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 driving superior commerce outcomes for
marketers and media owners through the world's leading Commerce Media Platform.
We operate in commerce media, the future of digital advertising, leveraging
commerce data and artificial intelligence ("AI") to connect ecommerce, digital
marketing and media monetization to reach consumers throughout their shopping
journey. Our vision is to bring richer experiences to every consumer by
supporting a fair and open internet that enables discovery, innovation, and
choice - powered by trusted and impactful advertising. We have accelerated and
deeply transformed the Company from a single-product to a multi-solution
platform provider, fast diversifying our business into new solutions.
We enable brands', retailers' and media owners' growth by providing
best-in-class marketing and monetization services and infrastructure on the open
Internet, driving approximately $40 billion of commerce outcomes for our
customers - in the form of product sales for retailers, brands and marketers and
advertising revenues for media owners. We differentiate ourselves by delivering
high-performing commerce audiences at scale and we deliver this value by
activating commerce data in a privacy-by-design way through proprietary AI
technology to reach and engage consumers in real time with highly relevant
digital advertisements ("ads") across all stages of the consumer journey. Our
data offers deep insights into consumer intent and purchasing habits.
Our focus is on commerce media. Our clients include many of the largest and most
sophisticated consumer brands, commerce companies and media owners in the world.
We partner with them to capture user activity on their websites and mobile
applications ("apps"), which we define as digital properties, and leverage that
data to deliver superior ad performance to help marketers, brands and agencies
reach their campaign objectives. This includes powering the retail media
ecosystem as we enable brands to reach shoppers with relevant ads near the
digital point of sale on retailer and marketplace websites while enabling
retailers to add a new revenue stream.
Demonstrating the depth and scale of our data, we collected data on over $1
trillion in online sales transactions1 on our clients' digital properties in the
year ended December 31, 2021 . Based on this data and other assets, we delivered
1.8 trillion targeted ads in the year ended December 31, 2021 . As of
December 31, 2021 , we served close to 22,000 clients and, in each of the last
three years, our average client retention rate, as measured on a quarterly
basis, was approximately 90%.
We serve a wide range of clients and our revenue is not concentrated within any
single client or group of clients. In 2021, 2020 and 2019, our largest client
represented 7.0, 3.5%, and 2.8% of our revenue, respectively, and in 2021, 2020
and 2019, our largest 10 clients represented 16.6%, 13.7% and 11.4% of our
revenue in the aggregate, respectively. There is no group of customers under
common control or customers that are affiliates of each other constituting an
aggregate amount equal to 10% or more of our consolidated revenues, the loss of
which would have a material adverse effect on the Company.
We operate in 96 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 93.2% of our revenue for year ended December 31,
2021 .
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 Company'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.
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1 Excluding Criteo Retail Media
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--------------------------------------------------------------------------------Our financial results include:
•Revenue of
•Gross profit of
•Contribution ex-TAC, which is a non-
•Net Income of
•Adjusted EBITDA, which is a non-U.S. GAAP financial measure, of$322.5 million ,$251.0 million and$299.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Please note that reconciliations of Gross Profit to Contribution ex-TAC and Net Income to Adjusted EBITDA - in each case the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles inthe United States or "U.S. GAAP," are presented below. We are focused on maximizing Contribution 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
OnMay 18, 2021 , we completed the acquisition of all of the outstanding shares ofDoobe In Site Ltd. ("Mabaya"), a leading retail media technology company that powers sponsored products and retail media monetization for major ecommerce marketplaces globally. InDecember 2021 , we executed a purchase agreement to acquire the business ofIPONWEB Holding Limited ("IPONWEB"), a market-leading AdTech company with world-class media trading capabilities, for$380 million comprised of a mix of cash and treasury shares of the Company, subject to certain adjustments including for working capital, other current assets and current liabilities and net indebtedness, with the transaction expected to close in the first quarter of 2022. The transaction is subject to customary closing conditions. 60
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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 on their own digital property or on the open Internet, that address multiple marketing goals.
We also have multiple pricing models which now include percentage of spend models in addition to cost-per-click, cost-per-install and cost-per-impression pricing models.
Cost of Revenue
Our cost of revenue primarily includes traffic acquisition costs and other cost of revenue.
Traffic Acquisition Costs. Traffic acquisition costs consist primarily of purchases of impressions from publishers on a CPM basis. We purchase impressions directly from publishers or third-party intermediaries, such as advertisement exchanges. We recognize cost of revenue on a publisher by publisher basis as incurred. Costs owed to publishers but not yet paid are recorded in our Consolidated Statements of Financial Position as trade payables. For solutions within Criteo Retail Media, we pay for the inventory of our retailer partners on a revenue sharing basis, effectively paying the retailers a portion of the click-based revenue generated by user clicks on the sponsored products advertisements or impressions on the commerce display advertisements displaying the products of our consumer brand clients. For a discussion of the trends we expect to see in traffic acquisition costs, see the section entitled " - Highlights and Trends - Contribution 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, the cost of data purchased from third parties and digital taxes. The Company does not build or operate its own data centers and none of its Research and Development employments are dedicated to revenue generating activities. As a result, we do not include the costs of such personnel in other cost of revenue.
Operating Expenses
Operating expenses consist of research and development, sales and operations, and general and administrative expenses. Salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs are the most significant components of each of these expense categories. The number of employees increased from 2,755 employees atJanuary 1, 2020 to 2,781 employees atDecember 31, 2021 .
We include equity awards compensation expense in connection with grants of share options, warrants, and restricted share units ("RSUs") in the applicable operating expense category based on the respective equity award recipient's function (Research and development, Sales and operations, General and administrative).
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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. Also
included are non-personnel costs such as subcontracting, consulting and
professional fees to third-party development resources, allocated overhead,
including internal IT and depreciation and amortization costs. These expenses
are partially offset by the French research tax credit that is conditional upon
the level of our expenditures in research and development.
The number of employees in research and development functions increased from 681
at
We believe our continued investment in research and development to be critical to maintaining and improving our technology within the Criteo Commerce Media Platform, our quality of service and our competitive position. Sales and Operations Expense. Sales and operations expense consists primarily of personnel-related costs for our employees working in our sales, account strategy, sales operations, publisher business development, analytics, marketing, technical solutions, creative services and other teams, including salaries, bonuses, equity awards compensation, and other personnel-related costs. Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, provisions for doubtful accounts, subcontracting, consulting and professional fees paid to third parties, allocated overhead, including internal IT, and depreciation and amortization costs. The number of employees in sales and operations functions increased from 1,578 atJanuary 1, 2020 to 1,596 atDecember 31, 2021 . In order to expand our business, we expect to make targeted investments in our resources in some areas of our sales and operations. Yet, we expect sales and operations expenses to remain fairly flat as a percentage of revenue over time as we increase the productivity of our sales and operations teams. General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs for our administrative, legal, information technology, human resources, facilities and finance teams. Additional expenses included in this category include travel-related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated overhead, including internal IT and depreciation and amortization costs. The number of employees in general and administrative functions increased from 496 atJanuary 1, 2020 to 503 atDecember 31, 2021 . We expect our general and administrative expense to decrease as a percentage of revenue over time as we increase the productivity of our general and administrative teams.
Financial and Other Income (Expense)
Financial and Other Income (Expense) primarily consists of:
•exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros (the Company's functional currency). We are exposed to changes in exchange rates primarily in theU.S. , theUnited Kingdom ,Japan ,Korea andBrazil . TheU.S. dollar, the British pound, the Korean won, the Japanese yen and the Brazilian real are our most significant foreign currency exchange risks. AtDecember 31, 2021 , our exposure to foreign currency risk was centralized at parent company level and hedged. These exchange differences in euro are then translated intoU.S. dollars (the Company's reporting currency) according to the average euro/U.S. dollar exchange rate.
•interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt loan agreements and revolving credit facilities ("RCFs").
•Proceeds from sale of data center equipment to third-parties, made as part of
•Dividends received from an investment made in 2018.
We monitor foreign currency exposure and look to mitigate exposures through normal business operations and hedging strategies.
