our reporting currency is the U.S. dollar, we face exposure to fluctuations in foreign currency exchange rates. Foreign currency exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro. While we are engaging in hedging transactions to minimize the impact of uncertainty in future success dependsexchange rates on intra-company transactions and financing, we may not hedge all of our ability to scale our offerings as our business grows.
As our business grows, it may become increasingly difficult to maintain the proper functioning of Criteo AI Engine as we continue to collect increasing amounts of data from new geographic markets, new advertising channels, new industry verticals and a growing base of clients. We currently process 250 terabytes of additional compressed data every day, with total storage capacity exceeding 750,000 terabytes and 2,000 terabytes of random-access memory. However, future growth could exceed these rates, and our ability to scale our offerings to keep pace with the amount of data we process may be impaired by failure of software or hardware (including storage, processing, support and security infrastructure).
As a result, our operations might suffer from unanticipated system disruptions or slow processing or reporting which could negatively affect our reputation and ability to attract and retain clients.foreign currency exchange rate risk. In addition, the expansionhedging transactions carry their own risks and improvement of our systemscosts, and infrastructure may requirecould expose us to commit substantialadditional risks that could harm our financial operationalcondition and technical resources, with no assurance our business will increase.operating results.
Furthermore, inventory-related traffic continues to increase faster than our revenue has grown over the past few years. Reducing the cost and improving the efficiency of our infrastructure may require us to invest an increasing percentage of our revenue, and there can be no assurance that we will be successful. Similarly, advancements in machine learning approaches and other technology may require us to upgrade or replace essential hardware (such as GPUs), which could involve substantial resources and could be difficult to implement.
If we fail to respond to technological change or to adequately maintain, expand, upgrade and develop our systems and infrastructure in a timely fashion, our growth prospects and results of operations could be adversely affected.
Moreover, even if we are able to expand our computing and other infrastructure to keep pace with the industry-related traffic growth, it may be too costly for us to continue to provide services under our current business model and capital expense assumptions and our profitability and results of operations may suffer.
If we fail to manage our growth and the shift in our client portfolio towardstoward the midmarket effectively, we may be unable to execute our business plan or maintain high levels of client and publisher satisfaction.
We have experienced, and may in the future experience, rapid growth and changes in our client portfolio, which have created, and may continue to create, challenges to the quality of our service to our clients, and which have placed, and may continue to place, significant demands on our management and our operational and financial resources.
For example, over the past few years, the size of our business with Tail clients (previously called midmarket businessclients) has grown significantly as a proportion of our overall business, and we expect it tomay continue to do sogrow in the future. AsWhile we intend to put more focus on our Strategic and Core clients and therefore less emphasis on the Tail client category, should our business shiftsevolve toward the midmarketTail category, there are several additional risks to our business, including risks relating to the financial stability of our clients and our ability to collect accounts receivable from such clients. In addition, since our midmarket business with Tail clients is comprised of thousands of smaller clients whichthat require significant resources to support, it is currently less profitable than our large client business with Strategic and overallCore clients. Overall there may not be a direct correlation between a change in the number of clients in a particular period and an increase or decrease in our revenue. In 2018, we started to implement a new go-to-market strategy, aimed at maximizing our commercial opportunity for our multi-solution offering, by providing the right level of services to each our client segments (based on their size and business potential with us) and scaling our midmarket operations more efficiently and profitably. However, due to the growing number of midmarket clients that require support, we will need to continue automating certain of our processes to service the midmarket category as it continues to grow globally. There can be no assurance that we will be able to successfully adjust to these shifting dynamics and remain profitable.
As we continue to expand, we also must maintain a high level of service to ensure client and publisher satisfaction. To the extent our client and publisher base grows, we will need to expand our account management, publisher support and other personnel in order to continue to provide adequate account management and services, the quality of which has been central to our growth to date. To do so will require significant expenses, significant capital expenditures and valuable management resources.
If we fail to successfully manage the anticipated changes in our client portfolio and the associated changes in a manner that preservesemployee headcount and our attention to our clients,organizational structure, our brand and reputation may suffer, which would in turn impair our ability to attract and retain clients and publishers.
If we are unable to successfully manage the changes in our client portfoliopublishers and the associated changes in employee headcount and our organizational structure, our results of operations could suffer.operations.
The development and deployment of the self-registration and onboarding module of the Criteo Platform and associated processes may be delayed or may experience technical issues.
In 2018, we started undertaking a transformation of our go-to-market model, aimed at maximizing the commercial opportunity for our multi-solution offering, by providing the right level of services to each of our client segments - based on their size and business potential with us - and by scaling our midmarket operations more efficiently and profitably. This includes the roll out of the self-registration and onboarding module of the Criteo Platform, supported by appropriate sales and marketing services and channels, to enable lower segments of midmarket clients to sign up and be self-served in a more automated, scalable and profitable way.
If our ability to develop the right capabilities internally, planning for roles and responsibilities, redeployment of resources, or training of teams fails or is lacking, then we may not be able to operate our self-registration and onboarding module in an effective manner. Further, if we lack coordination in anticipating project dependencies or lack project management and change management skills, the deployment of this self-registration and onboarding module may be delayed or may experience technical issues. As a result, we may not be able to timely leverage our self-registration and onboarding module to profitability scale, which could result in significant costs to us, lost revenue and reputational harm.
If we fail to successfully enhance our brand, our ability to protect and expand our client base will be impaired and our financial condition may suffer.
We believe that developing and maintaining awareness of the Criteo brand is critical to achieving widespread acceptance of our existing offering and any future solutions, such as new solutions directed toward capturing broader advertising budgets, and is an important element in attracting new commerce clients, consumer brand clients, retailer partners and publisher partners. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases.
Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable solutions for our commerce clients, consumer brand clients, retailer partners and publisher partners. In the past, our efforts to build our brand have involved significant expenses and they may continue to do so in the future. As a result, we may not be able to develop our brand in a cost-effective manner. Furthermore, brand promotion activities may not yield any increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand.
If we fail to successfully promote and maintain our brand we may fail to attract enough new commerce clients, consumer brand clients, retailer partners and publisher partners or retain enough of our existing commerce clients, consumer brand clients, retailer partners and publisher partners, and our business could suffer.
Our future success will depend in part on our ability to expand into new industry verticals.
As we market our offering to a wider group of consumer brands and companies outside of our historical three key industry verticals of retail, travel and classifieds, including businesses in the automotive, telecommunications, consumer goods and finance industries, as well as mobile app-first verticals such as gaming, ride sharing and food delivery,among others, we will need to adapt our solutions and effectively market our value to businesses in these new industry verticals. Our successsuccessful expansion into new industry verticals will depend on various factors, including our ability to:
design solutions that are attractive to businesses in such industries;
provide high returns on advertising spend in such industries and maintain such high returns on advertising spend at scale;
transparently measure the performance of such advertising spend based on clear, measurable metrics;
hire personnel with relevant industry vertical experience to lead sales and product teams;
work with clients in new industry verticals through the advertising agencies that manage their advertising budgets; and
•accumulate sufficient data sets relevant for those industry verticals to ensure that Criteo AI Engine has sufficient quantity and quality of information to deliver efficient and effective internet display advertisements withinapplicable to the relevant industry.industry;
For example,•design solutions that are attractive to businesses in such verticals;
•work with clients in new industry verticals through the acquisitionadvertising agencies that manage their advertising budgets
•hire personnel with relevant industry vertical experience to lead sales and product teams
•provide high returns on advertising spend in such industries and maintain such high returns on advertising spend at scale; and
•transparently measure the performance of Manage.com Group, Inc. in 2018, we further expanded our offering into gaming and other app-first areas such as food delivery and ride sharing. Similarly, with the acquisition of HookLogic in 2016 and the introduction of Criteo Retail Media, we expanded our offering to benefit consumer brands. However, there can be no assurance that we will be able to maintain the client base built by Manage or HookLogic or that we will be able to expand the Criteo Retail Media business successfully.advertising spend based on clear, measurable metrics.
If we are unable to successfully adapt our offering to appeal to businesses in industries other than our core verticals, or are unable to effectively market such solutions to businesses in such industries, we may not be able to achieve our growth or business objectives. Further, as we expand our client base and offering into new industry verticals, we may be unable to maintain our current client retention rates.
As we expand the market for our solutions, we may become more dependent on advertising agencies as intermediaries, which may adversely affect our ability to attract and retain business, or exert downward pressure on our margins.
As we market our solutions, we may increasingly need advertising agencies to work with us in assisting businesses in planning and purchasing for broader marketing goals. In particular, manyOver the second half of our2021, 50% of Criteo Retail Media clients, whom we have started working with since our acquisition of HookLogic, work with us through advertising agencies: 72%, 66%Media's gross media spend and 62%29% of Criteo sold sponsored products revenue for 2017, 2018 and 2019, respectively,Marketing Solutions' gross media spend relied on advertising agencies. Historically, however, direct relationships with our clients accounted for 73%, 73% and 74% of our revenue for 2017, 2018 and 2019, respectively, for Criteo Marketing Solutions.
We believe several elements of our growth strategy, including the increasing deployment and availability of self-service platform capabilities for our clients to have greater control and transparency over the management and execution of their advertising campaigns with us, as well as the ongoing expansion of our solutions into advertising scenarios to address Consideration marketing goals, may make our overall value proposition more attractive to advertisers, including to the potential advertising agencies that help them manage their advertising budgets. Overall, we believe that accessing broader advertising budgets by partnering with advertising agencies represents a significant incremental business opportunity for us.
However, an increasing exposure to advertising agencies may also represent significant risks. For example, if we have an unsuccessful engagement with an advertising agency on a particular advertising campaign, we risk losing the ability to work not only for the client for whom the campaign was run, but also for other clients represented by that agency. Further, if our business evolves such that we are increasingly working through advertising agency intermediaries, we would have less of a direct relationship with our clients. This may drive our clients to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with our clients. Additionally, our clients may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying client’s business when the client switches to a new agency.
The presence of advertising agencies as intermediaries between us and our clients thus creates a challenge to building our own brand awareness and maintaining an affinity with our clients, who are the ultimate sources of our revenue. In the event we were to become more dependent on advertising agencies as intermediaries, this may adversely affect our ability to attract and retain business. In addition, an increased dependency on advertising agencies may harm our results of operations, as a result of the increased agency fees we may be required to pay and/or as a result of longer payment terms from agencies.
Our future success will depend in part on our ability to expand into new advertising channels.
We define an advertising channel as a specific advertisement medium to engage with a user or a consumer for which we currently purchase inventory through a specific source. We started delivering elements of our offering through internet display advertisements in desktop browsers. Since then, we have expanded into mobile in-browser and in-app, native display, including on social media platforms, and online video inventory.
In the future, we may decide to broaden the spectrum of our advertising channels further, including Connected TV and Digital Out of Home, if we believe that doing so would significantly increase the value we can offer to clients. We believe a broader platform delivering our solutions through complementary advertising channels can enhance our value proposition for existing and prospective clients.
However, any future attempts to enter new advertising channels may not be successful. For example, we launched our
Criteo Email Retargeting offering in 2014 after we acquired Tedemis SA in 2014. In 2016, we decided to discontinue our Criteo Email Retargeting offering based on country-specific circumstances. Similarly, we launched our Criteo Predictive Search offering in 2016. In 2017, we decided to discontinue our Criteo Predictive Search offering based on client and country-specific circumstances.
Our success in expanding into any additional advertising channels will depend on various factors, including our ability to:
•identify additional advertising channels where our solutions could perform;
•accumulate sufficient data sets relevant for those advertising channels to ensure that Criteo AI Engine has a sufficient quantity and quality of information to deliver relevant personalized advertisements through those additional advertising channels;
•adapt our solutions to additional advertising channels and effectively market it for such additional advertising channels to our existing and prospective clients;
•integrate newly developed or acquired advertising channels into our pricing and measurement models, with a clear and measurable performance attribution mechanism that works across all channels, and in a manner that is consistent with our privacy standards;
accumulate sufficient data sets relevant for those advertising channels to ensure that Criteo AI Engine has a sufficient quantity and quality of information to deliver relevant personalized advertisements through those additional advertising channels;
•achieve client performance levels through the new advertising channels that are similar to those delivered through existing advertising channels, and in any case that are not dilutive to the overall client performance;
•identify and establish acceptable business arrangements with inventory partners and platforms to access inventories in sufficient quality and quantity for these new advertising channels;
•maintain our gross margin at a consistent level upon entering one or more additional advertising marketing channels;
•compete with new market participants active in these additional advertising channels; and
•hire and retain key personnel with relevant technology and product expertise to lead the integration of additional advertising channels onto our platform, and sales and operations teams to sell and integrate additional advertising channels.
If
Any decrease in the use of internet display advertisements, mobile in-browser and in-app, native display, including on social media platforms, and online video advertising, whether due to clients losing confidence in the value or effectiveness of such channels, regulatory or technology restrictions or if we are unable to successfully adapt our solutions to additional advertising channels and effectively market such offerings to our existing and prospective clients, or if we are unable to maintain our pricing and measurement models in these additional advertising channels, we may not be able to achieveprevent us from achieving our growth or business objectives.
We operate in a rapidly evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful. Our revenue would declinehistorical growth rates may not be indicative of our future growth, and we expect our operating and capital investments to continue to increase in the foreseeable future. Accordingly, we may have difficulty sustaining profitability.
We operate in a rapidly evolving industry. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth in both our business and the digital advertising market generally. We are subject to risks and uncertainties frequently experienced by growing companies in rapidly evolving industries, including challenges in forecasting accuracy, determining appropriate nature and levels of investments, assessing appropriate returns on investments, achieving market acceptance of our existing and future offerings, managing client implementations and developing new solutions. If our assumptions regarding these uncertainties, which we regularly use and update to plan our business, are incorrect or change in reaction to changes in our markets, or if we faildo not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
You should not consider our revenue growth in past periods to effectively coordinatebe indicative of our future performance. In future periods, our revenue could decline or grow more slowly than we expect. We believe the demandgrowth of our revenue depends on a number of factors, including our ability to:
•attract new clients, and retain and expand our relationships with existing clients;
•maintain the breadth of our media owner network and attract new publishers and media owners, including large retailers, publishers of web content, mobile applications and video and social games, in order to grow the volume and breadth of advertising inventory available to us;
•broaden our solutions portfolio to include additional marketing and monetization goals (including awareness and consideration) for commerce companies and consumer brands across the open Internet, including web, apps and stores;
•adapt our offering to meet evolving needs of businesses, including to address market trends such as (i) the continued migration of consumers from desktop to mobile and from websites to mobile applications, (ii) the increasing percentage of sales that involve multiple digital devices, (iii) the increasing retailer adoption of retail media monetization solutions, (iv) the growing adoption by consumers of “ad-blocking” software on web browsers on desktop and/or on mobile devices and use or consumption by consumers of advertising-free services, (v) changes in the marketplace for and supply of advertising inventory, including the shift toward header bidding, (vi) changes in a specific geographic market.the overall ecosystem such as Apple's introduction of its Intelligent Tracking Prevention feature into its Safari browser and its App Tracking Transparency feature in its iOS14.5 mobile operating system, Microsoft’s Tracking Prevention feature in its Edge browser, and Mozilla’s introduction of Enhanced Tracking Protection into its Firefox browser and (vii) changes in consumer acceptance of tracking technologies for targeted or behavioral advertising purposes;
The•maintain and increase our access to data necessary for the performance of Criteo AI Engine;
•continuously improve the algorithms underlying Criteo AI Engine and apply state-of-the-art Machine Learning approaches and hardware; and
•continue to adapt to a changing regulatory landscape governing data protection and privacy matters.
We also anticipate continuing to invest in our business to increase the scale of our solutions, existing and new, grow our headcount and expand our operations. In particular, we plan to continue to focus on maximizing our Contribution after traffic acquisition costs on an absolute basis, which we call Contribution ex-TAC, as we believe this focus fortifies a number of our competitive strengths. Our focus on maximizing Contribution ex-TAC on an absolute basis may have an adverse impact on our gross margin and we cannot be certain that this strategy will be successful or result in increased liquidity or long-term value for our shareholders.
We derive a significant portion of our revenue from companies in the retail, travel and classified industries, and any downturn in these industries or any changes in regulations affecting these industries could harm our business.
A significant portion of our revenue is derived from companies in the Retail, Travel and Classifieds industries. For example, in 2021, 2020, 2019 and 2018, 78.1%, 75.6%, 68.9% and 69.1%, respectively, of our combined revenue for Criteo Marketing Solutions was derived from advertisements placed for Retail commerce businesses. Any downturn or increased competitive pressure in any of our core industries, or other industries we may target in the future, may cause our clients to reduce their spending with us, or delay or cancel their advertising campaigns with us.
We have substantial client concentration in certain local markets and solutions, with a limited number of clients accounting for a substantial portion of our revenues in those areas.
Although our overall customer base is well-diversified, with our largest 10 clients only representing 16.6% of our revenue in the aggregate in 2021, in certain of our local markets and specific geographicsolutions we derive a substantial portion of revenues from a limited number of clients. There are inherent risks whenever a large percentage of revenues within any specific market dependsor solution are concentrated within a limited number of clients. We cannot predict the future level of demand for our services and products that will be generated by these clients. In addition, revenues from these clients may fluctuate from time to time. Further, some of our contracts with these clients may permit them to terminate use of our products at any time (subject to notice and certain other provisions). If we fail to retain any of these clients and any of these clients terminate or reduce use of our products, our revenues within local markets or specific solutions may be negatively impacted.
We experience fluctuations in our results of operations due to a number of factors, which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual results of operations fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on having sufficient clients implementeda period-to-period basis may not be meaningful. Fluctuations in our results of operations could cause our performance to fall below the expectations of analysts and utilizinginvestors, and adversely affect the price of our ADSs. You should not rely on our past results as an indication of our future performance. Factors that may affect our quarterly results of operations include:
•the nature of our clients’ products or services, including the seasonal nature of our clients’ advertising spending;
•lengthy implementation cycles resulting in substantial expenses incurred without any guarantee of revenue generation;
•demand for our offering and our ability to coordinate the demand forsize, scope and supplytiming of digital advertising inventorycampaigns;
•the relative lack of long-term agreements with the publishers in that market. Since we cannot consistently predict the demand for advertising inventory by our clients or the advertising inventory available to us, including on a priority basis, the demand for and supplypublishers;
•client and publisher retention rates;
•market acceptance of advertising inventoryour offering and future solutions and services (i) in that market may not be sufficient or sufficiently coordinated for Criteo AI Engine to function optimally. As such, as we targetcurrent industry verticals and new industry verticals, (ii) in new geographic markets, we will need to adequately coordinate (iii) in new advertising channels, or (iv) for broader marketing goals;
•the timing of large expenditures related to onboard local clientsexpansion into new solutions, new geographic markets, new industry verticals, acquisitions and/or capital projects;
•the timing of adding support for new digital devices, platforms and publishers. A failure to effectively manage demand for, and the supply of, advertising inventory processed through Criteo AI Engine could impair its ability to accurately predict user engagement in that market, which could result in:operating systems;
a reduction in •the amount of inventory purchased through direct relationships with publishers versus internet advertising exchanges or networks;
•our publishers make available to us in the future;clients’ budgeting cycles;
a loss of existing clients or publishers;
•changes in the priority givencompetitive dynamics of our industry, including consolidation among competitors;
•consumers' response to our clients’ advertisements, to online advertising in general and to tracking technologies for targeted or behavioral advertising purposes;
•our ability to control costs, including our operating expenses;
•network outages, errors in our technology or security breaches and any associated expense and collateral effects;
•foreign currency exchange rate fluctuations, as some of our foreign sales and costs are denominated in their local currencies;
•failure to successfully manage any acquisitions; and
•general economic and political conditions in our domestic and international markets.
As a result, we may have a limited ability to forecast the amount of future revenue and expense, and our results of operations may from time to time fall below our estimates or the expectations of public market analysts and investors.
Risks Related to Data Privacy, Intellectual Property and Cybersecurity
Our ability to generate revenue depends on our collection of significant amounts of data from various sources, which may be restricted by publishers;consumer choice, clients, publishers, browsers or other software, changes in technology, and new developments in laws, regulations and industry standards.
an adverse effect
Our ability to optimize the delivery of internet advertisements for our clients depends on our ability to attract new publishers willingsuccessfully leverage data, including data that we collect from our clients, data we receive from our publisher partners and third parties, and data from our own operating history. Using cookies and non-cookie based mechanisms, such as hashed emails, hashed customer log-ins, mobile phone numbers or mobile advertising identifiers, we collect information about the interactions of users with our clients’ and publishers’ digital properties (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our clients’ websites or advertisements). Our ability to give us preferred access;
harmsuccessfully leverage such data depends on our continued ability to our reputation;
increased cost;access and
lost revenue.
Our sales efforts with both potential use such data, which could be restricted by a number of factors, including consumer choice, restrictions imposed by counterparties (such as clients, supply sources and publishers, requirewho may also compete with us for advertising spend and inventory) and web browser developers or other software developers, changes in technology, including changes in web browser technology, increased visibility of consent or “do not track” mechanisms or “ad-blocking” software, and new developments in, or new interpretations of, laws, regulations and industry standards. These types of restrictions could materially impair the results of our operations.
Web browser developers, such as Apple, Mozilla Foundation, Microsoft or Google, have implemented or may implement changes in browser or device functionality that impair our ability to understand the preferences of consumers, including by limiting the use of third-party cookies or other tracking technologies or data indicating or predicting consumer preferences. Today, three major web browsers — Apple’s Safari, Mozilla’s Firefox and Microsoft’s Edge — block third party cookies by default. Internet users can also delete cookies from their computers at any time. In January 2020, Google announced that it plans to phase out support for third-party cookies in Chrome, which has since been delayed until late 2023. Google controls more than 60% of the browser market and has an even more dominant position in the digital advertising market. These web browser developers have significant timeresources at their disposal and expense,command substantial market share, and any restrictions they impose could foreclose our ability to understand the preferences of a substantial number of consumers. Although we are actively in the process of moving our business away from third-party cookies towards relying more on first-party data-based identifiers, if we are blocked from serving advertisements to a significant portion of internet users, our business could suffer and our results of operations could be harmed.
Similarly, Internet users are increasingly able to download free or paid “ad-blocking” software, including on mobile devices, which prevent third-party cookies from being stored on a user’s computer and block advertisements from being displayed to such user. In addition, Google has introduced ad blocking software in its Chrome browser that blocks certain ads based on quality standards established under a multi-stakeholder coalition. If such a feature inadvertently or mistakenly blocks ads that are not within the established blocking standards, or if such capabilities become widely adopted and the advertising technology industry does not collaboratively develop alternative technologies, our business could be harmed. The Interactive Advertising Bureau and Digital Advertising Alliance have also developed frameworks that allow users to opt out of the “sale” of their personal information under the CCPA, in ways that stop or severely limit the ability to show targeted ads.
In addition, search engines and other service providers that explicitly do not allow the tracking of data, such as DuckDuckGo, Inc., may be growing in popularity. If a significant number of web browser users switch to advertising-free services or platforms, our business could be materially impacted. Further, mobile devices allow users to opt out of the use of mobile device IDs for targeted advertising. For in-app advertising, data regarding interactions between users and devices are tracked mostly through stable, pseudonymous mobile device identifiers that are built into the device operating system with privacy controls that allow users to express a preference with respect to data collection for advertising, including to disable the identifier. These identifiers and privacy controls are defined by the developers of the mobile platforms and could be changed by the mobile platforms in a way that may negatively impact our business. For example, Apple announced in June 2020 that it will require user opt-in before permitting access to Apple’s unique identifier, or IDFA, and implemented iOS 15 in September 2021, which allows users to hide IP address information to prevent tracking web usage on the Safari browser and to shut off marketers’ ability to see if and when an email is opened through Apple’s Mail app. This shift from enabling user opt-out to an opt-in requirement is likely to have a substantial impact on the mobile advertising ecosystem and could harm our growth in this channel.
User privacy features of other channels of programmatic advertising, such as Connected TV or over-the-top video, are still developing. Technical or policy changes, including regulation or industry self-regulation, could harm our growth in those channels.
The data we gather is important to the continued development and success will depend on effectively expanding and integrating our sales and marketing operations and activities to grow our base of clients and publishers.
Attempting to increase our base of clients and publishersCriteo Shopper Graph, which is a key componentelement of the Criteo Commerce Media Platform. If too few of our growth strategy. However, attracting clients provide us with the permission to share their data or if our clients choose to stop sharing their data, or if regulatory or other factors inhibit or restrict us from maintaining the data collectives underlying Criteo Shopper Graph, the value of Criteo Shopper Graph could be materially diminished, which could impact the performance of our products and publishers requires substantial timematerially impact our business.
In addition, our ability to collect and expense, and ituse data may be difficult to identify, engage and market to potential clients that are unfamiliar with Criteo and our offering, particularly as we seek to address new marketing goals for clients,restricted or enter new advertising channels or new industry verticals. Furthermore, many potential clients require input from multiple internal constituencies to make advertising decisions, or delegate advertising decisions to advertising agencies. Asprevented by a result, we must identify those involved in number of other factors, including:
•the purchasing decision and devote a sufficient amount of time to presenting our offering to those individuals (including providing demonstrations and comparisonsfailure of our value relative to other available solutions), which can be a costly and time-consuming process.network, hardware, or software systems, or the network, hardware, or software systems of our clients;
Our ability•our inability to grow our client and publisher base will dependin new industry verticals and geographic markets in order to a significant extentobtain the critical mass of data necessary for Criteo AI Engine to perform optimally in such new industry verticals or geographic markets;
•malicious traffic (such as non-human traffic) that introduces "noise" in the information that we collect from clients and publishers; and
•interruptions, failures or defects in our data collection, mining, analysis and storage systems.
Any of the above described limitations could also harm our business and adversely impact our future results of operations.
The third parties upon which we rely for access to data and revenue opportunities may implement technical restrictions that impede our access to such data and revenue opportunities, which could materially impact our business and results of operations.
A substantial portion of the data we rely on comes from our publisher partners and other third parties, including advertising exchange platforms (including supply-side platforms, or “SSPs”, such as Google's Ad Manager). Similarly, we rely on our publisher partners, advertising exchange platforms and other third parties for opportunities to serve advertisements through which we generate our revenue. Our ability to successfully leverage such data and successfully generate revenue from such opportunities could be impacted by restrictions imposed by or on our publisher partners or other third parties, including restrictions on our ability to effectively expand our sales, marketing and publisher support operations. In particular, as we target new industry verticals, we will need to attract sales and publisher support personnel that are familiar with the relevant industries and geographic markets. We believe that there is significant competition for direct sales and support personnel with the sales skills and technical knowledge that we require.
Therefore,use or read cookies or other tracking features or our ability to grow our client and publisher base will depend,use real-time bidding networks or other bidding networks.
For example, in large part,light of the GDPR, some SSPs imposed restrictions on our success in recruiting, training and retaining the sales and publisher support personnel we require. Over the past years, we have hired a number of new sales personnel and expanded our marketing department. However, we may not be successful in growing headcount to the extent necessary to support and expand our operations. Similarly, we cannot be sure that newly hired personnel will be integrated effectively, and such personnel may require significant training and may not become productive as quickly as we would like, or at all. If we are not successful in recruiting and training our client sales and publisher support personnel and streamlining our sales and business development processes to cost-effectively grow our client and publisher base, our ability to grow our businessbid on opportunities to serve ads. Third-party publishers are responsible under GDPR for gathering necessary user consents and our resultsindicating to SSPs that Criteo has been approved by the applicable users. As part of operations could be adversely affected.
If we are unabletheir efforts to protect our proprietary information or other intellectual property, our business could be adversely affected.
We rely largely on trade secret law to protect our proprietary information and technology. We generally seek to protect our proprietary information through confidentiality, non-disclosure and assignment of invention agreementscomply with our employees, contractors and parties with which we do business. However, we may not execute these agreements with every party who has access to our confidential information or contributes to the development of our intellectual property. In addition, those agreements may be breached, and we may not have adequate remedies for any such breach.
Breachestheir understanding of the securityrequirements of our data center systemsthe GDPR, which are subject to interpretation, certain SSPs that run advertising exchanges have required actions from such third party publishers with respect to such consents that appear to be stricter than what the regulations require. Similarly, SSPs and infrastructureother relevant third parties may take similar actions in response to any new legislation or other IT resources could also result in the exposure of our proprietary information. Additionally, our trade secrets may be independently developed by competitors. We cannot be certain that the steps we have taken to protect our trade secrets and proprietary information will prevent unauthorized useregulatory developments or reverse engineering of our trade secrets or proprietary information.
Although we also rely on copyright laws to protect works of authorship created by us, including software, we do not register the copyrights in any of our copyrightable works. We will need to register the copyright before we can file an infringement suit in the United States, and our remedies in any such infringement suit may be limited.
In the United States and internationally, we have filed various applications for protection of certain aspects of our intellectual property, including patent applications. Effective protection of our intellectual property rights may require additional filings and applications in the future. However, pending and future applications may not be approved, and any of our existing or future patents, trademarks or other intellectual property rights may not provide sufficient protection for our business as currently conducted or may be challenged by others or invalidated through administrative process or litigation. Additionally, patent rights in the United States have switched from the former “first-to-invent” system to a “first-to-file” system, which may favor larger competitors that have the resources to file more patent applications. Furthermore, our existing patents and any patents issuedinterpretations in the future, may give risein response to ownership claimsperceived user preferences, or to claims for the payment of additional remuneration of fair price by persons having participated in the creation of the inventions. Similarly, to the extent that our employees, contractors or other reasons.
If third parties on which we rely for data or opportunities to serve advertisements impose similar restrictions or are not able to comply with whom we do business use intellectual property ownedrestrictions imposed by others in their work for us, disputes may arise as to the rights to such intellectual property.
Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions,other ecosystem participants, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.
To protect or enforce our intellectual property rights, we may initiate litigation against third parties. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may unintentionally provoke third parties to assert claims against us. These claims could invalidate or narrow the scope of our own intellectual property. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. The occurrence of any of these events may adversely affect our business, financial condition and results of operations.
