CRITEO S.A.
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 powering marketers with trusted and impactful
advertising. We strive to deliver measurable business results at scale across
multiple marketing goals for retailers and brands, through our self-service
Criteo Platform. Using shopping data, artificial intelligence ("AI") technology
and extensive consumer reach, we help marketers drive Awareness, Consideration
and Conversion for their products and services1, and help retailers generate
advertising revenues from consumer brands. 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 clients include some of the largest and most sophisticated commerce
companies in the world, along with world-class consumer brands. We partner with
them to capture user activity on their websites and mobile applications
("apps"), which we define as digital properties, and optimize the performance of
their ads based on that activity and other data. Demonstrating the depth and
scale of our data, we collected data on $900 billion in online sales
transactions2 on our clients' digital properties in the year ended December 31,
2019 . Based on this data and other assets, we delivered targeted ads that
generated over 11 billion clicks2 in the year ended December 31, 2019 . As of
December 31, 2019 , we served more than 20,000 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, 2018 and 2019, our largest client
represented 1.9%, 2.0% and 2.8% of our revenue, respectively, and in 2017, 2018
and 2019, our largest 10 clients represented 11.2%, 11.7% 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 103 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% of our revenue for year ended December 31,
2019 .
The Company's foreign currency risk exposure to the British pound, the Japanese
yen, the Brazilian real and the U.S dollar against the euro (the euro still
remains the Group'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
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Our financial results include:
• Revenue of
years ended
• Revenue ex-TAC, which is a non-
million, $966.0 million and $946.6 million for the years ended
December 31, 2017 , 2018 and 2019, respectively;
• Net Income of
ended
• Adjusted EBITDA, which is a non-
million, $321.1 million and $299.0 million for the years ended
December 31, 2017 , 2018 and 2019, respectively.
Please see footnotes 3, 4 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 accounting
principles generally accepted in the United States or "U.S. GAAP".
We are focused on maximizing Revenue 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 , we acquired Manage, a Silicon Valley -based company with an
attractive app install advertising solution.
On August 3, 2018 , we acquired Storetail, a Paris -based pioneering retail media
technology platform enabling retailers to monetize native placements on their
ecommerce sites.
Transition to U.S. GAAP and Change in Reporting Currency
As of June 30, 2015 , we no longer met the requirements to qualify as a foreign
private issuer under the Exchange Act. As 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 statement of cash flows
(effect of exchange rate changes on cash and cash equivalents). The functional
currency 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 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.
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--------------------------------------------------------------------------------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, theCriteo 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: • 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 ontheir own digital property or on the open Internet, that address multiple
marketing goals.
In conjunction with expanding our solutions, we have also started expanding our
pricing models to now include a combination of 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.
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 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 - Revenue 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. 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.
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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 grew from 2,503
employees at January 1, 2017 to 2,755 employees at December 31, 2019 .
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 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 grew from 603 at
January 1, 2017 to 681 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. We believe our continued investment in research
and development to be critical to maintaining and improving our technology
within the Criteo 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 and depreciation and amortization costs. The number
of employees in sales and operations functions declined from 1,489 at January 1,
2017 to 1,578 at December 31, 2019 . 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 weincrease 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 and depreciation and amortization costs. The
number of employees in general and administrative functions grew from 411 at
January 1, 2017 to 496 at December 31, 2019 . 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.
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Financial Income (Expense)
Financial 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
dollar, the British pound, the Korean won, the Japanese yen and the Brazilian
real are our most significant foreign currency exchange risks. At
2019, our exposure to foreign currency risk was centralized at parent company
level and hedged. These exchange differences in euro are then translated into
euro/
• interest received on our cash and cash equivalents and interest incurred on
outstanding borrowings under our debt loan agreements and revolving credit
facilities ("RCFs").
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 inFrance ,the United States 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. InFrance , we benefit from a reduced tax rate of 10% on a large portion of this technology royalty income. OnSeptember 27, 2017 , we received a draft notice of proposed adjustment from the Internal Revenue Service ("IRS") audit ofCriteo Corp. for the year endedDecember 31, 2014 , confirmed by the definitive notice datedFebruary 8, 2018 . If theIRS prevails in its position, it could result in an additional federal tax liability of an estimated maximum aggregate amount of$15.0 million , excluding relative fees, interest and penalties. We strongly disagree with theIRS's position as asserted in the draft notice of proposed adjustment and intend to contest it. No uncertain tax positions were identified as ofDecember 31, 2019 . Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance withU.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 revenue recognition, trade receivables, net of allowances for doubtful accounts, deferred tax assets, uncertain tax positions, impact of tax reforms in theU.S. , goodwill and intangible assets, internal-use software and equity awards compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. 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. 76 -------------------------------------------------------------------------------- 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 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. Trade Receivables, Net of Allowances for Doubtful Accounts We carry our accounts receivable at net realizable value. On a periodic basis, our management evaluates our accounts receivable and determines whether to provide an allowance or if any accounts should be written down and charged to expense as a bad debt. The evaluation is based on a past history of collections, current 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 endedDecember 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 ofDecember 31, 2017 , 2018, and 2019, respectively. 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. 77 -------------------------------------------------------------------------------- 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 our 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 in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results.
Acquired intangible assets are accounted for at acquisition cost less accumulated amortization and any impairment loss. Acquired intangible assets are amortized over their estimated useful lives of three to nine years on a straight-line method. 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 environment 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 selectedDecember 31 as the date 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 flows to be derived from the Company. If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. The first step of the impairment test involves comparing the fair value of the reporting unit 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
Costs related to customized internal-use software that have reached the
application development stage are capitalized. Capitalization of such costs
begins when the preliminary project stage is complete and stops when the project
is substantially complete 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, intention to use and future
economic benefits. Amortization of these costs begins when capitalization stops
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.
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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:
• 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 the 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 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.
• 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 ofthe 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
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.
• 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:
Year Ended December 31,
2017 2018 2019
Volatility 41.3% 40.7% - 41.5% 39.2% - 41.2%
Risk-free interest rate 0.00% 0.60% - 0.90% 0.00% - 0.10% Expected life (in years) 6 years
6 years 6 years
Dividend yield - % - % - %
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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.