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--------------------------------------------------------------------------------Provision for Income Taxes
We are subject to potential income taxes inFrance , theU.S. and numerous other jurisdictions. We recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable. Our effective tax rates differ from the statutory rate applicable to us primarily due to valuation allowance on deferred tax assets, differences between domestic and foreign jurisdiction tax rates, Research Tax Credit offsets, which are non-taxable items, potential tax audit provision settlements, share-based compensation expenses that are non-deductible in some jurisdictions under certain circumstances, and transfer pricing adjustments. We license access to our technology to our subsidiaries and charge a royalty fee to these subsidiaries for such access. InFrance , we benefit from a reduced tax rate of 10% on a large portion of this technology royalty income. 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. No uncertain tax positions were identified as ofDecember 31, 2021 .
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 (1) revenue recognition criteria (2) allowances for credit losses, (3) research tax credits (4) income taxes, including i) recognition of deferred tax assets arising from the subsidiaries projected taxable profit for future years, ii) evaluation of uncertain tax positions associated with our transfer pricing policy and iii) recognition of income tax position in respect with tax reforms recently enacted in countries we operate, (5) assumptions used in valuing acquired assets and assumed liabilities in business combinations, (6) assumptions used in the valuation of goodwill, intangible assets and right of use assets - operating lease, and (7) assumptions used in the valuation model to determine the fair value of share-based compensation plan. The spread of COVID-19 and the various attempts to contain it have continued to create volatility, uncertainty and economic disruption to global society, economics, financial markets and business practices and increase the uncertainty associated with certain estimates, in particular those related to allowance for credit losses, assumptions used in the valuation of goodwill and estimates relating to income taxes. See Note 1. Principles and Accounting Methods to our audited consolidated financial statements beginning on page F-1 for a description of our other significant accounting policies.
Revenue Recognition
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. For revenue generated from arrangements that involve third-party publishers, there is judgment in evaluating whether we are the principal, and report revenue on a gross basis, or the agent, and report revenue on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. The assessment of whether we are considered the principal or the agent in a transaction could impact our revenue and cost of revenue recognized on the consolidated statements of income.
Trade Receivables, Net of Allowances for Doubtful Accounts
We apply Accounting Standards Update No. 2016-13, Financial Instruments-Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which
requires the measurement and recognition of expected credit losses for financial
assets held at amortized cost that an entity does not expect to collect over the
asset's contractual life, considering past events, current conditions, and
reasonable and supportable forecasts of future economic conditions.
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For accounts receivable measured at amortized cost, we use aging analysis, and
probability of default methods to evaluating and estimating the expected credit
losses.
Deferred Tax Assets
Deferred taxes are recorded on all temporary differences between the financial
reporting and tax bases of assets and liabilities, and on tax losses, using the
liability method. Differences are defined as temporary when they are expected to
reverse within a foreseeable future. We may only recognize deferred tax assets
if, based on the projected taxable incomes within the next three years, we
determine that it is probable that future taxable profit will be available
against which the unused tax losses and tax credits can be utilized. As a
result, the measurement of deferred income tax assets is reduced, if necessary,
by a valuation allowance for any tax benefits which are not expected to be
realized. If future taxable profits are considerably different from those
forecasted that support recording deferred tax assets, we will have to revise
downwards or upwards the amount of the deferred tax assets, which could have a
significant impact on our financial results.
This determination requires many estimates and judgments by our management for which the ultimate tax determination may be uncertain.
Uncertain Tax Positions
We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Although we believe that we have adequately assessed all potential uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different.
Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the course of 2021, the Company has reassessed its operating and reportable segments in accordance with ASC 280 and now reports its results of operations through two segments: Marketing Solutions and Retail Media.Goodwill has been allocated to these two segments using a relative fair value allocation approach. The Company has selectedDecember 31 as the date to perform its annual impairment test. The test is performed at the reporting unit level, which we have determined to be Marketing Solutions and Retail Media. In the impairment assessment of its goodwill, the Company performs an impairment test, which involves assumptions regarding estimated future cash flows to be derived from the reporting unit. The estimated future cash flows are used to derive the fair value of the reporting unit, which is then compared to its net book value, including goodwill . If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. If the net book value exceeds its fair value, then the Company would be required to recognize an impairment loss. The impairment loss to be recognized would be calculated by comparing the fair value of the Company to its net book value, including goodwill. There is also significant judgement in the allocation of the net book value of the Company to each of its segments, as many of the assets are not directly attributable to the Company's operating segments.
Intangible Assets
Acquired intangible assets are accounted for at acquisition cost, less
accumulated amortization. Acquired intangible assets are composed of software,
technology and customer relationships amortized on a straight-line basis over
their estimated useful lives comprised between one and three years for the
software, and three and nine years, for the technology and customer
relationships. Intangible assets are reviewed for impairment whenever events or
changes in circumstances such as, but not limited to, significant declines in
revenue, earnings or cash flows or material adverse changes in the business
climate indicate that the carrying amount of an asset may be impaired.
Software development costs also include costs to develop software to be used
solely to meet internal needs and cloud based applications used to deliver our
services. We capitalize development costs related to these software applications
once the preliminary project stage is complete and it is probable that the
project will be completed and the software will be used to perform the function
intended. Amortization of these costs begins when assets are placed in service
and is calculated on a straight-line basis over the assets' useful lives
estimated at three to five years.
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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 Nasdaq on the date of grant for purposes of determining the fair value of ordinary shares.
•Exercise price of the option. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on Nasdaq on the date of grant for purposes of determining the exercise price with a floor value of 95% of the average of the closing sales price per ADS for the 20 trading days preceding the grant. •Expected term. The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the ordinary share option awards granted, we have based our expected term on the simplified method, which represents the average period from vesting to the expiration of the award. •Expected volatility. Prior to our initial public offering, as we did not have a trading history for our ordinary shares, the expected share price volatility for our ordinary shares was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the ordinary share option grants. From the initial public offering, the expected share price volatility takes into account theCriteo closing share price from the initial public offering date to the grant date and closing share price of industry peers for the remaining expected term of the ordinary share option grant. •Risk-free rate. The risk-free interest rate is based on the yields ofFrance 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,
2021 2020 2019
Volatility -% 39.2% - 39.9% 39.2% - 41.2%
Risk-free interest rate - % 0.00% - 0.25% 0.00% - 0.10%
Expected life (in years) - 6 years 6 years
Dividend yield -% -% - %
There were no grants of share options during the year ended
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
Revenue breakdown by segment
Beginning in the fourth quarter of 2021, we report our segments results as Marketing Solutions and Retail Media:
•Criteo Marketing Solutions allow commerce companies to address multiple
marketing goals by engaging their consumers with personalized ads across the
web, mobile and offline store environments.
•Criteo Retail Media solutions allow retailers to generate advertising revenues
from consumer brands, and/or to drive sales for themselves, by monetizing their
data and audiences through personalized ads, either on their own digital
property or on the open Internet, that address multiple marketing goals.
Year Ended December 31,
2021 2020 2019 2021 vs 2020 vs 2019
2020
(in thousands)
Revenue as reported $ 2,254,235 $ 2,072,617 $ 2,261,516 9 % (8) %
Conversion impact U.S. dollar/other
currencies (19,713) 3,239 51,373
Revenue at constant currency (1) $ 2,234,522 $ 2,075,856 $ 2,312,889 8 % (8) %
Marketing Solutions as reported $ 2,007,239 $
1,806,431
$ (16,511) $
4,364
Retail Media as reported (2)$ 246,996 $
266,186
$ (3,202) $
(1,125)
(1) Information herein with respect to results presented on a constant currency basis is computed by applying prior period average exchange rates to current period results. We have included results on a constant currency basis because it is a key measure used by our management and board of directors to evaluate operating performance. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. The table above reconciles the actual results presented in this section with the results presented on a constant currency basis. (2)Criteo operates as two reportable segments fromDecember 31, 2021 . The table above presents the operating results of our Marketing Solutions and Retail Media segments. A strategic building block ofCriteo's Commerce Media Platform, the Retail Media Platform, introduced inJune 2020 , and reported under the retail media segment, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements running on this platform,Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. We expect most clients usingCriteo's legacy Retail Media solutions to transition to this platform by the second half of 2022. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Contribution ex-TAC margin will increase. Contribution ex-TAC will not be impacted by this transition.