Our business may suffer if it is alleged or determined that our technology or another aspect of our business infringes the intellectual property rights of others.
The online and mobile advertising industries are characterized by the existence of large numbers of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in these industries are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use.
Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse consequences. From time to time, we may be the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others, particularly as we expand the scope and complexity of our business.
Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property rights could:
subject us to significant liabilities for monetary damages, which may be tripled in certain instances;
prohibit us from developing, commercializing or continuing to provide some or all of our offering unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, who may not be willing to offer them on terms that are acceptable to us, or at all;
subject us to indemnification obligations or obligations to refund fees to, and adversely affect our relationships with, our current or future clients, advertising agencies, media networks and exchanges or publishers;
cause delays or stoppages in providing our offering;
cause clients, potential clients, advertising agencies, media networks and exchanges or publishers to avoid working with us;
divert the attention and resources of management and technical personnel;
harm our reputation; and
require technology or branding changes to our offering that would cause us to incur substantial cost and that we may be unable to execute effectively or at all.
In addition, we may be exposed to claims that the content contained in advertising campaigns violates the intellectual property or other rights of third parties. Such claims could be made directly against us or against the advertising agencies we work with, and media networks and exchanges and publishers from whom we purchase advertising inventory.
Generally, under our agreements with advertising agencies, media networks and exchanges and publishers, we are required to indemnify the advertising agencies, media networks and exchanges and publishers against any such claim with respect to an advertisement we served. We generally require our clients to indemnify us for any damages from any such claims. There can be no assurance, however, that our clients will havelose the ability to satisfy their indemnification obligations to us, and pursuing any claims for indemnification may be costlyaccess data, bid on opportunities, or unsuccessful.purchase digital ad space, which could have a substantial impact on our revenue.
As a result, we may be required to satisfy our indemnification obligations to advertising agencies, media networks and exchanges and publishers or claims against us with our assets. This result could harm our reputation, business, financial condition and results of operations.
Our business involves the use, transmission and storage of personal data and confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.
Our business involves the use, storage and transmission of confidential consumer, client and publisher information and personal data, including certain purchaser data, as well as proprietary software and financial, employee and operational information. Security breaches could expose us to unauthorized disclosure of this information, litigation and possible liability, as well as damage to our relationships with our clients and publishers. If our security measures are breached as a result of third-party action, employee or contractor error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to our data or the data of consumers, our clients, publishers, employees or other third parties, our reputation could be damaged, our business may suffer and we could incur significant liability.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability to provide service. As a result of our prominence, the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information and intellectual property, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware,malware/ransomware, viruses, unauthorized access or system compromises and hacking by sophisticated actors have become more prevalent in our industry. Our products embed open source software. There may be vulnerabilities in open source software that may make our products susceptible to cyberattacks. Security incidents have occurred on our systems in the past, and will likely occur on our systems in the future. For example, in November 2019, we became aware of a compromise of certain of our systems. We have taken and continue to take additional steps to fully identify the incident and have and continue to implement remedial measures to increase the security of our systems and networks to respond to these types of threats. As of the date of this filing, we do not believe that this incident has resulted in a material adverse effect on our business or any material damage to us or any loss or misuse of customer data. However, the investigation is ongoing and there can be no assurance that this or any other breach or incident will not have a material impact on our operations and financial results in the future.
Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we are unable to anticipate some of these techniques or to implement adequate preventative measures for such techniques. In addition, the perpetrators of such activity often are very sophisticated, and can include foreign governments and other parties with significant resources at their disposal.
Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, such measures have not provided, and cannot be expected to provide, absolute security, and we may incur significant costs in protecting against and remediating cyber-attacks. We may also have to expend considerable resources on determining the nature and extent of such attacks.
If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose both clients and revenue. Any significant violations of data privacy or other security breaches could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition.
Moreover, if a high profile security breach occurs with respect to another provider of digital advertising solutions, our clients and potential clients may lose trust in the security of providers of digital advertising in general, and Display Advertising solutions in particular, which could adversely impact our ability to retain existing clients or attract new ones.
Additionally, third parties may attempt to fraudulently induce employees, consumers, our clients, our publishers or third-party providers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data, our clients’ data or our publishers’ data, which could result in significant legal and financial exposure and a loss of confidence in the security of our offering and, ultimately, harm to our future business prospects. A party who is able to compromise the security of our facilities, including our data centers or office facilities, or any device, such as a smartphone or laptop, connected to our systems could misappropriate our proprietary information or the proprietary information of consumers, our clients and/or our publishers, or cause interruptions or malfunctions in our operations or those of our clients and/or publishers. We have expended significant resources to protect against such threats and to alleviate problems caused by breaches in security and may have to expend additional resources for such purposes in the future. Finally, computer viruses or malware may harm our systems or cause the loss or alteration of data, and the transmission of computer viruses or malware via Criteo technology could expose us to litigation and a loss of confidence in the security of our technology. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable
terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.
While we have dedicated resources to privacy and security matters, our response process may not be adequate, may fail to accurately assess the severity of an incident, may not respond quickly enough, or may fail to sufficiently remediate an incident, among other issues. Our efforts to address undesirable activity on our platform may also increase the risk of retaliatory attacks. As a result, we may suffer significant legal, reputational, or financial exposure, which could adversely affect our business and results of operations.
Failures in the systems and infrastructure supporting our solutions and operations, including as we scale our offerings, could significantly disrupt our operations and cause us to lose clients.
In addition to the optimal performance of Criteo AI Engine, our business relies on the continued and uninterrupted performance of our software and hardware infrastructures. We currently place close to fourfive billion advertisements per day and each of those advertisements can be placed in under 100 milliseconds.
Sustained or repeated system failures of our software or hardware infrastructures (such as massive and sustained data center outages) or of the software or hardware infrastructures of our third-party providers, which interrupt our ability to deliver advertisements quickly and accurately, our ability to serve and track advertisements, our ability to process consumers’ responses to those advertisements or otherwise disrupt our internal operations, could significantly reduce the attractiveness of our offering to clients and publishers, reduce our revenue or otherwise negatively impact our financial situation, impair our reputation and subject us to significant liability.
Additionally, if, for any reason, our arrangement with one or more data centers is terminated, we could experience additional expense in arranging for new facilities and support. Any steps we take to increase the security, reliability and redundancy of our systems supporting the Criteo technology or operations may be expensive and may not be successful in preventing system failures. Similarly, advancements in machine learning approaches and other technology may require us to upgrade or replace essential hardware (such as graphics processing units), which could involve substantial resources and could be difficult to implement.
In addition, while we seek to maintain excess capacity to facilitate the rapid provision of new client deployments and the expansion of existing client deployments, we may need to increase data center hosting capacity, bandwidth, storage, power or other elements of our system architecture and our infrastructure as our client base and/or our traffic continues to grow.
The expansion and improvement of our systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no assurance our business will increase. Our existing systems may not be able to scale up in a manner satisfactory to our existing or prospective clients, and may not be adequately designed with the necessary reliability and redundancy of certain critical portions of our infrastructure to avoid performance delays or outages that could be harmful to our business.
Our failure to continuously upgrade or increase the reliability and redundancy of our infrastructure to meet the demands of a growing base of global clients and publishers could adversely affect the functioning and performance of our technology and could in turn affect our results of operations.
Finally, our systems and the systems of our third-party providers are vulnerable to damage from a variety of sources, some of which are outside of our control, including telecommunications failures, natural disasters, terrorism, power outages, a variety of other possible outages affecting data centers, a decision to close any data center or the facilities of any other third-party provider without adequate notice, and malicious human acts, including hacking, computer viruses, malwaremalware/ransomware and other security breaches. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate some of these techniques or to implement adequate preventive measures.
Any steps we take to increase the security, reliability and redundancy of our systems supporting the Criteo technology or operations may be expensive and may not be successful in preventing system failures.
If we are unable to prevent system failures, the functioning and performance of our solutions could suffer, which in turn could interrupt our business and harm our results of operations.
We
If we are unable to protect our proprietary information or other intellectual property, our business could be adversely affected.
Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets for us. Various events outside of our control pose a company operating in a rapidly evolving industry, which makes it difficultthreat to evaluate our future prospectsintellectual property rights, as well as to our products, services, and may increase the risk that we will not be successful. Our recent growth ratestechnologies. For example, effective intellectual property protection may not be indicative ofavailable in every country in which we operate or intend to operate our future growth,business. Third parties may knowingly or unknowingly infringe our proprietary rights or challenge proprietary rights held by us, and we expect our operating expenses to continue to increase in the foreseeable future. Accordingly, we may have difficulty sustaining profitability.
We are a company operating in a rapidly evolving industry. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth in both our business and the digital advertising market generally, and the Display Advertising market in particular. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly evolving industries, including challenges in forecasting accuracy, determining appropriate investments, achieving market acceptance of our existingpending and future offerings, managing client implementationstrademark and developing new solutions. For example, the Criteo model historically focused solely on converting our clients’ website visitors into customers through our historical solution, Criteo Dynamic Retargeting. Since then,patent applications may not be approved. Although we have broadened our solutions portfolioseek to include additional marketing and monetization goals (including Awareness and Consideration) for commerce companies and consumer brands across web, apps and stores, many of which are new to us and for which we do not have a long and established track record. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
You should not consider our revenue growth in past periods to be indicative of our future performance. In future periods, our revenue could decline or grow more slowly than we expect. We believe the growth of our revenue depends on a number of factors, including our ability to:
attract new clients, and retain and expand our relationships with existing clients;
maintain the breadth of our publisher network and attract new publishers, including publishers of web content, mobile applications and video and social games, in order to grow the volume and breadth of advertising inventory available to us;
broaden our solutions portfolio to include additional marketing and monetization goals (including Awareness and Consideration) for commerce companies and consumer brands across the open Internet, including web, apps and stores;
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• | adapt our offering to meet evolving needs of businesses, including to address market trends such as (i) the migration of consumers from desktop to mobile and from websites to mobile applications, (ii) the increasing percentage of sales that involve multiple digital devices, (iii) the growing adoption by consumers of “ad-blocking” software on web browsers on desktop and/or on mobile devices and use or consumption by consumers of advertising-free services such as Netflix, (iv) changes in the marketplace for and supply of advertising inventory, including the shift toward header bidding; and (v) changes in the overall ecosystem such as Apple's introduction of its Intelligent Tracking Prevention feature into its Safari browser, Microsoft’s Tracking Prevention feature in its Edge browser, and Mozilla’s introduction of Enhanced Tracking Protection into its Firefox browser; and (vi) changes in consumer acceptance of tracking technologies for targeted or behavioral advertising purposes;
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maintain and increase our access to data necessary for the performance of Criteo AI Engine;
continuously improve the algorithms underlying Criteo AI Engine and apply the state of the art in Machine Learning approaches and hardware; and
continue to adapt to a changing regulatory landscape governing dataobtain patent protection and privacy matters.
We also anticipate that our operating expenses will continue to increase as we scale our business, grow our headcount and expand our operations. In particular, we plan to continue to focus on maximizing our revenue after traffic acquisition costs on an absolute basis, or the revenue we derive after deducting the costs we incur to purchase advertising inventory, which we call Revenue ex-TAC, as we believe this focus fortifies a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of Criteo AI Engine’s performance. As part of this focus, we are continuing to invest in (i) building relationships with direct publishers on both web and mobile application properties, (ii) increasing access to leading advertising exchanges on both web and mobile application properties, and (iii) enhancing the liquidity of our advertising inventory supply, which may include purchasing advertising inventory that may result in lower margin on an individual impression basis and may be less effective in generating user engagement and driving measurable results, including sales, for our clients. In addition, we are experiencing, and expect to continue to experience, increased competition for advertising inventory purchased on a programmatic basis. Our focus on maximizing Revenue ex-TAC on an absolute basis may have an adverse impact on our gross margin and we cannot be certain that this strategy will be successful or result in increased liquidity or long-term value for our shareholders.
In addition, as our business expands,innovations, it is possible we may not be able to maintainprotect some of these innovations in a sufficient or effective manner. Moreover, we may not have adequate patent or copyright protection for certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our current profitability marginefforts, that the scope of the protection gained will be insufficient or to achieve our long-term profitability margin target. For example, our midmarket business is currently less profitable than our large client business. As we expect our midmarket business to grow as a proportionthat an issued patent may be deemed invalid or unenforceable.
Breaches of the security of our overall business,data center systems and infrastructure or other IT resources could also result in the exposure of our profitabilityproprietary information. Additionally, our trade secrets may be negatively affected. Similarly, asindependently developed by competitors. We cannot be certain that the steps we transitionhave taken to a multi-solution company, with solutions available to clients across several advertising channels, new solutionsprotect our trade secrets and proprietary information will prevent unauthorized use or reverse engineering of our trade secrets or proprietary information.
To protect or enforce our intellectual property rights, we may require additional investmentsinitiate litigation against third parties. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. We may not prevail in sales, business developmentany lawsuits that we initiate and marketing, such as product sales specialiststhe damages or similar resources to enable sales. As a result of such additional investments, our new solutionsother remedies awarded, if any, may not be less profitable than our existing business and therefore drive down our overall profitability.
In periods of economic uncertainty, businesses may delay or reduce their spending on advertising, which could materially harm our business.
General worldwide economic conditions have been significantly unstable in recent years, especiallycommercially valuable. Any increase in the European Union where we generated 29%unauthorized use of our revenue for 2019. Unstable conditions make it difficult forintellectual property may adversely affect our clients and us to accurately forecast and plan future business, activities, and could cause our clients to reduce or delay their advertising spending with us. Historically, economic downturns have resulted in overall reductions in advertising spending, and businesses may curtail spending both on advertising in general and on a solution such as ours. We cannot predict the timing, strength or duration of any economic slowdown or recovery. Any macroeconomic deterioration in the future, especially further deterioration in the European Union and some emerging markets, such as Brazil and Russia, could impair our revenuefinancial condition and results of operations.
Furthermore,
Our business may suffer if it is alleged or determined that our technology or another aspect of our business infringes the intellectual property rights of others.
The online and mobile advertising industries are characterized by the existence of large numbers of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse consequences. From time to time, we may be the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others, particularly as we expand the scope and complexity of our business.
Regardless of whether claims that we are infringing patents or other intellectual property rights have recently expandedany merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property rights could subject us to significant liabilities for monetary damages, interfere with or delay our development, commercialization or provision of our offerings to serve a larger number of smaller clients, and have expanded into emerging markets such as Brazil, India, and Russia. Our changing client portfolio exposeson acceptable terms, harm our reputation or require us to additional credit risk, which could result in further exposure in the event of economic uncertaintymake technology or an economic downturn.
branding changes to our offerings.
In addition, even if the overall economy improves, we cannot assure youmay be exposed to claims that the marketcontent contained in advertising campaigns violates the intellectual property or other rights of third parties. Such claims could be made directly against us or against the advertising agencies we work with, and media networks and exchanges and publishers from whom we purchase advertising inventory.
Under our agreements with larger partners, including advertising agencies, media networks and exchanges and publishers, we may be required to indemnify such partners against claims with respect to an advertisement we served. We generally require our clients to indemnify us for digitalany damages from any such claims. There can be no assurance, however, that our clients will have the ability to satisfy their indemnification obligations to us, and pursuing any claims for indemnification may be costly or unsuccessful.
As a result, we may be required to satisfy our indemnification obligations to advertising agencies, media networks and Display Advertising will experience growthexchanges and publishers or that we will experience growth. Furthermore, we generally sell through insertion ordersclaims against us with our clients. These insertion orders generally do not include long-term obligations and are cancellable upon short notice and without penalty. Any reduction in advertising spending could limit our ability to grow our business and negatively affect our results of operations.
We derive a significant portion of our revenue from companies in the retail, travel and classified industries, and any downturn in these industries or any changes in regulations affecting these industriesassets. This result could harm our business.reputation, business, financial condition and results of operations, and could impact our relationships with advertising agencies, media networks and exchanges, or clients.
A significant portion of our revenue is derived from companies in the retail, travel and classifieds industries. For example, in 2017, 2018 and 2019, 67.8%, 69.1% and 68.9%, respectively, of our combined revenue for Criteo Marketing Solutions
1 was derived from advertisements placed for retail commerce businesses. While we have been growing our client base in additional industries such as gaming, ride-sharing and food delivery, and expect to continue to do so in the future, any downturn or increased competitive pressure in any of our core industries, or other industries we may target in the future, may cause our clients to reduce their spending with us, or delay or cancel their advertising campaigns with us.
Furthermore, our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws by federal, state and foreign governmental or regulatory agencies which would impose taxes on goods and services provided over the internet. To the extent such taxes discourage the use of the internet as a means of commercial marketing or reduce the amount of products and services offered through ecommerce websites, online advertising spending may decline and the use or attractiveness of our offering by our clients or potential clients may be adversely affected.
We have substantial client concentration in certain local markets and solutions, with a limited number of clients accounting for a substantial portion of our revenues in those areas.
Although our overall customer base is well-diversified, in certain of our local markets and specific solutions we derive a substantial portion of revenues from a limited number of clients. For example, for fiscal year 2019, one single large client accounted for a third of our revenues in Korea, and four clients accounted for more than 50% of our revenues within the mobile marketing solutions of our business previously known as Manage.com. There are inherent risks whenever a large percentage of revenues within any specific market or solution are concentrated within a limited number of clients. We cannot predict the future level of demand for our services and products that will be generated by these clients. In addition, revenues from these clients may fluctuate from time to time. Further, some of our contracts with these clients may permit them to terminate use of our products at any time (subject to notice and certain other provisions). If any of these clients terminate or reduce use of our products, our revenues within local markets or specific solutions may be negatively impacted.
Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.
Our technology platform and internal systems incorporate software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our technology offering to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our solutions, which licenses may not be available on terms that are acceptable to us, or at all.
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1 Excluding the business acquired from Manage.
Alternatively, we may need to re-engineer our offering or discontinue using portions of the functionality provided by our technology. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable terms, such as by precluding us from charging license fees or by requiring us to disclose our source code. Any such restriction on the use of our own software, or our inability to use open source or third-party software, could result in disruptions to our business or operations, or delays in our development of future offerings or enhancements of our existing platform, which could impair our business.
We experience quarterly fluctuations in our results of operations due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly results of operations fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance.
If our revenue or results of operations fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our ADSs could decline substantially.
Our operating results and cash flows from operations may vary from quarter to quarter due to the seasonal nature of our clients’ spending. For example, many businesses in the online retail industry devote the largest portion of their advertising spend to the fourth quarter of the calendar year, and many of our commerce clients typically conduct fewer advertising campaigns in the second quarter than they do in other quarters. With respect to Criteo Retail Media, the concentration of advertising spend in the fourth quarter of the year is particularly pronounced. If, and to the extent that, seasonal fluctuations are significant, our operating cash flows could fluctuate materially from period to period as a result.
Additionally, implementing our advertising solutions for a client can be a long process, which generally requires clients to integrate software code on their digital property. This process can be complex and time-consuming, and can delay the deployment and use of our offering by a client even after the client has signed up to utilize it.
Depending upon the time and resources that a client is willing to devote to the integration of our technology with their digital property and the nature and complexity of a client’s network and systems, the actual implementation of our solution may occur long after a client has signed up to use our solution.
As a result, we may incur substantial expenses in one period without any guarantee of revenue generation in the near term, or at all. This possibly lengthy implementation cycle may result in difficulty in predicting our future results of operations.
We also plan to continue to substantially increase our investment in research and development, product development and sales and marketing, as we seek to continue to expand geographically, into new marketing goals, into new solutions, into new advertising channels and into new industry verticals to capitalize on what we see as a growing global opportunity for us. Our general and administrative expenses may also increase to support our growing operations and due to the increased costs of operating as a public company. For the foregoing reasons or other reasons we may not anticipate, historical patterns should not be considered as indicative of our future quarterly results of operations.
Other factors that may affect our quarterly results of operations include:
the nature of our clients’ products or services;
demand for our offering and the size, scope and timing of digital advertising campaigns;
the lack of long-term agreements with our clients and publishers;
client and publisher retention rates;
market acceptance of our offering and future solutions and services (i) in current industry verticals and new industry verticals, (ii) in new geographic markets, (iii) in new advertising channels, or (iv) for broader marketing goals;
the timing of large expenditures related to expansion into new solutions, new geographic markets, new industry verticals, acquisitions and/or capital projects;
the timing of adding support for new digital devices, platforms and operating systems;
the amount of inventory purchased through direct relationships with publishers versus internet advertising exchanges or networks;
our clients’ budgeting cycles;
changes in the competitive dynamics of our industry, including consolidation among competitors;
consumers' response to our clients’ advertisements, to online advertising in general and to tracking technologies for targeted or behavioral advertising purposes;
our ability to control costs, including our operating expenses;
network outages, errors in our technology or security breaches and any associated expense and collateral effects;
foreign currency exchange rate fluctuations, as some of our foreign sales and costs are denominated in their local currencies;
failure to successfully manage any acquisitions; and
general economic and political conditions in our domestic and international markets.
As a result, we may have a limited ability to forecast the amount of future revenue and expense, and our results of operations may from time to time fall below our estimates or the expectations of public market analysts and investors.
We have significant global sales and operations and face risks related to health epidemics that could impact our sales and operating results.
Our business could be adversely affected by the effects of a widespread outbreak of contagious disease, including the recent outbreak of respiratory illness caused by a novel strain of coronavirus (COVID-19) first identified in Wuhan, Hubei Province, China. Any outbreak of contagious diseases, and other adverse public health developments, could have a material adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or hold in-person commercial interactions, as well as temporary closures of our facilities or the facilities of our customers, the deferral of elective procedures in impacted countries, a disruption of supply chain for our customers, or the temporary suspension of operations by us or our customers. Additionally, because our revenues are, in part, tied to the revenues of our advertising customers, any impact on the business or revenues of our advertising customers may result in an impact on our own business or revenues. While the duration of business interruption from this outbreak and related financial impact cannot be reasonably estimated at this time, we expect that any disruption of our operations, or those of our customers, would likely impact our sales and operating results. In addition, a significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our offerings and likely impact our operating results.
Interruptions or delays in services provided by third-party providers that we rely upon could impair the performance of the Criteo technologyor operations and harm our business.
We currently lease space from third-party data center hosting facilities for our servers and/or networking equipment located in the United States (California, New York, Virginia), France, The Netherlands, Hong Kong and Japan. All of our data gathering and analytics are conducted on, and the advertisements we deliver are processed through, our servers and network equipment located in these facilities.
We also rely on bandwidth providers and internet service providers to deliver advertisements. Any damage to, or failure of, the systems or facilities of our third-party providers could adversely impact our ability to deliver technology offering to our clients. If, for any reason, our arrangement with one or more data centers is terminated, we could experience additional expense in arranging for new facilities and support.
The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close any data center or the facilities of any other third-party provider without adequate notice, or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our technology or operations. Our testing of our services in actual disasters or similar events has been limited. If any such event were to occur, our business, results of operations and financial condition could be adversely affected.
We are exposed to foreign currency exchange rate fluctuations.
The functional currency of the Company is the euro, while our reporting currency is the U.S. dollar. Since we incur large portions of our expenses and derive significant revenues in currencies other than the euro, we are exposed to foreign currency exchange risk to the extent that our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign currency exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro.
The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statement of income, statement of comprehensive income and statement of cash flow of such consolidated entities are translated at the average period to date exchange rate. The resulting translation adjustments are included in equity under the caption “Accumulated Other Comprehensive Income” in the consolidated statement of changes in equity.
While we are engaging in hedging transactions to minimize the impact of uncertainty in future exchange rates on intra-company transactions and financing, we may not hedge all of our foreign currency exchange rate risk. In addition, hedging transactions carry their own risks and costs, including the possibility of a default by the counterparty to the hedge transaction. There can be no assurance that we will be successful in managing our foreign currency exchange rate risk. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash flows.
Our failure to maintain certain tax benefits applicable to French technology companies may adversely affect our results of operations.
As a French technology company, we have benefited from certain tax advantages, including, for example, a reduced tax rate in France on technology royalty income received from subsidiaries and the French research tax credit (crédit d’impôt recherche), or CIR. The CIR is a French tax credit aimed at stimulating research and development. The CIR can be offset against French corporate income tax due and the portion in excess (if any) may be refunded at the end of a three fiscal-year period.
The CIR is calculated based on our claimed amount of eligible research and development expenditures in France and represented $6.3 million, $10.9 million and $16.2 million for 2017, 2018 and 2019, respectively and is classified as a reduction of our research and development expenses.
The French tax authority, with the assistance of the Research and Technology Ministry, may audit each research and development program in respect of which a CIR benefit has been claimed and assess whether such program qualifies, in their view, for the CIR benefit. If the French tax authority determines that our research and development programs do not meet the requirements for the CIR benefit, or challenges our calculations with respect to the CIR benefit, we could be liable for additional corporate tax, and penalties and interest related thereto, which could have a significant impact on our results of operations and future cash flows.
Furthermore, if the French Parliament decides to modify the regime of the reduced tax rate on technology royalty income or to reduce the scope or the rate of the CIR benefit, which it could decide to do at any time, our results of operations could be adversely affected.
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions as a result of new taxes or laws, or revised interpretations thereof, which may negatively affect our business.
As a multinational organization operating in multiple jurisdictions we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations.
For example, many of the jurisdictions in which we conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The tax authorities in these jurisdictions could challenge whether our related party transfer pricing policies are at arm’s length and, as a consequence, challenge our tax treatment of corresponding expenses and income. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these tax authorities were successful in challenging our transfer pricing policies, we may be liable for additional corporate income tax, and penalties, fines and interest related thereto, which may have a significant impact on our effective tax rate, results of operations and future cash flows.
The European Union and its member states, as well as a number of other countries, are actively considering changes to existing tax laws or have enacted new tax laws applicable to digital business activities. Such taxes could increase our tax liability in many countries where we do business.
U.S. holders of our ADSs may suffer adverse tax consequences if we are characterized as a passive foreign investment company.
A non-U.S. corporation will be considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. Based on the value and composition of our assets, although not free from doubt, we do not believe we were a PFIC for the taxable year ended December 31, 2019, and we do not expect to be a PFIC in the current taxable year or the foreseeable future. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds ADSs, the U.S. holder may be subject to adverse tax consequences, including (1) the treatment of all or a portion of any gain on disposition as ordinary income, (2) the application of an interest charge with respect to such gain and certain dividends and (3) compliance with certain reporting requirements. Each U.S. holder is strongly urged to consult its tax advisor regarding the application of these rules and the availability of any potential elections.
If a United States person is treated as owning at least 10% of our ADSs, such person may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly, or constructively) at least 10% of the value or voting power of our ADSs, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). Because our group includes one or more U.S. subsidiaries, certain of our non-U.S. subsidiaries could be treated as controlled foreign corporations (regardless of whether or not we are treated as a controlled foreign corporation). A United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income,” and investments in U.S. property by controlled foreign corporations, regardless of whether we make any distributions. Failure to comply with such reporting requirements could result in adverse tax effects for United States shareholders and potentially significant monetary penalties. An individual that is a United States shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether any of our non-U.S. subsidiaries is treated as a controlled foreign corporation or furnish to any United States shareholders information that may be necessary to comply with the aforementioned obligations. A United States investor should consult its advisors regarding the potential application of these rules to an investment in our ADSs.
Risks Related to Ownership of Our Shares and the ADSs and the Trading of the ADSs
The market price for the ADSs have been and may continue to be volatile or may decline regardless of our operating performance.
The trading price of the ADSs has significantly fluctuated, and is likely to continue to fluctuate, substantially. The trading price of the ADSs depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. Since the ADSs were sold at our initial public offering in October 2013 at a price of $31.00 per share, the price per ADS has ranged as low as $15.90$5.89 and as high as $60.95 through December 31, 2019.2021. The market price of the ADSs has fluctuated and may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our revenue and other results of operations;
•the guidance we may provide to the public, any changes in this guidance or our failure to meet this guidance;
•investor perception of risks in our industry, including but not limited to the competitive concentration of supply inventory or risks of fraudulent or malicious activity;
•failure of securities analysts to initiate or maintain coverage of us and our securities, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•announcements by us, our competitors or large influential technology companies of significant technical innovations or changes, acquisitions, strategic partnerships, joint ventures or capital commitments;
•changes in operating performance and stock market valuations of advertising technology or other technology companies, or those in our industry in particular;
•investor sentiment with respect to our competitors, our business partners or our industry in general;
•price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
•additional ADSs being sold into the market by us or the Company's insiders;
•media coverage of our business and financial performance;
•developments in anticipated or new legislation or new or pending lawsuits or regulatory actions;
•other events or factors, including those resulting from natural disasters or weather events, cyberattacks, pandemics, war, incidents of terrorism or other catastrophic events or responses to these events; and
•any other risks identified in this Form 10-K.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. Because of the past and the potential future volatility of our stock price, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.
If securities or industry analysts cease publishing research or publish inaccurate or unfavorable research about our business or our industry, the price and trading volume of the ADSs could decline.
The trading market for the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades the ADSs or publishes incorrect or unfavorable research about our business, the price of the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for the ADSs could decrease, which could cause the price of the ADSs or trading volume to decline.
Our business could be negatively impacted by the activities of predatory hedge funds or short sellers.
There is the risk that we may be subject, from time to time, to challenges arising from the activities of predatory hedge funds, short sellers or similar individuals who domay not have the best interests of shareholders or the Company in mind. Reports or other publications prepared and disseminated by such hedge funds or short sellers may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business, and could cause the price of our ADSs or trading volume to decline. Furthermore, responding to such activities could be costly and time-consuming and may be intended to, and may in fact, divert the attention of our board of directors and senior management from the pursuit of our business strategies and adversely affect our business.
We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.
We currently have a senior unsecured revolving credit facility under which we may borrow up to €350 million (or its equivalent in U.S. dollars or, subject to the satisfaction of certain conditions, other optional currencies) for general corporate purposes, including the funding of business combinations (the "General RCF"). While we anticipate that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If adequate funds are not available on acceptable terms, we may be unable to fund the expansion of our research and development and sales and marketing efforts, increase working capital, take advantage of acquisition or other opportunities, or adequately respond to competitive pressures which could seriously harm our business and results of operations.