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Results of Operations for the Years Ended December 31, 2017 , 2018 and 2019
Revenue
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
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
(1 )% 1 %
(*)
Americas
Revenue as reported $ 990,424 $ 954,073 $ 952,154 (4 )% (0.2 )%
Conversion impact U.S. (6,812 ) 7,693 4,584
dollar /other currencies
Revenue at constant currency $ 983,612 $ 961,766 $ 956,738 (3 )% 0.3 %
(*)
EMEA
Revenue as reported $ 808,961 $ 839,825 $ 806,197 4 % (4 )%
Conversion impact U.S. (7,179 ) (21,553 ) 44,478
dollar /other currencies
Revenue at constant currency $ 801,782 $ 818,272 $ 850,675 1 % 1 %
(*)
Asia-Pacific
Revenue as reported $ 497,307 $ 506,416 $ 503,165 2 % (1 )%
Conversion impact U.S. 9,186 (5,258 ) 2,311
dollar /other currencies
Revenue at constant currency $ 506,493 $ 501,158 $ 505,476 1 % (0.2 )%
(*)
(*) 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.
2019 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. Our revenue in theAmericas region decreased (0.2)% (or increased 0.3% on a constant currency basis) to$952.2 million for 2019 compared to 2018. Growth was driven by the acceleration of our midmarket business driven by larger midmarket clients, as well as continued traction in our Criteo Retail Media business in theU.S. , partly offset by lower retargeting spend by large clients. 81 -------------------------------------------------------------------------------- Our revenue in the EMEA region decreased (4)% (or increased 1% on a constant currency basis) to$806.2 million for 2019 compared to 2018. This increase at constant currency was largely driven by accelerated growth in our midmarket business and by the positive traction of our new solutions, including Retail Media, partly offset by softer business with large customers. Our revenue in theAsia-Pacific region decreased (1)% (or (0.2)% on a constant currency basis) to$503.2 million for 2019 compared to 2018. This slight decrease at constant currency was driven by a slow-down in our large customer business inJapan ,South-East Asia andAustralia , despite strong growth across client categories inKorea and our growing midmarket business across the region. Additionally, our$2,261.5 million of revenue for 2019 was negatively impacted by$(51.4) million of currency fluctuations, particularly as a result of the depreciation of the Japanese yen, the British pound, the Korean won, the Brazilian real and the Euro, compared to theU.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 Compared to 2017 Revenue for 2018 increased$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 asCriteo Retail Media solutions, launched campaigns in new environments, such as apps, and benefited from our broader direct connections with publishers throughCriteo Direct Bidder. Our revenue in theAmericas region decreased (4)% (or (3)% on a constant currency basis) to$954.1 million for 2018 compared to 2017. While we saw continued strength with our largest existing clients inthe United States , execution was more difficult in the midmarket across the region and we experienced prolonged difficult market conditions inLatin America . We saw a positive impact from the continued ramp up of our expandedCriteo Marketing Solutions and Criteo Retail Media solutions, in particular inthe 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. Our revenue in the EMEA region increased 4% (or 1% on a constant currency basis) to$839.8 million for 2018 compared to 2017. This was largely driven by solid growth inGermany ,Russia andMiddle-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 related to the implementation of our new go-to-market model across the region had a temporary negative impact on revenue growth. Our revenue in theAsia-Pacific region increased 2% (or 1% on a constant currency basis) to$506.4 million for 2018 compared to 2017. Overall, revenue growth was driven by a stronger business inKorea (particularly in apps) andIndia andJapan (particularly with large clients). Additionally, our$2,300.3 million of revenue for 2018 was positively impacted by$19.1 million of currency fluctuations, particularly as a result of the strengthening of the Japanese yen, the British pound and the euro partially offset by the depreciation of the Brazilian real and the Turkish lira, compared to theU.S. dollar. 82 -------------------------------------------------------------------------------- The year-over-year decrease in revenue on a constant currency basis was attributable to a slight decrease in the average cost-per-click, not entirely offset by growth in the volume of clicks delivered on the advertisements displayed by us. Cost of Revenue Year Ended December 31, % change 2017 2018 2019 2017 vs 2018 2018 vs 2019 (in thousands, except percentages) Traffic acquisition costs$ (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 % 2019 Compared to 2018 Cost of revenue for 2019 decreased$(33.6) million , or (2)%, compared to 2018. This decrease was primarily the result of a$(19.4) million , or (1)% decrease in traffic acquisition costs (or an increase of 1% on a constant currency basis), and a$(14.2) million , or (11)% (or (9)% on a constant currency basis), decrease in other cost of revenue. The increase in traffic acquisition costs on a constant currency basis related primarily to an increase of 9.2% in the total number of impressions we purchased, partly offset by a (9.8)% decrease (or (7.8)% decrease on a constant currency basis) in the average CPM for inventory purchased. The increase in the volume of purchased impressions reflects our expanding relationships with existing and new publisher partners to support the growth in our client demand for advertising campaigns. The year-over-year decrease in average CPM was driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process, as well as of the growing share of in-app inventory in our business, which inventory cost tends to be slightly lower than that in the web browser environment. The decrease in other cost of revenue includes a$(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. This decrease was primarily 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), 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 volume of purchased impressions reflects our expanding relationships with existing and new publisher partners 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 million increase in allocated depreciation and amortization expense and a$0.1 million increase in other cost of sales partially offset by a$3.1 million decrease in hosting costs. 83 -------------------------------------------------------------------------------- Revenue excluding Traffic Acquisition Costs We consider Revenue ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing our Revenue ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo AI Engine's performance, allowing it to deliver more relevant advertisements at scale. As part of this focus, we continue to invest in building relationships with direct publishers and pursue access to leading advertising exchanges. The following table sets forth our revenue, traffic acquisition costs and Revenue ex-TAC by region, including theAmericas (North and South America ),Europe ,Middle East andAfrica , or EMEA, andAsia-Pacific : Year Ended December 31, Region 2017 2018 2019 (in thousands) Revenue Americas$ 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 withU.S. GAAP. We have included Revenue ex-TAC and Revenue ex-TAC by Region in this Form 10-K because they are 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 region can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC and Revenue ex-TAC by Region provide 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 Revenue 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 underU.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 Revenue 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 Revenue ex-TAC and Revenue ex-TAC by Region alongside our otherU.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 withU.S. GAAP. 84 -------------------------------------------------------------------------------- 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 2017 2018 2019 2017 vs 2018 2018 vs 2019 (in thousands)
Revenue as reported
0.2% (2)%
Conversion impact
(1)% 1%
currency
Traffic acquisition
(2)% (1)% costs as reported Conversion impact U.S. 2,186 10,433(28,831 ) dollar /other currencies Traffic acquisition cost$ (1,353,370 ) $ (1,323,901 ) $ (1,343,778 ) (2)% 1% at constant currency Revenue ex-TAC as$ 941,136 $ 965,980 $ 946,569 3% (2)% reported Conversion impact U.S. (2,624 ) (8,686 )22,542 dollar /other currencies Revenue ex-TAC at$ 938,512 $ 957,294 $ 969,111 2% 0.3% constant currency Other cost of revenue as$ (121,641 ) $ (131,744 ) $ (117,533 ) 8% (11)% reported Conversion impact U.S. (990 ) (114 )(1,856 ) dollar /other currencies Other cost of revenue at$ (122,631 ) $ (131,858 ) $ (119,389 ) 8% (9)% constant currency 85
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Research and Development Expenses
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 )%
2019 Compared to 2018
Research and development expenses for 2019 decreased $(6.7) million , or (4)%,
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. This increase mainly related to an increase of
headcount-related costs and other expenses, partially offset by an increase in
the French Research Tax Credit.