2021 Compared to 2020
Revenue in 2021 increased$181.6 million , or 9% (or 8% on a constant currency basis) to$2,254.2 million compared to 2020. 84% of the year-over-year increase in revenue was driven by the contribution from our existing clients, and 16% of the year-over-year increase was driven by the contribution from new clients. We added 285 net new clients year-over-year across regions. The year-over-year increase in revenue on a constant currency basis was largely attributable to the increase in the average price charged to advertisers, and partially offset by the decreased number of impressions delivered by us. Marketing Solutions revenue increased 11% (or 10% on a constant currency basis) to$2,007.2 million for 2021, reflecting increased spend from Retail clients, both on our retargeting, audience targeting and omnichannel solutions, partially offset by incremental identity and privacy changes, as expected. 66
-------------------------------------------------------------------------------- Retail Media revenue decreased (7)% (or (8)% on a constant currency basis) to$246.9 million for 2021, as the strong performance with large retailers across theU.S. and EMEA was more than offset by the technical and transitory impact related to the ongoing client migration to the RMP.Criteo's RMP accounts for a fast-growing share of Retail Media revenue, or about 50% for the year endedDecember 31, 2021 , and its revenue is accounted for on a net basis. In 2020, less than 5% of Retail Media revenue was accounted for on a net basis, and as a result of this transition to a full RMP business, the growth of Retail Media revenue is temporarily impacted. Reflecting the underlying economic performance, Retail Media's Contribution ex-TAC increased 59% (or 58% on a constant currency basis) in the year endedDecember 31, 2021 , driven by continued strength in Retail Media onsite, in particular in the U.S. market, and growing network effects of the RMP.
2020 compared to 2019
Revenue in 2020 decreased
The COVID-19 pandemic impacted our business during most of the year, with an estimated net negative impact on revenue of approximately$262 million for the twelve months endedDecember 31, 2020 , or approximately 12 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us. The COVID-19 headwind impacted our large customers in our Marketing Solutions business, in particular in the Travel, Classifieds verticals and some large brick-and-mortar Retail clients. However, we believe that client spending from Retail clients in the midmarket and in our Retail Media solutions was supported by stronger ecommerce shopping trends emerging from the COVID-19 pandemic. The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average price charged to advertisers, partly driven by the evolution of our revenue mix over the period, and partially offset by the increased number of impressions delivered by us and the increased number of clicks delivered on the advertising banners displayed by us. The year-over-year decrease in revenue was also driven by the lower contribution from our existing clients and some churning clients, both of which we largely attribute to the COVID-19 outbreak, offsetting the positive contribution from new clients. We added 1,213 net new clients year-over-year across regions. Marketing Solutions revenue decreased (14)% (or (13)% on a constant currency basis) to$1,806.4 million for 2020, reflecting decreased spend from large clients, primarily as a result of the COVID-19 pandemic impact, which we consider as retail bankruptcies and softness with our Travel and Classifieds clients Retail clients, as well as incremental identity and privacy changes, as expected.
Retail Media revenue increased 58% (or 57% on a constant currency basis) to
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--------------------------------------------------------------------------------Revenue breakdown by region
Information in this Form 10-K with respect to results presented on a constant
currency basis was calculated by applying prior period average exchange rates to
current period results. Management reviews and analyzes business results
excluding the effect of foreign currency translation because they believe this
better represents our underlying business trends. Below is a table which
reconciles the actual results presented in this section with the results
presented on a constant currency basis.
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands)
Revenue as reported $ 2,254,235 $ 2,072,617 $ 2,261,516 9 % (8) %
Conversion impact
51,373
currencies
Revenue at constant currency (*)
$ 2,312,889 8 % (8) % Americas Revenue as reported$ 916,825 $ 894,854 $ 952,154 2 % (6) % Conversion impact U.S. dollar/other 1,380 12,770
4,584
currencies
Revenue at constant currency (*)
$ 956,738 3 % (5) % EMEA Revenue as reported$ 844,312 $ 749,672 $ 806,197 13 % (7) % Conversion impact U.S. dollar/other (24,324) (4,528)
44,478
currencies
Revenue at constant currency (*)
$ 850,675 9 % (8) % Asia-Pacific Revenue as reported$ 493,098 $ 428,091 $ 503,165 15 % (15) % Conversion impact U.S. dollar/other 3,231 (5,003)
2,311
currencies
Revenue at constant currency (*)
$ 505,476 16 % (16) %
(*) Revenue at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the average exchange rates for the prior year to the following year figures.
2021 Compared to 2020
Our revenue in theAmericas region increased$22.0 million , or 2% (or 3% on a constant currency basis) to$916.8 million for 2021 compared to 2020. This increase was driven by continued positive retail trends, in particular with large customers across Marketing Solutions, and continued strong performance of Retail Media, as the RMP continues to scale with consumer brands and large retailers, partially offset by the impact of recognizing revenue on a net basis for clients transitioning to the RMP. Our revenue in the EMEA region increased$94.6 million , or 13% (or 9% on a constant currency basis) to$844.3 million for 2021 compared to 2020. This increase was driven by positive retail trends in our main markets, in particular inGermany and emerging markets, positive traction with large customers across our retargeting and new solutions, and continued strong performance of Retail Media across the region. Our revenue in theAsia-Pacific region increased$65.0 million , or 15% (or 16% on a constant currency basis) to$493.1 million for 2021 compared to 2020. The increase was driven by the recovery of our large customers in the region, in particular inJapan , as well as positive contributions from Retail clients inSouth-East Asia . Additionally,$2,254 million of revenue for 2021 was positively impacted by$(19.7) million of currency fluctuations, particularly as a result of the depreciation of the Turkish Lira, Russian Ruble, Japanese Yen and the Brazilian real, partially offset by the appreciation of the Euro and the British pound sterling, compared to theU.S. dollar. 68 --------------------------------------------------------------------------------
2020 Compared to 2019
Our revenue in theAmericas region decreased$(57.3) million , or (6)% (or (5)% on a constant currency basis) to$894.9 million for 2020 compared to 2019. This decline was driven by an estimated revenue impact from COVID-19 of approximately$90 million , in particular with large customers in the broader Classifieds vertical and some large brick-and-mortar Retail clients in theU.S. Our revenue in the EMEA region decreased$(56.5) million , or (7)% (or (8)% on a constant currency basis) to$749.7 million for 2020 compared to 2019. This decrease at constant currency includes an estimated$96 million revenue impact from the COVID-19 pandemic, in part due to the fact that the EMEA region had the highest exposure to the Travel vertical prior to the pandemic, which was most impacted by COVID-19. Our revenue in theAsia-Pacific region decreased$(75.1) million , or (15)% (or (16)% on a constant currency basis) to$428.1 million for 2020 compared to 2019. The decrease at constant currency included an estimated$76 million revenue impact from the COVID-19 pandemic, mostly in the Travel and Classifieds verticals, and was also driven by a weak economic climate inJapan , our largest market in the region. Additionally,$2,073 million of revenue for 2020 was negatively impacted by $$3.2 million of currency fluctuations, particularly as a result of the depreciation of the Turkish Lira, Russian Ruble, the Brazilian real, partially offset by the appreciation of the Japanese Yen and the Euro, compared to theU.S. dollar. 69
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Cost of Revenue
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands, except percentages)
Traffic acquisition costs $ (1,333,440) $ (1,247,571) $ (1,314,947) 7% (5)%
Other cost of revenue (138,851) (137,028) (117,533) 1% 17%
Total cost of revenue $ (1,472,291) $ (1,384,599) $ (1,432,480) 6% (3)%
% of revenue (65) % (67) % (63) %
Gross profit % 35 % 33 % 37 %
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands, except percentages)
Marketing Solutions $ (1,211,087) $ (1,059,680) $ (1,197,483) 14% (12)%
Retail Media (1) $ (122,353) $ (187,891) $ (117,464) (35)% 60%
Traffic Acquisition Costs $ (1,333,440) $ (1,247,571) $ (1,314,947) 7% (5)%
(1) Criteo operates as two reportable segments from December 31, 2021 . The table
above presents the operating results of our Marketing Solutions and Retail Media
segments. A strategic building block of Criteo's Commerce Media Platform, the
Retail Media Platform, introduced in June 2020 , and reported under the retail
media segment, is a self-service solution providing transparency, measurement
and control to brands and retailers. In all arrangements running on this
platform, Criteo recognizes revenue on a net basis, whereas revenue from
arrangements running on legacy Retail Media solutions are accounted for on a
gross basis. We expect most clients using Criteo's legacy Retail Media solutions
to transition to this platform by the second half of 2022. As new clients
onboard and existing clients transition to the Retail Media Platform, Revenue
may decline but Contribution ex-TAC margin will increase. Contribution ex-TAC
will not be impacted by this transition.