We currently have a senior unsecured revolving credit facility under which we may borrow up to €350 million (or its equivalent in U.S. dollars or, subject to the satisfaction of certain conditions, other optional currencies) for general corporate purposes, including the funding of business combinations (the "General RCF").
To the extent we draw on the General RCF or incur new debt, the debt holders have rights senior to shareholders to make claims on our assets, and the terms of such debt could restrict our operations, including our ability to pay dividends on our ordinary shares. In addition, pursuant to the terms of our credit facilities, we may be restricted in the use of such facilities to fund capital expenditures and information technology-related expenses may be restricted.
If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
Furthermore, if we issue additional equity securities, shareholders will experience dilution, and the new equity securities could have rights senior to those of our ordinary shares.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our shareholders bear the risk of our future securities offerings reducing the market price of the ADSs and diluting their interest.
We do not currently intend to pay dividends on our securities and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of the ADSs. In addition, French law may limit the amount of dividends we are able to distribute.
We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, both organic and inorganic. In addition, we have used a portion of our available liquidity to repurchase our Company's shares in the past, and may continue to do so from time to time in the future.
Further, the credit agreement for the General RCF contains restrictions on our ability to pay dividends.
In addition, to the extent any dividends are paid in the future, under French law, payment of such dividends may subject us to additional taxes, and the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our statutory financial statements prepared and presented in accordance with accounting principles generally accepted in France. Therefore, we may be more restricted in our ability to declare dividends than companies not based in France.
Please see the section entitled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Taxation-French Tax Consequences” in Item 5 of Part II in this Form 10-K for further details on the limitations on our ability to declare and pay dividends and the taxes that may become payable by us if we elect to pay a dividend.
Finally, exchange rate fluctuations may affect the amount of euros that we are able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. These factors could harm the value of the ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of the ADSs.
Because you are not likely to receive any dividends on your ADSs for the foreseeable future, the success of an investment in ADSs will depend upon any future appreciation in their value. Consequently, investors may need to sell all or part of their holdings of ADSs after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
In July 2019, our board of directors authorized a share repurchase program of up to $80.0 million (€70.5 million) of our outstanding ADSs. We intend to use repurchased shares to satisfy employee equity plan vesting in lieu of issuing new shares, and potentially in connection with M&A transactions. The repurchase program commenced in July 2019 and remains in effect until May 15, 2020. If we adopt another such program in the future, the actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, federal and state regulatory restrictions, cash availability and various other factors. Further, as a French private company, we are subject to certain limitations with respect to share repurchase programs that would not apply if we were a U.S. company, which may limit our flexibility. If we were to adopt another such share buyback program, there would be no guarantee that it would enhance shareholder value. Any share repurchases could increase volatility in the trading price of our ADSs and would diminish our available cash. Any share buyback program we adopt may also be suspended or terminated at any time, which may result in a decrease in the trading price of our ADSs.
Our credit agreement contains, and future debt agreements may contain, restrictions that may limit our flexibility in operating our business.
The credit agreement for the General RCF contains, and documents governing our future indebtedness may contain, numerous covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, our ability and the ability of our subsidiaries to incur or guarantee additional indebtedness, pay dividends and make other distributions and restricted payments, make certain acquisitions and other investments, sell certain assets or engage in mergers, acquisitions and other business combinations, and create liens. Our credit agreement also requires, and documents governing our future indebtedness may require, us or our subsidiaries to meet certain financial ratios and tests in order to incur certain additional debt, make certain loans, acquisitions or other investments, or pay dividends or make other distributions or restricted payments. To the extent we draw on the General RCF or incur new debt, the debt holders have rights senior to shareholders to make claims on our assets.
Our ability and the ability of our subsidiaries to comply with these and other provisions of our debt agreements are dependent on our future performance, which will be subject to many factors, some of which are beyond our control.
The breach of any of these covenants or noncompliance with any of these financial ratios and tests could result in an event of default under the applicable debt agreement, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions.
Our by-laws and French corporate law contain provisions that may delay or discourage a sale of the Company.
Provisions contained in our by-laws and the corporate laws of France, the country in which we are incorporated, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. In addition, provisions of our by-laws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. These provisions include, but are not limited to, the following:
•our ordinary shares are in registered form only and we must be notified of any transfer of our shares in order for such transfer to be validly registered;
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• | under French law, a non-resident of France as well as any French entity controlled by non-French residents may have to file a declaration for statistical purposes with the Bank of France (Banque de France) following the date of certain direct or indirect investments in us (see the section entitled "Exchange Controls & Ownership by Non-French Residents" in Item 5 to Part II in this Form 10-K);
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under French law, certain investments in any individualentity governed by a French law relating to certain strategic industries and activities (such as data processing, transmission or entity located outside of the European Union may needstorage activities) by individuals or entities not French, not resident in France or controlled by entities not French or not resident in France are subject to seek theprior authorization of the French Minister of Economy prior to acquiring the control of, all or part of a business of, or more than 33.33% of the share capital or voting rights of the Company (see the section entitled" Exchange Controls & Ownership by Non-French Residents" in Item 5 to Part II in this Form 10-K);
•provisions of French law allowing the owner of 95%90% of the share capital or voting rights of a public company to force out the minority shareholders following a tender offer made to all shareholders are only applicable to companies listed on a stock exchange of the European Union and will therefore not be applicable to us;
•a merger (i.e., in a French law context, a stock-for-stock exchange following which our company would be dissolved into the acquiring entity and our shareholders would become shareholders of the acquiring entity) of our company into a company incorporated outside of the European Union would require the unanimous approval of our shareholders;
•a merger of our company into a company incorporated in the European Union would require the approval of our board of directors as well as a two-thirds majority of the votes held by the shareholders present, represented by proxy or voting by mail at the relevant extraordinary shareholders' meeting;
•under French law, a cash merger is treated as a share purchase and would require the consent of each participating shareholder; and
our shareholders have granted and may grant in the future our board of directors broad authorizations to increase our share capital or to issue additional ordinary shares or other securities (for example, warrants) to our shareholders, the public or qualified investors, including as a possible defense following the launching of a tender offer for our shares;
•our shareholders have preferential subscription rights proportionally to their shareholding in our company on the issuance by us of any additional securities for cash or a set-off of cash debts, which rights may only be waived by the extraordinary general meeting (by a two-thirds majority vote) of our shareholders or on an individual basis by each shareholder;shareholder.
our board of directors has the right to appoint directors to fill a vacancy created by the resignation or death of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;
our board of directors can only be convened by its chairman or, when no board meeting has been held for more than two consecutive months, by directors representing at least one third of the total number of directors;
our board of directors meetings can only be regularly held if at least half of the directors attend either physically or by way of videoconference or teleconference enabling the directors’ identification and ensuring their effective participation in the board’s decisions;
approval of at least a majority of the votes held by shareholders present, represented by a proxy, or voting by mail at the relevant ordinary shareholders’ general meeting, is required to remove directors with or without cause;
advance notice is required for nominations to the board of directors or for proposing matters to be acted upon at a shareholders’ meeting, except that a vote to remove and replace a director can be proposed at any shareholders’ meeting without notice; and
pursuant to French law, the sections of the by-laws relating to the number of directors and election and removal of a director from office may only be modified by a resolution adopted by a two-thirds majority of the votes of our shareholders present, represented by a proxy or voting by mail at the relevant extraordinary shareholders' meeting.
You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement.agreement, as amended from time to time. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (1) the notice of the meeting or solicitation of consent or proxy sent by us and (2) a statement as to the manner in which instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary shares so that you can vote them yourself.
If the depositary does not receive timely voting instructions from you, it may give a proxy to a person designated by us to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
Your right as a holder of ADSs to participate in any future preferential subscription rights or to elect to receive dividends in shares may be limited, which may cause dilution to your holdings.
According to French law, if we issue additional securities for cash, current shareholders will have preferential subscription rights for these securities proportionally to their shareholding in our company unless they waive those rights at an extraordinary meeting of our shareholders (by a two-thirds majority vote) or individually by each shareholder.
However, our ADS holders in the United StatesU.S. will not be entitled to exercise or sell such rights unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available.
In addition, the deposit agreement provides that the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act.
Further, if we offer holders of our ordinary shares the option to receive dividends in either cash or shares, under the deposit agreement the depositary may require satisfactory assurances from us that extending the offer to holders of ADSs does not require registration of any securities under the Securities Act before making the option available to holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act.
Accordingly, ADS holders may be unable to participate in our rights offerings or to elect to receive dividends in shares and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.
You may be subject to limitations on the transfer of your ADSs and the withdrawal of the underlying ordinary shares.
Your ADSs, which may be evidenced by ADRs,American Depositary Receipts, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares.
Temporary delays in the cancellation of your ADSs and your withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares.
In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities.
U.S. investors may have difficulty enforcing civil liabilities against our company and directors and senior management.
Certain of our directors and members of senior management, and those of certain of our subsidiaries, are non-residents of the U.S., and all or a substantial portion of our assets and the assets of such persons are located outside the U.S. As a result, it may not be possible to serve process on such persons or us in the U.S. or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the U.S. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the U.S.
Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a U.S. securities law claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim.
Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and procedural rules would still be governed by the law of the jurisdiction in which the foreign court resides. In particular, there is some doubt as to whether French courts would recognize and enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, damages exceeding the actual damages in actions brought in the U.S. or elsewhere, such as punitive damages, may be unenforceable in France.
The enforceability of any judgment in France will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The U.S. and France do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters; therefore the recognition and enforcement of any such judgment would be subject to French procedural law and may not be granted.
The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the U.S.
We are a French company with limited liability. Our corporate affairs are governed by our by-laws and by the laws governing companies incorporated in France. The rights of shareholders and the responsibilities of members of our board of directors are in many ways different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions.
For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder.
General Risk Factors
In periods of economic uncertainty, businesses may delay or reduce their spending on advertising, and we are exposed to the credit risk of some of our clients and customers, which could materially harm our business.
General worldwide economic conditions have been significantly unstable in recent years, especially in the European Union where we generated 30% of our revenue for 2021. Unstable conditions make it difficult for our clients and us to accurately forecast and plan future business activities, and could cause our clients to reduce or delay their advertising spending with us. Historically, economic downturns, including conditions such as inflation, recessions, or other changes in economic conditions have resulted in overall reductions in advertising spending, and businesses may curtail spending both on advertising in general and on a solution such as ours. We cannot predict the timing, strength or duration of any economic slowdown or recovery. Any macroeconomic deterioration in the future could impair our revenue and results of operations.
Furthermore, we have expanded our offerings to serve a larger number of smaller clients, and have expanded into emerging markets. Our changing client portfolio exposes us to additional credit risk, which could result in further exposure in the event of economic uncertainty or an economic downturn, including conditions such as inflation, recession, pandemic or other changes in economic conditions.
Additionally, our exposure to credit risks relating to our financing activities may increase if our customers are adversely affected by periods of economic uncertainty, including inflation, recession, pandemic, or other changes in economic conditions, or a global economic downturn. These losses have significantly impacted, and could continue to significantly impact, our operating results and financial condition.
If we fail to maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of the ADSs may, therefore, be adversely impacted.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control.
In addition, we are required to submit a report by management to the Audit Committee and external auditors on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the ADSs may be adversely impacted, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
U.S. investors
Our failure to maintain certain tax benefits applicable to French technology companies may adversely affect our results of operations.
As a French technology company, we have difficulty enforcing civil liabilities against our company and directors and senior management.
Certain of our directors and members of senior management, and those ofbenefited from certain of ourtax advantages, including, for example, a reduced tax rate in France on technology royalty income received from global subsidiaries are non-residents of the United States, and all or a substantial portion of our assets and the assetsFrench research tax credit (crédit d’impôt recherche), or CIR. The French tax authority may audit these tax incentives and challenge the benefits. Therefore, we could be liable for additional corporate tax, and penalties and interest related thereto, which could have a significant impact on our results of such persons are located outsideoperations and future cash flows. Furthermore, the United States.
As a result, ittax laws may not be possible to serve process on such persons or uschange, and could remove these incentives in the United Statesfuture or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States.reduce their benefits.
Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a U.S. securities law claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim.
Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides. In particular, there is some doubt as to whether French courts would recognize and enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in France.
The enforceability of any judgment in France will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and France do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters; therefore the recognition and enforcement of any such judgment would be subject to French procedural law and may not be granted.
The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.
We are a Frenchmultinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions as a result of new taxes or laws, or revised interpretations thereof, which may negatively affect our business.
As a multinational organization operating in multiple jurisdictions we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. For instance, several countries have proposed or enacted Digital Services Taxes ("DST"), many of which would apply to revenues derived from digital services. We will continue to assess the ongoing impact of DSTs that we pay in certain jurisdictions, as we anticipate that many jurisdictions may sign an agreement with the Organization for Economic Co-operation and Development in the coming years and that DSTs could be eliminated.
U.S. holders of our ADSs may suffer adverse tax consequences if we are treated as a "passive foreign investment company" for U.S. federal income tax purposes.
A non-U.S. corporation will be considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. For purposes of the above calculations, we will be treated as if we hold our proportionate share of the assets of, and receive directly our proportionate share of the income of, any other corporation in which we directly or indirectly own at least 25%, by value, of the shares of such corporation. Passive income includes, among other things, dividends, interest, certain non-active rents and royalties, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets, and our goodwill and other unbooked intangibles are taken into account. Based on the value and composition of our assets, although not free from doubt, we do not believe we were a PFIC for the taxable year ended December 31, 2021, and we do not expect to be a PFIC in the current taxable year or the foreseeable future. The determination of whether we are a PFIC is a fact-intensive determination that must be made on an annual basis applying principles and methodologies that are in some circumstances unclear. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds ADSs, we would continue to be treated as a PFIC with limited liability. Ourrespect to that U.S. person for such taxable year and, unless the U.S. person makes certain elections, for future years even if we cease to be a PFIC. The U.S. holder may be subject to adverse tax consequences, including (1) the treatment of all or a portion of any gain on disposition of our ADSs as ordinary income (and therefore ineligible for the preferential rates that apply to capital gains with respect to non-corporate U.S. persons), (2) the application of an interest charge with respect to such gain and on the receipt of certain dividends on our ADSs and (3) required compliance with certain reporting requirements. Each U.S. holder is strongly urged to consult its tax advisor regarding the application of these rules and the availability of any potential elections. For further information regarding the U.S. federal income tax considerations relevant to our potential status as a PFIC, please see the section entitled “Taxation—U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company, or PFIC, Rules” in our Annual Report.
If a U.S. person is treated as owning at least 10% of our ADSs, such person may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly, or constructively through attribution) at least 10% of the total value of our stock or at least 10% of the total combined voting power of all classes of our stock entitled to vote, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). We do not believe we are currently a controlled foreign corporation. However, no assurances can be given that we are not a controlled foreign corporation or that we will not become a controlled foreign corporation in the future. Because our group includes one or more U.S. corporations, certain of our non-U.S. corporate affairssubsidiaries could be treated as controlled foreign corporations (regardless of whether or not we are governedtreated as a controlled foreign corporation). A U.S. shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income,” and investments of earnings in U.S. property by controlled foreign corporations, regardless of whether we make any distributions to our by-lawsshareholders. Subpart F income generally includes dividends, interest, certain non-active rents and byroyalties, gains from the laws governing companies incorporatedsale of securities and income from certain transactions with related parties, and “global intangible low-taxed income” generally consists of net income of the controlled foreign corporation, other than Subpart F income and certain other types of income, in France. The rightsexcess of certain thresholds. In addition, a U.S. shareholder that realizes gain from the sale or exchange of shares in a controlled foreign corporation may be required to classify a portion of such gain as dividend income rather than capital gain. If we are classified as both a controlled foreign corporation and a PFIC (as discussed above), we generally will not be treated as a PFIC with respect to those U.S. holders that are U.S. shareholders during the period in which we are a controlled foreign corporation. Failure to comply with such reporting requirements could result in adverse tax effects for U.S. shareholders and potentially significant monetary penalties. An individual that is a U.S. shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. shareholder that is a U.S. corporation. The determinations of controlled foreign corporation status and U.S. shareholder status are complex and includes attribution rules, the responsibilitiesapplication of memberswhich are not entirely certain. We cannot provide any assurances that we will assist investors in determining whether any of our board of directors are in many ways different fromnon-U.S. subsidiaries is treated as a controlled foreign corporation or whether any investor is a U.S. shareholder, or that we will furnish to any U.S. shareholders information that may be necessary to comply with the rights and obligations of shareholders in companies governed byaforementioned obligations. A U.S. investor should consult its advisors regarding the laws of U.S. jurisdictions.
For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that somepotential application of these parties will have interests that are different from, orrules to an investment in addition to, your interests as a shareholder.our ADSs.
Item 1B. Unresolved Staff Comments
We do not have any unresolved comments from the SEC staff.
Item 2. Properties
Our headquarters are located in Paris, France, in an approximately 16,0008,089 square meter facility, under a lease agreement expiring on June 14, 2023.July, 2030. In addition, we had 29 offices in 15 countries as of December 31, 2019.2021. We currently lease space in data centers from third-party hosting providers to operate our servers located in the United States (California, Texas,U.S. (Texas, Virginia), France, the Netherlands, Hong Kong, Singapore and Japan. The properties are used by both our marketing solutions and retail media segments. We believe that our facilities are adequate for our current needs.
Item 3. Legal Proceedings
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our ADSs have been listed on the Nasdaq Global Select Market ("Nasdaq") under the symbol “CRTO” since October 30, 2013. Prior to that date, there was no public trading market for ADSs or our ordinary shares.
Holders
As of January 31, 2020,2022, there were 3835 holders of record of our ordinary shares and 130138 participants in DTC that held our ADSs. The actual number of holders is greater, and includes beneficial owners whose ADSs are held in street name by brokers and other nominees. This number of holders of record and DTC participants also does not include holders whose shares may be held in trust by other entities.
ADS Performance Graph
The following graph matches our cumulative five-year total shareholder return on our ADSs with the cumulative total returns of the Russell 2000 Index and the Nasdaq Internet Index. The graph tracks the performance of a $100 investment in our ADSs and in each index (with the reinvestment of all dividends) from December 31, 20142016 to December 31, 2019.2021. The returns shown are based on historical results and are not intended to suggest future performance.
The foregoing performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
Dividends
We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying cash dividends on our equity securities in the foreseeable future and intend to retain all available funds and any future earnings to fund our growth.
Subject to the requirements of French law and our by-laws, dividends may only be distributed from our statutory retained earnings. Dividend distributions, if any, will be made in euros and converted into U.S. dollars with respect to the ADSs, as provided in the deposit agreement. In addition, under the General RCF, we may not declare, make or pay dividends if our net debt to Adjusted EBITDA leverage ratio exceeds 2.0x.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2019 regarding compensation plans under which our equity securities are authorized for issuance.
|
| | | | | | |
| (a) | (b) | (c) |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights(1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
Equity compensation plans approved by security holders | 7,902,288 |
| $27.00(2) |
| 2,513,566 |
|
Equity compensation plans not approved by security holders | — |
| — |
| — |
|
Total | 7,902,288 |
| $27.00(2) | 2,513,566 |
|
(1) The weighted-average exercise price does not reflect the ordinary shares that will be issued in connection with the vesting of free shares, since free shares have no exercise price.
(2) The weighted-average exercise price was €24.12 and has been converted to U.S. dollars based on the average exchange rate for the year ended December 31, 2019 of €1.00=$1.119574.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In July 2019, the Board of Directors authorized a program to repurchase up to $80 million ofWe completed our ADSs. TheADS repurchase program commencedof $100 million in July 2019 and remains in effect until May 15, 2020. As of December 31, 2019, we had repurchased a total of 3,241,932 ADSs under the July 2019 share repurchase program. The following table summarizes the share repurchase activity for the three months ended December 31, 2019:
|
| | | | | | | | |
| | | | |
| Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Programs | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
October 1 to 31, 2019 | 469,047 |
| 18.56 |
| 469,047 |
| 53,700,529.96 |
|
November 1 to 30, 2019 | 1,046,354 |
| 17.33 |
| 1,046,354 |
| 35,567,215.14 |
|
December 1 to 31, 2019 | 811,623 |
| 17.40 |
| 811,623 |
| 21,444,974.94 |
|
| | | | |
Total | 2,327,024 |
| $17.60 | 2,327,024 |
| 21,444,974.94 |
|
(1) Average price paid per share excludes any broker commissions paid.2021.
Recent Sales of Unregistered Securities and Use of Proceeds
There were no unregistered sales of equity securities during 2019.
2021.
Exchange Controls & Ownership by Non-French Residents
Under current French foreign exchange control regulations there are no limitations on the amount of cash payments that we may remit to residents of foreign countries. Laws and regulations concerning foreign exchange controls do, however, require that all payments or transfers of funds made by a French resident to a non-resident, such as dividend payments, be handled by an accredited intermediary. All registered banks and substantially all credit institutions in France are accredited intermediaries.
Neither the French Commercial Code nor our by-laws presently impose any restrictions on the right of non-French residents or non-French shareholders to own and vote shares. However, non-French residents must file a declaration for statistical purposes with the Bank of France (Banque de France) within 20 working days following the date of certain direct foreign investments in us, including any purchase of our ADSs. In particular, such filings are required in connection with investments exceeding €15,000,000 that lead to the acquisition of at least 10% of our outstanding ordinary shares or voting rights or the crossing of either such 10% threshold. Violation of this filing requirement may be sanctioned by five years of imprisonment and a fine of up to twice the amount of the relevant investment. This amount may be increased fivefold if the violation is made by a legal entity.
Further, any investment (i) by (a) an individual or entity located in a country that is not a member State of the European Union or of a member State of the European Economic Area having entered into a convention on administrative assistance against tax evasion and fraud with France, or by anon-French citizen, (b) any French citizen not residing in France, and(c) any non-French entity or (d) any French entity controlled by one of the aforementioned persons or entities, (ii) that will result in the relevant investor (a) acquiring the control of any entity registered in France, (b) acquiring all or part of a business line of an entity registered in France, or more than 33.33%(c) for non-EU or non-EEA investors crossing, directly or indirectly, alone or in concert, a 25% threshold of the share capital or voting rights of, a companyin an entity registered in France, and developing activities(iii) made in certain strategic industries, such as telecommunications,telecommunication, cybersecurity, or data collection is subject toor storage.
If an investment requiring the prior authorization byof the French Minister of Economy. In the absence ofEconomy is completed without such authorization having been granted, the relevant investment shall be deemed null and void.void and the French Minister of Economy further might direct the relevant investor to nonetheless (i) submit a request for authorization, (ii) have the previous situation restored at its own expense or (iii) amend the investment. The relevant investor further may be found criminally liable and may be sanctioned with a fine not to exceed the greater of the following amounts: (i) twice the amount of the relevant investment, (ii) 10% of the annual turnover before tax of the target company or (iii) €5 million (for a company) or €1 million (for a natural person).
Further, (a) any non-French citizen, (b) any French citizen not residing in France, (c) any non- French entity or (d) any French entity controlled by one of the aforementioned persons or entities may have to file a declaration for statistical purposes with the Bank of France (Banque de France) within twenty working days following the date of certain direct foreign investments in us, including any purchase of our ADSs. In particular, such filings are required in connection with investments exceeding €15,000,000 that lead to the acquisition of at least 10% of our share capital or voting rights or cross such 10% threshold. Violation of this filing requirement may be sanctioned by five years of imprisonment and a fine of up to twice the amount of the relevant investment. This amount may be increased fivefold if the violation is made by a legal entity.
Taxation
French Tax Consequences
The following describes the material French income tax consequences to U.S. Holders (as defined below) of purchasing, owning and disposing of the ADSs and ordinary shares, or the Securities as in force on the date of this Form 10-K.
This discussion does not purport to be a complete analysis or listing of all potential tax effects of the acquisition, ownership or disposition of our securities to any particular investor, and does not discuss tax considerations that arise from rules of general application or that are generally assumed to be known by investors. All of the following is subject to change. Such changes could apply retroactively and could affect the consequences described below.
In 2011, France introduced a comprehensive set of new tax rules applicable to French assets that are held by or in foreign trusts. These rules, among other things, provide for the inclusion of trust assets in the settlor’s net assets for purpose of applying the French wealth tax, for the application of French gift and death duties to French assets held in trust, for a specific tax on capital on the French assets of foreign trusts not already subject to the French wealth tax and for a number of French tax reporting and disclosure obligations. The following discussion does not address the French tax consequences applicable to securities held in trusts. If securities are held in trust, the grantor, trustee and beneficiary are urged to consult their own tax adviser regarding the specific tax consequences of acquiring, owning and disposing of securities.
The description of the French income tax and wealth tax consequences set forth below is based on the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital dated August 31, 1994, or the Treaty, which came into force on December 30, 1995 (as amended by additional protocols of December 8, 2004 and January 13, 2009), and the tax guidelines issued by the French tax authorities in force as of the date of this Form 10-K.
For the purposes of this discussion, the term “U.S. Holder” means a beneficial owner of securities that is (1) an individual who is not a French tax resident under French domestic rules / applicable double tax treaty provisions and who is a U.S. citizen or resident for U.S. federal income tax purposes, or (2) a U.S. domestic corporation or certain other entities created or organized in or under the laws of the United StatesU.S. or any state thereof, including the District of Colombia,Columbia, or (3) otherwise subject to U.S. federal income taxation on a net income basis in respect of securities.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds securities, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership that holds securities, such holder is urged to consult its own tax adviser regarding the specific tax consequences of acquiring, owning and disposing of securities.
This discussion applies only to investors that hold our securities as capital assets that have the U.S. dollar as their functional currency, that are entitled to Treatytreaty benefits under the “Limitation on Benefits” provision contained in the Treaty,tax treaty between the Government of the U.S. and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital dated August 31, 1994, as amended by additional protocols of December 8, 2004 and January 13, 2009 ("The Treaty"), and whose ownership of the securities is not effectively connected to a permanent establishment or a fixed base in France.
Certain U.S. Holders (including, but not limited to, U.S. expatriates, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, banks, insurance companies, regulated investment companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, persons who acquired the securities pursuant to the exercise of employee share options or otherwise as compensation, persons that own (directly, indirectly or by attribution) 5% or more of our voting stock or 5% or more of our outstanding share capital, dealers in securities or currencies, persons that elect to mark their securities to market for U.S. federal income tax purposes and persons holding securities as a position in a synthetic security, straddle or conversion transaction) may be subject to special rules not discussed below.
U.S. Holders are urged to consult their own tax advisers regarding the tax consequences of the purchase, ownership and disposition of securities in light of their particular circumstances, especially with regard to the “Limitations on Benefits” provision.
Estate
Furthermore, specific rules apply in France with respect to French assets that are held by or in foreign trusts. These rules, among other things, provide for the inclusion of trust assets in the settlor’s net assets for purpose of applying the French real estate wealth tax, for the application of French gift and Gift Taxes and Transfer Taxes
In general,inheritance tax to French assets held in trust, for a transferspecific tax on capital on the French assets of securities by gift or by reason of death of a U.S. Holder that would otherwise beforeign trusts not already subject to the French gift or inheritancereal estate wealth tax respectively, will not be subject to suchand for a number of French tax by reason of the Convention between the Government of the United Statesreporting and the Government ofdisclosure obligations. The following discussion does not address the French Republic fortax consequences applicable to securities held in trusts.
If securities are held in trust, the Avoidancesettlor, trustee and beneficiary are urged to consult their own tax adviser regarding the specific tax consequences of Double Taxationacquiring, owning and the Preventiondisposing of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Gifts, dated November 24, 1978 (as amended by the protocol of December 8, 2004), unless the donor or the transferor is domiciled in France at the time of making the gift or at the time of his or her death, or the securities were used in, or held for use in, the conduct of a business through a permanent establishment or a fixed base in France.securities.
Purchasing Consequences
Financial Transactions Tax
Pursuant to Article 235 ter ZD of the Code général des impôts (FrenchFrench Tax Code or FTC)("FTC"), purchases of shares or ADSs of a French company listed on a regulated market of the European Union or an exchange formally acknowledged by the French Financial Market Authority (AMF)("AMF") are subject to a 0.3% French tax on financial transactions provided that the issuer’s market capitalization exceeds €1 billion as of December 1 of the year preceding the taxation year.
A list of companies whose market capitalization exceeds €1 billion as of December 1 of the year preceding the taxation year within the meaning of Article 235 ter ZD of the French Tax CodeFTC is published annually by the French tax authorities. Pursuant to Regulations BOI‑ANNX‑000467‑2019121820201223 issued on December 18, 2019,23, 2020, Criteo is currently not included in such list. Please note that such list may be updated from time to time, or may not be published anymore in the future.
Furthermore, Moreover, Nasdaq, on which Criteo's ADSs are listed for trading, is not currently acknowledged by the French AMF but this may change in the future.
Consequently, Criteo’s securities should not fall within the scope of the tax on financial transactions described above. In the future, purchasesabove and purchasers of Criteo’sCriteo's securities may becomein 2021 should not be subject to suchthe tax if Nasdaq is acknowledged by the French AMF.on financial transactions.
Registration Duties
In the case where Article 235 ter ZD of the FTC is not applicable, (i) transfers of shares issuedwhich are not listed on a regulated market of the European Union or an exchange formally acknowledged by a listed French companythe AMF are subject to uncapped registration duties at the rate of 0.1% if the transfer is evidenced by a written statement (“acte”) executed either in France or outside France, whereas (ii) transfers. As ordinary shares of shares whichCriteo are not listed areon an exchange formally acknowledged by the AMF, their transfer should be subject to uncapped registration duties at the rate of 0.1% notwithstanding the existence of a written statement (“acte”). As ordinary shares of Criteo are not listed, their transfer is subject to uncapped registration duties at the rate of 0.1% notwithstanding the existence of a written agreement (“acte”).
AlthoughHowever, although the official guidelines published by the French tax authorities are silent on this point, transfer of ADSs should remain outside of the scope of the aforementioned 0.1% registration duties.
Wealth Taxduties as they cannot be considered as French shares.