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 )%
2019 Compared to 2018
Sales and operations expenses for 2019 increased $2.8 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)%,
compared to 2017. This decrease mainly related to a decrease in
headcount-related costs, internal and marketing events costs and operating taxes
in Brazil and Singapore partially offset by an increase of bad debt expense.
86--------------------------------------------------------------------------------
General and Administrative Expenses
Year Ended December 31, % change
2017 2018 2019 2017 vs 2018 2018 vs 2019
(in thousands, except percent of revenue)
General and $ (127,077 ) $ (135,159 ) $ (139,754 ) 6% 3%
administrative expenses
% of revenue (6 )% (6 )% (6 )%
2019 Compared to 2018
General and administrative expenses for 2019 increased $4.6 million , or 3%,
compared to 2018. This increase was mostly driven by an increase in consulting
fees for process optimization projects and the proceeds from the disposal of the
HookLogic travel business in March 31, 2018
2018 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 increased by $0.7 million , or 13% compared to 2018.
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. At
December 31, 2019 , 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.
87--------------------------------------------------------------------------------
Provision for Income Taxes
Year Ended December 31, % change
2017 2018 2019 2017 vs 2018 2018 vs 2019
(in thousands, except percent information)
Provision for income taxes $ (31,651 ) $ (46,144 ) $ (39,496 ) 46% (14)%
% of revenue (1 )% (2 )% (2 )%
Effective tax rate 24.7 % 32.5 % 29.2 %
2019 Compared to 2018
The provision for income taxes for 2019 decreased by $(6.6) million , or 14%,
compared to 2018. The annual effective tax rate for 2019 was 29.2%, compared to
an annual effective tax rate of 32.5% for 2018. Generally, the annual effective
tax rates differ from 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, our income before taxes decreased by $(6.6) million to $135.5 million ,
compared to 2018, generating a $46.6 million theoretical income tax expense at a
nominal standard French tax rate of 34.43%. This theoretical tax expense is
impacted primarily by the following items contributing to a $39.5 million
effective tax expense and a 29.2% effective tax rate: $13.4 million of net
effect of share-based compensation, $2.7 million of deferred tax assets on which
we recognized a valuation allowance, $16.0 million resulting from the BEAT
waiver election issued by the United States Treasury and IRS in December 2019 ,
$7.7 million of permanent differences (mainly based on employee costs,
depreciation expenses and intercompany transactions), $3.6 million related to
the French business tax Cotisation sur la Valeur Ajoutée des Entreprises, or
"CVAE", offset by a $15.9 million tax deduction resulting from technology
royalty income we received from our subsidiaries, $10.9 million Research and
Development tax credit and the recognition or reversal of valuation allowance on
deferred tax assets for $20.6 million (mainly for Criteo Corp ). 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 statements are calculated at
the level of each subsidiary within our consolidated financial statements. As at
December 31, 2019 , the valuation allowance against deferred tax assets amounted
to $25.3 million . It mainly related to Criteo Corp. ($12.8 million ), Criteo Ltd
($7.5 million ), Criteo China ($3.3 million ), Criteo Brazil ($3.2 million ), and
Criteo France ($7.7 million ).
2018 Compared to 2017
The provision for income taxes for 2018 increased by $14.5 million , or 46%,
compared to 2017. The annual effective tax rate for 2018 was 32.5%, compared to
an annual effective tax rate of 24.7% for 2017. Generally, the annual effective
tax rates differ from 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 and equity awards
compensation expense.
In 2018, our income before taxes increased by $13.7 million to $142.0 million ,
compared to 2017, generating a $48.9 million theoretical income tax expense at a
nominal standard French tax rate of 34.43%. This theoretical tax expense is
impacted primarily by the following items contributing to a $46.1 million
effective tax expense and a 32.5% effective tax rate: $17.7 million of net
effect of share-based compensation, $11.7 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 million of permanent
differences (mainly based on employee costs, depreciation expenses and
intercompany transactions), $3.8 million related to the French business tax
Cotisation sur la Valeur Ajoutée des Entreprises, or "CVAE", offset by a
$38.6 million tax deduction resulting from technology royalty income we received
from our subsidiaries, $10.2 million Research and Development tax credit and the
recognition or reversal of valuation allowance on deferred tax assets for $4.5
million (mainly for Criteo Advertising (Beijing ) Co. Ltd) and $1.8 million
relating to other tax adjustments. Please see Note 22 to our audited
consolidated financial statements for more detailed information on the provision
for income taxes.