2021 Compared to 2020
Cost of revenue for 2021 increased$87.7 million , or 6%, compared to 2020. This increase was primarily the result of a$85.9 million , or 7% increase in traffic acquisition costs (or 6% on a constant currency basis), and by a$1.8 million , or 1% (or 2% on a constant currency basis), increase in other cost of revenue. The 14% increase in Marketing Solutions' traffic acquisition costs related primarily to the 6% increase (and 5% increase on a constant currency basis) in the average CPM for inventory purchased, reflecting the year-over-year recovery in the digital advertising market following the trough of the pandemic-related recession in the second quarter of 2020 and our preferred relationships with media owners, as well as the 8% increase in the number of impressions we purchased, reflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns. Traffic acquisition costs in Retail Media decreased by 35% reflecting the technical and transitory impact related to the ongoing client migration due to the transitioning of our RMP. Because we recognize revenue on a net basis in all arrangements running on the RMP, we expect our Traffic acquisition costs for Retail Media to decrease over time as all of our clients are transitioned to the RMP.
The increase in other cost of revenue includes a
70
--------------------------------------------------------------------------------2020 Compared to 2019
Cost of revenue for 2020 decreased$(47.9) million , or (3)%, compared to 2019. This decrease was primarily the result of a$(67.4) million , or (5)% decrease in traffic acquisition costs (or (5)% on a constant currency basis), partially offset by a$19.5 million , or 17%(or 18% on a constant currency basis), increase in other cost of revenue. The decrease in traffic acquisition costs on a constant currency basis related primarily to the (13)% decrease (and (13)% decrease on a constant currency basis) in the average CPM for inventory purchased. This was partly driven by lower global demand for advertising inventory, despite the increase in online traffic globally caused by the lockdown imposed in COVID-19 affected areas, making the unit price of inventory relatively cheaper than in the pre-pandemic period. This was also driven by the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process. This decrease was not entirely offset by the 10% increase in the number of impressions we purchased, reflecting higher volumes of inventory available and our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns. The increase in other cost of revenue includes$(11.1) million in the allocated depreciation and amortization expense,$(4.2) million in hosting costs,$(2.6) million in data acquisition and$(1.6) million increase in other cost of sales.
Contribution excluding Traffic Acquisition Costs
We consider Contribution ex-TAC as a key measure of our business activity. Our
strategy focuses on maximizing our Contribution ex-TAC on an absolute basis over
maximizing our near-term gross margin. We believe this focus builds sustainable
long-term value for our business by fortifying a number of our competitive
strengths, including access to advertising inventory, breadth and depth of data
and continuous improvement of the Criteo AI Engine's performance, allowing it to
deliver more relevant advertisements at scale. As part of this focus, we
continue to invest in building preferred relationships with direct publishers
and pursue access to leading advertising exchanges.
The following table sets forth our revenue and Contribution ex-TAC by segment:
Year Ended December 31,
Segment 2021 2020 2019
(in thousands)
Revenue Marketing Solutions $ 2,007,239 $ 1,806,431 $ 2,092,590
Retail Media 246,996 266,186 168,926
Total $ 2,254,235 $ 2,072,617 $ 2,261,516
Contribution ex-TAC(1) Marketing Solutions $ 796,152 $ 746,751 $ 895,107
Retail Media 124,643 78,295 51,462
Total $ 920,795 $ 825,046 $ 946,569
(1)We define Contribution ex-TAC as a profitability measure akin to gross
profit. It is calculated by deducting traffic acquisition costs from revenue and
reconciled to gross profit through the exclusion of other cost of revenue. We
have included Contribution ex-TAC in this Form 10-K because it is a key measures
used by our management and board of directors to evaluate operating performance
and generate future operating plans. In particular, we believe that this can
provide useful measures for period-to-period comparisons of our core business.
Accordingly, we believe that Contribution ex-TAC provides useful information to
investors and others in understanding and evaluating our results of operations
in the same manner as our management and board of directors. Our use of
Contribution ex-TAC has limitations as an analytical tool, and you should not
consider them in isolation or as a substitute for analysis of our financial
results as reported under U.S. GAAP. Some of these limitations are: (a) other
companies, including companies in our industry which have similar business
arrangements, may address the impact of TAC differently; (b) other companies
may report Contribution ex-TAC or similarly titled measures but calculate them
differently, which reduces their usefulness as a comparative measure. Because of
these and other limitations, you should consider Contribution ex-TAC alongside
our other U.S. GAAP financial results, including gross profit.
71
--------------------------------------------------------------------------------Constant Currency Reconciliation
Information in this Form 10-K with respect to results presented on a constant
currency basis was calculated by applying prior period average exchange rates to
current period results. Management reviews and analyzes business results
excluding the effect of foreign currency translation because they believe this
better represents our underlying business trends. Below is a table which
reconciles the actual results presented in this section with the results
presented on a constant currency basis:
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands)
Revenue as reported $ 2,254,235 $ 2,072,617 $ 2,261,516 9% (8)%
Conversion impact U.S. (19,713) 3,239 51,373
dollar /other currencies
Revenue at constant currency $ 2,234,522 $ 2,075,856 $ 2,312,889 8% (8)%
Gross profit as reported
829,036 14% (17)%
Conversion impact U.S. (7,822) 467 20,686
dollar/other currencies Gross profit at constant$ 774,122 $ 688,485 $ 849,722 13% (17)%
currency
Traffic acquisition costs as
7% (5)%
reported
Conversion impact U.S. 12,263 (1,605) (28,831)
dollar /other currencies
Traffic acquisition cost at $ (1,321,177) $ (1,249,176) $ (1,343,778) 6% (5)%
constant currency
Contribution ex-TAC as $ 920,795 $ 825,046 $ 946,569 12% (13)%
reported
Conversion impact U.S. (7,450) 1,634 22,542
dollar /other currencies
Contribution ex-TAC at $ 913,345 $ 826,680 $ 969,111 11% (13)%
constant currency
Other cost of revenue as $ (138,851) $ (137,028) $ (117,533) 1% 17%
reported
Conversion impact U.S. (372) (1,167) (1,856)
dollar /other currencies
Other cost of revenue at $ (139,223) $ (138,195) $ (119,389) 2% 18%
constant currency
72
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Research and Development Expenses
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands, except percent of revenue)
Research and development expenses
$ (172,591) 15% (23)% % of revenue (7) % (6) % (8) % 2021 Compared to 2020
Research and development expenses for 2021 increased
2020 Compared to 2019 Research and development expenses for 2020 decreased$(40.1) million , or (23)%, compared to 2019. This decrease mainly related to a decrease in headcount-related costs following the cessation of our R&D operations inPalo Alto in 2019 and lower amortization expense due to the Manage assets revised useful life in 2019. Sales and Operations Expenses Year Ended December 31, % change 2021 2020 2019 2021 vs 2020 2020 vs 2019 (in thousands, except percent of revenue) Sales and operations expenses$ (325,616) $ (330,285) $ (375,477) (1)% (12)% % of revenue (14) % (16) % (17) % 2021 Compared to 2020 Sales and operations expenses for 2021 decreased$(4.7) million , or (1)%, compared to 2020. This decrease was mainly driven by lower net bad debt expense, lower depreciation and amortization costs and lower rent and facilities costs due to the right-sizing of our real estate footprint, partially offset by the reversal of a provision that was settled in 2020 and the negative impact of our increasing stock price on headcount-related expenses.