The French wealth tax (impôt de solidarité sur la fortune) has been repealed by the finance bill for 2018 (loi de finances pour 2018) dated December 30, 2017. It used to apply only to individuals and did not generally apply to securities held by a U.S. Holder who is a resident pursuant to the provisions of the Treaty, provided that such U.S. Holder does not own directly or indirectly more than 25% of the issuer’s financial rights.
Ownership Consequences
As from January 1, 2018, it has been replaced by a new real estate wealth tax (impôt sur la fortune immobilière) which applies only to individuals owning French real estate assets or rights, directly or indirectly through one or more legal entities and whose net taxable assets amount to at least 1,300,000 euros.
French real estate wealth tax may only apply to a U.S. individual to the extent such individual holds, directly or indirectly, financial rights into a company the assets of which comprise French real estate assets that are not allocated to its operational activity. Such financial rights may be taxable for the fraction of their value representing the French real estate assets that are not allocated to an operational activity.
In any case, pursuant to Article 965 2° of the FTC, shares of an operating company holding French real estate assets in which the relevant individual holds, directly and indirectly, less than 10% of the share capital or voting rights are exempt from real estate wealth tax.
Taxation of Dividends
Dividends paid by a French corporation to non-residents of France are generally subject to French withholding tax at a rate of 30% for corporate bodies or other legal entities (which is expected in principle to be progressively decreased to 25% in the coming years) or 12.8% for individuals. Dividends paid by a French corporation in a non-cooperative State or territory, as set out in the list referred to in Article 238-0 A of the FTC, will generally be subject to French withholding tax at a rate of 75%., except to the extent this French corporation can prove that the main purpose and effect of the distribution is not transfer such dividend income in a non-cooperative State or territory with a view to avoiding taxes. However, eligible U.S. Holders entitled to Treaty benefits under the “Limitation on Benefits” provision contained in the Treaty who are U.S. tax residents, as defined pursuant to the provisions of the Treaty will not be subject to the 12.8%, 30% in 2019 and 28% in 2020, or 75% withholding tax rate, but may be subject to the withholding tax at a reduced rate (as described below).
Under the Treaty, the rate of French withholding tax on dividends paid to an eligible U.S. Holder who is a U.S. tax resident as defined pursuant to the provisions of the Treaty, who is the ultimate owner of the distributed dividends, and whose ownership of the ordinary shares or ADSs is not effectively connected with a permanent establishment or fixed base that such U.S. Holder has in France, is generally reduced to 15%, or to 5% if such U.S. Holder is a corporation and owns directly or indirectly at least 10% of the share capital of the issuer; such U.S. Holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rates of 15% or 5%, if any.issuer, subject to certain procedural requirements discussed below.
For U.S. Holders that are not individuals but are U.S. residents, as defined pursuant to the provisions of the Treaty, the requirements for eligibility for Treaty benefits, including the reduced 5%15% or 15%5% withholding tax rates contained in the “Limitation on Benefits” provision of the Treaty, are complicated, and certain technical changes were made to these requirements by the protocol of January 13, 2009. U.S. Holders are advised to consult their own tax advisers regarding their eligibility for Treaty benefits in light of their own particular circumstances.
Dividends paid to an eligible U.S. Holder may immediately be subject to the reduced rates of 5%15% or 15%5% provided that such holder establishes before the date of payment that it is a U.S. resident under the Treaty by completing and providing the depositary with athe applicable treaty formforms (Form 5000)5000 and Form 5001).
Dividends paid to a U.S. Holder that has not filed the Form 5000 before the dividend payment date will be subject to French withholding tax at the rate of 12.8%, 30% (in 2019),25% in 2022, or 75% if paid in a non-cooperative State or territory (as defined in Article 238-0 A of the FTC). Such U.S. Holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rates of 15% or 5%, and then reduced at a later date to 5% or 15%,if any, provided that such holder duly completes and provides the French tax authorities with the treaty forms Form(Form 5000 and Form 50015001) before December 31 of the second calendar year following the year during which the dividend is paid. Certain qualifying pension funds and certain other tax-exempt entities are subject to the same general filing requirements as other U.S. Holders except that they may have to supply additional documentation evidencing their entitlement to these benefits.
Form 5000 and Form 5001, together with instructions, will be provided by the depositary to all U.S. Holders registered with the depositary. The depositary will arrange for the filing with the French Tax authorities of all such forms properly completed and executed by U.S. Holders of ordinary shares or ADSs and returned to the depositary in sufficient time so that they may be filed with the French tax authorities before the distribution in order to obtain immediately a reduced withholding tax rate.
The withholding tax refund, if any, ordinarily occurs within 12 months from filing the applicable French Treasury Form, butwill not occur before January 15 of the year following the calendar year in which the related dividend was paid.
Tax on Sale or Other DispositionSubject to certain conditions, corporations can obtain a full refund of the withholding tax if they are in loss-making position. In such case, the taxation is deferred and will occur if and when profits are made.
As a matter of principle,Because the withholding tax rate applicable under French domestic law to U.S. holders who are individuals does not exceed the cap provided in the Treaty (i.e. 15%), the domestic 12.8% withholding tax law,rate will generally apply to dividends paid to those U.S. holders, as opposed to the rate provided under the Treaty.
Wealth Tax
As from January 1, 2018, French wealth tax (impôt de solidarité sur la fortune) has been replaced by a new real estate wealth tax (impôt sur la fortune immobilière) which applies only to individuals owning French real estate assets or rights, directly or indirectly through one or more legal entities, and whose net taxable assets amount to at least 1,300,000 euros. Generally, real estate assets allocated to an operational activity are excluded from the scope of the real estate wealth tax, depending on the structuring. Shares of an operating company holding French real estate assets in which the relevant individual holds, directly and indirectly, less than 10% of the share capital or voting rights, are also exempt from real estate wealth tax.
The Treaty does not prevent the application of real estate wealth tax to a U.S. Holder who would be a U.S. tax resident. However, based on the above domestic provisions and considering that Criteo SA is an operating company, the owning of ADSs or ordinary shares should not be subject to anyreal estate wealth tax.
Disposition
Taxation on sale or other disposition
Generally, under French tax law, a foreign shareholder who is not a French tax resident for French tax purposes is not be subject to French tax on any capital gain from the sale, exchange, repurchase or redemption by us of ordinary shares or ADSs, provided that all of the following apply to such U.S. Holder:
U.S. Holder is not a French tax resident for French tax purposes; and,
| |
• | U.S. Holder has not held more than 25% of our dividend rights, known as “droits aux bénéfices sociaux” at any time during the preceding five years, either directly or indirectly, and, as relates to individuals, alone or with relatives; and,
|
U.S. Holderforeign shareholder either (i) has not transferred ordinary sharesheld more than 25% of our dividend rights, at any time during the preceding five years, either directly or ADSs as part of redemption by Criteo, in which case the proceeds may under certain circumstances be partially or fully characterized as dividends under French domestic lawindirectly, and, as result, be subjectrelates to French dividend withholding tax. Asindividuals, alone or with relatives (as an exception, a U.S Holder,foreign shareholder established, domiciled or incorporated in a non-cooperative State or territory as defined in Article 238-0 A of the FTC should be subject to a 75% withholding tax in France on any such capital gain, regardless of the fraction of the dividend rights it holds.
In case an applicable double tax treaty between France andholds) or (ii) the U.S. Holder countryissuer of residence contains more favorable provisions, a U.S. Holder may not be subject to any French income tax or capital gains tax in case of sale or disposal of any ordinarythe relevant shares or ADSs of Criteo even if one or moreis a company at least 50% of the above mentioned statements are not applicable.assets of which consist of real estate located in France, or derives at least 50% of its value, directly or indirectly, from real estate located in France.
Particularly,
However, based on the Treaty, a U.S. Holder who is a U.S. tax resident for purposes of the Treaty, has no permanent establishment or fixed base in France within the meaning of the Treaty, and is entitled to Treaty benefitbenefits will notonly be subject to French tax on any such capital gain unlessresulting from the sale of shares, units or rights in a company at least 50% of the assets of which consist of real estate located in France, or derives at least 50% of its value, directly or indirectly, from real estate located in France. Criteo SA is not expected to meet this standard. Pursuant to these provisions, capital gain resulting from the sale or other disposition of ADSs and ordinary shares or the ADSs form part of the business property of a permanent establishment or fixed base that the U.S. Holder hasshould not be subject to taxation in France.
U.S. Holders who own ordinary shares or ADSs through U.S. partnerships that are not residents for Treaty purposes are advised to consult their own tax advisors regarding their French tax treatment and their eligibility for Treaty benefits in light of their own particular circumstances.
A U.S. Holder who owns ordinary shares or ADSs through U.S. partnerships that are not residents for Treaty purposes are advised to consult their own tax advisors regarding their French tax treatment and their eligibility for Treaty benefits in light of their own particular circumstances.
A U.S. Holder that is not a U.S. resident for Treaty purposes or is not entitled to Treaty benefitbenefits (and in both cases is not resident, established or incorporated in a non-cooperative State or territory as defined in Article 238-0 A of the FTC) and has held more than 25% of ourCriteo's dividend rights known as “droits aux bénéfices sociaux” at any time during the preceding five years, either directly or indirectly, and, as relates to individuals, alone or with relatives will be subject to a levy in France at the rate of 31% in 2019 (and 28% in 2020) (which is anticipated to be progressively decreased to(i) 25% in the coming years), if such U.S. Holder is a corporate body or a legal person,entity, or (ii) 12.8% if such U.S. Holder is an individual.
Special rules apply to U.S. Holders who are residents of more than one country.
Gift and Inheritance Tax
Generally, under French tax law, the following assets are subject to gift and inheritance tax:
•all movable or immovable property located in France or outside France when the donor or the deceased had his or her tax residence in France within the meaning of Article 4 B of the FTC;
•movable or immovable property located in France (including French real estate assets held indirectly), when the donor or the deceased is not domiciled for tax purposes in France;
•movable and immovable property located in France or outside France received from a donor or deceased domiciled outside France by an heir, donee or legatee who is domiciled for tax purposes in France within the meaning of Article 4 B of the FTC and has been so domiciled for at least six years during the last ten years preceding the year in which he or she receives the property.
However, under the Convention between the Government of the U.S. and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Gifts, dated November 24, 1978 (as amended by the protocol of December 8, 2004), if the U.S. Holder is domiciled in the U.S. and is a U.S. tax resident for purposes of the Treaty, has no permanent establishment or fixed base in France within the meaning of the Treaty, and is entitled to Treaty benefits, only French real estate assets and shares, units or other interests in a company or legal entity whose assets consist, directly or through one or more other companies or legal entities, of at least 50% of real property located in France or of rights relating to such property can be subject to gift and inheritance tax.
U.S. Federal Income Tax Considerations for U.S. Holders
The discussion abovefollowing section is a summary of the material FrenchU.S. federal income tax considerations generally applicable to U.S. Holders, as defined below, of owning and disposing of ADSs or ordinary shares.
This section applies only to a U.S. Holder that holds ADSs or ordinary shares as capital assets (generally, property held for investment) for U.S. federal income tax purposes. This section does not address the U.S. federal estate, gift or other non-income tax considerations or any state, local or non-U.S. tax considerations relating to the ownership or disposition of ADSs or ordinary shares. In addition, it does not set forth all of the U.S. federal income tax considerations that may be relevant in light of the U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax and tax consequences applicable to U.S. Holders subject to special rules, such as:
•certain banks and other financial institutions;
•dealers in securities or currencies;
•traders that elect to use a mark-to-market method of accounting;
•persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, wash sale, conversion transaction or other integrated transaction or persons entering into a constructive sale with respect to the ADSs or ordinary shares;
•persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
•entities or arrangements classified as partnerships for U.S. federal income tax purposes;
•insurance companies;
•pension plans;
•cooperatives;
•regulated investment companies;
•real estate investment trusts;
•tax-exempt entities, including private foundations and “individual retirement accounts” or “Roth IRAs”;
•certain former U.S. citizens or long-term residents;
•persons who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation;
•persons required for U.S. federal income tax purposes to conform the timing of income accruals with respect to the ADSs or ordinary shares to their financial statements under Section 451(b) of the Code;
•persons that directly, indirectly or constructively own 10% or more of our shares (by vote or value); or
•persons holding ADSs or ordinary shares in connection with a trade or business conducted outside of the U.S.
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will depend on the status of the partner and the activities of the partnership. Partnerships holding ADSs or ordinary shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of an investmentowning and disposing of the ADSs or ordinary shares.
Each U.S. Holder should consult its tax advisor as to the U.S. federal, state, local and non-U.S. tax considerations relevant to it with respect to the ownership and disposition of our ADSs or ordinary shares in our shares or ADSs andlight of its particular circumstances.
This section is based upon lawson the Code, administrative pronouncements, judicial decisions, final Treasury regulations, and relevant interpretations thereof in effectthe income tax treaty between France and the U.S. (the “Treaty”), all as of the date hereof, allany of which areis subject to change or differing interpretations, possibly with retroactive effect. It does not cover
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ADSs or ordinary shares and who is:
•a citizen or individual resident of the U.S.;
•a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state thereof or the District of Columbia;
•an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
•a trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons has or have the authority to control all of the trust’s substantial decisions, or the trust has validly elected to be treated as a domestic trust for U.S. federal income tax matterspurposes.
In general, it is expected that maya U.S. Holder who owns ADSs will be treated as the owner of importance tothe underlying shares represented by those ADSs for U.S. federal income tax purposes. The remainder of this discussion assumes that a prospective investor. Each prospective investor is urged toU.S. Holder of our ADSs will be treated in this manner. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
U.S. Holders should consult its owntheir tax advisor aboutadvisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances.
Taxation of Distributions
We do not currently expect to make distributions on our ADSs or ordinary shares. If we are not and have not been a PFIC (as discussed below in the section entitled “—Passive Foreign Investment Company, or PFIC, Rules”), in the event that we do make distributions of cash or other property, the following rules would apply. The gross amount of any distributions paid on ADSs or ordinary shares, other than certain pro rata distributions of ADSs or ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent such amount is treated as a dividend, it will generally be includible in the gross income of an investmenta U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or ADSsby the depositary, in lightthe case of ADSs. If distributions exceed our current and accumulated earnings and profits, such excess distributions will generally constitute a return of capital to the extent of the investor’s own circumstances.
Item 6. Selected Financial Data
Our audited consolidated financial statements have been preparedU.S. Holder’s tax basis in its ADSs or ordinary shares and will result in a reduction thereof. To the extent such excess exceeds a U.S. Holder’s tax basis in the ADSs or ordinary shares, such excess will generally be subject to tax as capital gain. Because we do not intend to determine our earnings and profits in accordance with U.S. GAAP. We derivedfederal income tax principles, the selected consolidated statementsfull amount of any distribution we pay is generally expected to be treated as a dividend for U.S. federal income datatax purposes. Dividends received on our ADSs or ordinary shares will not be eligible for the yearsdividends received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Individuals and other non-corporate U.S. Holders will be subject to tax at the lower capital gains tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares on which the dividends are paid are readily tradable on an established securities market in the U.S., or we are eligible for the benefit of the Treaty, (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met.
If we are eligible for benefits under the Treaty, dividends we pay on our ADSs or ordinary shares, regardless of whether such ADSs or shares are considered readily tradable on an established securities market in the U.S., would be eligible for the reduced rates of taxation described in the preceding paragraph, provided the other conditions described above are satisfied. Further, as discussed below under “—Passive Foreign Investment Company, or PFIC, Rules”, although there can be no assurance that we will be considered a PFIC for any taxable year, we believe we were not a PFIC for our 2021 taxable year and we do not anticipate that we will be a PFIC in the current and future taxable years. U.S. Holders should consult their tax advisors regarding the availability of the reduced tax rate on dividends in their particular circumstances.
For U.S. foreign tax credit purposes, dividends paid on our ADSs or ordinary shares generally will be treated as income from foreign sources and generally will constitute passive category income. The amount of any dividend income paid in euro will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of whether the payment is in fact converted into U.S. dollars at that time.
If the foreign currency received as a dividend is converted into U.S. dollars on the date it is received, a U.S. Holder will generally not be required to recognize foreign currency gain or loss in respect of the dividend income. If the foreign currency received as a dividend is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the foreign currency will be treated as U.S. source ordinary income or loss.
Sale or Other Disposition of ADSs or Ordinary Shares
Subject to the discussion below under “—Passive Foreign Investment Company, or PFIC, Rules”, gain or loss realized on the sale or other disposition of ADSs or ordinary shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the ADSs or ordinary shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Long-term capital gain of individuals and certain other non-corporate U.S. Holders will generally be eligible for a reduced rate of taxation. The deductibility of a capital loss may be subject to limitations. Any capital gain or loss will generally be treated as U.S.-source gain or loss for U.S. foreign tax credit purposes, which will generally limit the availability of foreign tax credits.
Passive Foreign Investment Company, or PFIC, Rules
Under the Code, we will be a PFIC for any taxable year in which either (i) 75% or more of our gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of our assets consist of assets that produce, or are held for the production of, “passive income.” For purposes of the above calculations, we will be treated as if we hold our proportionate share of the assets of, and receive directly our proportionate share of the income of, any other corporation in which we directly or indirectly own at least 25%, by value, of the shares of such corporation.
Passive income includes, among other things, interest, dividends, certain non-active rents and royalties, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets, and our goodwill and other unbooked intangibles are taken into account.
The determination of whether we are a PFIC is a fact-intensive determination that must be made on an annual basis applying principles and methodologies that are in some circumstances unclear. Based on the value and composition of our assets, although not free from doubt, we do not believe we were a PFIC for the taxable year ended December 31, 2017, 20182021, and 2019we do not expect to be a PFIC in the current taxable year or the foreseeable future. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, the PFIC rules discussed below generally will apply to such U.S. Holder for such taxable year, and selected consolidated statementsunless the U.S. Holder makes certain elections, will apply in future years even if we cease to be a PFIC.
If we were a PFIC for any taxable year during which a U.S. Holder held ADSs or ordinary shares (assuming such U.S. Holder has not made a timely mark-to-market or QEF election, as described below), gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of financial position data as of December 31, 2018 and 2019 from our audited consolidated financial statements included in Part IV, Item 15 “Exhibits and Financial Statements” of this Form 10-K. The selected consolidated statements of income datathe ADSs or ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the years ended December 31, 2015 and 2016 andADSs or ordinary shares. The amounts allocated to the selected consolidated financial position data as of December 31, 2015, 2016 and 2017 have been derived from our audited consolidated financial statements and notes thereto which are not included in this Form 10-K. This data should be read together with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our audited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. Our historical results are not necessarily indicativetaxable year of the results to be expected in the future.
Consolidated Statements of Income Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands, except share and per share data) |
Revenue | $ | 1,323,169 |
|
| $ | 1,799,146 |
|
| $ | 2,296,692 |
|
| $ | 2,300,314 |
|
| $ | 2,261,516 |
|
| | | | | | | | | |
Cost of revenue (1): | | | | | | | | | |
Traffic acquisition costs | (789,152 | ) |
| (1,068,911 | ) |
| (1,355,556 | ) |
| (1,334,334 | ) |
| (1,314,947 | ) |
Other cost of revenue | (62,201 | ) |
| (85,260 | ) |
| (121,641 | ) |
| (131,744 | ) |
| (117,533 | ) |
Gross profit | 471,816 |
| | 644,975 |
| | 819,495 |
| | 834,236 |
| | 829,036 |
|
| | | | | | | | | |
Operating expenses | | | | | | | | | |
Research and development expenses (1) | (86,807 | ) |
| (123,649 | ) |
| (173,925 | ) |
| (179,263 | ) |
| (172,591 | ) |
Sales and operations expenses (1) | (229,530 | ) |
| (282,853 | ) |
| (380,649 | ) |
| (372,707 | ) |
| (375,477 | ) |
General and administrative expenses (1) | (79,145 | ) |
| (117,469 | ) |
| (127,077 | ) |
| (135,159 | ) |
| (139,754 | ) |
Total operating expenses | (395,482 | ) | | (523,971 | ) | | (681,651 | ) | | (687,129 | ) | | (687,822 | ) |
Income from operations | 76,334 |
| | 121,004 |
| | 137,844 |
| | 147,107 |
| | 141,214 |
|
Financial income (expense) | (4,541 | ) |
| (546 | ) |
| (9,534 | ) |
| (5,084 | ) |
| (5,749 | ) |
Income before taxes | 71,793 |
| | 120,458 |
| | 128,310 |
| | 142,023 |
| | 135,465 |
|
Provision for income taxes | (9,517 | ) |
| (33,129 | ) |
| (31,651 | ) |
| (46,144 | ) |
| (39,496 | ) |
Net income | $ | 62,276 |
| | $ | 87,329 |
| | $ | 96,659 |
| | $ | 95,879 |
| | $ | 95,969 |
|
Net income available to shareholders of Criteo S.A. (2) | $ | 59,553 |
|
| $ | 82,272 |
|
| $ | 91,214 |
|
| $ | 88,644 |
|
| $ | 90,745 |
|
Net income available to shareholders per share: | | | | | | | | | |
Basic | $ | 0.96 |
| | $ | 1.30 |
| | $ | 1.40 |
| | $ | 1.33 |
| | $ | 1.41 |
|
Diluted | $ | 0.91 |
| | $ | 1.25 |
| | $ | 1.34 |
| | $ | 1.31 |
| | $ | 1.38 |
|
Weighted average shares outstanding used in computing per share amounts: | | | | | | | | | |
Basic | 61,835,499 |
|
| 63,337,792 |
|
| 65,143,036 |
|
| 66,456,890 |
|
| 64,305,965 |
|
Diluted | 65,096,486 |
|
| 65,633,470 |
|
| 67,851,971 |
|
| 67,662,904 |
|
| 65,598,588 |
|
(1)Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense, acquisition-related costs, restructuring costs and deferred price consideration as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands) |
Equity awards compensation expense | | | | | | | | | |
Research and development expenses | $ | 6,520 |
|
| $ | 12,108 |
|
| $ | 21,093 |
|
| $ | 21,232 |
|
| $ | 15,036 |
|
Sales and operations expenses | 11,678 |
|
| 16,838 |
|
| 31,386 |
|
| 29,244 |
|
| 19,301 |
|
General and administrative expenses | 5,791 |
|
| 14,313 |
|
| 19,872 |
|
| 16,600 |
|
| 14,795 |
|
Total equity awards compensation expense (a) | 23,989 |
| | 43,259 |
| | 72,351 |
| | 67,076 |
| | 49,132 |
|
Pension service costs | | | | | | | | | |
Research and development expenses | 163 |
|
| 211 |
|
| 621 |
|
| 844 |
|
| 760 |
|
Sales and operations expenses | 153 |
|
| 144 |
|
| 247 |
|
| 325 |
|
| 283 |
|
General and administrative expenses | 125 |
|
| 169 |
|
| 363 |
|
| 522 |
|
| 513 |
|
Total pension service costs | 441 |
| | 524 |
| | 1,231 |
| | 1,691 |
| | 1,556 |
|
Depreciation and amortization expense | | | | | | | | | |
Cost of revenue | 29,866 |
|
| 38,469 |
|
| 53,988 |
|
| 67,347 |
|
| 44,866 |
|
Research and development expenses (b) | 7,995 |
|
| 7,211 |
|
| 11,226 |
|
| 10,602 |
|
| 16,508 |
|
Sales and operations expenses (c) | 5,178 |
|
| 7,757 |
|
| 19,844 |
|
| 18,245 |
|
| 24,914 |
|
General and administrative expenses | 1,526 |
|
| 3,342 |
|
| 5,738 |
|
| 7,306 |
|
| 7,200 |
|
Total depreciation and amortization expense | 44,565 |
| | 56,779 |
| | 90,796 |
| | 103,500 |
| | 93,488 |
|
Acquisition-related costs | | | | | | | | | |
General and administrative expenses | — |
|
| 2,921 |
|
| 6 |
|
| 1,738 |
|
| — |
|
Total acquisition-related costs | — |
| | 2,921 |
| | 6 |
| | 1,738 |
| | — |
|
Acquisition-related deferred price consideration |
| |
| |
| |
| |
|
Research and development expense | 324 |
|
| 85 |
|
| — |
|
| — |
|
| — |
|
Sales and operations expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
General and administrative expenses | (2,218 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
Total acquisition-related deferred price considerations | (1,894 | ) | | 85 |
| | — |
| | — |
| | — |
|
Restructuring | | | | | | | | | |
Cost of revenue | — |
|
| — |
|
| 2,497 |
|
| — |
|
|
|
Research and development expenses | — |
|
| — |
|
| 2,911 |
|
| (332 | ) |
| 2,000 |
|
Sales and operations expenses | — |
|
| — |
|
| 1,825 |
|
| 290 |
|
| 8,810 |
|
General and administrative expenses | — |
|
| — |
|
| 123 |
|
| (11 | ) |
| 2,772 |
|
Total Restructuring (d) | $ | — |
| | $ | — |
| | $ | 7,356 |
| | $ | (53 | ) | | $ | 13,582 |
|
(a) Excludes $0.7 million, $(0.5) million and $(8.1) million disclosed as restructuring costs as of December 31, 2017, 2018 and 2019, respectively.
(b) Includes acquisition-related amortization of intangible assets of $6.3 million, $4.1 million, $17.7 million, $15.8 million and $12.3 million (including the accelerated amortization for Manage technology due to a revised useful life for $2.2 million) as of December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
(c) Includes acquisition-related amortization of intangible assets of $3.2 million, $0.8 million, $10.0 million, $9.1 million and $15.6 million (including an impairment loss for Manage customers relationships for $4.6 million as of December 31, 2015, 2016, 2017, 2018 and 2019, respectively.
(d) The Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy as detailed below as of December 31, 2019:
|
| | | |
| | Year Ended December 31, 2019 |
|
(Gain) from forfeitures of share-based compensation expense | (4,849 | ) |
Depreciation and amortization expense | (67 | ) |
Facilities and impairment related costs | 9,432 |
|
Payroll and Facilities related costs | 6,145 |
|
Total restructuring costs | 10,661 |
|
(2) For the years ended December 31, 2015, 2016, 2017, 2018 and 2019, this excludes $2.7 million, $5.1 million, $5.4 million, $7.2 million and $5.2 million, respectively, of net income available to non-controlling interests in our Japanese subsidiary held by Yahoo! Japan.
Reconciliation from Non-GAAP Operating Expenses to Operating Expenses under GAAP:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands) |
Research and development expenses | $ | (86,807 | ) | | $ | (123,649 | ) | | $ | (173,925 | ) | | $ | (179,263 | ) | | $ | (172,591 | ) |
Equity awards compensation expense | 6,520 |
| | 12,108 |
| | 21,093 |
| | 21,232 |
| | 15,036 |
|
Depreciation and amortization expense | 7,995 |
| | 7,211 |
| | 11,226 |
| | 10,602 |
| | 16,508 |
|
Pension service costs | 163 |
| | 211 |
| | 621 |
| | 844 |
| | 760 |
|
Acquisition-related deferred price consideration | 324 |
| | 85 |
| | — |
| | — |
| | — |
|
Restructuring | — |
| | — |
| | 2,911 |
| | (332 | ) | | 2,000 |
|
Non-GAAP - Research and development expenses | $ | (71,805 | ) | | $ | (104,034 | ) | | $ | (138,074 | ) | | $ | (146,917 | ) | | $ | (138,287 | ) |
Sales and operations expenses | (229,530 | ) | | (282,853 | ) | | (380,649 | ) | | (372,707 | ) | | (375,477 | ) |
Equity awards compensation expense | 11,678 |
| | 16,838 |
| | 31,386 |
| | 29,244 |
| | 19,301 |
|
Depreciation and amortization expense | 5,178 |
| | 7,757 |
| | 19,844 |
| | 18,245 |
| | 24,914 |
|
Pension service costs | 153 |
| | 144 |
| | 247 |
| | 325 |
| | 283 |
|
Restructuring | — |
| | — |
| | 1,825 |
| | 290 |
| | 8,810 |
|
Non-GAAP - Sales and operations expenses | (212,521 | ) | | (258,114 | ) | | (327,347 | ) | | (324,603 | ) | | (322,169 | ) |
General and administrative expenses | (79,145 | ) | | (117,469 | ) | | (127,077 | ) | | (135,159 | ) | | (139,754 | ) |
Equity awards compensation expense | 5,791 |
| | 14,313 |
| | 19,872 |
| | 16,600 |
| | 14,795 |
|
Depreciation and amortization expense | 1,526 |
| | 3,342 |
| | 5,738 |
| | 7,306 |
| | 7,200 |
|
Pension service costs | 125 |
| | 169 |
| | 363 |
| | 522 |
| | 513 |
|
Acquisition-related costs | — |
| | 2,921 |
| | 6 |
| | 1,738 |
| | — |
|
Acquisition-related deferred price consideration | (2,218 | ) | | — |
| | — |
| | — |
| | — |
|
Restructuring | — |
| | — |
| | 123 |
| | (11 | ) | | 2,772 |
|
Non-GAAP - General and administrative expenses | (73,921 | ) | | (96,724 | ) | | (100,975 | ) | | (109,004 | ) | | (114,474 | ) |
Total Operating expenses | (395,482 | ) | | (523,971 | ) | | (681,651 | ) | | (687,129 | ) | | (687,822 | ) |
Equity awards compensation expense | 23,989 |
| | 43,259 |
| | 72,351 |
| | 67,076 |
| | 49,132 |
|
Depreciation and Amortization expense | 14,699 |
| | 18,310 |
| | 36,808 |
| | 36,153 |
| | 48,622 |
|
Pension service costs | 441 |
| | 524 |
| | 1,231 |
| | 1,691 |
| | 1,556 |
|
Acquisition-related costs | — |
| | 2,921 |
| | 6 |
| | 1,738 |
| | — |
|
Acquisition-related deferred price consideration | (1,894 | ) | | 85 |
| | — |
| | — |
| | — |
|
Restructuring | — |
| | — |
| | 7,356 |
| | (53 | ) | | 13,582 |
|
Total Non-GAAP Operating expenses | $ | (358,247 | ) | | $ | (458,872 | ) | | $ | (566,396 | ) | | $ | (580,524 | ) | | $ | (574,930 | ) |
Non-GAAP Operating Expenses are our consolidated operating expenses adjusted to eliminate the impact of depreciation and amortization, equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. The Company uses Non-GAAP Operating Expenses to understand and compare operating results across accounting periods, for internal budgeting and forecasting purposes, for short-term and long-term operational plans,sale or other disposition and to assessany year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and measure our financial performance andan additional tax based on the abilityinterest charge generally applicable to underpayments of our operationstax would be imposed on the amount allocated to generate cash. We believe Non-GAAP Operating Expenses reflects our ongoing operating expenses inthat taxable year. Further, to the extent that any distribution received by a mannerU.S. Holder on its ADSs or ordinary shares exceeds 125% of the average of the annual distributions on the ADSs or ordinary shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that allows for meaningful period-to-period comparisons and analysis of trends in our business. As a result, we believe that Non-GAAP Operating Expenses provides useful informationdistribution would be subject to investors in understanding and evaluating our core operating performance and trendstaxation in the same manner as gain, described immediately above.