88-------------------------------------------------------------------------------- Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As atDecember 31, 2018 , the valuation allowance against deferred tax assets amounted to$43.2 million . It mainly related toCriteo Corp ($18.6 million ),Criteo Ltd ($7.2 million ), Criteo China ($3.5 million ), Criteo Brazil ($3.6 million ), Criteo Singapore ($2.9 million ) and Criteo France ($3.9 million ). Net Income Year Ended December 31, % change 2017 2018 2019 2017 vs 2018 2018 vs 2019 (in thousands, except percent of revenue) Net income$ 96,659 $ 95,879 $ 95,969 (1)% 0.1% % of revenue 4 % 4 % 4 % 2019 Compared to 2018 Net income for 2019 increased$0.1 million , or 0.1% compared to 2018. This increase was the result of the factors discussed above, in particular a$(5.9) million decrease in income from operations and a$(0.7) million increase in financial expense offset by a$6.7 million decrease in provision for income taxes compared to 2018. 2018 Compared to 2017 Net income for 2018 decreased$(0.8) million , or (1)% compared to 2017. This decrease was the result of the factors discussed above, in particular a$9.3 million increase in income from operations and a$(4.5) million decrease in financial expense offset by a$14.5 million increase in provision for income taxes compared to 2017. 89
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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
March 31, 2018 June 30, 2018 September
30, 2018
(in thousands)
Consolidated Statements
of Income Data:
Revenue $ 564,164 $ 537,185 $
528,869 $ 670,096
522,606 $ 652,640
Cost of revenue (1)
Traffic
acquisition (323,746 ) (306,963 ) (305,387 ) (398,238 ) (322,429 ) (304,229 ) (301,901 ) (386,388 )
costs
Other cost of (30,059 ) (29,957 )
(32,921 ) (38,807 ) (26,045 ) (29,059 ) (31,101 ) (31,328 )
revenue
Gross profit 210,359 200,265 190,561 233,051 209,649 194,859 189,604 234,924
Operating expenses
(1):
Research and
development (45,318 ) (47,544 ) (41,796 ) (44,605 ) (46,577 ) (44,015 ) (41,414 ) (40,585 )
expenses
Sales and
operations (95,649 ) (92,726 ) (90,526 ) (93,806 ) (95,909 ) (95,503 ) (85,985 ) (98,080 )
expenses
General and
administrative (34,591 ) (35,644 ) (32,463 ) (32,461 ) (33,770 ) (35,767 ) (32,835 ) (37,382 )
expenses
Total operating (175,558 ) (175,914 )
(164,785 ) (170,872 ) (176,256 ) (175,285 ) (160,234 ) (176,047 )
expenses
Income from 34,801 24,351 25,776 62,179 33,393 19,574 29,370 58,877
operations
Financial income (1,325 ) (1,006 ) (1,007 ) (1,746 ) (1,974 ) (1,354 ) (900 ) (1,521 )
(expense)
Income before taxes 33,476 23,345 24,769 60,433 31,419 18,220 28,470 57,356
Provision for income (12,386 ) (8,638 ) (6,821 ) (18,299 ) (10,018 ) (5,683 ) (7,913 ) (15,882 )
taxes
Net income $ 21,090 $ 14,707 $ 17,948 $ 42,134 $ 21,401 $ 12,537 $ 20,557 $ 41,474Net income available
to shareholders of 19,809 13,726 17,143 37,966 19,120 10,823 18,778 42,024
Criteo S.A.
Other Financial Data:
Revenue ex-TAC (2) $ 240,418 $ 230,222 $ 223,482 $ 271,858 $ 235,694 $ 223,918 $
220,705 $ 266,252
Adjusted EBITDA (3)
64,219 $ 109,499
90--------------------------------------------------------------------------------
(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
March 31, 2018 June 30, 2018
(in thousands)
Equity awards
compensation expense
Research and development $ 4,555 $ 6,771 $
4,901 $ 5,005 $ 4,025 $ 4,203 $ 3,230 $ 3,578
expenses
Sales and operations 7,832 8,668 6,952 5,793 6,201 5,693 4,398 3,009
expenses
General and 6,916 4,806 5,408 (531 ) 3,656 4,495 4,142 2,502
administrative expenses
Total equity awards $ 19,303 $ 20,245 $ 17,261 $ 10,267 $ 13,882 $ 14,391 $ 11,770 $ 9,089
compensation expense (a)
Pension service costs
Research and development $ 220 $ 212 $
208 $ 204 $ 193 $ 191 $ 188 $ 188
expenses
Sales and operations 79 75 83 88 72 71 71 69
expenses
General and 135 132 128 127 129 129 129 126
administrative expenses
Total pension service $ 434 $ 419 $ 419 $ 419 $ 394 $ 391 $ 388 $ 383
costs
Depreciation and
amortization expense
Cost of revenue $ 15,249 $ 15,050 $ 16,571 $ 20,477 $ 9,135 $ 10,847 $ 12,193 $ 12,691
Research and development 2,221 2,245 2,724 3,412 3,477 3,534 4,249 5,248
expenses (b)
Sales and operations 4,454 4,518 4,442 4,831 4,864 5,109 4,178 10,763
expenses (b)
General and 1,722 1,747 1,882 1,955 1,820 1,825 1,768 1,787
administrative expenses
Total depreciation and $ 23,646 $ 23,560 $ 25,619 $ 30,675 $ 19,296 $ 21,315 $ 22,388 $ 30,489
amortization expense
Acquisition-related costs
General and $ - $ - $
516 $ 1,222 $ - $ - $ - $ -
administrative expenses
Total depreciation and $ - $ - $ 516 $ 1,222 $ - $ - $ - $ -
amortization expense
Restructuring
Cost of revenue $ - $ - $ - $ - $ - $ - $ - $ -
Research and development (348 ) 16 - - - 124 172 1,704
expenses
Sales and operations 107 183 - - 1,890 175 131 6,614
expenses
General and (11 ) - - - - 429 - 2,343
administrative expenses
Total restructuring (c) $ (252 ) $ 199 $ - $ - $ 1,890 $ 728 $ 303 $ 10,661
(a) Excludes
91
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(c) For the Three Months Ended
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) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance withU.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 Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance withU.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 (323,746 ) (306,963 ) (305,387 ) (398,238 ) (322,429 ) (304,229 ) (301,901 ) (386,388 ) costs 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
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.