2020 Compared to 2019
Sales and operations expenses for 2020 decreased$(45.2) million , or (12)%, compared to 2019. This decrease mainly related to a reduction in headcount-related costs, a lower share-based compensation expense, the absence of Manage customer relationships amortization (as asset was fully impaired in 2019), discretionary spend measures on marketing and events, partially offset by an increase in the provision for credit losses. 73
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General and Administrative Expenses
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands, except percent of revenue)
General and administrative $ (152,634) $ (116,395) $ (139,754) 31% (17)%
expenses
% of revenue (7) % (6) % (6) %
2021 Compared to 2020
General and administrative expenses for 2021 increased $36.2 million , or 31%,
compared to 2020. This increase was mainly related to an increase in third-party
services as part of our on-going transformation program and an increase in
headcount related costs including the negative impact of our increasing stock
price on compensation expense.
2020 Compared to 2019
General and administrative expenses for 2020 decreased
Financial and Other Income (Expense)
Year Ended December 31, % change
2021 2020 2019 2021 vs 2020 2020 vs 2019
(in thousands, except percent of revenue)
Financial and Other Income $ 1,939 $ (1,939) $ (5,749) (200)% (66)%
(Expense)
% of revenue 0.1 % (0.1) % (0.3) %
2021 Compared to 2020
Financial and Other Income for 2021 decreased by $(3.9) million , or (200)%
compared to 2020. The $(1.9) million financial and other income for the period
ended December 31, 2021 was mainly driven by the financial expense relating to
our $350 million available Revolving Credit Facility (RCF), including up-front
fees amortization and non-utilization costs, partially offset by income from
cash and cash equivalent. Financial and Other income for the period ended
December 31, 2021 was supported by $3.0 million in proceeds from disposal of
servers and equipments and $2.4 million in dividends received from a minority
interest. At December 31, 2021 , our exposure to foreign currency risk was
centralized at Criteo S.A. and hedged using foreign currency swaps, forward
purchases or sales of foreign currencies.
2020 Compared to 2019
Financial expense for 2020 decreased by$(3.8) million , or (66)% compared to 2019. The$1.9 million financial expense for the period endedDecember 31, 2020 was mainly driven by the financial expense relating to the €140 million drawing fromMay 2020 toNovember 2020 as part of our available Revolving Credit Facility (RCF) financing, the up-front fees amortization, and the non-utilization costs, partially offset by income from invested cash & cash equivalents. AtDecember 31, 2020 , our exposure to foreign currency risk was centralized atCriteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies. 74 -------------------------------------------------------------------------------- Provision for Income Taxes Year Ended December 31, % change 2021 2020 2019 2021 vs 2020 2020 vs 2019 (in thousands, except percent information) Provision for income taxes$ (16,169) $ (32,197) $ (39,496) (50)% (18)% % of revenue (1) % (2) % (2) % Effective tax rate 10.5 % 30.1 % 29.2 % 2021 Compared to 2020 The provision for income taxes for 2021 decreased by$(16.0) million , or 50%, compared to 2020. The annual effective tax rate for 2021 was 10.5%, compared to an annual effective tax rate of 30.1% for 2020. The annual effective tax rates differs from the statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain 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 2021, our income before taxes increased by$46.9 million to$153.8 million , compared to 2020, generating a$43.7 million theoretical income tax expense at a nominal standard French tax rate of 28.40%. This theoretical tax expense is impacted mainly by the following items contributing to a$16.2 million effective tax expense and a 10.5% effective tax rate:$1.7 million of deferred tax assets on which we recognized a valuation allowance,$6.6 million resulting from the BEAT expense,$6.5 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions),$2.2 million related to the French business tax, Cotisation sur la Valeur Ajoutée des Entreprises, or "CVAE", offset by a$25.7 million tax deduction resulting from technology royalty income we received from our subsidiaries,$4.8 million Research and Development tax credit, the recognition or reversal of valuation allowance on deferred tax assets of$10.4 million and$1.4 million of net effect of share-based compensation. Please see Note 22 to our audited consolidated financial statements for more detailed information on the provision for income taxes. Amounts recognized in our Consolidated Financial Statements are calculated at the level of each subsidiary within our Consolidated Financial Statements. As atDecember 31, 2021 , 2020 and 2019, the valuation allowance against net deferred income taxes amounted to$36.4 million ,$37.3 million and$25.3 million , which related mainly toCriteo Corp. ($5.7 million ,$13.3 million and$12.8 million , respectively), Criteo Brazil ($2.7 million ,$2.8 million and$3.2 million , respectively),Criteo Ltd ($7.6 million ,$7.4 million and$7.5 million , respectively), Criteo China ($3.3 million ,$3.3 million and$3.3 million , respectively), Criteo Singapore ($4.2 million ,$3.3 million and$2.8 million ), Criteo Pty ($2.7 million ,$2.8 million and$2.6 million ) andCriteo France ($6.2 million ,$1.0 million and$(7.7) million , respectively).
2020 Compared to 2019
The provision for income taxes for 2020 decreased by$(7.3) million , or 18%, compared to 2019. The annual effective tax rate for 2020 was 30.1%, compared to an annual effective tax rate of 29.2% for 2019. The annual effective tax rates differs from the statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain 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 2020, our income before taxes decreased by$28.6 million to$106.9 million , compared to 2019, generating a$34.2 million theoretical income tax expense at a nominal standard French tax rate of 32.02%. This theoretical tax expense is impacted primarily by the following items contributing to a$32.2 million effective tax expense and a 30.1% effective tax rate:$11.6 million of net effect of share-based compensation,$6.0 million of deferred tax assets on which we recognized a valuation allowance,$13.4 million resulting from the BEAT waiver election,$3.5 million related to the French business tax, Cotisation sur la Valeur Ajoutée des Entreprises, or "CVAE", offset by a$13.4 million tax deduction resulting from technology royalty income we received from our subsidiaries,$5.3 million Research and Development tax credit, the recognition or reversal of valuation allowance on deferred tax assets of$2.5 million and$9.0 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions). Please see Note 21 to our audited consolidated financial statements for more detailed information on the provision for income taxes. 75
-------------------------------------------------------------------------------- Amounts recognized in our Consolidated Financial Statements are calculated at the level of each subsidiary within our Consolidated Financial Statements. As atDecember 31, 2020 , 2019 and 2018, the valuation allowance against net deferred income taxes amounted to$37.3 million ,$25.3 million and$43.2 million , which related mainly toCriteo Corp. ($13.3 million ,$12.8 million and$18.6 million , respectively),Criteo do Brasil ($2.8 million ,$3.2 million and$3.6 million , respectively),Criteo Ltd ($7.4 million ,$7.5 million and$7.2 million , respectively), Criteo China ($3.3 million ,$3.3 million and$3.5 million , respectively), Criteo Singapore ($3.3 million ,$3.6 million and$2.9 million ), Criteo Pty ($2.8 million ,$2.6 million and$2.5 million ) andCriteo France ($1.0 million ,$(7.7) million and$3.9 million , respectively). Net Income Year Ended December 31, % change 2021 2020 2019 2021 vs 2020 2020 vs 2019 (in thousands, except percent of revenue) Net income$ 137,647 $ 74,689 $ 95,969 84% (22)%
% of revenue 6 % 4 % 4 % 2021 Compared to 2020 Net income for 2021 increased$63.0 million , or 84% compared to 2020. This increase was the result of the business dynamics discussed above, in particular a$43.1 million increase in income from operations, a$3.9 million increase in financial and other income and a$16.0 million decrease in the provision for income taxes compared to 2020.