If we are a PFIC for any taxable year during which a U.S. Holder holds our managementADSs or ordinary shares and any of our non-U.S. affiliated entities are also PFICs, the holder will be treated as owning a proportionate amount (by value) of the shares of each such non-U.S. affiliate classified as a PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder can avoid certain of the adverse rules described above by making a mark-to-market election with respect to its ADSs or ordinary shares, provided that the ADSs or ordinary shares are “marketable.” ADSs or ordinary shares will be marketable if they are traded in comparing financial results across periods.other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a “qualified exchange” or other market within the meaning of applicable Treasury regulations. We expect that our ADSs, but not our ordinary shares, will continue to be listed on the Nasdaq Global Select Market, which is a qualified exchange for these purposes, but no assurances may be given in this regard. Consequently, assuming that our ADSs are regularly traded, if a U.S. Holder holds our ADSs, it is expected that the mark-to-market election would be available to such holder were we to be or become a PFIC. In addition, Non-GAAP Operating Expenses isbecause, as a key componenttechnical matter, a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such holder’s indirect interest in calculating Adjusted EBITDA, which is oneany investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
If a U.S. Holder makes the mark-to-market election, it will recognize as ordinary income any excess of the key measures we use to provide our quarterlyfair market value of the ADSs or ordinary shares at the end of each taxable year over their adjusted tax basis, and annual business outlookwill recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs or ordinary shares over their fair market value at the end of the taxable year (but only to the investment community.
Consolidated Statementsextent of Financial Position Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| (in thousands) |
Cash and cash equivalents | $ | 353,537 |
|
| $ | 270,317 |
|
| $ | 414,111 |
|
| $ | 364,426 |
|
| $ | 418,763 |
|
Total assets | $ | 841,719 |
|
| $ | 1,211,186 |
|
| $ | 1,531,300 |
|
| $ | 1,597,135 |
|
| $ | 1,790,384 |
|
Trade receivables, net of allowances for doubtful accounts | $ | 261,581 |
|
| $ | 397,244 |
|
| $ | 484,101 |
|
| $ | 473,901 |
|
| $ | 481,732 |
|
Total financial liabilities | $ | 10,428 |
|
| $ | 85,580 |
|
| $ | 3,657 |
|
| $ | 3,508 |
|
| $ | 4,405 |
|
Total liabilities | $ | 362,696 |
|
| $ | 601,309 |
|
| $ | 633,602 |
|
| $ | 629,244 |
|
| $ | 752,396 |
|
Total equity | $ | 479,023 |
|
| $ | 609,877 |
|
| $ | 897,698 |
|
| $ | 967,891 |
|
| $ | 1,037,988 |
|
Otherthe net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs or ordinary shares will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs or ordinary shares in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes such a mark-to-market election, tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by us (except that the lower applicable capital gains rate for qualified dividend income would not apply). FinancialIf a U.S. Holder makes a valid mark-to-market election, and Operating Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands, except number of clients) |
Number of clients | 10,198 |
|
| 14,468 |
|
| 18,118 |
|
| 19,419 |
|
| 20,247 |
|
Revenue ex-TAC (3) | $ | 534,017 |
|
| $ | 730,235 |
|
| $ | 941,136 |
|
| $ | 965,980 |
|
| $ | 946,569 |
|
Adjusted net income (4) | $ | 89,835 |
|
| $ | 136,777 |
|
| $ | 183,311 |
|
| $ | 168,738 |
|
| $ | 175,399 |
|
Adjusted EBITDA (5) | $ | 143,435 |
|
| $ | 224,572 |
|
| $ | 309,584 |
|
| $ | 321,059 |
|
| $ | 298,972 |
|
(3) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs, or TAC, generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC in this Form 10-K because it is a key measure used by our management and board of directorswe subsequently cease to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Revenue ex-TAC has limitations as an analytical tool, and you should not consider it in isolation orbe classified as a substitute for analysis of our financial results as reported underPFIC, such U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may addressHolder will not be required to take into account the impact of TAC differently; and (b) other companies may report Revenue ex-TACmark-to-market income or similarly titled measures but calculate them differently, which reduces their usefulnessloss described above during any period that we are not classified as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC alongside our U.S. GAAP financial results, including revenue . The following table presents a reconciliation of Revenue ex-TACPFIC.
In addition, in order to revenue,avoid the most directly comparable U.S. GAAP measure, for each of the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands) |
Revenue | $ | 1,323,169 |
|
| $ | 1,799,146 |
|
| $ | 2,296,692 |
|
| $ | 2,300,314 |
|
| $ | 2,261,516 |
|
Adjustment: | | | | | | | | | |
Traffic acquisition costs | (789,152 | ) |
| (1,068,911 | ) |
| (1,355,556 | ) |
| (1,334,334 | ) |
| (1,314,947 | ) |
Revenue ex-TAC | $ | 534,017 |
| | $ | 730,235 |
| | $ | 941,136 |
| | $ | 965,980 |
| | $ | 946,569 |
|
(4) We define Adjusted Net Income as our net income adjusted to eliminate the impact of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration and the tax impactapplication of the foregoing adjustments. Adjusted Net Income is notrules, a measure calculatedU.S. person that owns shares in accordancea PFIC for U.S. federal income tax purposes may make a “qualified electing fund” (“QEF”) election with respect to such PFIC, if the PFIC provides the information necessary for such election to be made. If a U.S. GAAP. We have included Adjusted Net Income in this Form 10-K because it isperson makes a key measure used by our managementQEF election with respect to a PFIC, the U.S. person will be currently taxable on its pro rata share of the PFIC’s ordinary earnings and board of directors to evaluate operating performance, generate future operating plansnet capital gain (at ordinary income and make strategic decisions regarding the allocation of capital. In particular, we believecapital gain rates, respectively) for each taxable year that the elimination of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costsentity is classified as a PFIC and deferred price considerationwill not be required to include such amounts in income when actually distributed by the PFIC. No assurances can be given that we will provide holders with the information necessary for U.S. Holders to make a QEF election.
In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns ADSs or ordinary shares during any year in which we are a PFIC, the U.S. Holder must file annual reports, containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, with the U.S. Holder’s federal income tax return for that year, unless otherwise specified in the instructions with respect to such form.
U.S. Holders should consult their tax advisers concerning our potential PFIC status and the tax impactpotential application of the foregoing adjustments in calculating Adjusted Net Income can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Net Income provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported underPFIC rules.
THE PRECEDING SUMMARY OF U.S. GAAP. Some of these limitations are: (a) Adjusted Net Income does not reflect the potentially dilutive impact of equity-based compensation or the impact of certain acquisition related costs; and (b) other companies, including companies in our industry, may calculate Adjusted Net Income or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted Net Income alongside ourFEDERAL INCOME TAX CONSIDERATIONS IS INTENDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparableHOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE U.S. GAAP measure, for each of the periods indicated:FEDERAL, STATE, LOCAL, AND NON-U.S. TAX CONSIDERATIONS GENERALLY APPLICABLE TO THEM OF THE OWNERSHIP AND DISPOSITION OF OUR ADSs OR ORDINARY SHARES IN THEIR PARTICULAR CIRCUMSTANCES.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands) |
Net income | $ | 62,276 |
|
| $ | 87,329 |
|
| $ | 96,659 |
|
| $ | 95,879 |
|
| $ | 95,969 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards compensation expense (a) | 23,989 |
|
| 43,259 |
|
| 72,351 |
|
| 67,076 |
|
| 49,132 |
|
Amortization of acquisition-related intangible assets | 6,342 |
|
| 4,131 |
|
| 17,731 |
|
| 15,821 |
|
| 27,906 |
|
Acquisition-related costs | — |
|
| 2,921 |
|
| 6 |
|
| 1,738 |
|
| — |
|
Acquisition-related deferred price consideration | (1,894 | ) |
| 85 |
|
| — |
|
| — |
|
| — |
|
Restructuring costs | — |
|
| — |
|
| 7,356 |
|
| (53 | ) |
| 13,582 |
|
Tax impact of the above adjustments | (878 | ) |
| (948 | ) |
| (10,792 | ) |
| (11,723 | ) |
| (11,190 | ) |
Adjusted net income | $ | 89,835 |
| | $ | 136,777 |
| | $ | 183,311 |
| | $ | 168,738 |
| | $ | 175,399 |
|
Item 6. [Reserved]
Excludes $0.7 million, $(0.5) million and $(8.1) million disclosed as restructuring costs as of December 31, 2017, 2018 and 2019, respectively.
(5)
We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted EBITDA in this Form 10-K because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 |
| (in thousands) |
Net income | $ | 62,276 |
|
| $ | 87,329 |
|
| $ | 96,659 |
|
| $ | 95,879 |
|
| $ | 95,969 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
Financial expense (income) net | 4,541 |
|
| 546 |
|
| 9,534 |
|
| 5,084 |
|
| 5,749 |
|
Provision for income taxes | 9,517 |
|
| 33,129 |
|
| 31,651 |
|
| 46,144 |
|
| 39,496 |
|
Equity awards compensation expense (a) | 23,989 |
|
| 43,259 |
|
| 72,351 |
|
| 67,076 |
|
| 49,132 |
|
Pension service costs | 441 |
|
| 524 |
|
| 1,231 |
|
| 1,691 |
|
| 1,556 |
|
Depreciation and amortization expense | 44,565 |
|
| 56,779 |
|
| 90,796 |
|
| 103,500 |
|
| 93,488 |
|
Acquisition-related costs | — |
|
| 2,921 |
|
| 6 |
|
| 1,738 |
|
| — |
|
Acquisition-related deferred price consideration | (1,894 | ) |
| 85 |
|
| — |
|
| — |
|
| — |
|
Restructuring costs | — |
|
| — |
|
| 7,356 |
|
| (53 | ) |
| 13,582 |
|
Total net adjustments | 81,159 |
| | 137,243 |
| | 212,925 |
| | 225,180 |
| | 203,003 |
|
Adjusted EBITDA | $ | 143,435 |
| | $ | 224,572 |
| | $ | 309,584 |
| | $ | 321,059 |
| | $ | 298,972 |
|
(a) Excludes $0.7 million, $(0.5) million and $(8.1) million disclosed as restructuring costs as of December 31, 2017, 2018 and 2019, respectively.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K.
Overview
We are a global technology company poweringdriving superior commerce outcomes for marketers withand media owners through the world’s leading Commerce Media Platform. We operate in commerce media, the future of digital advertising, leveraging commerce data and artificial intelligence ("AI") to connect ecommerce, digital marketing and media monetization to reach consumers throughout their shopping journey. Our vision is to bring richer experiences to every consumer by supporting a fair and open internet that enables discovery, innovation, and choice – powered by trusted and impactful advertising. We strivehave accelerated and deeply transformed the Company from a single-product to deliver measurablea multi-solution platform provider, fast diversifying our business resultsinto new solutions.
We enable brands', retailers' and media owners’ growth by providing best-in-class marketing and monetization services and infrastructure on the open Internet, driving approximately $40 billion of commerce outcomes for our customers – in the form of product sales for retailers, brands and marketers and advertising revenues for media owners. We differentiate ourselves by delivering high-performing commerce audiences at scale and we deliver this value by activating commerce data in a privacy-by-design way through proprietary AI technology to reach and engage consumers in real time with highly relevant digital advertisements ("ads") across multiple marketing goals for retailers and brands, through our self-service Criteo Platform. Using shopping data, artificial intelligence ("AI") technology and extensiveall stages of the consumer reach, we help marketers drive Awareness, Consideration and Conversion for their products and services1, and help retailers generate advertising revenues from consumer brands.journey. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive trusted and impactful advertising for marketers, we activate our data assets in a privacy-by-design way through proprietary AI technology to engage consumers in real time by designing, pricing and delivering highly relevant digital advertisements ("ads") across devices and environments. We price our offering on a range of pricing models and measure our value based on clear, well-defined performance metrics, making our impact on the business of our clients both transparent and easy to measure.
Our focus is on commerce media. Our clients include somemany of the largest and most sophisticated consumer brands, commerce companies and media owners in the world, along with world-class consumer brands.world. We partner with them to capture user activity on their websites and mobile applications ("apps"), which we define as digital properties, and optimizeleverage that data to deliver superior ad performance to help marketers, brands and agencies reach their campaign objectives. This includes powering the performanceretail media ecosystem as we enable brands to reach shoppers with relevant ads near the digital point of their ads basedsale on that activityretailer and other data. marketplace websites while enabling retailers to add a new revenue stream.
Demonstrating the depth and scale of our data, we collected data on $900 billionover $1 trillion in online sales transactions21 on our clients' digital properties in the year ended December 31, 2019.2021. Based on this data and other assets, we delivered 1.8 trillion targeted ads that generated over 11 billion clicks2 in the year ended December 31, 2019.2021. As of December 31, 2019,2021, we served more than 20,000close to 22,000 clients and, in each of the last three years, our average client retention rate, as measured on a quarterly basis, was approximately 90%.
We serve a wide range of clients and our revenue is not concentrated within any single client or group of clients. In 2017, 20182021, 2020 and 2019, our largest client represented 1.9%7.0, 3.5%, 2.0% and 2.8% of our revenue, respectively, and in 2017, 20182021, 2020 and 2019, our largest 10 clients represented 11.2%16.6%, 11.7%13.7% and 11.4% of our revenue in the aggregate, respectively. There is no group of customers under common control or customers that are affiliates of each other constituting an aggregate amount equal to 10% or more of our consolidated revenues, the loss of which would have a material adverse effect on the Company.
We operate in 10396 countries through a network of 29 offices located in Europe, Middle East, Africa (EMEA), the Americas and Asia-Pacific. As a result of our significant international operations, our revenue from outside of France, our home country, accounted for 93.6%93.2% of our revenue for year ended December 31, 2019.2021.
The Company's foreign currency risk exposure to the British pound, the Japanese yen, the Brazilian real and the U.SU.S. dollar against the euro (the euro still remains the Group'sCompany's functional currency) is described in Item 7 note B. Liquidity and Capital Resources to our Management's Discussion and Analysis included elsewhere in this Form 10-K.
___________________________________________________
1 Driving Awareness for a brand means exposing its brand name to consumers who have not been in touch with the brand before, thereby creating brand awareness from such consumers. Driving Consideration for an advertiser's products or services means attracting prospective new consumers to consider engaging with and/or buying this advertiser's products or services. Driving Conversion for an advertisers' products or services means triggering a purchase by consumers who have already engaged with this advertisers products or services in the past.
2 Excluding Criteo Retail Media
Our financial results include:
•Revenue of $2,296.7$2,254.2 million, $2,300.3$2,072.6 million and 2,261.5$2,261.5 million for the years ended December 31, 2017, 20182021, 2020 and 2019, respectively;
Revenue•Gross profit of $781.9 million, $688.0 million and $829.0 million for the years ended December 31, 2021, 2020 and 2019, respectively;
•Contribution ex-TAC, which is a non-U.S. GAAP financial measure, of $941.1$920.8 million, $966.0$825.0 million and $946.6 million for the years ended December 31, 2017, 20182021, 2020 and 2019, respectively;
•Net Income of $96.7$137.6 million, $95.9$74.7 million and $96.0 million for the years ended December 31, 2017, 20182021, 2020 and 2019, respectively; and
•Adjusted EBITDA, which is a non-U.S. GAAP financial measure, of $309.6$322.5 million, $321.1$251.0 million and $299.0 million for the years ended December 31, 2017, 20182021, 2020 and 2019, respectively.
Please see footnotes 3, 4note that reconciliations of Gross Profit to Contribution ex-TAC and 5 to the Other Financial and Operating Data table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue to Revenue ex-TAC, Net Income to Adjusted EBITDA and Net Income to Adjusted Net Income respectively,- in each case the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles generally accepted in the United States or "U.S. GAAP".GAAP," are presented below.
We are focused on maximizing RevenueContribution ex-TAC. We believe this focus builds sustainable long-term value for our business and fortifies a number of our competitive strengths, including a highly liquid marketplace for digital advertising inventory. As part of this focus, we seek to maximize our percentage of overall marketing spend in the digital advertising market over the long-term. In addition, this focus enriches liquidity for both advertisers and publishers resulting in more effective advertising for clients, better monetization for publishers and more relevant advertisements for consumers. We believe our results of operations reflect this focus.
Acquisitions
On October 29, 2018,May 18, 2021, we acquired Manage,completed the acquisition of all of the outstanding shares of Doobe In Site Ltd. ("Mabaya"), a Silicon Valley-based company with an attractive app install advertising solution.
On August 3, 2018, we acquired Storetail, a Paris-based pioneeringleading retail media technology platform enabling retailerscompany that powers sponsored products and retail media monetization for major ecommerce marketplaces globally.
In December 2021, we executed a purchase agreement to monetize native placements on their ecommerce sites.
Transition to U.S. GAAP and Change in Reporting Currency
Asacquire the business of June 30, 2015, we no longer met the requirements to qualify asIPONWEB Holding Limited ("IPONWEB"), a foreign private issuer under the Exchange Act. Asmarket-leading AdTech company with world-class media trading capabilities, for $380 million comprised of a result, we began reporting as a domestic registrant as of January 1, 2016 and we are required under current SEC rules to prepare our financial statements in accordance with U.S. GAAP, rather than IFRS, and to present our financial information in U.S. dollars instead of euros. The transition from consolidated financial statements under IFRS to U.S. GAAP only impacted the presentation of our consolidated statement of financial position (order of liquidity) and of our consolidated statementmix of cash flows (effect of exchange rate changes on cash and cash equivalents). The functional currencytreasury shares of the Company, remains the euro, while our reporting currency changed from the euro to the U.S. dollar. Consequently, since we incur portions of our expenses and derive revenues in currencies other than the euro, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuationscertain adjustments including for working capital, other current assets and current liabilities and net indebtedness, with the transaction expected to close in foreign currency exchange rates. Foreign exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro.first quarter of 2022. The transaction is subject to customary closing conditions.
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A. | Operating Results.
A.Operating Results. |
Basis of Presentation
The key elements of our results of operations include:
Revenue
We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies. Historically, the Criteo model has focused solely on converting our clients' website visitors into customers, enabling us to charge our clients only when users engage with an ad we deliver, usually by clicking on it. More recently, we have expanded our solutions to address a broader range of marketing goals for our clients.
We offer two families of solutions to our commerce and brand clients:
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• | •Criteo Marketing Solutions allow commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments. •Criteo Retail Media solutions allow retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals. We also have multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments. |
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• | Criteo Retail Media solutions allow retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals.
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In conjunction with expanding our solutions, we have also started expanding our pricing models towhich now include a combinationpercentage of spend models in addition to cost-per-click, cost-per-install and cost-per-impression for selected new solutions, in addition to cost-per-click.
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.
For campaigns priced on a cost-per-click and cost-per-install basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognize revenue when a user clicks on an advertisement or installs an application.
For campaigns priced on a cost-per-impression basis, we bill our clients based on the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed.
We act as principal in our arrangements because (i) we control the advertising inventory (spaces on websites) before it is transferred to our clients; (ii) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and (iii) we have full discretion in establishing prices. Therefore, based on these factors, we report revenue earned and the related costs incurred on a gross basis.models.
Cost of Revenue
Our cost of revenue primarily includes traffic acquisition costs and other cost of revenue.
Traffic Acquisition Costs. Traffic acquisition costs consist primarily of purchases of impressions from publishers on a CPM basis. We purchase impressions directly from publishers or third-party intermediaries, such as advertisement exchanges. We recognize cost of revenue on a publisher by publisher basis as incurred. Costs owed to publishers but not yet paid are recorded in our Consolidated Statements of Financial Position as trade payables.
For some solutions within Criteo Retail Media, we pay for the inventory of our retailer partners on a revenue sharing basis, effectively paying the retailers a portion of the click-based revenue generated by user clicks on the sponsored products advertisements or impressions on the commerce display advertisements displaying the products of our consumer brand clients.
For a discussion of the trends we expect to see in traffic acquisition costs, see the section entitled " - Highlights and Trends - RevenueContribution ex-TAC" in Item 7.D - Trend Information below.
Other Cost of Revenue. Other cost of revenue includes expenses related to third-party hosting fees, depreciation of data center equipment, and the cost of data purchased from third parties.parties and digital taxes. The Company does not build or operate its own data centers and none of its Research and Development employments are dedicated to revenue generating activities. As a result, we do not include the costs of such personnel in other cost of revenue.
Operating Expenses
Operating expenses consist of research and development, sales and operations, and general and administrative expenses. Salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs are the most significant components of each of these expense categories. We grewThe number of employees increased from 2,5032,755 employees at January 1, 20172020 to 2,7552,781 employees at December 31, 2019.2021.
We include equity awards compensation expense in connection with grants of share options, warrants, and restricted share units ("RSUs") in the applicable operating expense category based on the respective equity award recipient’s function (Research and development, Sales and operations, General and administrative).
Research and Development Expense. Research and development expense consists primarily of personnel-related costs for our employees working in the engine, platform, site reliability engineering, scalability, infrastructure, engineering program management, product, analytics and other teams, including salaries, bonuses, equity awards compensation and other personnel related costs. Our research and development function was supplemented in January 2013 to include a dedicated product organization following the appointment of a Chief Product Officer. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third-party development resources, allocated overhead, including internal IT and depreciation and amortization costs. These expenses are partially offset by the French research tax credit that is conditional upon the level of our expenditures in research and development.
Our research and development efforts are focused on enhancing the performance of our solution and improving the efficiency of the services we deliver to our clients and publisher partners. All development costs, principally headcount-related costs, are expensed as management determines that technological feasibility is reached, shortly before the release of the developed products or features. As a result, the development costs incurred after the establishment of technological feasibility and before the release of those products or features are not material and, accordingly, are expensed as incurred. Capitalized costs mainly relates to internally developed internal-use software and IT licenses.
The number of employees in research and development functions grewincreased from 603681 at January 1, 20172020 to 681682 at December 31, 2019. On October 7, 2019, in connection with the new organization structure, the Company announced a plan to restructure its R&D activities with the closing of its R&D operations in Palo Alto, and we expect our headcount to be slightly reduced upon completion of this restructuring. We expect research and development expenses to slightly decrease as a percentage of our revenue. 2021.
We believe our continued investment in research and development to be critical to maintaining and improving our technology within the Criteo Commerce Media Platform, our quality of service and our competitive position.
Sales and Operations Expense. Sales and operations expense consists primarily of personnel-related costs for our employees working in our sales, account strategy, sales operations, publisher business development, analytics, marketing, technical solutions, creative services and other teams, including salaries, bonuses, equity awards compensation, and other personnel-related costs. Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, provisions for doubtful accounts, subcontracting, consulting and professional fees paid to third parties, allocated overhead, including internal IT, and depreciation and amortization costs. The number of employees in sales and operations functions declinedincreased from 1,4891,578 at January 1, 20172020 to 1,5781,596 at December 31, 2019.2021. In order to expand our business, we expect to make targeted investments in our resources in some areas of our sales and operations. Yet, we expect sales and operations expenses to remain fairly flat as a percentage of revenue over time as weincreasewe increase the productivity of our sales and operations teams.
General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs for our administrative, legal, information technology, human resources, facilities and finance teams. Additional expenses included in this category include travel-related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated overhead, including internal IT and depreciation and amortization costs. The number of employees in general and administrative functions grewincreased from 411496 at January 1, 20172020 to 496503 at December 31, 2019.2021. We expect our general and administrative expense to decrease as a percentage of revenue over time as we increase the productivity of our general and administrative teams.
Financial and Other Income (Expense)
Financial income (expense)and Other Income (Expense) primarily consists of:
•exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros (the Company's functional currency). We are exposed to changes in exchange rates primarily in the United States,U.S., the United Kingdom, Japan, Korea and Brazil. The U.S. dollar, the British pound, the Korean won, the Japanese yen and the Brazilian real are our most significant foreign currency exchange risks. At December 31, 2019,2021, our exposure to foreign currency risk was centralized at parent company level and hedged. These exchange differences in euro are then translated into U.S. dollars (the Company's reporting currency) according to the average euro/U.S. dollar exchange rate.
•interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt loan agreements and revolving credit facilities ("RCFs").
•Proceeds from sale of data center equipment to third-parties, made as part of Criteo's data center update program.
•Dividends received from an investment made in 2018.
We monitor foreign currency exposure and look to mitigate exposures through normal business operations and hedging strategies.
Provision for Income Taxes
We are subject to potential income taxes in France, the United StatesU.S. and numerous other jurisdictions. We recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable.
Our effective tax rates differ from the statutory rate applicable to us primarily due to valuation allowance on deferred tax assets, differences between domestic and foreign jurisdiction tax rates, Research Tax Credit offsets, which are non-taxable items, potential tax audit provision settlements, share-based compensation expenses that are non-deductible in some jurisdictions under certain circumstances, and transfer pricing adjustments. We license access to our technology to our subsidiaries and charge a royalty fee to these subsidiaries for such access. In France, we benefit from a reduced tax rate of 10% on a large portion of this technology royalty income.
On September 27, 2017,Although we received a draft notice of proposed adjustment from the Internal Revenue Service ("IRS") audit of Criteo Corp.believe that we have adequately reserved for the year ended December 31, 2014, confirmed by the definitive notice dated February 8, 2018. If the IRS prevails in its position, it could result in an additional federalour uncertain tax liability of an estimated maximum aggregate amount of $15.0 million, excluding relative fees,positions (including net interest and penalties. We strongly disagree withpenalties), we can provide no assurance that the IRS's position as asserted in the draft noticefinal tax outcome of proposed adjustment and intend to contest it.
these matters will not be materially different. No uncertain tax positions were identified as of December 31, 2019.2021.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe estimates associated with (1) revenue recognition trade receivables, net ofcriteria (2) allowances for doubtful accounts,credit losses, (3) research tax credits (4) income taxes, including i) recognition of deferred tax assets arising from the subsidiaries projected taxable profit for future years, ii) evaluation of uncertain tax positions impactassociated with our transfer pricing policy and iii) recognition of income tax position in respect with tax reforms recently enacted in countries we operate, (5) assumptions used in valuing acquired assets and assumed liabilities in business combinations, (6) assumptions used in the U.S.,valuation of goodwill, intangible assets and right of use assets - operating lease, and (7) assumptions used in the valuation model to determine the fair value of share-based compensation plan. The spread of COVID-19 and the various attempts to contain it have continued to create volatility, uncertainty and economic disruption to global society, economics, financial markets and business practices and increase the uncertainty associated with certain estimates, in particular those related to allowance for credit losses, assumptions used in the valuation of goodwill and intangible assets, internal-use software and equity awards compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider theseestimates relating to be our critical accounting policies and estimates.income taxes. See Note 1. Principles and Accounting Methods to our audited consolidated financial statements beginning on page F-1 for a description of our other significant accounting policies.
Revenue Recognition
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.
For campaigns pricedrevenue generated from arrangements that involve third-party publishers, there is judgment in evaluating whether we are the principal, and report revenue on a cost-per-clickgross basis, or the agent, and cost-per-install basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognizereport revenue when a user clicks on an advertisement or installs an application.
For campaigns priced on a cost-per-impression basis,net basis. In this assessment, we bill our clients based onconsider if we obtain control of the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed.
We act as principal in our arrangements because (i) we control the advertising inventory (spaces on websites)specified goods or services before it isthey are transferred to our clients; (ii) we bear sole responsibilitythe customer, as well as other indicators such as the party primarily responsible for fulfillment, of the advertising promiseinventory risk, and inventory risks and (iii) we have full discretion in establishing prices. Therefore, basedprice. The assessment of whether we are considered the principal or the agent in a transaction could impact our revenue and cost of revenue recognized on these factors, we report revenue earned and the related costs incurred on a gross basis.consolidated statements of income.
Trade Receivables, Net of Allowances for Doubtful Accounts
We carry ourapply Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost that an entity does not expect to collect over the asset's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
For accounts receivable measured at net realizable value. On a periodic basis, our management evaluates our accounts receivableamortized cost, we use aging analysis, and determines whetherprobability of default methods to provide an allowance or if any accounts should be written downevaluating and charged to expense as a bad debt. The evaluation is based on a past history of collections, currentestimating the expected credit conditions, the length of time the trade receivable is past due and a past history of write downs. A trade receivable is considered past due if we have not received payments based on agreed-upon terms. A higher default rate than estimated or a deterioration in our major clients’ creditworthiness could have an adverse impact on our future results. Allowances for doubtful accounts on trade receivables are recorded in “Sales and Operations” in our consolidated statements of income. We generally do not require any security or collateral to support our trade receivables. The amount of allowance for doubtful accounts charged to our consolidated statements of income for the years ended December 31, 2017, 2018 and 2019 was $13.3 million, $17.7 million and $11.1 million, respectively and represented 2.7%, 3.7% and 2.3% of our trade receivables, net of allowances, as of December 31, 2017, 2018, and 2019, respectively.losses.