92
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Three Months Ended
March 31, 2018 June 30, 2018 September
30, 2018
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) 1,325 1,006
1,007 1,746 1,974 1,354 900 1,521
expense
Provision for 12,386 8,638 6,821 18,299 10,018 5,683 7,913 15,882
income taxes
Equity awards
compensation 19,303 20,245 17,261 10,267 13,882 14,391 11,770 9,089
expense (a)
Pension service 434 419 419 419 394 391 388 383
costs
Depreciation and
amortization 23,646 23,560 25,619 30,675 19,296 21,315 22,388 30,489
expense (b)
Acquisition-related - - 516 1,222 - - - -
costs
Acquisition-related
deferred price - - - - - - - -
consideration
Restructuring (252 ) 199 - - 1,890 728 303 10,661
costs(c)
Total net 56,841 54,067 51,643 62,628 47,454 43,862 43,662 68,025
adjustments
Adjusted EBITDA $ 77,931 $ 68,774 $ 69,591 $ 104,762 $ 68,855 $ 56,399 $ 64,219 $ 109,499
(a) Excludes
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
93
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Three Months Ended
March 31, 2018 June 30, 2018 September 30,
2018
(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 (57.4 ) (57.1 ) (57.7 ) (59.4 ) (57.8 ) (57.6 ) (57.8 ) (59.2 )
acquisition costs
Other cost of (5.3 ) (5.6 ) (6.2 ) (5.8 ) (4.7 ) (5.5 ) (6.0 ) (4.8 )
revenue
Gross profit 37.3 37.3 36.0 34.8 37.6 36.9 36.3 36.0
Operating expenses:
Research and
development (8.0 ) (8.9 ) (7.9 ) (6.7 ) (8.3 ) (8.3 ) (7.9 ) (6.2 )
expenses
Sales and
operations (17.0 ) (17.3 ) (17.1 ) (14.0 ) (17.2 ) (18.1 ) (16.5 ) (15.0 )
expenses
General and
administrative (6.1 ) (6.6 ) (6.1 ) (4.8 ) (6.1 ) (6.8 ) (6.3 ) (5.7 )
expenses
Total operating (31.1 ) (32.7 ) (31.2 )
(25.5 ) (31.6 ) (33.2 ) (30.7 ) (27.0 )
expenses
Income from 6.2 4.5 4.9 9.3 6.0 3.7 5.6 9.0
operations
Financial income (0.2 ) (0.2 ) (0.2 ) (0.3 ) (0.4 ) (0.3 ) (0.2 ) (0.2 )
(expense)
Income before taxes 5.9 4.3 4.7 9.0 5.6 3.4 5.4 8.8 Provision for income (2.2 ) (1.6 ) (1.3 ) (2.7 ) (1.8 ) (1.1 ) (1.5 ) (2.4 ) taxes Net income 3.7 % 2.7 % 3.4 % 6.3 % 3.8 % 2.4 % 3.9 % 6.4 %
Net income available
to shareholders of 3.5 % 2.6 % 3.2 % 5.7 % 3.4 % 2.0 % 3.6 % 6.4 %Criteo S.A. 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 % 94
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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 theU.S. dollar. Consequently, as a first step, 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 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 theU.S. dollar are translated intoU.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 million financial expense for the period endedDecember 31, 2017 resulted from the interest incurred as a result of the$75.0 million drawn on the RCF entered into inSeptember 2015 (as amended inMarch 2017 ) and the hedging cost related to an intra-group position betweenCriteo S.A. and itsU.S. subsidiary, both in the context of the funding of theHookLogic acquisition inNovember 2016 , as well as the non-utilization fees incurred as part of our available RCF financing. The$5.1 million financial expense for the period endedDecember 31, 2018 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available RCF financing. The intra-group position betweenCriteo S.A. and itsU.S subsidiary in the context of the funding of theHookLogic acquisition is qualified as a net investment in a foreign operation fromFebruary 2018 and no longer requires hedging, resulting in reduced costs compared to the same period endedDecember 31, 2017 . The$5.7 million financial expense for the period endedDecember 31, 2019 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available RCF financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. Since 2013, the Company has had a foreign currency risk management policy in place. AtDecember 31, 2019 , our exposure to foreign currency risk was centralized atCriteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies. 95 -------------------------------------------------------------------------------- Foreign Currency Risk A 10% increase or decrease of the British pound, the euro, the Japanese yen or the Brazilian real against theU.S. dollar would have impacted the Consolidated Statements of Income including non-controlling interests as follows: Year Ended December 31, 2017 2018 2019 (in thousands) GBP/USD +10% -10% +10% -10% +10% -10% Net income impact$ (707 ) $ 707 $ (785 ) $ 785 $ (386 ) $ 386 Year Ended December 31, 2017 2018 2019 (in thousands) BRL/USD +10% -10% +10% -10% +10% -10% Net income impact$ 1,236 $ (1,236 ) $ (645 ) $ 645 $ (71 ) $ 71 Year Ended December 31, 2017 2018 2019 (in thousands) JPY/USD +10% -10% +10% -10% +10% -10% Net income impact$ 970 $ (970 ) $ 1,404 $ (1,404 ) $ 1,019 $ (1,019 ) Year Ended December 31, 2017 2018 2019 (in thousands) EUR/USD +10% -10% +10% -10% +10% -10% Net income impact$ 13,047 $ (13,047 ) $ 11,552 $ (11,552 ) $ 10,755 $ (10,755 ) Counterparty Risk As ofDecember 31, 2019 , we show a positive net cash position. Since 2012, we utilize a cash pooling arrangement, reinforcing cash management centralization. Investment and financing decisions are carried out by our internal central treasury function. We only deal with counterparties with high credit ratings. In addition, under our Investment and Risk Management Policy, our central treasury function ensures a balanced distribution between counterparties of the investments, no matter the rating of such counterparty. 96 -------------------------------------------------------------------------------- Liquidity Risk We are mainly exposed to changes of foreign currency exchange rate fluctuations. Working Capital The following table summarizes our cash flows from operations, trade receivables, net of allowances and working capital for the periods indicated: Year Ended December 31, 2018 2019 Cash flows provided by operating activities$260,726
Trade receivables, net of allowances$473,901
Working capital (current assets less current
In addition, the cash flows were also negatively impacted by a$5.5 million change in foreign exchange rates on our cash position over the period. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. Sources of Liquidity Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations. 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. Since our inception, we raised a total of$51.1 million aggregate net proceeds from the sale of preferred shares through four private placements. InNovember 2013 , we received aggregate net proceeds before expenses of$269.0 million from our initial public offering. InMarch 2014 , we received aggregate net proceeds before expenses of$22.6 million from our secondary equity offering. We also benefited to a much lesser extent from the proceeds of the exercise of share options and warrants and expect to continue to do so in the future, as such securities are exercised by holders. In 2018, we completed an$80 million share repurchase program. InJuly 2019 , the Board of Directors authorized a new share repurchase program of up to$80 million of the Company's outstanding American Depositary Shares. Other than these repurchase programs, we intend to retail all available funds any future earnings to fund our growth. We are party to a loan agreement and several RCFs with third-party financial institutions. Our loan and RCF agreements as ofDecember 31, 2019 are presented in the table below: 97 --------------------------------------------------------------------------------
Nominal/ Amount drawn as Amount Outstanding
Authorized of December 31, as of December 31,
amounts 2019 (RCF only) 2019
(RCF Only)
Nature (in thousands) Interest Settlement date
rate
BPI Loan - NA NA $ 1,011 Fixed: 2.09% May 2021
February 2014
Other BPI Loans NA NA $ 901 0% 2023 and after
Other Loans NA NA $ 166 0% 2024
Floating
rate:
Bank Syndicate EURIBOR /
RCF - September € 350,000 € - € - LIBOR + March 2022
2015 margin
depending on
leverage
ratio
For additional information regarding our loan and RCF agreements, please refer
to Note 12 - Financial Liabilities and Note 24 - Commitments.