2020 Compared to 2019
Net income for 2020 decreased$(21.3) million , or (22)% compared to 2019. This decrease was the result of the factors discussed above, in particular a$(32.4) million decrease in income from operations, a$3.8 million decrease in financial expense and a$7.3 million decrease in the provision for income taxes compared to 2019. 76
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Non-GAAP Financial Measure Reconciliation
Reconciliation of Contribution ex-TAC to Gross Profit
We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and reconciled to gross profit through the exclusion of other cost of revenue. Contribution ex-TAC is not a measure calculated in accordance withU.S. GAAP. We have included Contribution ex-TAC because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions. In particular, we believe that this measure can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Contribution ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Contribution ex-TAC has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported 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 Contribution ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Contribution ex-TAC alongside our otherU.S. GAAP financial result measures. The below table provides a reconciliation of Contribution ex-TAC to gross profit: Twelve Months Ended December 31, 2021 2020 2019 (in thousands) Gross Profit 781,944 688,018 829,036 Other Cost of Revenue 138,851 137,028 117,533 Contribution ex-TAC$ 920,795 $ 825,046 $ 946,569 77
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Reconciliation of Adjusted EBITDA to Net Income
We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, acquisition-related costs and restructuring related and transformation costs. Adjusted EBITDA is not a measure calculated in accordance withU.S. GAAP. We have included Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational plans. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, and restructuring related and transformation costs in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported underU.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside ourU.S. GAAP financial results, including net income. Twelve Months Ended December 31, 2021 2020 2019 (in thousands) Net income$ 137,647 $ 74,689 $ 95,969 Adjustments: Financial (Income) expense 1,044 1,939 5,749 Provision for income taxes 16,169 32,197 39,496 Equity awards compensation expense 44,955 31,425 49,132 Research and development 16,334 10,253 15,036 Sales and operations 13,023 12,042 19,301 General and administrative 15,598 9,130 14,795 Pension service costs 1,324 2,232 1,556 Research and development 686 1,114 760 Sales and operations 207 394 283 General and administrative 431 724 513 Depreciation and amortization expense 88,402 88,238 93,488 Cost of revenue (data center equipment) 61,119 55,935 44,866 Research and development 9,484 10,741 16,508 Sales and operations 14,780 16,770 24,914 General and administrative 3,019 4,792 7,200 Acquisition-related costs 11,256 286 - General and administrative 11,256 286 - Restructuring related and transformation (gain) costs (1) 21,698 19,989 13,582 Research and development 5,751 4,240 2,000 Sales and operations 9,380 9,398 8,810 General and administrative 6,567 6,351 2,772 Total net adjustments 184,848 176,306 203,003 Adjusted EBITDA$ 322,495 $ 250,995 $ 298,972 78
-------------------------------------------------------------------------------- (1) For the Twelve Months EndedDecember 2021 , 2020 and 2019, respectively, the Company recognized restructuring related and transformation costs following its new organizational structure implemented to support its Commerce Media Platform strategy: Twelve Months Ended December 31, 2021 2020 2019 (Gain) from forfeitures of share-based compensation (427) (2,655) (8,133)
awards
Depreciation and amortization expense - - 1,161 Facilities related (gain) costs 16,020 12,975 11,080 Payroll related (gain) costs 4,480 5,911 9,474 Consulting costs related to transformation 1,625 3,758 - Total restructuring related and transformation$ 21,698 $ 19,989 $ 13,582 (gain) costs For the twelve months endedDecember 31, 2021 andDecember 31, 2020 , respectively, the cash outflows related to restructuring related and transformation costs were$3.9 million and$16.9 million respectively, and were mainly comprised of payroll costs, broker and termination penalties related to real-estate facilities and other consulting fees. 79 --------------------------------------------------------------------------------
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
December 31, September 30, June 30, 2021 March 31, 2021
December 31, September 30, June 30, 2020 March 31, 2020
2021 2021 2020 2020
(in thousands)Consolidated Statements of Income Data:
Revenue $ 653,267 $ 508,580 $ 551,311 $ 541,077 $ 661,282 $ 470,345 $ 437,614 $ 503,376
Cost of revenue (1)
Traffic acquisition costs (377,076) (297,619) (331,078) (327,667) (408,108) (284,401) (257,698) (297,364)
Other cost of revenue (31,840) (34,935) (37,364) (34,712) (34,700) (34,608) (33,914) (33,806)
Gross profit 244,351 176,026 182,869 178,698 218,474 151,336 146,002 172,206
Operating expenses (1)
Research and development (44,860) (33,345) (41,915) (31,697) (32,797) (30,954) (31,247) (37,515)
expenses
Sales and operations (89,892) (75,619) (80,751) (79,354) (85,871) (83,659) (75,781) (84,974)
expenses
General and administrative (43,855) (34,877) (40,474) (33,428) (32,623) (28,672) (29,185) (25,915)
expenses
Total operating expenses (178,607) (143,841) (163,140) (144,479) (151,291) (143,285) (136,213) (148,404)
Income from operations 65,744 32,185 19,729 34,219 67,183 8,051 9,789 23,802
Financial and Other income (expense) 3,330 (154) (519) (718) (111) (491) (1,003) (334)
Income before taxes 69,074 32,031 19,210 33,501 67,072 7,560 8,786 23,468
Provision for income taxes 5,864 (7,801) (4,181) (10,051) (20,254) (2,267) (2,636) (7,040)
Net income $
74,938
16,428
Net income available to shareholders of Criteo 73,765 23,481 14,804 22,406 45,277 5,227 5,716 15,459
S.A.
Other Financial Data:
Contribution ex-TAC (2) $ 276,191 $ 210,961 $ 220,233 $ 213,410 $ 253,174 $ 185,944 $ 179,916 $ 206,012
Adjusted EBITDA (3) $ 110,867 $ 68,430 $ 67,269 $ 79,929 $ 103,423 $ 49,471 $ 38,911 $ 59,190 (1) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense and acquisition-related costs and deferred price consideration as follows:
80
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Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2021 2021 2021 2021 2020 2020 2020 2020
(in thousands)
Equity awards compensation expense
Research and development expenses 4,762 4,858 4,218 2,496 2,482 3,333 2,068 2,370
Sales and operations expenses 3,143 3,875 3,636 2,369 3,662 3,190 1,572 3,618
General and administrative 4,209 4,557 3,815 3,017 2,816 280 3,519 2,515
expenses
Total equity awards compensation 12,114 13,290 11,669 7,882 8,960 6,803 7,159 8,503
expense (a)
Pension service costs
Research and development expenses 166 170 175 175 290 286 269 269
Sales and operations expenses 49 52 53 53 103 101 95 95
General and administrative 104 108 109 110 190 185 175 174
expenses
Total pension service costs 319 330 337 338 583 572 539 538
Depreciation and amortization
expense
Cost of revenue 14,611 15,520 15,744 15,244 15,354 14,712 13,098 12,771
Research and development expenses 2,967 2,557 2,207 1,753 1,712 1,721 1,658 5,650
Sales and operations expenses 3,579 3,545 3,702 3,954 4,033 4,176 4,221 4,340
General and administrative 599 679 838 903 1,041 1,143 1,231 1,377
expenses
Total depreciation and 21,756 22,301 22,491 21,854 22,140 21,752 20,208 24,138
amortization expense
Acquisition-related costs
General and administrative 6,118 2,091 3,047 - 174 112 - -
expenses
Total acquisition-related costs 6,118 2,091 3,047 - 174 112 - -
Restructuring related and
transformation costs
Research and development expenses 513 (1,029) 4,831 1,436 747 1,985 513 995
Sales and operations expenses 568 (106) 1,551 7,367 2,605 5,357 415 1,021
General and administrative 752 (632) 3,614 2,833 1,031 4,839 288 193
expenses
Total restructuring related and
9,996$ 11,636 $ 4,383 $ 12,181 $ 1,216 $ 2,209 transformation costs (b)
(a) Excludes
(b) For the three months ended
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Three Months Ended
December 31,
2021 2020
(Gain) from forfeitures of share-based compensation 239 (2,655)
awards
Facilities and impairment related costs 1,328 4,158 Payroll related costs (157) 1,422 Consulting costs related to transformation 423 1,458 Total restructuring related and transformation costs $ 1,833
$ 4,383