Deferred Tax Assets
Deferred taxes are recorded on all temporary differences between the financial reporting and tax bases of assets and liabilities, and on tax losses, using the liability method. Differences are defined as temporary when they are expected to reverse within a foreseeable future. We may only recognize deferred tax assets if, based on the projected taxable incomes within the next three years, we determine that it is probable that future taxable profit will be available against which the unused tax losses and tax credits can be utilized. As a result, the measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. If future taxable profits are considerably different from those forecasted that support recording deferred tax assets, we will have to revise downwards or upwards the amount of the deferred tax assets, which could have a significant impact on our financial results.
This determination requires many estimates and judgments by our management for which the ultimate tax determination may be uncertain.
Uncertain Tax Positions
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, our estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for ourassessed all potential uncertain tax positions, (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves
Goodwill
Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the course of 2021, the Company has reassessed its operating and reportable segments in accordance with the income tax accounting guidance when factsASC 280 and circumstances change, suchnow reports its results of operations through two segments: Marketing Solutions and Retail Media. Goodwill has been allocated to these two segments using a relative fair value allocation approach.
The Company has selected December 31 as the closingdate to perform its annual impairment test. The test is performed at the reporting unit level, which we have determined to be Marketing Solutions and Retail Media. In the impairment assessment of a tax audit orits goodwill, the refinement ofCompany performs an estimate. To the extent that the final tax outcome of these matters is differentimpairment test, which involves assumptions regarding estimated future cash flows to be derived from the amounts recorded, such differences will affectreporting unit. The estimated future cash flows are used to derive the provision for income taxesfair value of the reporting unit, which is then compared to its net book value, including goodwill . If these estimates or their related assumptions change in the periodfuture, the Company may be required to record impairment for these assets. If the net book value exceeds its fair value, then the Company would be required to recognize an impairment loss. The impairment loss to be recognized would be calculated by comparing the fair value of the Company to its net book value, including goodwill. There is also significant judgement in which such determination is made, and could have a material impact on our financial condition andthe allocation of the net book value of the Company to each of its segments, as many of the assets are not directly attributable to the Company's operating results.segments.
Goodwill and Intangible Assets
Acquired intangible assets are accounted for at acquisition cost, less accumulated amortization and any impairment loss.amortization. Acquired intangible assets are composed of software, technology and customer relationships amortized on a straight-line basis over their estimated useful lives ofcomprised between one and three toyears for the software, and three and nine years, on a straight-line method.for the technology and customer relationships. Intangible assets are reviewed for impairment whenever events or changes in circumstances such as, but not limited to, significant declines in revenue, earnings or cash flows or material adverse changes in the financial and economic environmentbusiness climate indicate that the carrying amount of an asset may be impaired.
Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as a single reporting unit and has selected December 31 as the dateSoftware development costs also include costs to perform its annual impairment test. In the impairment assessment of its goodwill, the Company performs a two-step impairment test, which involves assumptions regarding estimated future cash flowsdevelop software to be derived from the Company. If these estimates or their related assumptions change in the future, the Company may be requiredused solely to record impairment for these assets.
The first step of the impairment test involves comparing the fair value of the reporting unitmeet internal needs and cloud based applications used to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss to be recognized would be calculated by comparing the implied fair value of the Company to its net book value. In calculating the implied fair value of the Company’s goodwill, the fair value of the Company would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the Company over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized in the Consolidated Statement of Income when the carrying amount of goodwill exceeds its implied fair value.
There has been no impairment of goodwill during the years ended December 31, 2017, 2018 and 2019, as the Company's reporting unit's fair value was substantially in excess of the carrying value based on the annual goodwill impairment test.
Internal-Use Software
Costsdeliver our services. We capitalize development costs related to customized internal-usethese software that have reached the application development stage are capitalized. Capitalization of such costs begins whenapplications once the preliminary project stage is complete and stops whenit is probable that the project is substantially completewill be completed and is ready for its intended purpose. In making this determination, several analyses for each phase are performed, including analysis of the feasibility, availability of resources, intentionsoftware will be used to use and future economic benefits.perform the function intended. Amortization of these costs begins when capitalization stopsassets are placed in service and is calculated on a straight-line basis over the assets’ useful lives estimated at three to five years. Costs incurred during the preliminary development stage, as well as maintenance and training costs, are expensed as incurred.
Equity Awards Compensation
We account for share-based compensation in accordance with ASC 718 - Compensation - Stock Compensation. Under the fair value recognition provisions of this guidance, share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award.
Determining the fair value of share-based awards at the grant date requires judgment. The determination of the grant date fair value of RSUs is based on the share price on the grant date. We use the Black-Scholes option-pricing model to determine the fair value of share options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated ordinary share fair value as well as assumptions regarding a number of other complex and subjective variables.
These variables include the fair value of our ordinary shares, the exercise price of the option, the expected term of the options, our expected share price volatility, risk-free interest rates, and expected dividends, which are estimated as follows:
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• | •Fair value of our ordinary shares. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on Nasdaq on the date of grant for purposes of determining the fair value of ordinary shares. •Exercise price of the option. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on Nasdaq on the date of grant for purposes of determining the exercise price with a floor value of 95% of the average of the closing sales price per ADS for the 20 trading days preceding the grant. •Expected term. The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the ordinary share option awards granted, we have based our expected term on the simplified method, which represents the average period from vesting to the expiration of the award. •Expected volatility. Prior to our initial public offering, as we did not have a trading history for our ordinary shares, the expected share price volatility for our ordinary shares was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the ordinary share option grants. From the initial public offering, the expected share price volatility takes into account the Criteo closing share price from the initial public offering date to the grant date and closing share price of industry peers for the remaining expected term of the ordinary share option grant. •Risk-free rate. The risk-free interest rate is based on the yields of France Treasury securities with maturities similar to the expected term of the options for each option group. • Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on the Nasdaq on the date of grant for purposes of determining the fair value of ordinary shares. |
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• | Exercise price of the option. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on the Nasdaq on the date of grant for purposes of determining the exercise price with a floor value of 95% of the average of the closing sales price per ADS for the 20 trading days preceding the grant.
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• | Expected term. The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the ordinary share option awards granted, we have based our expected term on the simplified method, which represents the average period from vesting to the expiration of the award.
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• | Expected volatility. Prior to our initial public offering, as we did not have a trading history for our ordinary shares, the expected share price volatility for our ordinary shares was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the ordinary share option grants. From the initial public offering, the expected share price volatility takes into account the Criteo closing share price from the initial public offering date to the grant date and closing share price of industry peers for the remaining expected term of the ordinary share option grant.
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• | Risk-free rate. The risk-free interest rate is based on the yields of France Treasury securities with maturities similar to the expected term of the options for each option group.
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• | Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero. |
If any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.
The following table presents the range of assumptions used to estimate the fair value of options granted during the periods presented:
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| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Volatility | —% | | 39.2% - 39.9% | | 39.2% - 41.2% |
Risk-free interest rate | — | % | | 0.00% - 0.25% | | 0.00% - 0.10% |
Expected life (in years) | - | | 6 years | | 6 years |
Dividend yield | —% | | —% | | — | % |
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| | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2018 | | 2019 |
Volatility | 41.3% |
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| 40.7% - 41.5% |
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| 39.2% - 41.2% |
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Risk-free interest rate | 0.00% |
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| 0.60% - 0.90% |
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| 0.00% - 0.10% |
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Expected life (in years) | 6 years |
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| 6 years |
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| 6 years |
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Dividend yield | — | % |
| — | % |
| — | % |
There were no grants of share options during the year ended December 31, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements applicable to us, see Note 1 to our audited consolidated financial statements beginning on page F-1.
Results of Operations for the Years Ended December 31, 2017, 20182021, 2020 and 2019
Revenue breakdown by segment
Beginning in the fourth quarter of 2021, we report our segments results as Marketing Solutions and Retail Media:
•Criteo Marketing Solutions allow commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments.
•Criteo Retail Media solutions allow retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals.
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| Year Ended December 31, | | |
| 2021 | | 2020 | | 2019 | 2021 vs 2020 | 2020 vs 2019 |
| (in thousands) | | |
Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | 9 | % | (8) | % |
Conversion impact U.S. dollar/other currencies | (19,713) | | | 3,239 | | | 51,373 | | | |
Revenue at constant currency (1) | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | 8 | % | (8) | % |
| | | | | | | |
Marketing Solutions as reported | $ | 2,007,239 | | | $ | 1,806,431 | | | $ | 2,092,590 | | 11 | % | (14) | % |
Conversion impact U.S. dollar/other currencies | $ | (16,511) | | | $ | 4,364 | | | $ | 49,668 | | | |
Marketing Solutions at constant currency (1) | $ | 1,990,728 | | | $ | 1,810,795 | | | $ | 2,142,258 | | 10 | % | (13) | % |
| | | | | | | |
Retail Media as reported (2) | $ | 246,996 | | | $ | 266,186 | | | $ | 168,926 | | (7) | % | 58 | % |
Conversion impact U.S. dollar/other currencies | $ | (3,202) | | | $ | (1,125) | | | $ | 1,705 | | | |
Retail Media at constant currency (1) | $ | 243,794 | | | $ | 265,061 | | | $ | 170,631 | | (8) | % | 57 | % |
(1) Information herein with respect to results presented on a constant currency basis is computed by applying prior period average exchange rates to current period results. We have included results on a constant currency basis because it is a key measure used by our management and board of directors to evaluate operating performance. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. The table above reconciles the actual results presented in this section with the results presented on a constant currency basis.
(2) Criteo operates as two reportable segments from December 31, 2021. The table above presents the operating results of our Marketing Solutions and Retail Media segments. A strategic building block of Criteo’s Commerce Media Platform, the Retail Media Platform, introduced in June 2020, and reported under the retail media segment, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements running on this platform, Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. We expect most clients using Criteo’s legacy Retail Media solutions to transition to this platform by the second half of 2022. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Contribution ex-TAC margin will increase. Contribution ex-TAC will not be impacted by this transition.
2021 Compared to 2020
Revenue in 2021 increased $181.6 million, or 9% (or 8% on a constant currency basis) to $2,254.2 million compared to 2020.
84% of the year-over-year increase in revenue was driven by the contribution from our existing clients, and 16% of the year-over-year increase was driven by the contribution from new clients. We added 285 net new clients year-over-year across regions.
The year-over-year increase in revenue on a constant currency basis was largely attributable to the increase in the average price charged to advertisers, and partially offset by the decreased number of impressions delivered by us.
Marketing Solutions revenue increased 11% (or 10% on a constant currency basis) to $2,007.2 million for 2021, reflecting increased spend from Retail clients, both on our retargeting, audience targeting and omnichannel solutions, partially offset by incremental identity and privacy changes, as expected.
Retail Media revenue decreased (7)% (or (8)% on a constant currency basis) to $246.9 million for 2021, as the strong performance with large retailers across the U.S. and EMEA was more than offset by the technical and transitory impact related to the ongoing client migration to the RMP. Criteo's RMP accounts for a fast-growing share of Retail Media revenue, or about 50% for the year ended December 31, 2021, and its revenue is accounted for on a net basis. In 2020, less than 5% of Retail Media revenue was accounted for on a net basis, and as a result of this transition to a full RMP business, the growth of Retail Media revenue is temporarily impacted. Reflecting the underlying economic performance, Retail Media's Contribution ex-TAC increased 59% (or 58% on a constant currency basis) in the year ended December 31, 2021, driven by continued strength in Retail Media onsite, in particular in the U.S. market, and growing network effects of the RMP.
2020 compared to 2019
Revenue in 2020 decreased $(188.9) million, or (8)% (or (8)% on a constant currency basis) to $2,072.6 million compared to 2019.
The COVID-19 pandemic impacted our business during most of the year, with an estimated net negative impact on revenue of approximately $262 million for the twelve months ended December 31, 2020, or approximately 12 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us. The COVID-19 headwind impacted our large customers in our Marketing Solutions business, in particular in the Travel, Classifieds verticals and some large brick-and-mortar Retail clients. However, we believe that client spending from Retail clients in the midmarket and in our Retail Media solutions was supported by stronger ecommerce shopping trends emerging from the COVID-19 pandemic.
The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average price charged to advertisers, partly driven by the evolution of our revenue mix over the period, and partially offset by the increased number of impressions delivered by us and the increased number of clicks delivered on the advertising banners displayed by us.
The year-over-year decrease in revenue was also driven by the lower contribution from our existing clients and some churning clients, both of which we largely attribute to the COVID-19 outbreak, offsetting the positive contribution from new clients. We added 1,213 net new clients year-over-year across regions.
Marketing Solutions revenue decreased (14)% (or (13)% on a constant currency basis) to $1,806.4 million for 2020, reflecting decreased spend from large clients, primarily as a result of the COVID-19 pandemic impact, which we consider as retail bankruptcies and softness with our Travel and Classifieds clients Retail clients, as well as incremental identity and privacy changes, as expected.
Retail Media revenue increased 58% (or 57% on a constant currency basis) to $266.2 million for 2020, reflecting the strong adoption by large retailers across the U.S. and EMEA.
Revenue breakdown by region
Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis.
| | | Year Ended December 31, | | % change | | Year Ended December 31, | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 | | 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands) | | | | | | (in thousands) | | | | |
Revenue as reported | $ | 2,296,692 |
|
| $ | 2,300,314 |
|
| $ | 2,261,516 |
| | 0.2 | % | | (2 | )% | Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | | 9 | % | | (8) | % |
Conversion impact U.S. dollar/other currencies | $ | (4,809 | ) |
| (19,118 | ) |
| 51,373 |
| | | | | Conversion impact U.S. dollar/other currencies | $ | (19,713) | | | $ | 3,239 | | | 51,373 | | |
Revenue at constant currency (*) | 2,291,883 |
| | 2,281,196 |
| | 2,312,889 |
| | (1 | )% | | 1 | % | Revenue at constant currency (*) | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | | 8 | % | | (8) | % |
| | | | | | | | | | |
| Americas | | | | | | | | | | Americas | |
Revenue as reported | $ | 990,424 |
|
| $ | 954,073 |
|
| $ | 952,154 |
| | (4 | )% | | (0.2 | )% | Revenue as reported | $ | 916,825 | | | $ | 894,854 | | | $ | 952,154 | | | 2 | % | | (6) | % |
Conversion impact U.S. dollar/other currencies | (6,812 | ) |
| 7,693 |
|
| 4,584 |
| | | | | Conversion impact U.S. dollar/other currencies | 1,380 | | | 12,770 | | | 4,584 | | |
Revenue at constant currency (*) | $ | 983,612 |
| | $ | 961,766 |
| | $ | 956,738 |
| | (3 | )% | | 0.3 | % | Revenue at constant currency (*) | $ | 918,205 | | | $ | 907,624 | | | $ | 956,738 | | | 3 | % | | (5) | % |
| | | | | | | | | | | | | | | | | | | | |
EMEA | | | | | | | | | | EMEA | |
Revenue as reported | $ | 808,961 |
|
| $ | 839,825 |
|
| $ | 806,197 |
| | 4 | % | | (4 | )% | Revenue as reported | $ | 844,312 | | | $ | 749,672 | | | $ | 806,197 | | | 13 | % | | (7) | % |
Conversion impact U.S. dollar/other currencies | (7,179 | ) |
| (21,553 | ) |
| 44,478 |
| | | | | Conversion impact U.S. dollar/other currencies | (24,324) | | | (4,528) | | | 44,478 | | |
Revenue at constant currency (*) | $ | 801,782 |
| | $ | 818,272 |
| | $ | 850,675 |
| | 1 | % | | 1 | % | Revenue at constant currency (*) | $ | 819,988 | | | $ | 745,144 | | | $ | 850,675 | | | 9 | % | | (8) | % |
| | | | | | | | | | |
| Asia-Pacific | | | | | | | | | | Asia-Pacific | |
Revenue as reported | $ | 497,307 |
|
| $ | 506,416 |
|
| $ | 503,165 |
| | 2 | % | | (1 | )% | Revenue as reported | $ | 493,098 | | | $ | 428,091 | | | $ | 503,165 | | | 15 | % | | (15) | % |
Conversion impact U.S. dollar/other currencies | 9,186 |
|
| (5,258 | ) |
| 2,311 |
| | | | | Conversion impact U.S. dollar/other currencies | 3,231 | | | (5,003) | | | 2,311 | | |
Revenue at constant currency (*) | $ | 506,493 |
| | $ | 501,158 |
| | $ | 505,476 |
| | 1 | % | | (0.2 | )% | Revenue at constant currency (*) | $ | 496,329 | | | $ | 423,088 | | | $ | 505,476 | | | 16 | % | | (16) | % |
|
(*) Revenue at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the average exchange rates for the prior year to the following year figures.
20192021 Compared to 2018
Revenue for 2019 decreased $(38.8) million, or (2)% (or increased 1% on a constant currency basis) to $2,261.5 million, compared to 2018. The year-over-year increase in revenue at constant currency was entirely driven by new clients, offsetting the decrease in our business with existing clients. We added 828 net new clients across regions and client sizes over the period, a lower volume than the prior year. This was primarily driven by focused execution and productivity improvements in the midmarket category leading to higher additions of higher-value midmarket clients. Contribution from existing clients was impacted by lower retargeting spend from large clients, as well as by a general softness in the web environment, where users tend to progressively spend less time than in apps, where our solutions do not yet contribute significantly to our revenue growth, despite continued adoption of our new products.2020
Our revenue in the Americas region decreased (0.2)%increased $22.0 million, or 2% (or increased 0.3%3% on a constant currency basis) to $952.2$916.8 million for 20192021 compared to 2018. Growth2020. This increase was driven by the accelerationcontinued positive retail trends, in particular with large customers across Marketing Solutions, and continued strong performance of our midmarket business driven by larger midmarket clients, as well as continued traction in our Criteo Retail Media, business inas the U.S., partlyRMP continues to scale with consumer brands and large retailers, partially offset by lower retargeting spend by large clients.
the impact of recognizing revenue on a net basis for clients transitioning to the RMP.
Our revenue in the EMEA region decreased (4)%increased $94.6 million, or 13% (or increased 1%9% on a constant currency basis) to $806.2$844.3 million for 20192021 compared to 2018.2020. This increase at constant currency was largely driven by accelerated growthpositive retail trends in our midmarket businessmain markets, in particular in Germany and by theemerging markets, positive traction ofwith large customers across our retargeting and new solutions, includingand continued strong performance of Retail Media partly offset by softer business with large customers.across the region.
Our revenue in the Asia-Pacific region decreased (1)%increased $65.0 million, or 15% (or (0.2)%16% on a constant currency basis) to $503.2$493.1 million for 20192021 compared to 2018. This slight decrease at constant currency2020. The increase was driven by a slow-down inthe recovery of our large customer businesscustomers in the region, in particular in Japan, as well as positive contributions from Retail clients in South-East Asia and Australia, despite strong growth across client categories in Korea and our growing midmarket business across the region.Asia.
Additionally, our $2,261.5$2,254 million of revenue for 20192021 was negativelypositively impacted by $(51.4)$(19.7) million of currency fluctuations, particularly as a result of the depreciation of the Turkish Lira, Russian Ruble, Japanese yen,Yen and the Brazilian real, partially offset by the appreciation of the Euro and the British pound the Korean won, the Brazilian real and the Euro,sterling, compared to the U.S. dollar.
The year-over-year growth in revenue on a constant currency basis was entirely attributable to an increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us, offsetting the decrease in the average cost-per-click charged to advertisers.
2018
2020 Compared to 2017
Revenue for 2018increased $3.6 million, or 0.2% (or decreased (1)% on a constant currency basis) to $2,300.3 million, compared to 2017. Revenue was impacted by the discontinuation of certain products over the period. Revenue from new clients contributed 63% to the year-over-year revenue growth of the period, while revenue from existing clients contributed 37%. Business with our existing clients was generally resilient despite significant headwinds resulting in softer contribution to revenue growth. We added 1,301 net new clients across regions and client sizes over the period, a lower volume than the prior year, primarily driven by delayed sales headcount hiring and increased employee attrition, particularly in the midmarket.
Offsetting this, clients increasingly used our Criteo Marketing Solutions to address new marketing goals, particularly Consideration, as well as Criteo Retail Media solutions, launched campaigns in new environments, such as apps, and benefited from our broader direct connections with publishers through Criteo Direct Bidder.2019
Our revenue in the Americas region decreased (4)$(57.3) million, or (6)% (or (3)(5)% on a constant currency basis) to $954.1$894.9 million for 20182020 compared to 2017. While we saw continued strength2019. This decline was driven by an estimated revenue impact from COVID-19 of approximately $90 million, in particular with our largest existinglarge customers in the broader Classifieds vertical and some large brick-and-mortar Retail clients in the United States, execution was more difficult in the midmarket across the region and we experienced prolonged difficult market conditions in Latin America.
We saw a positive impact from the continued ramp up of our expanded Criteo Marketing Solutions and Criteo Retail Media solutions, in particular in the United States. Contribution from existing clients was negatively impacted by user coverage limitations across the region, and the discontinuation of certain products over the period. Contribution from new clients was negatively impacted by hiring delays within our sales teams.U.S.
Our revenue in the EMEA region increased 4%decreased $(56.5) million, or (7)% (or 1%(8)% on a constant currency basis) to $839.8$749.7 million for 20182020 compared to 2017.2019. This was largely driven by solid growthdecrease at constant currency includes an estimated $96 million revenue impact from the COVID-19 pandemic, in Germany, Russia and Middle-East, as well as the traction from our broader solutions offering. External negative factors, including the implementation of the GDPR, as well as some short-term disturbance relatedpart due to the implementation of our new go-to-market model acrossfact that the EMEA region had a temporary negative impact on revenue growth.the highest exposure to the Travel vertical prior to the pandemic, which was most impacted by COVID-19.
Our revenue in the Asia-Pacific region increased 2%decreased $(75.1) million, or (15)% (or 1%(16)% on a constant currency basis) to $506.4$428.1 million for 20182020 compared to 2017. Overall,2019. The decrease at constant currency included an estimated $76 million revenue growthimpact from the COVID-19 pandemic, mostly in the Travel and Classifieds verticals, and was also driven by a stronger businessweak economic climate in Korea (particularlyJapan, our largest market in apps) and India and Japan (particularly with large clients).the region.
Additionally, our $2,300.3$2,073 million of revenue for 20182020 was positivelynegatively impacted by $19.1$ $3.2 million of currency fluctuations, particularly as a result of the strengtheningdepreciation of the Japanese yen,Turkish Lira, Russian Ruble, the British pound and the euroBrazilian real, partially offset by the depreciationappreciation of the Brazilian realJapanese Yen and the Turkish lira,Euro, compared to the U.S. dollar.
The year-over-year decrease in revenue on a constant currency basis was attributable to a slight decrease in the average cost-per-click, not entirely offset by growth in the volume of clicks delivered on the advertisements displayed by us.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percentages) | | | | |
Traffic acquisition costs | $ | (1,333,440) | | | $ | (1,247,571) | | | $ | (1,314,947) | | | 7% | | (5)% |
Other cost of revenue | (138,851) | | | (137,028) | | | (117,533) | | | 1% | | 17% |
Total cost of revenue | $ | (1,472,291) | | | $ | (1,384,599) | | | $ | (1,432,480) | | | 6% | | (3)% |
% of revenue | (65) | % | | (67) | % | | (63) | % | | | | |
Gross profit % | 35 | % | | 33 | % | | 37 | % | | | | |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands, except percentages) | | | | |
Traffic acquisition costs | $ | (1,355,556 | ) |
| $ | (1,334,334 | ) |
| $ | (1,314,947 | ) | | (2)% | | (1)% |
Other cost of revenue | (121,641 | ) |
| (131,744 | ) |
| (117,533 | ) | | 8% | | (11)% |
Total cost of revenue | $ | (1,477,197 | ) | | $ | (1,466,078 | ) | | $ | (1,432,480 | ) | | (1)% | | (2)% |
% of revenue | (64 | )% | | (64 | )% | | (63 | )% | | | | |
Gross profit % | 36 | % | | 36 | % | | 37 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| | | | | | | | | |
| (in thousands, except percentages) | | | | |
Marketing Solutions | $ | (1,211,087) | | | $ | (1,059,680) | | | $ | (1,197,483) | | | 14% | | (12)% |
Retail Media (1) | $ | (122,353) | | | $ | (187,891) | | | $ | (117,464) | | | (35)% | | 60% |
Traffic Acquisition Costs | $ | (1,333,440) | | | $ | (1,247,571) | | | $ | (1,314,947) | | | 7% | | (5)% |
2019(1) Criteo operates as two reportable segments from December 31, 2021. The table above presents the operating results of our Marketing Solutions and Retail Media segments. A strategic building block of Criteo’s Commerce Media Platform, the Retail Media Platform, introduced in June 2020, and reported under the retail media segment, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements running on this platform, Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. We expect most clients using Criteo’s legacy Retail Media solutions to transition to this platform by the second half of 2022. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Contribution ex-TAC margin will increase. Contribution ex-TAC will not be impacted by this transition.
2021 Compared to 20182020
Cost of revenue for 2019 decreased $(33.6)2021 increased $87.7 million, or (2)6%, compared to 2020. This increase was primarily the result of a $85.9 million, or 7% increase in traffic acquisition costs (or 6% on a constant currency basis), and by a $1.8 million, or 1% (or 2% on a constant currency basis), increase in other cost of revenue.
The 14% increase in Marketing Solutions' traffic acquisition costs related primarily to the 6% increase (and 5% increase on a constant currency basis) in the average CPM for inventory purchased, reflecting the year-over-year recovery in the digital advertising market following the trough of the pandemic-related recession in the second quarter of 2020 and our preferred relationships with media owners, as well as the 8% increase in the number of impressions we purchased, reflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns.
Traffic acquisition costs in Retail Media decreased by 35% reflecting the technical and transitory impact related to the ongoing client migration due to the transitioning of our RMP. Because we recognize revenue on a net basis in all arrangements running on the RMP, we expect our Traffic acquisition costs for Retail Media to decrease over time as all of our clients are transitioned to the RMP.
The increase in other cost of revenue includes a $(5.2) million increase in allocated depreciation and amortization expense, $(3.0) million increase in other cost of sales mainly due to the digital tax, partially offset by $5.7 million in hosting costs and $0.8 million in data acquisition costs.
2020 Compared to 2019
Cost of revenue for 2020 decreased $(47.9) million, or (3)%, compared to 2018.2019. This decrease was primarily the result of a $(19.4)$(67.4) million, or (1)(5)% decrease in traffic acquisition costs (or an increase of 1% on a constant currency basis), and a $(14.2) million, or (11)% (or (9)(5)% on a constant currency basis), decreasepartially offset by a $19.5 million, or 17%(or 18% on a constant currency basis), increase in other cost of revenue.
The increasedecrease in traffic acquisition costs on a constant currency basis related primarily to an increase of 9.2% in the total number of impressions we purchased, partly offset by a (9.8)(13)% decrease (or (7.8)(and (13)% decrease on a constant currency basis) in the average CPM for inventory purchased. The increase in the volume of purchased impressions reflects our expanding relationships with existing and new publisher partners to support the growth in our clientThis was partly driven by lower global demand for advertising campaigns. The year-over-year decreaseinventory, despite the increase in average CPMonline traffic globally caused by the lockdown imposed in COVID-19 affected areas, making the unit price of inventory relatively cheaper than in the pre-pandemic period. This was also driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process, as well as of the growing share of in-app inventory in our business, which inventory cost tends to be slightly lower than that in the web browser environment.
The decrease in other cost of revenue includes a $(22.5) million decrease in the allocated depreciation and amortization expense following the changes in our estimation of the useful life of the servers and other equipment used in our data centers from 3 to 5 years, partially offset by a $5.9 million increase in other cost of sales and a $2.4 million increase in hosting costs.
2018 Compared to 2017
Cost of revenue for 2018 decreased $(11.1) million, or (1)%, compared to 2017.process. This decrease was primarilynot entirely offset by the result of a $(21.2) million, or (2)% (or (2)% on a constant currency basis), decrease in traffic acquisition costs and a $10.1 million, or 8% (or 8% on a constant currency basis),10% increase in other cost of revenue.
The decrease in traffic acquisition costs related primarily to a (2.7)% decrease (or (3.2)% decrease on a constant currency basis) in the average CPM for inventory purchased, partly offset by an increase of 1.2% in the total number of impressions we purchased. The increase in the volumepurchased, reflecting higher volumes of purchased impressions reflectsinventory available and our expanding relationships with existing and new publisher partners, in particular through direct connections, to support the growth in our client demand for advertising campaigns. The year-over-year decrease in average CPM was driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows to buy quality inventory directly from large publishers and remove intermediary fees in the process, as well as of the growing share of in-app inventory in our business, which inventory cost tends to be slightly lower than that in the web browser environment.
The increase in other cost of revenue includes a $13.1$(11.1) million increase in the allocated depreciation and amortization expense, $(4.2) million in hosting costs, $(2.6) million in data acquisition and a $0.1$(1.6) million increase in other cost of sales partially offset by a $3.1 million decrease in hosting costs.sales.
RevenueContribution excluding Traffic Acquisition Costs
We consider RevenueContribution ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing our RevenueContribution ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo AI Engine’s performance, allowing it to deliver more relevant advertisements at scale. As part of this focus, we continue to invest in building preferred relationships with direct publishers and pursue access to leading advertising exchanges.