All of these loans and RCFs are unsecured and contain customary events of
default but do not contain any affirmative, financial or negative covenants,
with the exception of the September 2015 RCF which contains covenants, including
compliance with a total net debt to Adjusted EBITDA ratio and restrictions on
the incurrence of additional indebtedness. At December 31, 2019 , we were in
compliance with the required leverage ratio.
We are also party to short-term credit lines and overdraft facilities with HSBC
Holdings plc, LCL and BNP Paribas . We are authorized to draw up to a maximum of
€21.5 million ($24.2 million ) in the aggregate under the short-term credit lines
and overdraft facilities. As of December 31, 2019 , we had not drawn on either of
these facilities. Any loans or overdrafts under these short-term facilities bear
interest based on the one month EURIBOR rate or three month EURIBOR rate. As
these facilities are exclusively short-term credit and overdraft facilities, our
banks have the ability to terminate such facilities on short notice.
Operating and Capital Expenditure Requirements
In 2017, 2018 and 2019, our actual capital expenditures were $108.5 million ,
$125.5 million and $97.9 million , respectively, primarily related to the
acquisition of data center and server equipment, and internal IT systems. We
expect our capital expenditures to remain at, or slightly below, 3% of revenue
for 2020, as we plan to continue to build and maintain additional data center
equipment capacity in all regions and increase our redundancy capacity to
strengthen our infrastructure.
As part of our strategy to build upon our market and technology leadership, in
2016 we acquired all of the outstanding shares of HookLogic for a final purchase
price of $249.0 million financed by (i) a $75.0 million amount drawn on the
General RCF and (ii) a $175.1 million amount financed by the available cash
resources and in 2018 we acquired all of the outstanding shares of Storetail and
Manage for $43.7 million and $60.0 million respectively, financed by the
available cash resources.
We believe our existing cash balances will be sufficient to meet our anticipated
cash requirements through at least the next 12 months.
Our future working capital requirements will depend on many factors, including
the rate of our revenue growth, the amount and timing of our investments in
personnel and capital equipment, and the timing and extent of our introduction
of new products and product enhancements.
If our cash and cash equivalents balances and cash flows from operating
activities are insufficient to satisfy our liquidity requirements, we may need
to raise additional funds through equity, equity-linked or debt financings to
support our operations, and such financings may not be available to us on
acceptable terms, or at all. We may also need to raise additional funds in the
event we determine in the future to effect one or more acquisitions of
businesses, technologies, assets or products.
98
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If we are unable to raise additional funds when needed, our operations and
ability to execute our business strategy could be adversely affected. If we
raise additional funds through the incurrence of indebtedness, such indebtedness
would have rights that are senior to holders of our equity securities and could
contain covenants that restrict our operations. Any additional equity financing
will be dilutive to our shareholders.
Historical Cash Flows
The following table sets forth our cash flows for 2017, 2018 and 2019:
Year Ended December 31,
2017 2018 2019
(in thousands)
Cash flows provided by operating activities
(106,253 ) (226,717 )
(103,888 )
Cash used for financing activities
Our cash and cash equivalents atDecember 31, 2019 were held for working capital and general corporate purposes, which could include acquisitions. The increase in cash and cash equivalents compared withDecember 31, 2018 , primarily resulted from$222.8 million in cash flows from operating activities partially offset by$(103.9) million in cash flows used for investing activities and$(59.1) million used for financing activities. Operating Activities Cash provided by operating activities is primarily impacted by the increase in the number of clients using our solution and by the amount of cash we invest in personnel to support the anticipated growth of our business. Cash provided by operating activities has typically been generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating expense items such as depreciation, amortization, equity awards compensation, deferred tax assets and income taxes. In 2019, net cash flows provided by operating activities were$222.8 million and consisted of net income of$96.0 million ,$126.3 million in adjustments for non-cash and non-operating items and$0.6 million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of$97.1 million , equity awards compensation expense of$41.0 million ,$15.4 million of changes in deferred tax assets and$0.8 million of changes in other items, partially offset by$28.0 million of accrued income taxes net of income tax paid. The$0.6 million increase in cash resulting from changes in working capital primarily consisted of a$11.4 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, a$7.6 million decrease in other current assets (including prepaid expenses and VAT receivables) and a$0.9 million decrease in accounts receivable partially offset by a$14.1 million decrease in accounts payable and a$5.2 million decrease due to changes in operating lease liabilities and right of use assets. In 2018, net cash flows provided by operating activities were$260.7 million and consisted of net income of$95.9 million ,$154.4 million in adjustments for non-cash and non-operating items and by$10.4 million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of$111.8 million , equity awards compensation expense of$66.6 million , partially offset by$12.7 million of accrued income taxes net of income tax paid,$8.2 million of changes in deferred tax assets and other items for$3.1 million including$2.3 million reclassification of the cash impact of the settlement of hedging derivatives to financing activities. The$10.4 million increase in cash resulting from changes in working capital primarily consisted of$1.4 million decrease in accounts receivable, a$4.0 million decrease in other current assets (including prepaid expenses and VAT receivables) and a$9.0 million increase in accounts payable partially offset by a$4.0 million decrease in accrued expenses such as payroll and payroll related expenses and VAT payables. 99 -------------------------------------------------------------------------------- In 2017 net cash flows provided by operating activities were$245.5 million and consisted of net income of$96.7 million and$155.9 million in adjustments for non-cash and non-operating items partially offset by$7.1 million of cash flows used for working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of$104.0 million , equity awards compensation expense of$71.6 million and other items for a total amount of$4.9 million including the reclassification of the cash impact of the settlement of hedging derivatives to financing activities of$4.1 million , partially offset by$13.3 million of changes in deferred tax assets and$11.5 million of accrued income taxes net of income tax paid. The$7.1 million decrease in cash resulting from changes in working capital primarily consisted of$76.9 million increase in accounts receivable and$3.4 million increase in other current assets (including prepaid expenses and VAT receivables) driven by increased revenue during the year and, to a lesser extent, an increase in office rental advance payments. This was partially offset by an$32.9 million increase in accounts payable and$40.3 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, explained primarily by an increase in traffic acquisition costs, and an increase in accrued payroll and payroll-related expenses resulting from an increase in the number of our employees. Investing Activities Our investing activities to date have consisted primarily of purchases of servers and other data-center equipment and business acquisitions. In 2019, net cash flows used in investing activities were$103.9 million and consisted of$97.9 million for purchases of servers and other data-center equipment,$4.6 million for business acquisitions and$1.2 million in other financial liabilities. In 2018, net cash flows used in investing activities were$226.7 million and consisted of$125.5 million for purchases of property and equipment, and by$101.2 million related to the Storetail and Manage acquisitions and disposal of a business. In 2017, net cash flows used in investing activities were$106.3 million and consisted of$108.5 million for purchases of property and equipment, partially offset by$1.1 million related to change in acquisition price ofHookLogic due to the working capital adjustment and$1.1 million of lease deposits refunds. Financing Activities In 2019, net cash used in financing activities was$59.1 million resulting from$58.6 million relating to the share repurchase program,$1.2 million of changes in other financial liabilities and$1.0 million for the repayment of borrowings, partially offset by$1.7 million related to proceeds from capital increase. In 2018, net cash used in financing activities was$62.7 million resulting from$1.5 million from proceeds of share option exercises and$16.8 million of changes in other financial liabilities relating to the cash impact of the settlement of hedging derivatives, offset by$80.0 million relating to the share repurchase program and by$1.0 million for the repayment of borrowings. In 2017, net cash provided by financing activities was$29.5 million resulting from$3.7 million of the drawing on the China RCF,$32.0 million from proceeds of share option exercises and$24.6 million of changes in the other financial liabilities relating to the cash impact of the settlement of hedging derivatives, offset by$89.7 million for the repayment of drawings on the General RCF used in the context of the acquisition ofHookLogic in 2016 and on the China RCF. 100 --------------------------------------------------------------------------------
C. Research and Development, Patents and Licenses, etc.
We invest substantial resources in research and development to enhance our solution and technology infrastructure, develop new features, conduct quality assurance testing and improve our core technology. Our engineering group is primarily located in research and development centers inParis, France andAnn Arbor, Michigan . We expect to continue to expand the capabilities of our technology in the future and to invest significantly in continued research and development efforts. We had 681 employees primarily engaged in research and development atDecember 31, 2019 . Research and development expense totaled$173.9 million ,$179.3 million and$172.6 million for 2017, 2018 and 2019, respectively. 101 --------------------------------------------------------------------------------
D. Trend Information.
Key Metrics
We review three key metrics to help us monitor the performance of our business
and to identify trends affecting our business. These key metrics include number
of clients, Revenue ex-TAC, and Adjusted EBITDA. We believe these metrics are
useful to understanding the underlying trends in our business. The following
table summarizes our key metrics for 2017, 2018 and 2019.
Year Ended December 31,
2017 2018 2019
(in thousands, except number of clients)
Number of clients 18,118 19,419 20,247
Revenue ex-TAC $ 941,136 $ 965,980 $ 946,569
Adjusted EBITDA $ 309,584 $ 321,059 $ 298,972
Number of Clients
We define a client to be a unique party from whom we have received an insertion
order and delivered an advertisement during the previous 12 months. We believe
this criteria best identifies clients who are actively using our solution. We
count specific brands or divisions within the same business as distinct clients
so long as those entities have separately signed insertion orders with us. In
the case of some solutions within Criteo Retail Media, we count the parent
company of the brands as an individual client, even if several distinct brands
pertaining to the same parent company have signed separate insertion orders with
us. On the other hand, we count a client who runs campaigns in multiple
geographies as a single client, even though multiple insertion orders may be
involved. When the insertion order is with an advertising agency, we generally
consider the client on whose behalf the advertising campaign is conducted as the
"client" for purposes of this calculation. In the event a client has its
advertising spend with us managed by multiple agencies, that client is counted
as a single client.
We believe that our ability to increase the number of clients is an important
indicator of our ability to grow revenue over time. While our client count has
increased over time, this metric can also fluctuate from quarter to quarter due
to the seasonal trends in advertising spend of clients and the timing and amount
of revenue contribution from new clients. In addition, over time we have added
an increasing number of midmarket clients that generate a lower revenue per
client than large clients on average, and may continue to add a significant
number of midmarket clients in the future. Therefore, there is not necessarily a
direct correlation between a change in clients in a particular period and an
increase or decrease in our revenue.
Revenue ex-TAC
We consider Revenue ex-TAC as a key measure of our business activity. Our
traffic acquisition costs primarily consist of purchases of impressions from
publishers on a CPM basis.
Our management views our Revenue ex-TAC as a key measure to evaluate, plan and
make decisions on our business activities and sales performance. In particular,
we believe that the elimination of TAC from revenue can provide a useful measure
for period-to-period comparisons of our 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 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
a discussion of the limitations of Revenue ex-TAC and a reconciliation of
Revenue ex-TAC to revenue, the most comparable U.S. GAAP measure, for 2015,
2016, 2017, 2018 and 2019.
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Adjusted EBITDA
Adjusted EBITDA represents 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 and acquisition-related costs and deferred price
consideration. Adjusted EBITDA is a key measure used by management 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 and acquisition-related costs and deferred price
consideration 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. 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 a discussion of the limitations of Adjusted EBITDA
and a reconciliation of Adjusted EBITDA to net income, the most comparable U.S.
GAAP measure, for 2015, 2016, 2017, 2018 and 2019.
Highlights and Trends
Revenue
We believe the expansion of our business with existing clients as well as the
addition of new clients have both been significant drivers of our historical
growth. We believe significant opportunities exist for us to continue to expand
our business going forward. Specifically, we believe that we can strengthen our
core business, expand our product portfolio, explore strategic game changes and
drive further technology excellence and innovation to further expand our
business over time. However, due to external challenges and other factors, we
may not be able to maintain our historical growth rates in the future.
Revenue ex-TAC
We are focused on maximizing our Revenue ex-TAC on an absolute basis. We believe
this focus builds sustainable long-term value for our business by fortifying a
number of our competitive strengths, including access to digital advertising
inventory, breadth and depth of data and continuous improvement of the Criteo AI
Engine's performance, allowing us to deliver more relevant advertisements at
scale. As part of this focus we are continuing to invest in building
relationships with direct publishers, including with ecommerce retailers, and
increasing access to leading advertising exchanges, which includes purchasing
advertising inventory that may have lower margins on an individual impression
basis, but generates incremental Revenue ex-TAC. We believe this strategy
maximizes the growth of our Revenue ex-TAC on an absolute basis and strengthens
our market position. As a result, we expect our traffic acquisition costs to
continue to increase on an absolute basis as we continue to grow our revenue.
However, our traffic acquisition costs might also increase as a percentage of
revenue as we continue to invest in building liquidity and long-term value for
clients and publishers over optimizing near-term gross margins, and as we grow
our new solutions, some of which might involve a higher level of traffic
acquisition costs as a percentage of revenue relative to our historical trends.
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Adjusted EBITDA
Our Adjusted EBITDA for 2019 was $299.0 million , a (7)% decrease over 2018. Our
decrease in Adjusted EBITDA for 2019 compared to 2018 was primarily the result
of the (2)% decrease in Revenue ex-TAC over the period, slightly offset by the
decrease in our Non-GAAP operating expenses. In the short-term, we expect to
continue to have a disciplined management of our expense base cross the company
and to drive efficiency through more automation and operational excellence
across all functions, in order to be in a position to reinvest a portion of
savings driven by such efficiency gains into strategic areas of our business. We
anticipate a slight decrease in our Adjusted EBITDA margin as a percentage of
Revenue ex-TAC in 2020. Over time, we expect Adjusted EBITDA to increase
slightly as a percentage of our Revenue ex-TAC, as we benefit from disciplined
expenses management and operating leverage. 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 a discussion of the limitations of Adjusted EBITDA and a
reconciliation of Adjusted EBITDA to net income, the most comparable U.S. GAAP
measure.
Number of Clients
Since our inception, we have significantly grown the number of clients with
which we do business. Our base of clients increased to more than 20,000 at
December 31, 2019 , a 4% increase over December 31, 2018 . This growth in our
number of clients has been driven by a number of factors, including our global
footprint and our commercial expansion in existing markets, our continued
development of large clients in the retail, travel and classifieds industry
verticals, our expansion of midmarket clients and our penetration into the
consumer brand vertical through some of our Criteo Retail Media offerings. We
believe that our ability to increase our number of clients is a leading
indicator of our ability to grow revenue over time. We expect to continue to
focus our attention and investment on further growing our client base across all
regions, client categories and verticals. While we intend to grow our client
base across all categories, we expect midmarket customers to continue to
increase their contribution in the mix of our total revenue.
Client Retention
We believe our ability to retain and grow revenue from our existing clients is a
useful indicator of the stability of our revenue base and the long-term value of
our client relationships. Our offering, the Criteo Platform, is powered by AI
technology and aims to cover the entire marketing funnel (Awareness,
Consideration, Conversion). Our technology is optimized to drive impactful
business results for advertisers across multiple marketing goals. We measure our
client satisfaction through our ability to retain them and the revenue they
generate quarter after quarter. We define client retention rate as the
percentage of live clients during the previous quarter that continued to be live
clients during the current quarter. This metric is calculated on a quarterly
basis, and for annual periods, we use an average of the quarterly metrics. We
define a live client as a client whose advertising campaign has or had been
generating Revenue ex-TAC for us on any day over the relevant measurement
period. In each of 2017, 2018 and 2019, our client retention rate was
approximately 90%1. We define our revenue retention rate with respect to a given
12-month period as (1) revenue recognized during such period from clients that
contributed to revenue recognized in the prior 12-month period divided by
(2) total revenue recognized in such prior 12-month period. Our revenue
retention rate was 115%, 101% and 94% for the years ended December 31, 2017 ,
2018 and 2019, respectively1.
Seasonality
Our client base consists primarily of businesses in the digital retail, travel
and classifieds industries, which we define as commerce clients. In the digital
retail industry in particular, many businesses devote the largest portion of
their advertising spend to the fourth quarter of the calendar year, to coincide
with increased holiday spending by consumers. With respect to Criteo Retail
Media, the concentration of advertising spend in the fourth quarter of the
calendar year is particularly pronounced. Our retail commerce clients typically
conduct fewer advertising campaigns in the first and second quarters than they
do in other quarters, while our travel clients typically increase their travel
campaigns in the first and third quarters and conduct fewer advertising
campaigns in the second quarter. As a result, our revenue tends to be seasonal
in nature, but the impact of this seasonality has, to date, been partly offset
by our significant growth and geographic expansion. If the seasonal fluctuations
become more pronounced, our operating cash flows could fluctuate materially from
period to period.
___________________________________________________
1 Excluding Criteo Retail Media.
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--------------------------------------------------------------------------------E. Off-balance Sheet Arrangements.
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. F. Tabular Disclosure of Contractual Obligations.
The following table discloses aggregate information about material contractual
obligations and periods in which payments were due as of
Less than 1 year 1 to 5 years More than 5 years Total
(in thousands of U.S. Dollars)
Long-term debt $ 1,557 $ 638 $ 14 $ 2,209
Other financial liabilities 537 433 - 970
Financial derivatives 1,284 - - 1,284
Other purchase obligations 7,435 346 - 7,781
Total $ 10,813 $ 1,417 $ 14 $ 12,244
The commitment amounts in the table above are associated with contracts that are
enforceable and legally binding and that specify all significant terms,
including interest on long-term debt, fixed or minimum services to be used,
fixed, minimum or variable price provisions, and the approximate timing of the
actions under the contracts. The table does not include obligations under
agreements that we can cancel without a significant penalty. Long-term debt
includes interest of $0.1 million . Pension contributions and cash outflows have
not been included in the above table as they have been deemed immaterial.
G. Safe Harbor.
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act and as
defined in the Private Securities Litigation Reform Act of 1995. See "Special
Note Regarding Forward-Looking Statements."
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are mainly exposed to changes of foreign currency exchange rate fluctuations.
For a description of our foreign exchange risk and a sensitivity analysis of the
impact of foreign currency exchange rates on our net income, please see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - B. Liquidity and Capital Resources" in this Form 10-K.
Item 8. Financial Statements and Supplementary Data
The information required by Item 8 is set forth on pages F-1 through F-65 of
this Form 10-K.
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