(2 We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and reconciled to gross profit through the exclusion of other cost of revenue. Contribution ex-TAC is not a measure calculated in accordance withU.S. GAAP. Below is a reconciliation of Contribution ex-TAC to gross profit, the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP. Three Months EndedDecember 31 ,September 30 ,June 30, 2021 March 31, 2021 December 31 ,September 30 ,June 30, 2020 March 31, 2020 2021 2021 2020 2020 (in thousands) Gross Profit 244,351 176,026 182,869 178,698 218,474 151,336 146,002 172,206 Other Cost of Revenue 31,840 34,935 37,364 34,712 34,700 34,608 33,914 33,806 Contribution ex-TAC$ 276,191 $ 210,961 $ 220,233 $ 213,410 $ 253,174 $ 185,944 $ 179,916 $ 206,012 (3) We define Adjusted EBITDA as our consolidated earnings before financial income (expense), including dividends, income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance withU.S. GAAP. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance withU.S. GAAP. Three Months Ended December 31, September 30, June 30, 2021 March 31,
December 31, September 30, June 30, 2020 March 31,
2021 2021 2021 2020 2020 2020
(in thousands)Reconciliation of Adjusted EBITDA to Net Income:
Net Income $ 74,938 $ 24,230 $ 15,029 $ 23,450 $ 46,818 $ 5,293 $ 6,150 $ 16,428
Adjustments:
Financial (income) expense (347) 154 519 718 111 491 1,003 334
Provision for income taxes (5,864) 7,801 4,181 10,051 20,254 2,267 2,636 7,040
Equity awards compensation 12,114 13,290 11,669 7,882 8,960 6,803 7,159 8,503
expense (a)
Pension service costs 319 330 337 338 583 572 539 538
Depreciation and amortization 21,756 22,301 22,491 21,854 22,140 21,752 20,208 24,138
expense
Acquisition-related costs 6,118 2,091 3,047 - 174 112 - -
Restructuring costs 1,833 (1,767) 9,996 11,636 4,383 12,181 1,216 2,209
Total net adjustments 35,929 44,200 52,240 52,479 56,605 44,178 32,761 42,762
Adjusted EBITDA $ 110,867 $ 68,430 $ 67,269 $ 75,929 $ 103,423 $ 49,471 $ 38,911 $ 59,190 (a) Excludes
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Three Months Ended
December 31 , September 30 , June 30, 2021 March 31, 2021 December 31 , September 30 , June 30, 2020 March 31, 2020
2021 2021 2020 2020
(as a percentage of revenue)Statements of Operations Data:
Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue
Traffic acquisition (57.7) (58.5) (60.1) (60.6) (61.7) (60.5) (58.9) (59.1)
costs
Other cost of revenue (4.9) (6.9) (6.8) (6.4) (5.2) (7.4) (7.7) (6.7)
Gross profit 37.4 34.6 33.2 33.0 33.0 32.2 33.4 34.2
Operating expenses:
Research and (6.9) (6.6) (7.6) (5.9) (5.0) (6.6) (7.1) (7.5)
development expenses
Sales and operations (13.8) (14.9) (14.6) (14.7) (13.0) (17.8) (17.3) (16.9)
expenses
General and
administrative (6.7) (6.9) (7.3) (6.2) (4.9) (6.1) (6.7) (5.1)
expenses
Total operating (27.3) (28.3) (29.6) (26.7) (22.9) (30.5) (31.1) (29.5)
expenses
Income from operations 10.1 6.3 3.6 6.3 10.2 1.7 2.2 4.7
Financial and Other income (expense) 0.5 - (0.1) (0.1) - (0.1) (0.2) (0.1)
Income before taxes 10.6 6.3 3.5 6.2 10.1 1.6 2.0 4.7
Provision for income taxes 0.9 (1.5) (0.8) (1.9) (3.1) (0.5) (0.6) (1.4)
Net income 11.5 % 4.8 % 2.7 % 4.3 % 7.1 % 1.1 % 1.4 % 3.3 %
Net income available to shareholders of 11.3 % 4.6 % 2.7 % 4.1 % 6.8 % 1.1 % 1.3 % 3.1 %
Criteo S.A.
Other Financial Data:
Contribution ex-TAC 42.3 % 41.5 % 39.9 % 39.4 % 38.3 % 39.5 % 41.1 % 40.9 %
Adjusted EBITDA 17.0 % 13.5 % 12.2 % 14.8 % 15.6 % 10.5 % 8.9 % 11.8 %
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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. Because we incur some 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$(1.9) million financial and other income for the period endedDecember 31, 2021 was mainly driven by the financial expense relating to our$350 million available Revolving Credit Facility (RCF), including up-front fees amortization and non-utilization costs, partially offset by income from cash and cash equivalent. Financial and Other income for the period endedDecember 31, 2021 was supported by other incomes being$3.0 million proceeds from disposal of servers equipments and$2.4 million dividends received from a minority interest. The$1.9 million financial expense for the period endedDecember 31, 2020 was mainly driven by the financial expense relating to the €140 million drawdown fromMay 2020 toNovember 2020 as part of our available Revolving Credit Facility (RCF) financing, the up-front fees amortization, and the non-utilization costs, partially offset by income from invested cash & cash equivalents.
The
Since 2013, the Company has had a foreign currency risk management policy in place. AtDecember 31, 2021 , our exposure to foreign currency risk was centralized atCriteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies. 84 --------------------------------------------------------------------------------
Foreign Currency Risk
A 10% increase or decrease of the British pound, the euro, the Japanese yen or the Brazilian real against theU.S. dollar would have impacted the Consolidated Statements of Income including non-controlling interests as follows: Year Ended December 31, 2021 2020 2019 (in thousands) GBP/USD +10% -10% +10% -10% +10% -10% Net income impact$ (351) $ 351 $ 116 $ (116) $ (386) $ 386 Year Ended December 31, 2021 2020 2019 (in thousands) BRL/USD +10% -10% +10% -10% +10% -10% Net income impact$ (38) $ 38 $ (41) $ 41
$ (71) $ 71 Year Ended December 31, 2021 2020 2019 (in thousands) JPY/USD +10% -10% +10% -10% +10% -10% Net income impact$ 619 $ (619) $ 614 $ (614) $ 1,019 $ (1,019) Year Ended December 31, 2021 2020 2019 (in thousands) EUR/USD +10% -10% +10% -10% +10% -10%
Net income impact
Counterparty Risk As ofDecember 31, 2021 , 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. 85 --------------------------------------------------------------------------------
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,
2021 2020
Cash flows provided by operating activities $220,913 $185,356
Trade receivables, net of allowances $581,988 $474,055
Working capital (current assets less current liabilities) $591,620 $464,219
In addition, the cash flows were also negatively impacted by a $(36.9) 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. We completed two ADS repurchase programs in 2020: ourJuly 2019 program of up to$80 million , which was completed inFebruary 2020 , and ourApril 2020 program of up to$30 million , which was completed inJuly 2020 . InDecember 2021 , we completed a$100 million share repurchase program. Other than these repurchase programs, we intend to retain all available funds and 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, 2021 are presented in the table below: Nominal/ Amount drawn as Amount Authorized of December 31, Outstanding as amounts 2021 (RCF only) of December 31, (RCF Only) 2021 Nature (in thousands) Interest rate Settlement date Floating rate:
Bank Syndicate RCF - € 350,000 € - €
- EURIBOR / LIBOR + March 2022
September 2015 (1) margin depending
on leverage ratio
(1) Subsequent to the settlement date of
86
--------------------------------------------------------------------------------For additional information regarding our loan and RCF agreements, please refer to Note 13 - Financial Liabilities and Note 24 - Commitments.
This revolving credit facilities is unsecured and contain customary events of default and covenants, including compliance with a total net debt to adjusted EBITDA ratio and restrictions on the incurrence of additional indebtedness. AtDecember 31, 2021 , 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 andBNP Paribas . We are authorized to draw up to a maximum of €21.5 million ($24.4 million ) in the aggregate under the short-term credit lines and overdraft facilities. As ofDecember 31, 2021 , 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. Our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return. Our cash and cash equivalents atDecember 31, 2021 were held for working capital and general corporate purposes, which could include acquisitions, and amounted to$515.5 million as ofDecember 31, 2021 . The$27.5 million increase in cash and cash equivalents compared withDecember 31, 2020 primarily resulted from an increase of$220.9 million in cash from operating activities partially offset by a decrease of$(76.4) million in cash used for investing activities and a decrease of$(80.1) million in cash used for financing activities. In addition, the increase in cash includes a$36.9 million negative impact due to changes 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 that are currently providing only a minimal return. Furthermore,Criteo had financial liquidity of approximately$1.068 million , including its cash position, marketable securities and its Revolving Credit Facility as ofDecember 31, 2021 . Overall, we believe that our current financial liquidity, combined with our expected cash-flow generation in 2022, enables financial flexibility.