The following table sets forth our revenue and Contribution ex-TAC by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Segment | | 2021 | | 2020 | | 2019 |
| | | (in thousands) |
Revenue | Marketing Solutions | | $ | 2,007,239 | | | $ | 1,806,431 | | | $ | 2,092,590 | |
| Retail Media | | 246,996 | | | 266,186 | | | 168,926 | |
| Total | | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | |
| | | | | | | |
Contribution ex-TAC(1) | Marketing Solutions | | $ | 796,152 | | | $ | 746,751 | | | $ | 895,107 | |
| Retail Media | | 124,643 | | | 78,295 | | | 51,462 | |
| Total | | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | |
(1)We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and Revenue ex-TAC by region, includingreconciled to gross profit through the Americas (North and South America), Europe, Middle East and Africa, or EMEA, and Asia-Pacific: |
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Region | | 2017 | | 2018 | | 2019 |
| | | (in thousands) |
Revenue | Americas | | $ | 990,424 |
|
| $ | 954,073 |
|
| $ | 952,154 |
|
| EMEA | | 808,961 |
|
| 839,825 |
|
| 806,197 |
|
| Asia-Pacific | | 497,307 |
|
| 506,416 |
|
| 503,165 |
|
| Total | | $ | 2,296,692 |
| | $ | 2,300,314 |
| | $ | 2,261,516 |
|
| | | | | | | |
Traffic acquisition costs | Americas | | $ | (619,393 | ) |
| $ | (579,597 | ) |
| $ | (579,175 | ) |
| EMEA | | (450,297 | ) |
| (471,654 | ) |
| (453,530 | ) |
| Asia-Pacific | | (285,866 | ) |
| (283,083 | ) |
| (282,242 | ) |
| Total | | $ | (1,355,556 | ) | | $ | (1,334,334 | ) | | $ | (1,314,947 | ) |
| | | | | | | |
Revenue ex-TAC (1) | Americas | | $ | 371,031 |
|
| $ | 374,476 |
|
| $ | 372,979 |
|
| EMEA | | 358,664 |
|
| 368,171 |
|
| 352,667 |
|
| Asia-Pacific | | 211,441 |
|
| 223,333 |
|
| 220,923 |
|
| Total | | $ | 941,136 |
| | $ | 965,980 |
| | $ | 946,569 |
|
(1) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue ex-TAC by Region are not measures calculated in accordance with U.S. GAAP.exclusion of other cost of revenue. We have included RevenueContribution ex-TAC and Revenue ex-TAC by Region in this Form 10-K because they areit is a key measures used by our management and board of directors to evaluate operating performance and generate future operating plans. In particular, we believe that the elimination of TAC from revenue and review of these measures by regionthis can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that RevenueContribution ex-TAC and Revenue ex-TAC by Region provideprovides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of RevenueContribution ex-TAC and Revenue ex-TAC by Region has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Revenue ex-TAC and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report RevenueContribution ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider RevenueContribution ex-TAC and Revenue ex-TAC by Region alongside our other U.S. GAAP financial results, including revenue. The above table provides a reconciliation of Revenue ex-TAC by region to revenue by region. Please also refer to footnote 3 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.gross profit.
Constant Currency Reconciliation
Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands) | | | | |
Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | | 9% | | (8)% |
Conversion impact U.S. dollar/other currencies | (19,713) | | | 3,239 | | | 51,373 | | | | | |
Revenue at constant currency | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | | 8% | | (8)% |
| | | | | | | | | |
| | | | | | | | | |
Gross profit as reported | $ | 781,944 | | | $ | 688,018 | | | $ | 829,036 | | | 14% | | (17)% |
Conversion impact U.S. dollar/other currencies | (7,822) | | | 467 | | | 20,686 | | | | | |
Gross profit at constant currency | $ | 774,122 | | | $ | 688,485 | | | $ | 849,722 | | | 13% | | (17)% |
| | | | | | | | | |
Traffic acquisition costs as reported | $ | (1,333,440) | | | $ | (1,247,571) | | | $ | (1,314,947) | | | 7% | | (5)% |
Conversion impact U.S. dollar/other currencies | 12,263 | | | (1,605) | | | (28,831) | | | | | |
Traffic acquisition cost at constant currency | $ | (1,321,177) | | | $ | (1,249,176) | | | $ | (1,343,778) | | | 6% | | (5)% |
| | | | | | | | | |
| | | | | | | | | |
Contribution ex-TAC as reported | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | | | 12% | | (13)% |
Conversion impact U.S. dollar/other currencies | (7,450) | | | 1,634 | | | 22,542 | | | | | |
Contribution ex-TAC at constant currency | $ | 913,345 | | | $ | 826,680 | | | $ | 969,111 | | | 11% | | (13)% |
| | | | | | | | | |
| | | | | | | | | |
Other cost of revenue as reported | $ | (138,851) | | | $ | (137,028) | | | $ | (117,533) | | | 1% | | 17% |
Conversion impact U.S. dollar/other currencies | (372) | | | (1,167) | | | (1,856) | | | | | |
Other cost of revenue at constant currency | $ | (139,223) | | | $ | (138,195) | | | $ | (119,389) | | | 2% | | 18% |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands) | | | | |
Revenue as reported | $ | 2,296,692 |
| | $ | 2,300,314 |
| | $ | 2,261,516 |
| | 0.2% | | (2)% |
Conversion impact U.S. dollar/other currencies | (4,809 | ) | | (19,118 | ) | | 51,373 |
| | | | |
Revenue at constant currency | $ | 2,291,883 |
| | $ | 2,281,196 |
| | $ | 2,312,889 |
| | (1)% | | 1% |
| | | | | | | | | |
Traffic acquisition costs as reported | $ | (1,355,556 | ) | | $ | (1,334,334 | ) | | $ | (1,314,947 | ) | | (2)% | | (1)% |
Conversion impact U.S. dollar/other currencies | 2,186 |
| | 10,433 |
| | (28,831 | ) | | | | |
Traffic acquisition cost at constant currency | $ | (1,353,370 | ) | | $ | (1,323,901 | ) | | $ | (1,343,778 | ) | | (2)% | | 1% |
| | | | | | | | | |
Revenue ex-TAC as reported | $ | 941,136 |
| | $ | 965,980 |
| | $ | 946,569 |
| | 3% | | (2)% |
Conversion impact U.S. dollar/other currencies | (2,624 | ) | | (8,686 | ) | | 22,542 |
| | | | |
Revenue ex-TAC at constant currency | $ | 938,512 |
| | $ | 957,294 |
| | $ | 969,111 |
| | 2% | | 0.3% |
| | | | | | | | | |
Other cost of revenue as reported | $ | (121,641 | ) | | $ | (131,744 | ) | | $ | (117,533 | ) | | 8% | | (11)% |
Conversion impact U.S. dollar/other currencies | (990 | ) | | (114 | ) | | (1,856 | ) | | | | |
Other cost of revenue at constant currency | $ | (122,631 | ) | | $ | (131,858 | ) | | $ | (119,389 | ) | | 8% | | (9)% |
Research and Development Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | |
Research and development expenses | $ | (151,817) | | | $ | (132,513) | | | $ | (172,591) | | | 15% | (23)% |
% of revenue | (7) | % | | (6) | % | | (8) | % | | | |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
Research and development expenses | $ | (173,925 | ) |
| $ | (179,263 | ) |
| $ | (172,591 | ) | | 3% | | (4)% |
% of revenue | (8 | )% | | (8 | )% | | (8 | )% | | | | |
20192021 Compared to 20182020
Research and development expenses for 2019 decreased $(6.7)2021 increased $19.3 million, or (4)%15%, compared to 2018. This decrease mainly related to an increase in the French Research Tax Credit and a decrease of headcount-related costs due to a lower share-based compensation expense, partially offset by an increased amortization expense for Manage technology due to a revised useful life (see Note 8). On October 7, 2019, in connection with the new organization structure, the Company announced a plan to restructure its R&D activities with the closing of its R&D operations in Palo Alto. The company incurred net restructuring costs of $0.7 million (see Note 2).
2018 Compared to 2017
Research and development expenses for 2018 increased $5.3 million, or 3%, compared to 2017.2020. This increase mainly related to an increase in headcount-related expenses driven by the negative impact of headcount-related costs and other expenses, partially offset by an increase in the French Research Tax Credit.our increasing stock price.
Sales and Operations Expenses
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % change |
| | 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| | | | | | | | | | |
| | (in thousands, except percent of revenue) | | | | |
Sales and operations expenses | | $ | (380,649 | ) |
| $ | (372,707 | ) |
| $ | (375,477 | ) | | (2)% | | 1% |
% of revenue | | (17 | )% | | (16 | )% | | (17 | )% | | | | |
20192020 Compared to 20182019
SalesResearch and operationsdevelopment expenses for 2019 increased $2.82020 decreased $(40.1) million, or 1%, compared to 2018. This increase mainly related to impairment of facilities following our offices right sizing policy implementation (see Note 2), the $4.8 million impairment loss recognized on Manage customers relationships (see Note 8) and a $5.0 million increase following an exceptional charge related to an invoicing dispute partially offset by a positive change in provisions for doubtful receivables.
2018 Compared to 2017
Sales and operations expenses for 2018 decreased $(7.9) million, or (2)(23)%, compared to 2017.2019. This decrease mainly related to a decrease in headcount-related costs internalfollowing the cessation of our R&D operations in Palo Alto in 2019 and marketing eventslower amortization expense due to the Manage assets revised useful life in 2019.
Sales and Operations Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | % change |
| | 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| | | | | | | | | | |
| | (in thousands, except percent of revenue) | | | | |
Sales and operations expenses | | $ | (325,616) | | | $ | (330,285) | | | $ | (375,477) | | | (1)% | | (12)% |
% of revenue | | (14) | % | | (16) | % | | (17) | % | | | | |
2021 Compared to 2020
Sales and operations expenses for 2021 decreased $(4.7) million, or (1)%, compared to 2020. This decrease was mainly driven by lower net bad debt expense, lower depreciation and amortization costs and operating taxeslower rent and facilities costs due to the right-sizing of our real estate footprint, partially offset by the reversal of a provision that was settled in Brazil2020 and Singaporethe negative impact of our increasing stock price on headcount-related expenses.
2020 Compared to 2019
Sales and operations expenses for 2020 decreased $(45.2) million, or (12)%, compared to 2019. This decrease mainly related to a reduction in headcount-related costs, a lower share-based compensation expense, the absence of Manage customer relationships amortization (as asset was fully impaired in 2019), discretionary spend measures on marketing and events, partially offset by an increase of bad debt expense.in the provision for credit losses.
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
General and administrative expenses | $ | (152,634) | | | $ | (116,395) | | | $ | (139,754) | | | 31% | | (17)% |
% of revenue | (7) | % | | (6) | % | | (6) | % | | | | |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
General and administrative expenses | $ | (127,077 | ) |
| $ | (135,159 | ) |
| $ | (139,754 | ) | | 6% | | 3% |
% of revenue | (6 | )% | | (6 | )% | | (6 | )% | | | | |
20192021 Compared to 20182020
General and administrative expenses for 2021 increased $36.2 million, or 31%, compared to 2020. This increase was mainly related to an increase in third-party services as part of our on-going transformation program and an increase in headcount related costs including the negative impact of our increasing stock price on compensation expense.
2020 Compared to 2019
General and administrative expenses for 2019 increased $4.62020 decreased $(23.4) million, or 3%(17)%, compared to 2018.2019. This increasedecrease was mostly driven by an increasea decrease in consultingheadcount-related costs, a lower share-based compensation expense and a decrease in rent and facilities costs, following the right-sizing of our real estate footprint, partially offset by transformation fees.
Financial and Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
Financial and Other Income (Expense) | $ | 1,939 | | | $ | (1,939) | | | $ | (5,749) | | | (200)% | | (66)% |
% of revenue | 0.1 | % | | (0.1) | % | | (0.3) | % | | | | |
2021 Compared to 2020
Financial and Other Income for 2021 decreased by $(3.9) million, or (200)% compared to 2020. The $(1.9) million financial and other income for the period ended December 31, 2021 was mainly driven by the financial expense relating to our $350 million available Revolving Credit Facility (RCF), including up-front fees amortization and non-utilization costs, partially offset by income from cash and cash equivalent. Financial and Other income for process optimization projects and the period ended December 31, 2021 was supported by $3.0 million in proceeds from the disposal of the HookLogic travel businessservers and equipments and $2.4 million in Marchdividends received from a minority interest. At December 31, 20182021, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps, forward purchases or sales of foreign currencies.
20182020 Compared to 2017
General and administrative expenses for 2018 increased $8.1 million, or 6%, compared to 2017. This increase mainly related to an increase of headcount-related costs and consulting fees relating to the Storetail and Manage acquisitions.
Financial Expense
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
Financial expense | $ | (9,534 | ) | | $ | (5,084 | ) | | $ | (5,749 | ) | | (47)% | | 13% |
% of revenue | (0.4 | )% | | (0.2 | )% | | (0.3 | )% | | | | |
2019 Compared to 2018
Financial expense for 2019 increased2020 decreased by $0.7$(3.8) million, or 13%(66)% compared to 2018.2019. The $5.7$1.9 million financial expense for the period ended December 31, 20192020 was mainly driven by the non-utilization costs and upfront fees amortization incurredfinancial expense relating to the €140 million drawing from May 2020 to November 2020 as part of our available RCFRevolving Credit Facility (RCF) financing, the up-front fees amortization, and the recognition of a negative impact of foreign exchange reevaluations net of related hedging.
non-utilization costs, partially offset by income from invested cash & cash equivalents. At December 31, 2019,2020, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
2018 Compared to 2017
Financial expense for 2018 decreased by $(4.5) million, or (47)% compared to 2017. The $5.1 million financial expense for the period ended December 31, 2018 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available revolving credit facility RCF financing. The hedging costs related to the intra-group position between Criteo S.A. and its U.S subsidiary in the context of the funding of the HookLogic acquisition was lower in the year ended December 31, 2018 compared to the same period ended in 2017 as this intra-group position no longer requires hedging following the qualification as a net investment in a foreign operation in February 2018. At December 31, 2018, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
Provision for Income Taxes
| | | Year Ended December 31, | | % change | | Year Ended December 31, | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 | | 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent information) | | | (in thousands, except percent information) | | | | |
Provision for income taxes | $ | (31,651 | ) |
| $ | (46,144 | ) |
| $ | (39,496 | ) | | 46% | | (14)% | Provision for income taxes | $ | (16,169) | | | $ | (32,197) | | | $ | (39,496) | | | (50)% | | (18)% |
% of revenue | (1 | )% | | (2 | )% | | (2 | )% | | % of revenue | (1) | % | | (2) | % | | (2) | % | |
Effective tax rate | 24.7 | % | | 32.5 | % | | 29.2 | % | | Effective tax rate | 10.5 | % | | 30.1 | % | | 29.2 | % | |
20192021 Compared to 20182020
The provision for income taxes for 20192021 decreased by $(6.6)$(16.0) million, or 14%50%, compared to 2018.2020. The annual effective tax rate for 20192021 was 29.2%10.5%, compared to an annual effective tax rate of 32.5%30.1% for 2018. Generally, the2020. The annual effective tax rates differdiffers from the statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain of our foreign subsidiaries, non-recognition of deferred tax assets related to tax losses and temporary differences, recognition of previously unrecognized tax losses and equity awards compensation expense.
In 2019,2021, our income before taxes decreasedincreased by $(6.6)$46.9 million to $135.5$153.8 million, compared to 2018,2020, generating a $46.6$43.7 million theoretical income tax expense at a nominal standard French tax rate of 34.43%28.40%. This theoretical tax expense is impacted primarilymainly by the following items contributing to a $39.5$16.2 million effective tax expense and a 29.2%10.5% effective tax rate: $13.4 million of net effect of share-based compensation, $2.7$1.7 million of deferred tax assets on which we recognized a valuation allowance, $16.0$6.6 million resulting from the BEAT waiver election issued by the United States Treasury and IRS in December 2019, $7.7expense, $6.5 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions), $3.6$2.2 million related to the French business tax, Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, offset by a $15.9$25.7 million tax deduction resulting from technology royalty income we received from our subsidiaries, $10.9$4.8 million Research and Development tax credit, and the recognition or reversal of valuation allowance on deferred tax assets for $20.6of $10.4 million (mainly for Criteo Corp).and $1.4 million of net effect of share-based compensation. Please see Note 22 to our audited consolidated financial statements for more detailed information on the provision for income taxes.
Amounts recognized in our consolidated financial statementsConsolidated Financial Statements are calculated at the level of each subsidiary within our consolidated financial statements.Consolidated Financial Statements. As at December 31, 2021, 2020 and 2019, the valuation allowance against net deferred tax assetsincome taxes amounted to $36.4 million, $37.3 million and $25.3 million. Itmillion, which related mainly related to Criteo Corp. ($12.8 million)5.7 million, $13.3 million and $12.8 million, respectively), Criteo Brazil ($2.7 million, $2.8 million and $3.2 million, respectively), Criteo Ltd ($7.5 million)7.6 million, $7.4 million and $7.5 million, respectively), Criteo China ($3.3 million, $3.3 million and $3.3 million, respectively), Criteo Singapore ($4.2 million, $3.3 million and $2.8 million), Criteo BrazilPty ($3.22.7 million, $2.8 million and $2.6 million), and Criteo France ($7.7 million)6.2 million, $1.0 million and $(7.7) million, respectively).
20182020 Compared to 20172019
The provision for income taxes for 2018 increased2020 decreased by $14.5$(7.3) million, or 46%18%, compared to 2017.2019. The annual effective tax rate for 20182020 was 32.5%30.1%, compared to an annual effective tax rate of 24.7%29.2% for 2017. Generally, the2019. The annual effective tax rates differdiffers from the statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain of our foreign subsidiaries, non-recognition of deferred tax assets related to tax losses and temporary differences, recognition of previously unrecognized tax losses and equity awards compensation expense.
In 2018,2020, our income before taxes increaseddecreased by $13.7$28.6 million to $142.0$106.9 million, compared to 2017,2019, generating a $48.9$34.2 million theoretical income tax expense at a nominal standard French tax rate of 34.43%32.02%. This theoretical tax expense is impacted primarily by the following items contributing to a $46.1$32.2 million effective tax expense and a 32.5%30.1% effective tax rate: $17.7$11.6 million of net effect of share-based compensation, $11.7$6.0 million of deferred tax assets on which we recognized a valuation allowance, (mainly related to Criteo Ltd, Criteo Corp., Criteo Pty and Criteo do Brasil LTDA), $12.0$13.4 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions), $3.8resulting from the BEAT waiver election, $3.5 million related to the French business tax, Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, offset by a $38.6$13.4 million tax deduction resulting from technology royalty income we received from our subsidiaries, $10.2$5.3 million Research and Development tax credit, and the recognition or reversal of valuation allowance on deferred tax assets for $4.5of $2.5 million and $9.0 million of permanent differences (mainly for Criteo Advertising (Beijing) Co. Ltd)based on employee costs, depreciation expenses and $1.8 million relating to other tax adjustments.intercompany transactions). Please see Note 2221 to our audited consolidated financial statements for more detailed information on the provision for income taxes.
Amounts recognized in our consolidated financial statementsConsolidated Financial Statements are calculated at the level of each subsidiary within our consolidated financial statements.Consolidated Financial Statements. As at December 31, 2020, 2019 and 2018, the valuation allowance against net deferred tax assetsincome taxes amounted to $37.3 million, $25.3 million and $43.2 million. Itmillion, which related mainly related to Criteo CorpCorp. ($18.6 million)13.3 million, $12.8 million and $18.6 million, respectively), Criteo do Brasil ($2.8 million, $3.2 million and $3.6 million, respectively), Criteo Ltd ($7.2 million)7.4 million, $7.5 million and $7.2 million, respectively), Criteo China ($3.5 million), Criteo Brazil ($3.6 million)3.3 million, $3.3 million and $3.5 million, respectively), Criteo Singapore ($2.93.3 million, $3.6 million and $2.9 million ), Criteo Pty ($2.8 million, $2.6 million and $2.5 million) and Criteo France ($3.9 million)1.0 million, $(7.7) million and $3.9 million, respectively).
Net Income
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2017 | | 2018 | | 2019 | | 2017 vs 2018 |
| 2018 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
Net income | $ | 96,659 |
|
| $ | 95,879 |
|
| $ | 95,969 |
| | (1)% | | 0.1% |
% of revenue | 4 | % | | 4 | % | | 4 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | |
Net income | $ | 137,647 | | | $ | 74,689 | | | $ | 95,969 | | 84% | | (22)% |
% of revenue | 6 | % | | 4 | % | | 4 | % | | | |
2019
2021 Compared to 20182020
Net income for 20192021 increased $0.1$63.0 million, or 0.1%84% compared to 2018.2020. This increase was the result of the factorsbusiness dynamics discussed above, in particular a $(5.9)$43.1 million decreaseincrease in income from operations, and a $(0.7)$3.9 million increase in financial expense offset byand other income and a $6.7$16.0 million decrease in the provision for income taxes compared to 2018.2020.
20182020 Compared to 20172019
Net income for 20182020 decreased $(0.8)$(21.3) million, or (1)(22)% compared to 2017.2019. This decrease was the result of the factors discussed above, in particular a $9.3$(32.4) million increasedecrease in income from operations, and a $(4.5)$3.8 million decrease in financial expense offset byand a $14.5$7.3 million increasedecrease in the provision for income taxes compared to 2017.2019.
Non-GAAP Financial Measure Reconciliation
Reconciliation of Contribution ex-TAC to Gross Profit
We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and reconciled to gross profit through the exclusion of other cost of revenue. Contribution ex-TAC is not a measure calculated in accordance with U.S. GAAP. We have included Contribution ex-TAC because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions. In particular, we believe that this measure can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Contribution ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Contribution ex-TAC has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Contribution ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Contribution ex-TAC alongside our other U.S. GAAP financial result measures. The below table provides a reconciliation of Contribution ex-TAC to gross profit:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | (in thousands) |
Gross Profit | | 781,944 | | | 688,018 | | | 829,036 | |
| | | | | | |
Other Cost of Revenue | | 138,851 | | | 137,028 | | | 117,533 | |
| | | | | | |
Contribution ex-TAC | | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reconciliation of Adjusted EBITDA to Net Income
We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, acquisition-related costs and restructuring related and transformation costs. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational plans. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, and restructuring related and transformation costs in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our U.S. GAAP financial results, including net income.
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Net income | | $ | 137,647 | | | $ | 74,689 | | | $ | 95,969 | |
Adjustments: | | | | | | |
Financial (Income) expense | | 1,044 | | | 1,939 | | | 5,749 | |
Provision for income taxes | | 16,169 | | | 32,197 | | | 39,496 | |
Equity awards compensation expense | | 44,955 | | | 31,425 | | | 49,132 | |
Research and development | | 16,334 | | | 10,253 | | | 15,036 | |
Sales and operations | | 13,023 | | | 12,042 | | | 19,301 | |
General and administrative | | 15,598 | | | 9,130 | | | 14,795 | |
Pension service costs | | 1,324 | | | 2,232 | | | 1,556 | |
Research and development | | 686 | | | 1,114 | | | 760 | |
Sales and operations | | 207 | | | 394 | | | 283 | |
General and administrative | | 431 | | | 724 | | | 513 | |
Depreciation and amortization expense | | 88,402 | | | 88,238 | | | 93,488 | |
Cost of revenue (data center equipment) | | 61,119 | | | 55,935 | | | 44,866 | |
Research and development | | 9,484 | | | 10,741 | | | 16,508 | |
Sales and operations | | 14,780 | | | 16,770 | | | 24,914 | |
General and administrative | | 3,019 | | | 4,792 | | | 7,200 | |
Acquisition-related costs | | 11,256 | | | 286 | | | — | |
| | | | | | |
| | | | | | |
General and administrative | | 11,256 | | | 286 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Restructuring related and transformation (gain) costs (1) | | 21,698 | | | 19,989 | | | 13,582 | |
| | | | | | |
Research and development | | 5,751 | | | 4,240 | | | 2,000 | |
Sales and operations | | 9,380 | | | 9,398 | | | 8,810 | |
General and administrative | | 6,567 | | | 6,351 | | | 2,772 | |
Total net adjustments | | 184,848 | | | 176,306 | | | 203,003 | |
Adjusted EBITDA | | $ | 322,495 | | | $ | 250,995 | | | $ | 298,972 | |
(1) For the Twelve Months Ended December 2021, 2020 and 2019, respectively, the Company recognized restructuring related and transformation costs following its new organizational structure implemented to support its Commerce Media Platform strategy:
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
(Gain) from forfeitures of share-based compensation awards | | (427) | | | (2,655) | | | (8,133) | |
Depreciation and amortization expense | | — | | | — | | | 1,161 | |
Facilities related (gain) costs | | 16,020 | | | 12,975 | | | 11,080 | |
Payroll related (gain) costs | | 4,480 | | | 5,911 | | | 9,474 | |
Consulting costs related to transformation | | 1,625 | | | 3,758 | | | — | |
Total restructuring related and transformation (gain) costs | | $ | 21,698 | | | $ | 19,989 | | | $ | 13,582 | |
For the twelve months ended December 31, 2021 and December 31, 2020, respectively, the cash outflows related to restructuring related and transformation costs were $3.9 million and $16.9 million respectively, and were mainly comprised of payroll costs, broker and termination penalties related to real-estate facilities and other consulting fees.
Unaudited Quarterly Results of Operations
The following tables set forth our unaudited consolidated statement of income data for the last eight quarters, as well as the percentage of revenue for each line item shown. We derived this information from our unaudited interim consolidated financial information, which, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. The quarterly results of operations have been prepared by, and are the responsibility of, our management and have not been audited or reviewed by our independent registered public accounting firm. You should read this information together with our audited consolidated financial statements and related notes beginning on page F-1.