Operating and Capital Expenditure Requirements
In 2021, 2020 and 2019, our actual capital expenditures were$53.0 million ,$65.5 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, 4% of revenue for 2022, as we plan to continue to build, reshape and maintain additional data center equipment capacity in all regions and increase our investments supporting our new work from home policy as part of our office right sizing program. As part of our strategy to build upon our market and technology leadership, in 2016 we acquired all of the outstanding shares ofHookLogic 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, in 2018 we acquired all of the outstanding shares of Storetail and Manage for$43.7 million and$60.0 million respectively, and in 2021 we acquired all of the outstanding shares ofDoobe In Site Ltd. ("Mabaya"), all financed by 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.
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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 2021, 2020 and 2019 :
Year Ended December 31,
2021 2020 2019
(in thousands)
Cash flows provided by operating activities
Cash used in investing activities (76,367) (101,093) (103,888)
Cash used for financing activities $ (80,117) $
(57,747)
Our cash and cash equivalents atDecember 31, 2021 were held for working capital and general corporate purposes, which could include acquisitions. The increase in cash and cash equivalents compared withDecember 31, 2020 , primarily resulted from an increase of$220.9 million in cash flows from operating activities partially offset by a decrease of$(76.4) million in cash flows used for investing activities and a decrease of$(80.1) million in cash flows 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 2021, net cash flows provided by operating activities were$220.9 million and consisted of net income of$137.6 million ,$124.9 million in adjustments for non-cash and non-operating items and$(41.6) million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of$90.9 million , equity awards compensation expense of$44.5 million , changes in deferred tax assets of$(18.6) million ,$2.0 million generated on disposal of non-current assets, and by$6.0 million of accrued income taxes net of income tax paid. The$(41.6) million decrease in cash resulting from changes in working capital primarily consisted of a$(2.6) million decrease due to changes in operating lease liabilities and right of use assets, a$(19.7) million increase in other current assets (including prepaid expenses and VAT receivables) and a$(135.0) million increase in accounts receivable partially offset by a$33.6 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables and$82.7 million increase in accounts payable. 88 -------------------------------------------------------------------------------- In 2020, net cash flows provided by operating activities were$185.4 million and consisted of net income of$74.7 million ,$154.6 million in adjustments for non-cash and non-operating items and$(44.0) million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of$106.6 million , equity awards compensation expense of$28.8 million , changes in deferred tax assets of$3.7 million ,$2.7 million generated on disposal of non-current assets,$1.9 million from other non-operating items, and by$10.9 million of accrued income taxes net of income tax paid. The$(44.0) million decrease in cash resulting from changes in working capital primarily consisted of a$(33.3) million decrease in accounts payable, a$(5.8) million decrease due to changes in operating lease liabilities and right of use assets, a$(7.2) million increase in other current assets (including prepaid expenses and VAT receivables) and a$(4.0) million increase in accounts receivable partially offset by a$6.3 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables. 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.
Investing Activities
Our investing activities to date have consisted primarily of purchases of servers and other data-center equipment and business acquisitions.
In 2021, net cash flows used in investing activities were
In 2020, net cash flows used in investing activities were$101.1 million and consisted of$65.5 million for purchases of servers and other data-center equipment,$1.2 million for business acquisitions and$34.4 million change in other non-current financial assets resulting from investments inMarketable Securities (see Note 2 and 3).
In 2019, net cash flows used in investing activities were
Financing Activities
In 2021, net cash used in financing activities was
In 2020, net cash used in financing activities was$57.7 million mainly resulting from the$10.9 million impact of the €140 million drawing fromMay 2020 toNovember 2020 as part of our available Revolving Credit Facility (RCF) and the$43.7 million impact from our share repurchase program. 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. 89 --------------------------------------------------------------------------------
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 , Grenoble,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 682 employees primarily engaged in research and development atDecember 31, 2021 . Research and development expense totaled$151.8 million ,$132.5 million and$172.6 million for 2021, 2020 and 2019, respectively. 90 --------------------------------------------------------------------------------
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, Contribution 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 2021, 2020 and 2019.
Year Ended December 31,
2021 2020 2019
(in thousands, except number of clients)
Number of clients 21,745 21,460 20,247
Contribution ex-TAC $ 920,795 $ 825,046 $ 946,569
Adjusted EBITDA $ 322,495 $ 250,995 $ 298,972
Number of Clients
We define a client to be a unique party from whom we have received a signed
contract or an insertion order and for whom we have delivered an advertisement
or monetized an advertising inventory during the previous 12 months. We believe
this criteria best identifies clients who actively use our set of solutions. 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 contracts or
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. 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 over that same period.
Contribution ex-TAC
We consider Contribution 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 Contribution ex-TAC as a key measure to evaluate, plan and make decisions on our business activities and sales performance. In particular, we believe this can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Contribution ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Contribution ex-TAC is not a measure calculated in accordance withU.S. GAAP. Please see above for a discussion of the limitations of Contribution ex-TAC and a reconciliation of Contribution ex-TAC to gross profit, the most comparableU.S. GAAP measure, for 2017, 2018, 2019, 2020 and 2021. 91
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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 related and transformation costs, 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 related and transformation costs, 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 withU.S. GAAP. Please see above for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparableU.S. GAAP measure, for 2017, 2018, 2019, 2020 and 2021. 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, as part of our Commerce Media Platform strategy, we believe that we can further strengthen our core business, continue to expand our product portfolio, explore strategic game changers for our business and drive further technology innovation and operational excellence 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. Contribution ex-TAC We are focused on maximizing our Contribution 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 preferred 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 Contribution ex-TAC. We believe this strategy maximizes the growth of our Contribution ex-TAC on an absolute basis and strengthens our market position. As a result, in Marketing Solutions, we expect our traffic acquisition costs to continue to increase on an absolute basis as we continue to grow our revenue. 92 --------------------------------------------------------------------------------
Adjusted EBITDA
Our Adjusted EBITDA for 2021 was$ 322.5 million , a 28% increase over 2020. Our increase in Adjusted EBITDA for 2021 compared to 2020 was primarily the result of the 12% increase in Contribution ex-TAC over the period, partly offset by a 16% increase in our Non-GAAP operating expenses. This drove a 35% adjusted EBITDA margin in 2021. While this margin improvement was largely driven by operating leverage from revenue growth and productivity improvement, it also reflects several structural cost measures initiated in 2020, including in our hosting and facilities costs, as well as COVID-19-related savings related to the lack of marketing events and travel and entertainment during the pandemic. For 2022, we expect to invest in the strategic growth areas of our business, such as Retail Media, our first-party media network, Contextual advertising, video, Connected TV and Commerce Insights to accelerate growth in 2023, driving a lower Adjusted EBITDA margin as a percentage of Contribution ex-TAC compared to 2021. Over time, we expect to continue to invest in the growth areas of our business and to maintain a healthy profitability as we continue to deliver sustainable revenue growth and as we benefit from operating leverage and continued discipline in our expense management. Adjusted EBITDA is not a measure calculated in accordance withU.S. GAAP. Please see above for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparableU.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 close to 22,000 atDecember 31, 2021 , a 1% increase overDecember 31, 2020 . 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 vertical, especially in ecommerce, 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, with continued strong focus on ecommerce.
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 Commerce Media Platform, is powered by AI technology and aims to cover the entire marketing funnel (Awareness, Audience Targeting, Conversion). Our technology is optimized to drive impactful business outcomes from marketing and monetization for retailers and brands. 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 for us on any day over the relevant measurement period. In each of 2021, 2020 and 2019, our client retention rate was approximately 90%. 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 and the consumer brand verticals 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 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.
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1 Excluding Criteo Retail Media.
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--------------------------------------------------------------------------------E. 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.
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