| | | | Three Months Ended | | Three Months Ended |
| | March 31, 2018 |
| June 30, 2018 |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 |
| December 31, 2019 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| | (in thousands) | | (in thousands) |
Consolidated Statements of Income Data: | Consolidated Statements of Income Data: | | | | | | | | | | | | | | | | Consolidated Statements of Income Data: | |
| Revenue | $ | 564,164 |
|
| $ | 537,185 |
|
| $ | 528,869 |
|
| $ | 670,096 |
|
| $ | 558,123 |
|
| $ | 528,147 |
|
| $ | 522,606 |
|
| $ | 652,640 |
| | Revenue | $ | 653,267 | | | $ | 508,580 | | | $ | 551,311 | | | $ | 541,077 | | | $ | 661,282 | | | $ | 470,345 | | | $ | 437,614 | | | $ | 503,376 | |
| Cost of revenue (1) | | | | | | | | | | | | | | | | | Cost of revenue (1) | |
| | Traffic acquisition costs | (323,746 | ) |
| (306,963 | ) |
| (305,387 | ) |
| (398,238 | ) |
| (322,429 | ) |
| (304,229 | ) |
| (301,901 | ) |
| (386,388 | ) | | Traffic acquisition costs | (377,076) | | | (297,619) | | | (331,078) | | | (327,667) | | | (408,108) | | | (284,401) | | | (257,698) | | | (297,364) | |
| | Other cost of revenue | (30,059 | ) |
| (29,957 | ) |
| (32,921 | ) |
| (38,807 | ) |
| (26,045 | ) |
| (29,059 | ) |
| (31,101 | ) |
| (31,328 | ) | | Other cost of revenue | (31,840) | | | (34,935) | | | (37,364) | | | (34,712) | | | (34,700) | | | (34,608) | | | (33,914) | | | (33,806) | |
| Gross profit | 210,359 |
| | 200,265 |
| | 190,561 |
| | 233,051 |
| | 209,649 |
| | 194,859 |
| | 189,604 |
| | 234,924 |
| | Gross profit | 244,351 | | | 176,026 | | | 182,869 | | | 178,698 | | | 218,474 | | | 151,336 | | | 146,002 | | | 172,206 | |
| Operating expenses (1): | | | | | | | | | | | | | | | | | Operating expenses (1) | | | | | | | | | | | | | | | |
| | Research and development expenses | (45,318 | ) |
| (47,544 | ) |
| (41,796 | ) |
| (44,605 | ) |
| (46,577 | ) |
| (44,015 | ) |
| (41,414 | ) |
| (40,585 | ) | | Research and development expenses | (44,860) | | | (33,345) | | | (41,915) | | | (31,697) | | | (32,797) | | | (30,954) | | | (31,247) | | | (37,515) | |
| | Sales and operations expenses | (95,649 | ) |
| (92,726 | ) |
| (90,526 | ) |
| (93,806 | ) |
| (95,909 | ) |
| (95,503 | ) |
| (85,985 | ) |
| (98,080 | ) | | Sales and operations expenses | (89,892) | | | (75,619) | | | (80,751) | | | (79,354) | | | (85,871) | | | (83,659) | | | (75,781) | | | (84,974) | |
| | General and administrative expenses | (34,591 | ) |
| (35,644 | ) |
| (32,463 | ) |
| (32,461 | ) |
| (33,770 | ) |
| (35,767 | ) |
| (32,835 | ) |
| (37,382 | ) | | General and administrative expenses | (43,855) | | | (34,877) | | | (40,474) | | | (33,428) | | | (32,623) | | | (28,672) | | | (29,185) | | | (25,915) | |
| | Total operating expenses | (175,558 | ) | | (175,914 | ) | | (164,785 | ) | | (170,872 | ) | | (176,256 | ) | | (175,285 | ) | | (160,234 | ) | | (176,047 | ) | | Total operating expenses | (178,607) | | | (143,841) | | | (163,140) | | | (144,479) | | | (151,291) | | | (143,285) | | | (136,213) | | | (148,404) | |
| Income from operations | 34,801 |
| | 24,351 |
| | 25,776 |
| | 62,179 |
| | 33,393 |
| | 19,574 |
| | 29,370 |
| | 58,877 |
| | Income from operations | 65,744 | | | 32,185 | | | 19,729 | | | 34,219 | | | 67,183 | | | 8,051 | | | 9,789 | | | 23,802 | |
| Financial income (expense) | (1,325 | ) |
| (1,006 | ) |
| (1,007 | ) |
| (1,746 | ) |
| (1,974 | ) |
| (1,354 | ) |
| (900 | ) |
| (1,521 | ) | | Financial and Other income (expense) | 3,330 | | | (154) | | | (519) | | | (718) | | | (111) | | | (491) | | | (1,003) | | | (334) | |
| Income before taxes | 33,476 |
| | 23,345 |
| | 24,769 |
| | 60,433 |
| | 31,419 |
| | 18,220 |
| | 28,470 |
| | 57,356 |
| | Income before taxes | 69,074 | | | 32,031 | | | 19,210 | | | 33,501 | | | 67,072 | | | 7,560 | | | 8,786 | | | 23,468 | |
| Provision for income taxes | (12,386 | ) |
| (8,638 | ) |
| (6,821 | ) |
| (18,299 | ) |
| (10,018 | ) |
| (5,683 | ) |
| (7,913 | ) |
| (15,882 | ) | | Provision for income taxes | 5,864 | | | (7,801) | | | (4,181) | | | (10,051) | | | (20,254) | | | (2,267) | | | (2,636) | | | (7,040) | |
| Net income | $ | 21,090 |
| | $ | 14,707 |
| | $ | 17,948 |
| | $ | 42,134 |
| | $ | 21,401 |
| | $ | 12,537 |
| | $ | 20,557 |
| | $ | 41,474 |
| | Net income | $ | 74,938 | | | $ | 24,230 | | | $ | 15,029 | | | $ | 23,450 | | | $ | 46,818 | | | $ | 5,293 | | | $ | 6,150 | | | $ | 16,428 | |
| Net income available to shareholders of Criteo S.A. | 19,809 |
|
| 13,726 |
|
| 17,143 |
|
| 37,966 |
|
| 19,120 |
|
| 10,823 |
|
| 18,778 |
|
| 42,024 |
| | Net income available to shareholders of Criteo S.A. | 73,765 | | | 23,481 | | | 14,804 | | | 22,406 | | | 45,277 | | | 5,227 | | | 5,716 | | | 15,459 | |
Other Financial Data: | Other Financial Data: | | | | | | | | | | | | | | | | Other Financial Data: | |
Revenue ex-TAC (2) | $ | 240,418 |
| | $ | 230,222 |
| | $ | 223,482 |
| | $ | 271,858 |
| | $ | 235,694 |
| | $ | 223,918 |
| | $ | 220,705 |
| | $ | 266,252 |
| |
Contribution ex-TAC (2) | | Contribution ex-TAC (2) | $ | 276,191 | | | $ | 210,961 | | | $ | 220,233 | | | $ | 213,410 | | | $ | 253,174 | | | $ | 185,944 | | | $ | 179,916 | | | $ | 206,012 | |
Adjusted EBITDA (3) | Adjusted EBITDA (3) | $ | 77,932 |
|
| $ | 68,774 |
|
| $ | 69,591 |
|
| $ | 104,762 |
|
| $ | 68,855 |
|
| $ | 56,399 |
|
| $ | 64,219 |
|
| $ | 109,499 |
| Adjusted EBITDA (3) | $ | 110,867 | | | $ | 68,430 | | | $ | 67,269 | | | $ | 79,929 | | | $ | 103,423 | | | $ | 49,471 | | | $ | 38,911 | | | $ | 59,190 | |
(1) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense and acquisition-related costs and deferred price consideration as follows:
| | | Three Months Ended | | Three Months Ended |
| March 31, 2018 |
| June 30, 2018 |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 |
| December 31, 2019 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| (in thousands) | | (in thousands) |
Equity awards compensation expense | | | | | | | | | | | | | | | | Equity awards compensation expense | |
Research and development expenses | $ | 4,555 |
|
| $ | 6,771 |
|
| $ | 4,901 |
|
| $ | 5,005 |
|
| $ | 4,025 |
|
| $ | 4,203 |
|
| $ | 3,230 |
|
| $ | 3,578 |
| Research and development expenses | 4,762 | | | 4,858 | | | 4,218 | | | 2,496 | | | 2,482 | | | 3,333 | | | 2,068 | | | 2,370 | |
Sales and operations expenses | 7,832 |
|
| 8,668 |
|
| 6,952 |
|
| 5,793 |
|
| 6,201 |
|
| 5,693 |
|
| 4,398 |
|
| 3,009 |
| Sales and operations expenses | 3,143 | | | 3,875 | | | 3,636 | | | 2,369 | | | 3,662 | | | 3,190 | | | 1,572 | | | 3,618 | |
General and administrative expenses | 6,916 |
|
| 4,806 |
|
| 5,408 |
|
| (531 | ) |
| 3,656 |
|
| 4,495 |
|
| 4,142 |
|
| 2,502 |
| General and administrative expenses | 4,209 | | | 4,557 | | | 3,815 | | | 3,017 | | | 2,816 | | | 280 | | | 3,519 | | | 2,515 | |
Total equity awards compensation expense (a) | $ | 19,303 |
| | $ | 20,245 |
| | $ | 17,261 |
| | $ | 10,267 |
| | $ | 13,882 |
| | $ | 14,391 |
| | $ | 11,770 |
| | $ | 9,089 |
| Total equity awards compensation expense (a) | 12,114 | | | 13,290 | | | 11,669 | | | 7,882 | | | 8,960 | | | 6,803 | | | 7,159 | | | 8,503 | |
| | | | | | | | | | | | | | | | | |
Pension service costs | | | | | | | | | | | | | | | | Pension service costs | |
Research and development expenses | $ | 220 |
|
| $ | 212 |
|
| $ | 208 |
|
| $ | 204 |
|
| $ | 193 |
|
| $ | 191 |
|
| $ | 188 |
|
| $ | 188 |
| Research and development expenses | 166 | | | 170 | | | 175 | | | 175 | | | 290 | | | 286 | | | 269 | | | 269 | |
Sales and operations expenses | 79 |
|
| 75 |
|
| 83 |
|
| 88 |
|
| 72 |
|
| 71 |
|
| 71 |
|
| 69 |
| Sales and operations expenses | 49 | | | 52 | | | 53 | | | 53 | | | 103 | | | 101 | | | 95 | | | 95 | |
General and administrative expenses | 135 |
|
| 132 |
|
| 128 |
|
| 127 |
|
| 129 |
|
| 129 |
|
| 129 |
|
| 126 |
| General and administrative expenses | 104 | | | 108 | | | 109 | | | 110 | | | 190 | | | 185 | | | 175 | | | 174 | |
Total pension service costs | $ | 434 |
| | $ | 419 |
| | $ | 419 |
| | $ | 419 |
| | $ | 394 |
| | $ | 391 |
| | $ | 388 |
| | $ | 383 |
| Total pension service costs | 319 | | | 330 | | | 337 | | | 338 | | | 583 | | | 572 | | | 539 | | | 538 | |
| | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | Depreciation and amortization expense | |
Cost of revenue | $ | 15,249 |
|
| $ | 15,050 |
|
| $ | 16,571 |
|
| $ | 20,477 |
|
| $ | 9,135 |
|
| $ | 10,847 |
|
| $ | 12,193 |
|
| $ | 12,691 |
| Cost of revenue | 14,611 | | | 15,520 | | | 15,744 | | | 15,244 | | | 15,354 | | | 14,712 | | | 13,098 | | | 12,771 | |
Research and development expenses (b) | 2,221 |
|
| 2,245 |
|
| 2,724 |
|
| 3,412 |
|
| 3,477 |
|
| 3,534 |
|
| 4,249 |
|
| 5,248 |
| |
Sales and operations expenses (b) | 4,454 |
|
| 4,518 |
|
| 4,442 |
|
| 4,831 |
|
| 4,864 |
|
| 5,109 |
|
| 4,178 |
|
| 10,763 |
| |
Research and development expenses | | Research and development expenses | 2,967 | | | 2,557 | | | 2,207 | | | 1,753 | | | 1,712 | | | 1,721 | | | 1,658 | | | 5,650 | |
Sales and operations expenses | | Sales and operations expenses | 3,579 | | | 3,545 | | | 3,702 | | | 3,954 | | | 4,033 | | | 4,176 | | | 4,221 | | | 4,340 | |
General and administrative expenses | 1,722 |
|
| 1,747 |
|
| 1,882 |
|
| 1,955 |
|
| 1,820 |
|
| 1,825 |
|
| 1,768 |
|
| 1,787 |
| General and administrative expenses | 599 | | | 679 | | | 838 | | | 903 | | | 1,041 | | | 1,143 | | | 1,231 | | | 1,377 | |
Total depreciation and amortization expense | $ | 23,646 |
| | $ | 23,560 |
| | $ | 25,619 |
| | $ | 30,675 |
| | $ | 19,296 |
| | $ | 21,315 |
| | $ | 22,388 |
| | $ | 30,489 |
| Total depreciation and amortization expense | 21,756 | | | 22,301 | | | 22,491 | | | 21,854 | | | 22,140 | | | 21,752 | | | 20,208 | | | 24,138 | |
| | | | | | | | | | | | | | | | | |
Acquisition-related costs | | | | | | | | | | | | | | | | Acquisition-related costs | |
General and administrative expenses | $ | — |
|
| $ | — |
|
| $ | 516 |
|
| $ | 1,222 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| General and administrative expenses | 6,118 | | | 2,091 | | | 3,047 | | | — | | | 174 | | | 112 | | | — | | | — | |
Total depreciation and amortization expense | $ | — |
| | $ | — |
| | $ | 516 |
| | $ | 1,222 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Restructuring | | | | | | | | | | | | | | | | |
Cost of revenue | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |
Total acquisition-related costs | | Total acquisition-related costs | 6,118 | | | 2,091 | | | 3,047 | | | — | | | 174 | | | 112 | | | — | | | — | |
| | Restructuring related and transformation costs | | Restructuring related and transformation costs | |
| Research and development expenses | (348 | ) |
| 16 |
|
| — |
|
| — |
|
| — |
|
| 124 |
|
| 172 |
|
| 1,704 |
| Research and development expenses | 513 | | | (1,029) | | | 4,831 | | | 1,436 | | | 747 | | | 1,985 | | | 513 | | | 995 | |
Sales and operations expenses | 107 |
|
| 183 |
|
| — |
|
| — |
|
| 1,890 |
|
| 175 |
|
| 131 |
|
| 6,614 |
| Sales and operations expenses | 568 | | | (106) | | | 1,551 | | | 7,367 | | | 2,605 | | | 5,357 | | | 415 | | | 1,021 | |
General and administrative expenses | (11 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| 429 |
|
| — |
|
| 2,343 |
| General and administrative expenses | 752 | | | (632) | | | 3,614 | | | 2,833 | | | 1,031 | | | 4,839 | | | 288 | | | 193 | |
Total restructuring (c) | $ | (252 | ) | | $ | 199 |
| | $ | — |
| | $ | — |
| | $ | 1,890 |
| | $ | 728 |
| | $ | 303 |
| | $ | 10,661 |
| |
Total restructuring related and transformation costs (b) | | Total restructuring related and transformation costs (b) | $ | 1,833 | | | $ | (1,767) | | | $ | 9,996 | | | $ | 11,636 | | | $ | 4,383 | | | $ | 12,181 | | | $ | 1,216 | | | $ | 2,209 | |
(a) Excludes $0.7$0.2 million, $(0.5)$(2.7) million and $(4.8) million disclosed as restructuring costs as of December 31, 2017, 20182021, 2020 and 2019, respectively.
(b)For the Three Months Ended December 31, 2019, the Company recognized accelerated amortization for Manage technology due to a revised useful life ($2.2 million in Research and development) and an impairment loss for Manage customers relationships ($4.6 million in Sales and operations).
(c) For the Three Months Endedthree months ended December 31, 20192021 and 2020 the Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy asand office right sizing policy detailed below:
|
| | | |
| | Year Ended December 31, 2019 |
|
(Gain) from forfeitures of share-based compensation expense | (4,849 | ) |
Depreciation and amortization expense | (67 | ) |
Facilities and impairment related costs | 9,432 |
|
Payroll and Facilities related costs | 6,145 |
|
Total restructuring costs | 10,661 |
|
| | | | | | | | | | | |
| Three Months Ended |
| December 31, |
| 2021 | | 2020 |
(Gain) from forfeitures of share-based compensation awards | 239 | | | (2,655) | |
| | | |
Facilities and impairment related costs | 1,328 | | | 4,158 | |
Payroll related costs | (157) | | | 1,422 | |
Consulting costs related to transformation | 423 | | | 1,458 | |
Total restructuring related and transformation costs | $ | 1,833 | | | $ | 4,383 | |
(2) (2 We define RevenueContribution ex-TAC as our revenue excludinga profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs generated overfrom revenue and reconciled to gross profit through the applicable measurement period. Revenueexclusion of other cost of revenue. Contribution ex-TAC is not a measure calculated in accordance with U.S. GAAP. Please see footnote 3 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for more information. Below is a reconciliation of RevenueContribution ex-TAC to revenue,gross profit, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2018 |
| June 30, 2018 |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 |
| December 31, 2019 |
| | | (in thousands) |
Reconciliation of Revenue ex-TAC to Revenue: | | | | | | | | | | | | | | | |
| Revenue | $ | 564,164 |
|
| $ | 537,185 |
|
| $ | 528,869 |
|
| $ | 670,096 |
|
| $ | 558,123 |
|
| $ | 528,147 |
|
| $ | 522,606 |
|
| $ | 652,640 |
|
| Adjustment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | Traffic acquisition costs | (323,746 | ) |
| (306,963 | ) |
| (305,387 | ) |
| (398,238 | ) |
| (322,429 | ) |
| (304,229 | ) |
| (301,901 | ) |
| (386,388 | ) |
| | Revenue ex-TAC | $ | 240,418 |
| | $ | 230,222 |
| | $ | 223,482 |
| | $ | 271,858 |
| | $ | 235,694 |
| | $ | 223,918 |
| | $ | 220,705 |
| | $ | 266,252 |
|
| |
(3)
| We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Please see footnote 5 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for more information. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2018 |
| June 30, 2018 |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 |
| December 31, 2019 |
| | | (in thousands) |
Reconciliation of Adjusted EBITDA to Net Income: | |
| Net Income | $ | 21,090 |
|
| $ | 14,707 |
|
| $ | 17,948 |
|
| $ | 42,134 |
|
| $ | 21,401 |
|
| $ | 12,537 |
|
| $ | 20,557 |
|
| $ | 41,474 |
|
| Adjustments: | | | | | | | | | | | | | | | |
| | Financial (income) expense | 1,325 |
|
| 1,006 |
|
| 1,007 |
|
| 1,746 |
|
| 1,974 |
|
| 1,354 |
|
| 900 |
|
| 1,521 |
|
| | Provision for income taxes | 12,386 |
|
| 8,638 |
|
| 6,821 |
|
| 18,299 |
|
| 10,018 |
|
| 5,683 |
|
| 7,913 |
|
| 15,882 |
|
| | Equity awards compensation expense (a) | 19,303 |
|
| 20,245 |
|
| 17,261 |
|
| 10,267 |
|
| 13,882 |
|
| 14,391 |
|
| 11,770 |
|
| 9,089 |
|
| | Pension service costs | 434 |
|
| 419 |
|
| 419 |
|
| 419 |
|
| 394 |
|
| 391 |
|
| 388 |
|
| 383 |
|
| | Depreciation and amortization expense (b) | 23,646 |
|
| 23,560 |
|
| 25,619 |
|
| 30,675 |
|
| 19,296 |
|
| 21,315 |
|
| 22,388 |
|
| 30,489 |
|
| | Acquisition-related costs | — |
|
| — |
|
| 516 |
|
| 1,222 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| | Acquisition-related deferred price consideration | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| | Restructuring costs(c) | (252 | ) |
| 199 |
|
| — |
|
| — |
|
| 1,890 |
|
| 728 |
|
| 303 |
|
| 10,661 |
|
| | Total net adjustments | 56,841 |
| | 54,067 |
| | 51,643 |
| | 62,628 |
| | 47,454 |
| | 43,862 |
| | 43,662 |
| | 68,025 |
|
| Adjusted EBITDA | $ | 77,931 |
| | $ | 68,774 |
| | $ | 69,591 |
| | $ | 104,762 |
| | $ | 68,855 |
| | $ | 56,399 |
| | $ | 64,219 |
| | $ | 109,499 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | |
| December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 | |
| (in thousands) | |
Gross Profit | 244,351 | | | 176,026 | | | 182,869 | | | 178,698 | | | 218,474 | | | 151,336 | | | 146,002 | | | 172,206 | | |
Other Cost of Revenue | 31,840 | | | 34,935 | | | 37,364 | | | 34,712 | | | 34,700 | | | 34,608 | | | 33,914 | | | 33,806 | | |
Contribution ex-TAC | $ | 276,191 | | | $ | 210,961 | | | $ | 220,233 | | | $ | 213,410 | | | $ | 253,174 | | | $ | 185,944 | | | $ | 179,916 | | | $ | 206,012 | | |
(3) We define Adjusted EBITDA as our consolidated earnings before financial income (expense), including dividends, income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| | | (in thousands) |
Reconciliation of Adjusted EBITDA to Net Income: | |
| Net Income | $ | 74,938 | | | $ | 24,230 | | | $ | 15,029 | | | $ | 23,450 | | | $ | 46,818 | | | $ | 5,293 | | | $ | 6,150 | | | $ | 16,428 | |
| Adjustments: | | | | | | | | | | | | | | | |
| | Financial (income) expense | (347) | | | 154 | | | 519 | | | 718 | | | 111 | | | 491 | | | 1,003 | | | 334 | |
| | Provision for income taxes | (5,864) | | | 7,801 | | | 4,181 | | | 10,051 | | | 20,254 | | | 2,267 | | | 2,636 | | | 7,040 | |
| | Equity awards compensation expense (a) | 12,114 | | | 13,290 | | | 11,669 | | | 7,882 | | | 8,960 | | | 6,803 | | | 7,159 | | | 8,503 | |
| | Pension service costs | 319 | | | 330 | | | 337 | | | 338 | | | 583 | | | 572 | | | 539 | | | 538 | |
| | Depreciation and amortization expense | 21,756 | | | 22,301 | | | 22,491 | | | 21,854 | | | 22,140 | | | 21,752 | | | 20,208 | | | 24,138 | |
| | Acquisition-related costs | 6,118 | | | 2,091 | | | 3,047 | | | — | | | 174 | | | 112 | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
| | Restructuring costs | 1,833 | | | (1,767) | | | 9,996 | | | 11,636 | | | 4,383 | | | 12,181 | | | 1,216 | | | 2,209 | |
| | Total net adjustments | 35,929 | | | 44,200 | | | 52,240 | | | 52,479 | | | 56,605 | | | 44,178 | | | 32,761 | | | 42,762 | |
| Adjusted EBITDA | $ | 110,867 | | | $ | 68,430 | | | $ | 67,269 | | | $ | 75,929 | | | $ | 103,423 | | | $ | 49,471 | | | $ | 38,911 | | | $ | 59,190 | |
(a) Excludes $0.7$0.2 million, $(0.5)$(2.7) million and $(4.8) million disclosed as restructuring costs as of December 31, 2017, 20182021, 2020 and 2019, respectively.
(b) For the Three Months Ended December 31, 2019, the Company recognized accelerated amortization for Manage technology due to a revised useful life ($2.2 million in Research and development) and an impairment loss for Manage customers relationships ($4.6 million in Sales and operations).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| | | (as a percentage of revenue) |
Statements of Operations Data: | | | | | | | | | | | | | | | |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | | | | | | | | | | | | | | | |
| | Traffic acquisition costs | (57.7) | | | (58.5) | | | (60.1) | | | (60.6) | | | (61.7) | | | (60.5) | | | (58.9) | | | (59.1) | |
| | Other cost of revenue | (4.9) | | | (6.9) | | | (6.8) | | | (6.4) | | | (5.2) | | | (7.4) | | | (7.7) | | | (6.7) | |
| Gross profit | 37.4 | | | 34.6 | | | 33.2 | | | 33.0 | | | 33.0 | | | 32.2 | | | 33.4 | | | 34.2 | |
| Operating expenses: | | | | | | | | | | | | | | | |
| | Research and development expenses | (6.9) | | | (6.6) | | | (7.6) | | | (5.9) | | | (5.0) | | | (6.6) | | | (7.1) | | | (7.5) | |
| | Sales and operations expenses | (13.8) | | | (14.9) | | | (14.6) | | | (14.7) | | | (13.0) | | | (17.8) | | | (17.3) | | | (16.9) | |
| | General and administrative expenses | (6.7) | | | (6.9) | | | (7.3) | | | (6.2) | | | (4.9) | | | (6.1) | | | (6.7) | | | (5.1) | |
| | Total operating expenses | (27.3) | | | (28.3) | | | (29.6) | | | (26.7) | | | (22.9) | | | (30.5) | | | (31.1) | | | (29.5) | |
| Income from operations | 10.1 | | | 6.3 | | | 3.6 | | | 6.3 | | | 10.2 | | | 1.7 | | | 2.2 | | | 4.7 | |
| Financial and Other income (expense) | 0.5 | | | — | | | (0.1) | | | (0.1) | | | — | | | (0.1) | | | (0.2) | | | (0.1) | |
| Income before taxes | 10.6 | | | 6.3 | | | 3.5 | | | 6.2 | | | 10.1 | | | 1.6 | | | 2.0 | | | 4.7 | |
| Provision for income taxes | 0.9 | | | (1.5) | | | (0.8) | | | (1.9) | | | (3.1) | | | (0.5) | | | (0.6) | | | (1.4) | |
| Net income | 11.5 | % | | 4.8 | % | | 2.7 | % | | 4.3 | % | | 7.1 | % | | 1.1 | % | | 1.4 | % | | 3.3 | % |
| Net income available to shareholders of Criteo S.A. | 11.3 | % | | 4.6 | % | | 2.7 | % | | 4.1 | % | | 6.8 | % | | 1.1 | % | | 1.3 | % | | 3.1 | % |
| | | | | | | | | | | | | | | | | |
Other Financial Data: | | | | | | | | | | | | | | | |
Contribution ex-TAC | 42.3 | % | | 41.5 | % | | 39.9 | % | | 39.4 | % | | 38.3 | % | | 39.5 | % | | 41.1 | % | | 40.9 | % |
Adjusted EBITDA | 17.0 | % | | 13.5 | % | | 12.2 | % | | 14.8 | % | | 15.6 | % | | 10.5 | % | | 8.9 | % | | 11.8 | % |
B. For the Three Months Ended December 31, 2019 the Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy as detailed below:Liquidity and Capital Resources.
|
| | | |
| | Year Ended December 31, 2019 |
|
(Gain) from forfeitures of share-based compensation expense | (4,849 | ) |
Depreciation and amortization expense | (67 | ) |
Facilities and impairment related costs | 9,432 |
|
Payroll and Facilities related costs | 6,145 |
|
Total restructuring costs | 10,661 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | March 31, 2018 |
| June 30, 2018 |
| September 30, 2018 |
| December 31, 2018 |
| March 31, 2019 |
| June 30, 2019 |
| September 30, 2019 |
| December 31, 2019 |
| | | (as a percentage of revenue) |
Statements of Operations Data: | | | | | | | | | | | | | | | |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of revenue | | | | | | | | | | | | | | | |
| | Traffic acquisition costs | (57.4 | ) | | (57.1 | ) | | (57.7 | ) | | (59.4 | ) | | (57.8 | ) | | (57.6 | ) | | (57.8 | ) | | (59.2 | ) |
| | Other cost of revenue | (5.3 | ) | | (5.6 | ) | | (6.2 | ) | | (5.8 | ) | | (4.7 | ) | | (5.5 | ) | | (6.0 | ) | | (4.8 | ) |
| Gross profit | 37.3 |
| | 37.3 |
| | 36.0 |
| | 34.8 |
| | 37.6 |
| | 36.9 |
| | 36.3 |
| | 36.0 |
|
| Operating expenses: | | | | | | | | | | | | | | | |
| | Research and development expenses | (8.0 | ) | | (8.9 | ) | | (7.9 | ) | | (6.7 | ) | | (8.3 | ) | | (8.3 | ) | | (7.9 | ) | | (6.2 | ) |
| | Sales and operations expenses | (17.0 | ) | | (17.3 | ) | | (17.1 | ) | | (14.0 | ) | | (17.2 | ) | | (18.1 | ) | | (16.5 | ) | | (15.0 | ) |
| | General and administrative expenses | (6.1 | ) | | (6.6 | ) | | (6.1 | ) | | (4.8 | ) | | (6.1 | ) | | (6.8 | ) | | (6.3 | ) | | (5.7 | ) |
| | Total operating expenses | (31.1 | ) | | (32.7 | ) | | (31.2 | ) | | (25.5 | ) | | (31.6 | ) | | (33.2 | ) | | (30.7 | ) | | (27.0 | ) |
| Income from operations | 6.2 |
| | 4.5 |
| | 4.9 |
| | 9.3 |
| | 6.0 |
| | 3.7 |
| | 5.6 |
| | 9.0 |
|
| Financial income (expense) | (0.2 | ) | | (0.2 | ) | | (0.2 | ) | | (0.3 | ) | | (0.4 | ) | | (0.3 | ) | | (0.2 | ) | | (0.2 | ) |
| Income before taxes | 5.9 |
| | 4.3 |
| | 4.7 |
| | 9.0 |
| | 5.6 |
| | 3.4 |
| | 5.4 |
| | 8.8 |
|
| Provision for income taxes | (2.2 | ) | | (1.6 | ) | | (1.3 | ) | | (2.7 | ) | | (1.8 | ) | | (1.1 | ) | | (1.5 | ) | | (2.4 | ) |
| Net income | 3.7 | % | | 2.7 | % | | 3.4 | % | | 6.3 | % | | 3.8 | % | | 2.4 | % | | 3.9 | % | | 6.4 | % |
| Net income available to shareholders of Criteo S.A. | 3.5 | % | | 2.6 | % | | 3.2 | % | | 5.7 | % | | 3.4 | % | | 2.0 | % | | 3.6 | % | | 6.4 | % |
| | | | | | | | | | | | | | | | | |
Other Financial Data: | | | | | | | | | | | | | | | |
Revenue ex-TAC | 42.6 | % | | 42.9 | % | | 42.3 | % | | 40.6 | % | | 42.2 | % | | 42.4 | % | | 42.2 | % | | 40.8 | % |
Adjusted EBITDA | 13.8 | % | | 12.8 | % | | 13.2 | % | | 15.6 | % | | 12.3 | % | | 10.7 | % | | 12.3 | % | | 16.8 | % |
| |
B. | Liquidity and Capital Resources.
|
Market Risk
We are mainly exposed to changes of foreign currency exchange rate fluctuations.
The functional currency of the Company is the euro, while our reporting currency is the U.S. dollar. Consequently, as a first step, sinceBecause we incur portionssome of our expenses and derive revenues in currencies other than the euro, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro. The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statement of income, statement of comprehensive income and statement of cash flow of such consolidated entities are translated at the average period to date exchange rate. The resulting translation adjustments are included in equity under the caption “Accumulated Other Comprehensive Income” in the Consolidated Statement of Changes in Equity.
The $9.5$(1.9) million financial and other income for the period ended December 31, 2021 was mainly driven by the financial expense relating to our $350 million available Revolving Credit Facility (RCF), including up-front fees amortization and non-utilization costs, partially offset by income from cash and cash equivalent. Financial and Other income for the period ended December 31, 2021 was supported by other incomes being $3.0 million proceeds from disposal of servers equipments and $2.4 million dividends received from a minority interest.
The $1.9 million financial expense for the period ended December 31, 2017 resulted2020 was mainly driven by the financial expense relating to the €140 million drawdown from the interest incurred as a result of the $75.0 million drawn on the RCF entered into in September 2015 (as amended in March 2017) and the hedging cost relatedMay 2020 to an intra-group position between Criteo S.A. and its U.S. subsidiary, both in the context of the funding of the HookLogic acquisition in November 2016, as well as the non-utilization fees incurred2020 as part of our available RCF financing.
The $5.1 million financial expense forRevolving Credit Facility (RCF) financing, the period ended December 31, 2018 was mainly driven byup-front fees amortization, and the non-utilization costs, and upfront fees amortization incurred as part of our available RCF financing. The intra-group position between Criteo S.A. and its U.S subsidiary in the context of the funding of the HookLogic acquisition is qualified as a net investment in a foreign operationpartially offset by income from February 2018 and no longer requires hedging, resulting in reduced costs compared to the same period ended December 31, 2017.invested cash & cash equivalents.
The $5.7 million financial expense for the period ended December 31, 2019 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available RCF financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging.
Since 2013, the Company has had a foreign currency risk management policy in place. At December 31, 2019,2021, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
Foreign Currency Risk
A 10% increase or decrease of the British pound, the euro, the Japanese yen or the Brazilian real against the U.S. dollar would have impacted the Consolidated Statements of Income including non-controlling interests as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
GBP/USD | +10% | | -10% | | +10% | | -10% | | +10% | | -10% |
Net income impact | $ | (351) | | | $ | 351 | | | $ | 116 | | | $ | (116) | | | $ | (386) | | | $ | 386 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, |
| Year Ended December 31, | | 2021 | | 2020 | | 2019 |
| 2017 | | 2018 | | 2019 | | (in thousands) |
| (in thousands) | |
GBP/USD | +10% |
| | -10% |
| | +10% |
| | -10% |
| | +10% |
| | -10% |
| |
BRL/USD | | BRL/USD | +10% | | -10% | | +10% | | -10% | | +10% | | -10% |
Net income impact | $ | (707 | ) |
| $ | 707 |
|
| $ | (785 | ) |
| $ | 785 |
|
| $ | (386 | ) |
| $ | 386 |
| Net income impact | $ | (38) | | | $ | 38 | | | $ | (41) | | | $ | 41 | | | $ | (71) | | | $ | 71 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (in thousands) |
JPY/USD | +10% | | -10% | | +10% | | -10% | | +10% | | -10% |
Net income impact | $ | 619 | | | $ | (619) | | | $ | 614 | | | $ | (614) | | | $ | 1,019 | | | $ | (1,019) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, |
| Year Ended December 31, | | 2021 | | 2020 | | 2019 |
| 2017 | | 2018 | | 2019 | | (in thousands) |
| (in thousands) | |
BRL/USD | +10% |
| | -10% |
| | +10% |
| | -10% |
| | +10% |
| | -10% |
| |
EUR/USD | | EUR/USD | +10% | | -10% | | +10% | | -10% | | +10% | | -10% |
Net income impact | $ | 1,236 |
|
| $ | (1,236 | ) |
| $ | (645 | ) |
| $ | 645 |
|
| $ | (71 | ) |
| $ | 71 |
| Net income impact | $ | 11,162 | | | $ | (11,162) | | | $ | 9,360 | | | $ | (9,360) | | | $ | 10,755 | | | $ | (10,755) | |
We are mainly exposed to changes of foreign currency exchange rate fluctuations.
The following table summarizes our cash flows from operations, trade receivables, net of allowances and working capital for the periods indicated: