Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The aggregate market value of voting stock held by non-affiliates of the registrant as of the last business day of the registrant's most recently completed second fiscal quarter was $3.1 billion,$2,716 million, based on the closing sale price of the American Depositary Shares as reported by the Nasdaq Global Select Market on June 30, 2017.2021. Ordinary shares, nominal value €0.025 per share, held by each officer and director and by each person who owns or may be deemed to own 10% or more of the outstanding ordinary shares have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
Part III incorporates certain information by reference from the registrant’s proxy statement for the 20182022 Annual Meeting of Shareholders. Such proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2017.2021.
CRITEO S.A.
ANNUAL REPORT ON FORM 10-K
For The Fiscal Year Ended December 31, 20172021
Except where the context otherwise requires, all references in this Annual Report on Form 10-K ("Form 10-K") to the "Company," "Criteo," "we," "us," "our" or similar words or phrases are to Criteo S.A. and its subsidiaries, taken together. In this Form 10-K, references to "$" and "US$" are to United States dollars. Our audited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Unless otherwise indicated, the statistical and financial data contained in this Form 10-K are presented as of December 31, 2017.2021.
This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than present and historical facts and conditions contained in this Form 10-K, including statements regarding our future results of operations and financial position, business strategy, plans and our objectives for future operations, are forward-looking statements. When used in this Form 10-K, the words "anticipate," "believe," "can," "could," "estimate," "expect," "intend," "is designed to," "may," "might," "objective," "plan," "potential," "predict," "objective,"project," "seek," "should," "will," "would" or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
You should refer to Item 1A "Risk Factors" of this Form 10-K for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Form 10-K and the documents that we reference in this Form 10-K and have filed as exhibits to this Form 10-K completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Each day, we are presented with billions of opportunities to connect consumers with relevant marketingadvertising messages from our commerce and consumer brand clients.customers in compliance with the highest privacy standards, including the General Data Protection Regulation ("GDPR") and California Consumer Privacy Act ("CCPA"). For each of these opportunities, our algorithms analyze massive volumes of shopping data to observe and predict consumer preferences and intent, and deliver specific messaging for products or services that are likely to engage that particular consumer and generate a sale for our client.consumer. The accuracy of our algorithms improves with every advertisementad we deliver, as they incorporate new data while continuing to learn from prior interactions.
•Fairness: theour data collectives are designed and governed in ways such that the value gained by clients participatingeach participant largely exceeds theirthe individual contribution to the collectives.collectives,irrespective of the participant’s size.
Consistent with our data minimization principles, our technologies only rely on categories of data that are strictly necessary for the purpose of our services. This means that the user information we collect relates primarily to purchase intent. In addition, we provide consumers with easy-to-use and easy-to-access mechanisms to control their advertising experience and opt out of receiving targeted ads we deliver. This transparent, consumer-centric, and controllable approach to privacy empowers consumers to make better-informed decisions about our use of their data. We also actively encourage our customers and media owner partners to provide transparent and clear information to consumers about our collection and use of data relating to the ads we deliver and monitor.
1 Source: eMarketer.
2 Products are not unique and may appear in the catalogs of different customers.
Our Media assets: our first-party media integrations and media buying scale
We provide our marketer customers with extensive real-time access to advertising inventory through direct relationships with thousands of media owner partners, as well as selective supply side partnerships. We define inventory as the combination of desktop web, mobile web, mobile in-app display, including social and native, online video displays, connected TV, and ad inventory on major retail ecommerce properties, including standard banners, native and sponsored product formats.
In some cases, we have negotiated direct and privileged access with publishers, giving us the opportunity to select, buy and price, on an impression-per-impression basis and in real time: (1) inventory that a publisher might otherwise only sell subject to minimum volume commitments; and/or (2) particular ad impressions before such impressions are made available to other potential buyers. Among their multiple benefits, these direct relationships can give us privileged access to first-party publisher data which allow us to bid on impressions without using third-party cookies or other third-party identifiers.
Many of our direct publisher partners have granted us preferred access to portions of their inventory as a result of our ability to effectively monetize that inventory. For example, within Criteo Retail Media, we access inventory and first-party data from ecommerce sites that are generally not available to traditional advertising demand. We believe this inventory and data from ecommerce retailers is particularly valuable for consumer brands looking to advertise their products in a multi-brand retail environment.
We price and buy inventory in real time and typically do not pre-buy any impression. In addition, in some instances, we may commit to buying minimum volumes of impressions to certain publishers partners. Across both our direct publisher relationships and inventory purchasing done on Real-Time Bidding (RTB) exchanges, we leverage Criteo AI Engine's ability to quickly and accurately value available advertising inventory, and utilize that information to bid for inventory on a programmatic, automated basis.
Alongside our existing technologies to integrate directly with publishers, we have developed Criteo Direct Bidder, our header-bidding technology. Header-bidding allows publishers to make their inventory simultaneously available for public auction to several competitive bidders, including RTB exchanges. Thanks to our large scale, Criteo Direct Bidder allows us to connect directly to the ad server of publishers in situations where publishers use header bidding to monetize their inventory, allowing us, among other advantages, to bypass RTB exchanges in the bidding process and to save publishers the take-rate RTBs would typically charge them. As a result, Criteo Direct Bidder helps publishers increase the average monetization of their inventory sold through Criteo Direct Bidder, relative to our overall spend through all channels. Using Criteo Direct Bidder, we were connected to publishers globally, on both web and apps, including: IBM Watson Advertising (The Weather Channel), Globo, OLX, NBC, Forbes, The Criteo EngineWall Street Journal, Leboncoin, Daily Mail, Viber, Axel Springer's websites, Marktplaats, M6, AJA Japan and EstSoft.
TheWe take a variety of brand safety measures to ensure that the brand equity of our clients is preserved at all possible times. These measures include determining that each publisher's inventory meets our content requirements and those of our clients to ensure that their ads are not shown in inappropriate content categories, such as, for example, adult, violent or sensitive political content. In addition, we are an active member of the Coalition for Better Ads, supported by Google, and are compliant with their recommendations for user-friendly advertising formats. In 2020, we entered into a partnership with Oracle Advertising to strengthen our existing brand safety offering. Criteo’s AI Engine is now integrated with Oracle Contextual Intelligence, a solution providing real-time content review and page-level pre-bid classification to clients across 11 standard brand safety categories. In recognition of our efforts to combat fraud and ensure a brand safe digital ecosystem for our advertisers, Criteo Engine has been developed overindependently certified by the past 12 yearsTrustworthy Accountability Group for the Certification Against Fraud and the Brand Safety Certification.
For Criteo Marketing Solutions, we typically purchase inventory programmatically on a CPM basis from our direct publisher partners and RTBs, through standard terms and conditions for the purchase of advertising inventory. This means that inventory purchased for Criteo Marketing Solutions is paid to the publisher irrespective of whether the user engages, in whatever form, with the advertisement delivered on that publisher's digital property. Pursuant to such arrangements, we purchase impressions for users that Criteo recognizes on these publishers' digital properties. Such arrangements are cancellable upon short notice and without penalty.
For Criteo Retail Media, we historically pay for the inventory of retailer partners based on a revenue share, effectively paying the retailer a portion of the click-based revenue generated by customers clicking on the ads displaying the products of our consumer brand clients. This means that, with these Criteo Retail Media solutions, retailer publishers only get paid if a user effectively clicks on the ad that is displayed on their site. We may also buy inventory on a CPM basis. For our Retail Media Platform (RMP), which represents the majority of our Retail Media Contribution ex-TAC and growing fast, we do not incur our own media cost as retailers use our Retail Media Platform as a technology platform to sell their inventory directly to consumer brands and we bill and collect media cost on their behalf.
We believe that our ability to efficiently access, value and monetize inventory at scale results in a deeply liquid marketplace for both buyers and sellers of advertising, allowing us to deliver effective ads at the right price for our clients, even as the size and complexity of the marketing campaign increases.
Criteo AI Engine
Criteo AI Engine consists of multiple machine learningartificial intelligence algorithms, and the proprietary global hardware and software infrastructure that enables the Criteo Commerce Marketing EcosystemMedia Platform to operate in real time at significant scale.scale, and activate our commerce datasets and unique media for effective marketing and monetization.
The Criteo AI Engine leverages our vast and high-quality data assets,leverages the Buyer Index, with thethe goal of maximizing consumer engagement and conversionto drive impactful business outcomes for clients through the delivery of highly relevant and personalized advertisementsads in real time.
The Criteo AI Engine consists of:
Recommendation•Lookalike finder algorithms.These algorithms create advertisementsuser audiences, or groups of consumers likely to be interested in and engage with a specific category of our clients’ products or services, from a predetermined audience seed based on other clients’ audiences that were already targeted and exposed to similar products or services in the context of previous advertising campaigns. Once created, these audiences are used by Criteo AI Engine as targets to reach and be exposed to tailored ads for relevant products or services for the purpose of a dedicated campaign. This set of algorithms typically supports campaign types addressing Audience Targeting objectives, i.e. driving new prospects to consider brands, products or services with which they have not yet engaged in the past.
•Recommendation algorithms.These algorithms create ads tailored to specific customerconsumer interest and intent by determining the specific products andor services to include in the advertisement.ad. These products and services may be ones that the customerconsumer has already been exposed to, or that the algorithms predict the customer could be interested in. Alternatively, these may be products and services that other customers exposed to some of the same products and services,consumers within Criteo Buyer Index have been interested in. Since
•Dynamic Creative Optimization+ (DCO+).Based on the results of our acquisitiondynamic creative algorithms, Criteo AI Engine automatically and dynamically assembles customized creative ad content on an impression-per-impression basis in real time, by optimizing each individual creative component in the ad, from the font, color, size and format of HookLogic, Inc. andproduct images to the launch"call to action" or price discount. Our patented Dynamic Creative Optimization+ technology offers virtually unlimited personalization, with up to 17 trillion visual ad variations, without the need to define ad sizes or layouts upfront, while always maintaining the consistency of Criteo Sponsored Products, we have also made investments in this Engine feature to improve product recommendation on retailer sites.
our clients' brand image.•Predictive bidding algorithms.These algorithms predict the probability and nature of a user's engagement with a given advertisement.ad. Such predicted user engagement can take the form of, for example, ofcustomer site visits, clicks, conversions, shopping basket value, specific product categories purchased, or even the gross margin of the purchased product or service that our client generates from such purchase. This prediction of engagement incorporates data from our clients, publishersmarketer customers, our media owner customers and third-party sources,partners, including user intent, who the clientour customer is, the products offered byin the client,ad, as well as data on the creative content of the advertisementad and the publishermedia context in which the advertisementad is viewed.displayed, as well as third-party sources. Together with our recommendation algorithms, the prediction algorithms allow us to determine the most appropriate price to pay for an advertisingad impression, based on an individual user's predicted click-through, conversion and the dollar value of that conversion,predicted engagement, what the clientour customer is willing to pay for that engagement, as well as Criteo's own target Revenue ex-TAC margin (or economic "take rate" retained by Criteo) from placing the advertisement.that individual ad.Our bidding engine executes campaigns based on certain objectives set by our clients (for example,(such as cost-per-click, cost-per-order, cost-of-sales, budget goal)cost-per-visit, cost-per-impression, cost-per-install or total campaign budget). After a bid for an advertisingad impression is placed and won, the Criteo AI Engine assembles and delivers individualized advertisementsads, and provides campaign reporting all in near-real time.
Kinetic Design.Based on the results of our algorithms, the Criteo Engine automatically and dynamically assembles customized creative advertising content on an impression-by-impression basis in real time, by optimizing each individual creative component in the advertisement, from the font, color, size and format of product images to the "call to action" or price discount. Our patented Kinetic Design creative technology offers virtually unlimited personalization, with up to 17 trillion visual ad variations, without the need to define advertisement sizes or layouts upfront, while maintaining the consistency of our clients' brand image.
•Software systems and processes. Our algorithms are supported by robust software infrastructure that allows us to operate seamlessly at a very large scale.scale through our network of more than 45,000 servers as of the end of 2021. The architecture and processing capabilities of this technology have been designed to match the massive computational demands and complexity of our algorithms.algorithms in real time. This technology enables data synchronization, storage and analysis across a large-scale distributed computing infrastructure in multiple geographies, as well as fast data collection and retrieval using multi-layered caching infrastructure.
•Experimentation platform.ThisOur Research & Development team continuously tunes Criteo AI Engine via experimentation and A/B tests. For example, in 2021, we performed about 800 online A/B tests and over 100,000 offline experiments and tests.We use an online/offline testing platform is used to improve the capabilities and effectiveness of our prediction models by measuring the correlation of specific parameters with user engagement, usually measured by consumer visits, clicks and conversions, typically in the form of sales. A dedicated team is constantly testing new types and sources of data, sourcesas well as new variables, to determine whether they help diminish the gap between, for example, predicted click-throughvisits, click-throughs and conversion,conversions, and actual click-throughvisits, click-throughs and conversionconversions over the course of a live campaign.
A key attribute of the Criteo AI Engine is the vast metadata of learnings on marketing and commerce marketing learningeffectiveness that we have accumulated from having delivered and measured responses to over 4.7close to 11 trillion advertising impressions since our Company's inception.
In addition, weWe have long established and adoptedPrivacy-by-design as a central element of our technology and product design and development cycles, with a strong commitment to ensuring best practices in privacy, security and safety for consumers and our commercemarketer and brand clients. Wemedia owner customers. Since 2013, we have had a designated Data Privacy Officer since 2013 along with a team of privacy experts. These experts are part of theintegrated within our R&D and Product organizationorganizations and processes, and consider all facets of user privacy as key elements in the design of any new producttechnology, solution or feature of the Criteo Commerce Marketing Ecosystem.Media Platform. They also perform ongoing Privacy Impact Assessments to monitor potential risks during the product lifecycle and proactively mitigate those risks. The Data Privacy team delivers company-wide privacy training, enforces our privacy policies and is integral to ensuring that we build the best productssolutions and services. We regularly review and document our internal privacy policies, amend existing privacy policies as necessary and enforce these policies with our clients, publishermedia owner partners and vendors.
Our Publisher NetworkSolutions
We benefit from broad real-time accessCriteo reports its business results for two operating and reportable segments: Marketing Solutions and Retail Media.
•Criteo Marketing Solutions allow commerce companies to inventoryengage consumers with personalized ads across the full marketing funnel, leveraging online and offline store data.
◦Examples of expected business outcomes driven by Criteo Marketing Solutions include:
▪Awareness: creating and building brand awareness for a client's existing or new product or service, by targeting relevant high-quality consumer audiences showing intent for that particular product or service and reaching these audiences, for example, through our direct relationships with thousands of publisher partners. We define inventory asonline video ads across the combination of desktop web, mobile in-web and mobile in-app Display Advertising impressions, including social and native display inventory; video inventory; and inventory for sponsored products advertisements on major retail ecommerce sites.
Through our relationships with thousands of direct publisher partners and with real-time bidding, or "RTB," Display Advertising exchanges, we provide extensive access to advertising inventory. In some cases, we have negotiated direct and privileged access with publishers, giving us the opportunity to select, buy and price, on an impression-per-impression basis and in real time: (1) inventory that a publisher might otherwise only sell subject to minimum volume commitments; and/or (2) particular advertising impressions before such impressions are made available to other potential buyers. We believe that manybreadth of our directpremium publisher partners have granted us preferred access to portions of their inventory as a result of our ability to effectively monetize that inventory. For example, in Japan, we have entered into a strategic relationship with Yahoo! Japan, that grants us privileged access to its advertising inventory for delivering personalized display advertisements. With Criteo Sponsored Products, we access inventory from retail ecommerce sites that is generally not available to traditional advertising demand. This sponsored product inventory from ecommerce retailers is a valuable source of inventory for brand manufacturers looking to advertise their products on a performance basis in a multi-brand retail environment.
We price and buy inventory in real time and typically do not pre-buy any impression, and do not commit to buying any minimum volume of impressions, except in some limited specific cases involving publishers using Criteo Sponsored Products. Across both our direct publisher relationships and inventory purchasing done on RTB exchanges, we leverage the Criteo Engine's ability to quickly and accurately value available advertising inventory, and utilize that information to bid for inventory on a programmatic, automated basis.
For Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA and Criteo Audience Match BETA, we purchase inventory programmatically from our direct publisher partners, through standard terms and conditions for the purchase of Display Advertising inventory. Pursuant to such arrangements, we purchase impressions on a CPM basis (or cost-per-thousand-impressions) for potential customers that Criteo recognizesnetwork on the publishers' digital properties. This means that inventory purchased for Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA and Criteo open Internet;
▪Audience Match BETA is paid to the publisher irrespective of whether the user engages with the advertisement delivered on that publisher's digital property. Such arrangements are cancellable upon short notice and without penalty.
For Criteo Sponsored Products, we pay for the inventory of publisher partners based on a revenue share, effectively paying the publishers a portion of the click-based revenue generated by potential customers clickingTargeting: driving visits from new prospects on the sponsored products advertisements displaying the products of our brand clients. This means that, with Criteo Sponsored Products, the publishers only get paid if a user effectively clicks on the advertisement that is displayed on their digital property.
Alongside our existing technologies to integrate directly with publishers, we have developed the Criteo Direct Bidder, our new generation header bidding technology. In recent years, the publisher landscape has rapidly transitioned towards header bidding technology, allowing publishers to make their inventory simultaneously available for public auction to several competitive bidders, including RTB exchanges. Header bidding replaces a previous auction structure, whereby a publisher's inventory was made available sequentially to auctioneers in a so-called "waterfall" priority system. Thanks to our large scale, Criteo Direct Bidder allows us to connect directly to the ad server of publishers in situations where publishers use header bidding to monetize their inventory, thereby allowing us to by-pass RTB exchanges in the bidding process. Using Criteo Direct Bidder, we were connected to 1,500 large publishers globally as of December 31, 2017, including among others The Weather Channel, Daily Mail, The Washington Post, eBay, Orange, Viber, Axel Springer's websites and the LA Times. Criteo Direct Bidder has been positively received by publishers, helping them to increase the average monetization of their inventory monetized by Criteo by 20% to 40%, relative to our overall spend through all channels1.
We believe that our ability to efficiently access and value inventory at scale results in a deeply liquid marketplace for both buyers and sellers of Display Advertising, allowing us to deliver effective advertisements at the right price for our clients, even as the size and complexity of the campaign increases.
We take a variety of brand safety measures to ensure that the brand equitywebsite of our clients, is preserved at all times. These measures include determining that each publisher's inventory meets our content requirements and thoseor driving installations of our clients' apps by new consumers, by engaging such prospect visitors online (either on the web, in apps or on connected TV), with personalized ads offering products or services tailored to their predicted interest through our audience targeting capabilities, based on our Buying Index data and/or contextual signals;
▪Conversion: driving sales for commerce clients by engaging consumers online, with personalized ads offering products or services for which they have already expressed shopping intent; or driving more salesfrom existing customers of our commerce clients, by accurately targeting and re-engaging these existing customers online with personalized ads offering new products or services that they have not yet purchased nor been exposed to.
◦Our clients' use and consumption of Criteo Marketing Solutions is made flexible through a set of tools and services:
▪Our clients have access to mitigatean integrated self-service customer interface, called the risk thatManagement Center, providing transparency, control and visibility over their display advertisements are shown in inappropriate content categories, such as in adult, violent or political content. For that purpose, we use numerous internal systemsmarketing investments and processes to filter out inventory in real time, includingcampaigns with us, whatever their business and marketing goals may be. This interface enables the listflexible and modular consumption of suspect IP addresses from the Trustworthy Accountability Group and the lists of invalid traffic from several specialized external vendors. With respect to our inventory purchased through RTB exchanges, we utilize a mix of proprietary methodologiesvarious solutions directly by our clients, as well as third-party software to verify that inventory where the advertisement placement is shown conforms to our advertising guidelines and the content expectations and branding guidelines of our clients. In addition, we are an active member of the Coalition for Better Ads, supported by Google, and are compliant with their recommendations for the most user-friendly advertising formats.
Client Platform
We offer our clients an integrated technology platform that provides comprehensive visibility and detailed transparency on their campaigns across the consumer journey. This platform enables campaign execution and management of their campaigns through a unified and easy-to-use dashboard and a suite of software and services that automates key campaign processes. Asprocesses, and a result, we reducehigh level of control over the objectives, parameters and performance of their various campaigns with us. Criteo Management Center reduces unnecessary complexity and cost associated with manual processes andof having to use multiple vendorsDemand-Side Platforms ("DSPs") and sources of commerce marketing products,inventory supply, delivering efficiencies across the consumer journey,marketing funnel, even as campaigns grow in size, complexity and product mix.
The Criteo Commerce Marketing Ecosystem includes a comprehensive suitemix of services and software, including:marketing goals.
A unified and transparent dashboard10
▪In addition to manage campaigns, product by product. This dashboard automatesself-service access to Criteo Management Center, we also offer a number of campaign execution and management tasks. Key attributes of the dashboard include:
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▪ | granular control, with the ability to specify, for each Criteo product, the CPC that the client is ready to bid on at its own product category level; |
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▪ | transparent and detailed reporting of key campaign metrics, such as CPCs, impressions served, effective cost per thousand impressions, or eCPM, click-through rate and post-click sales; and |
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▪ | transparent standard reports that clients can download through the Criteo API, showing detailed impression-level information4, including: publisher domains where their advertisements are shown, time stamps of displayed advertisements and the value of each impression. We believe that more transparency increases the confidence our clients have in Criteo, and further strengthens our relationship with them.
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4 Based on A/B tests performed by Criteo over the months of February and March 2017.
Business intelligence and analytics. Included in our client service, we provide high-value consulting servicesmanaged-service approach to our larger clients through a team, providing deep business intelligence and analytics services. Our teams of advisers that aid themour larger customers in setting goals for, extracting insights from, and evaluating trends and performance of their various advertising campaigns with us across multiple marketing campaigns across different marketing objectives,goals, sources of inventory, supply, marketingadvertising channels and formats, and the multiple digital devices that customersconsumers may use.
▪In addition, we offer multiple API integrations for certain partners and clients to enable the management of our clients' advertising investments with us in a unified and integrated way with some of their other advertising or marketing technology partners which makes Criteo solutions directly available in their back-office.
▪In parallel with accessing transparent performance reporting and measurementfrom the Criteo Client Platform,Management Center, a large proportion of our clients regularly use their own attribution tools and solutions from third-party vendors(such as, for example, Nielsen’s Digital Ad Ratings, GoogleTM Analytics, IBM Coremetrics®Coremetrics or Adobe®Adobe Analytics) to independently measure and assess the performance of the post-clickresults that Criteo delivers, including visits, sales delivered by Criteo.and other key metrics.
Our CommerceIn Marketing Product Portfolio
We offer four productsSolutions, our new solutions are focused on driving salesthe following areas:
•Brand awareness: We are extending our offering to allow for our clients.
All our products are priced on a cost per click basis, which means that we only get paid when a user engages with our advertisements. For all of our products, our clients generally measure performance based on post-click sales.
Criteo Dynamic Retargeting drives post-click salesmore brand awareness campaigns for our commerce clients by engaging consumers with personalized advertisements offering products or services for which they have already expressed shopping intent.
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• | Criteo Customer Acquisition BETAdrives post-click sales for our commerce clients by helping them to acquire new prospective customers, using intent information across a large pool of clients and engaging such prospective customers with personalized advertisements offering products or services that are predicted to be of interest to them.
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• | Criteo Audience Match BETAdrives more post-click sales for our commerce clients by accurately targeting and re-engaging their existing customers with personalized advertisements offering new products or services that they have not yet purchased.
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Criteo Sponsored Products drives post-click sales for our brand clients by pricingboth brands and delivering in real time sponsored product advertisements to consumers demonstrating intent, or actively searching for a specific product or product category,retailers on the websites of retailers selling such brand product.
open Internet, including in online video formats and through the Connected TV channel.With our product portfolio, we help our clients cover the entire consumer journey: acquiring new prospective customers, converting them into buyers and regularly re-engaging them across the•Audience-first Targeting: We already address customer lifetime.
Excluding our core product, Criteo Dynamic Retargeting, no other product accounted for more than 10% of total consolidated revenue for the periods presented.
Industry Background
The ability to engage and convert customers is critical for most companies, especially for businesses in the broader commerce and consumer brand sectors, who often dedicate a significant portion of their cost base to developing such an ability.
Ecommerce is Growing Fast But Physical Stores Remain Key Assets for Retailers.
The global retail commerce market is massive in size, representing $22.7 trillion in 2017, and is expected to continue to grow by a 5% compound annual growth rate, or CAGR, to $26.5 trillion in 2020, according to eMarketer. While business-to-consumer ecommerce is growing much faster than global commerce (by a 17.2% CAGR, from $2.9 trillion in 2017 to $4.7 trillion in 2020, according to eMarketer), retail ecommerce still represents a fairly limited share of overall retail commerce (growing from 10.1% in 2017 to 14.6% in 2020 according to eMarketer). This means that, despite the rapid growth of ecommerce, physical stores still capture approximately 90% of the global retail commerce market and remain key assets for retail commerce companies looking to offer differentiated services to consumers while distributing their products.
Display Advertising Grows Faster than Search Advertising But Faces Challenges for Broad-Based Performance Marketing.
While the internet and mobile devices continue to be critical to generating customer engagement and driving sales, both online and offline, they remain fragmented and complex marketing platforms, making it difficult and costly to engage and convert prospective customers. For example, the global cart abandonment rate, or the percentage of online customers leaving their order behind instead of purchasing, was 75.6% in the first quarter 2017 according to SaleCycle, including 72.8% in the Retail vertical and 81.7% in the Travel vertical.
There are two primary marketing channels for customer engagement and conversion in the digital space: Search Advertising and Display Advertising. According to eMarketer, digital marketers spent $185 billion on paid Search Advertising and Display Advertising combined in 2017, with this combined spend, defined as Digital Marketing, expected to grow at a 10.3% CAGR to $249 billion in 2020.
Display Advertising involves placing images, video or advertisements that incorporate animation, sound and/or interactivity, alongside website and mobile application content. According to eMarketer, Display Advertising, including on social media, represented 52% of the Digital Marketing market, or $97 billion in 2017, and is projected to grow at a 12.2% CAGR to $137 billion in 2020. The market for Display Advertising is more fragmented and is projected to grow over 50% faster than the market for Search Advertising, due in part to the rapid rise of mobile internet usage and the continued proliferation of free content across the internet, including on social media platforms.
The market for Display Advertising is growing fast but continues to face a number of significant challenges as an effective intent-driven medium for customer engagement and conversion, including:
Still Difficult to Deliver Targeted, Relevant Ads. In general, traditional Display Advertising solutions have incorporated limited personalization capabilities and have not been effective in utilizing consumer intentacquisition as a signal for the delivery of advertisements. As a result, targeting and messaging have mainly been done by buying advertising impressions for generic audiences and placing generic advertisements alongside certain types of content (e.g., non-personalized automotive advertisements on sites related to cars), without incorporating purchase intent or interests. These traditional campaigns often lack relevance and, as a consequence, result in limited user engagement and conversion.
Difficult to Deliver Performance at Scale. Many Display Advertising solutions are unable to sustain performance for larger campaigns or longer trials due in part to the highly fragmented nature of the Display Advertising landscape, increasing amounts of data and lack of robust technology. Therefore, the challenges described above are amplified for larger and more complex campaigns.
Pricing Disconnected from Performance. Display Advertising inventory has historically been sold on a cost-per-impression, or CPM, basis, meaning that an advertiser is charged each time an advertisement is displayed, whether or not a user has effectively seen or interacted with the advertisement. This makes it difficult for advertisers to determine the true cost of an advertising campaign and evaluate the relationship of that cost to the effectiveness of the campaign in driving engagement and sales. Today, the pricing models generally available in the Display Advertising market include the cost-per-action, or CPA, pricing model, where an advertiser is charged when a user takes a specific action; and hybrid pricing models, which reflect a combination of one or more of the CPM, CPC and CPA models. While Search Advertising inventory is generally priced on a CPC model, we believe Display Advertising inventory has generally been and continues to be largely priced on a CPM basis and, as a result, does not offer a clear performance-based pricing to marketers.
Inefficient Campaign Execution. Deployment of Display Advertising campaigns can be inefficient and costly. Traditional solutions are often a combination of many point solutions, requiring businesses to connect and manage multiple intermediaries and complex elements of the advertising campaign execution process, including media planning, data management and analysis, targeting, creative assembly, media buying, optimization, advertisement serving and reporting. In addition, meaningful portions of campaign planning, execution and management remain highly manual.
Lack of Performance-Based Advertising Options for Brand Manufacturers. Brand manufacturers, who usually do not directly sell their products online via their own ecommerce store, face a number of significant challenges when attempting to invest in performance-based digital advertising outside of Search Advertising to engage customers and drive sales. Among such challenges is a very limited number of options to advertise their products on a performance basis via Display Advertising campaigns and to get a clear and measurable view of how such advertising campaigns drive their sales.
Increasing Complexity and Fragmentation of the Path to Purchase. The consumer path to purchase has become complex and highly fragmented as shoppers move across multiple digital devices and platforms, from the initial intent to buy a product, to engaging with an advertisement and finally purchasing the product. It is therefore critical for marketers willing to use Display Advertising to drive sales that such marketing campaigns be developed and executed across all devices and environments.
Four Trends Point to Digital Display Advertising Reaching an Inflection Point in Driving More Sales for Marketers
We believe that, over the past few years, Display Advertising has reached an inflection point, becoming both a brand building medium and a more effective engagement and conversion channel. Four trends are driving this transformation:
Mobile and Cross-Device Commerce. Penetration of smartphones and tablets is driving rapid growth of global mobile commerce. Mobile commerce represented $1.4 trillion globally in 2017, and is expected to grow at a 29% CAGR between 2017 and 2020, according to eMarketer. In parallel, consumers increasingly use multiple devices to shop across ecommerce websites and mobile applications. As a result, we believe that transactions involving the use of multiple devices, referred to as "cross-device" transactions, represent between 40% and 50% of ecommerce, growing much faster than ecommerce.
Programmatic Buying. Technologies for more automated and efficient buying and selling of Display Advertising have been gaining traction for several years with both advertising buyers and publishers. Programmatic buying from real-time, automated bidding platforms and exchanges, as well as through relationships with publishers, provides advertisers with dynamic, targeted and efficient ways to access the proper inventory, and helps publishers maximize the value of their inventory. Worldwide spending in programmatic Display Advertising is expected to grow from $58 billion in 2017 to $85 billion in 2019 according to Zenith Optimedia, representing a CAGR of 21%.
Machine Learning. According to IDC Research, from now until 2020, the digital information universe is expected to double in size every two years. The large and diverse data sets that make up this digital information, often referred to as big data, are generally categorized into: business application data, human-generated content and machine data. New computational approaches and the falling costs of computing power enable technology companies to process and draw insights from this data using machine-learning approaches. These insights can be used to optimize Display Advertising campaigns in ways that were not previously possible. The ability to collect, collate and analyze shopping intent data points using machine-learning technology, is becoming a key differentiator for advertisers, including brand manufacturers.
Increasing Willingness from Commerce Companies and Brands to Share Data Within Collectives. We believe that brand manufacturers and retailers not only realize the strong potential of their commerce data, but also increasingly view collaboration and pooled data as key assets in order to better meet customers' needs, drive value for their business and better compete in today's environment. According to a study published by Forbes Insights in collaboration with Criteo in October 2017, 71% of retailers are willing to contribute online product searches data to a pool5. 60% of surveyed retailers are already part of a data cooperative, with almost 70% of those companies already pleased with their collaboration as well as the data they receive. Additionally, 72% of marketers cite "increased revenue" as a key benefit they experience from pooled data.
The Rise of Commerce Marketing Provides Significant Opportunities for Commerce Companies and Brand Manufacturers
In today's highly competitive environment, commerce companies and brand manufacturers increasingly focus on profitably engaging and converting their customers. To achieve this, they need a marketing partner who effectively capitalizes on large amounts of consumer intent and identification data and has the ability to activate this dataset through machine-learning technology, to drive measurable sales at scale across digital devices and environments.
Building on the four trends discussed above, we believe Commerce Marketing is quickly emerging as the next big marketing category. We define Commerce Marketing as the category of marketing that directly drives sales and profits from shoppers, unlike other forms of marketing that focus on media consumption and rely on objectives such as awareness, reach and engagement.
Commerce Marketing is not limited to digital. While many marketing channels, including Search Advertising and Social Platforms, are more naturally digital-native, Commerce Marketing has the potential to be the category where physical and digital converge, enabling retailers who operate physical stores, that provide valuable commerce data assets, to leverage their offline presence to drive sales online and vice versa.
Commerce Marketing centers on inspiring people to buy things. Unlike Search Advertising, which focuses on finding relevant information, and Social Platforms, which are all about connecting people, the sole focus of Commerce Marketing is inspiring consumers to purchase products using data to deliver relevant ads tailored to their interests and needs.
Commerce Marketing is measured by performance, directly driving sales and profits. Unlike all other marketing categories, Commerce Marketing is solely measured by the sales and corresponding profits it is driving for marketers through personalized campaigns at the individual user and individual product level.
We believe our large network of retailers provides us with a key role as an aggregator for the online retail industry.
We believe that Commerce Marketing is at the junction of Commerce Sales, Digital Marketing and CRM technology, supported by massive growth in big data and machine-learning capabilities6. As a result, we believe the following market dynamics will continue to support the growth in Commerce Marketing:
Global retail commerce will represent sales of $26.5 trillion by 2020, including $4.7 trillion in global retail ecommerce, growing by 17% CAGR, according to eMarketer.
Digital Marketing will grow 10% CAGR to represent $270 billion by 2020, including 12% CAGR to $137 billion for Display Advertising, according to eMarketer.
Sales of CRM software will grow 14% CAGR to represent $39 billion by 2021, according to Gartner.
We see Commerce Marketing as a powerful marketing category for marketers seeking to maximize customer engagement and conversion from current and past shoppers at scale. With marketers focused more and more on measurable performance, we believe Commerce Marketing is poised for rapid growth and will represent a major marketing category in the future.
Since inception, Criteo has solely focused on Commerce Marketing and developed numerous competitive strengths over time.
Competitive Strengths of theCriteo Commerce Marketing Ecosystem
We believe that our solution is transforming the way our commerce and brand clients use commerce marketing by making their marketing investments, in particular in Digital Marketing, more efficient, effective and measurable by driving sales across the consumer journey. We believe the following competitive strengths will enable us to capture a growing share of commerce marketing spend:
Criteo Shopper Graph Leverages a Massive, Granular and Open Data Set Focused on Commerce. Over the past few years, we have built the Criteo Shopper Graph, comprisingthree data collectives -the Identity Graph, the Interest Map and the Measurement Network- through data sharing among our clients. With the Criteo Shopper Graph, we are building one of the largest data sets focused on shoppers, with a scope among the largest in the industry. With 79% of our clients providing CRM data to enable us to match 3.7 billion user IDs across multiple digital devices or environments, we believe the matching rates of our Identity Graph are, in some markets, similar to, if not higher than, Google's and Facebook's7. In addition, our Interest Map offers a comprehensive and accurate shopper profile for all customers on whom we have collected information, and is the foundation for the development of compelling new products that will span the consumer journey. Importantly, we believe the guiding principles of Criteo Shopper Graph, in particular its open, transparent and fair approach to sharing and leveraging data within data collectives, differentiate it from the proprietary data management approaches of most of the large Internet companies.
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5 "The Commerce Marketing Opportunity - How Collaboration Levels the Retail Playing Field", Forbes Insight, in collaboration with Criteo, October 10, 2017 http://www2.criteo.com/vibrant-future
6 Third-party data for the size of the Commerce Marketing opportunity is not publicly available.
7 Based on Criteo client feedback in large Western European markets, reporting that the matching rates of their anonymized customer emails within our Identity Graph is generally higher than that of Google's and Facebook's.
Our Powerful Technology Activates Our Dataset for Commerce. While shopping data is readily available to our commerce and brand clients, and plays a critical role for them, we believe the real challenge in commerce marketing is the ability to effectively activate this dataset to drive sales. The Criteo Commerce Marketing Ecosystem is the result of 12 years of research and development and investment in our technology, with a single focus on driving sales for clients. Through our deep data-driven understanding of consumer intent and behavior, we are able to deliver highly relevant, targeted and personalized advertisements across multiple marketing objectives and digital devices. The scale and breadth of our data is constantly expanding as users interact with our clients and as we deliver targeted advertisements. For example, in 2017, we delivered over 1.3 trillion targeted advertisements. By dynamically matching a user's intent or interest with a personalized advertisement, we are able to deliver more relevant and engaging advertisements to users, which are more likely to lead to sales. Our average click-through rate ("CTR"), or the ratio of clicks generated by our advertisements over the number of advertising impressions we purchased, was 0.84% in 20178, which represents a factor of over six times the average CTR as measured by the DoubleClick display benchmark tool9. We believe our superior CTR demonstrates the performance we consistently deliver. In addition, the Criteo Engine is supported by a flexible and scalable high-performance computing infrastructure, made of two Hadoop clusters hosting 76,000 processing cores with total storage capacity of 240,000 terabytes and 530 terabytes of random-access memory. Every day, our platform can process 250 terabytes of additional compressed data. We own approximately 25,500 servers through a global network of eight data centers. We believe the power and scalability of our core technology assets are increasingly hard to replicate by other market participants.
Our Large Scale Drives Powerful Network Effects. Our technology, developed and maintained by over 700 engineers, operates at significant scale and is powered by machine-learning algorithms whose accuracy and performance improve with each new piece of information about a user and the billions of advertising impressions we analyze daily. We believe this creates a cycle of increasing network effects. Over the past twelve years, we have built an extensive network of relationships with our clients and publishers, creating a highly liquid marketplace for advertising inventory. As of December 31, 2017, we had over 18,000 clients, including some of the largest commerce companies in the world. As we continue to grow our client base, we continue to grow the number of users who interact with our advertisements, which allows us to benefit from greater scale when we purchase inventory from publisher partners, many of whom have granted us preferred access to portions of their advertising inventory. On the supply side, we have direct relationships with thousands of publisher partners and are also integrated with the leading RTB advertising exchanges. As of December 31, 2017, we had matched an estimated 1.2 billion individual users, with an average of three user IDs matched per user, globally within our Identity Graph, making it one of the biggest user graphs in the market. As commerceclients spend more with us and we attract more publisher inventory and deliver more advertisements, our data assets grow, enabling us to deliver even more precisely targeted and personalized advertisements and generate additional sales for our clients. For brands, we have also created a strong network effect with Sponsored Products by offering brands the opportunity to advertise on a large network of retailers with a single campaign. As a result, we believe more commerce and brand clients will use our offering and potentially increase their spend with us. This, in turn, will enable us to increase advertising revenue for our publishers, further expanding our publisher network and enhancing our ability to drive increasing volumes of sales for clients. We expect this cycle of self-reinforcing network effects to continue to fuel our growth.
We Have a Complete Commerce Marketing Solution. Our solution addresses the entire consumer journey (customer acquisition, conversion and re-engagement) and works seamlessly across digital devices (desktops, laptops, smartphones and tablets), digital environments (web and mobile applications), platforms and operating systems, marketing channels (Display Advertising inventory, including social and native, video inventory, and sponsored products advertisements on retail ecommerce sites), and publisher networks (Google, Facebook and thousands of publishers and mobile application developers in the open web). With the fast increase in smartphone and tablet usage in an increasingly fragmented digital landscape, it has become critical for marketers to engage and convert their customers across multiple digital devices. We believe that, for marketers looking to engage with their prospective customers, or existing customers, irrespective of their position in the consumer journey, their digital device, digital environment, platform, marketing channel or publisher network where the customer may be reached and engaged, our complete commerce marketing solution provides a clear advantage over other solutions available on the market.
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8 Does not include Criteo Sponsored Products.
9 Based on the average click-through rate on Standard Media of 0.14% over March-April 2017 as per the DoubleClick display benchmark tool. Data for the full year 2017 is not available.
We Have a Performance-Driven Model. With all our commerce marketing products, we only get paid when a user engages with one of our advertisements, usually by clicking on it, and our clients generally measure the performance of our solution based on post-click sales. This is a proven model, valued by our clients because it provides a clear link between the cost of marketing campaigns and their effectiveness in generating sales. As the Criteo Engine becomes more sophisticated, we are optimizing our technology to maximize post-click sales at a target cost-of-sales or the target gross margin per product of our clients. As a result of our measurable pay-for-performance model, most of our clients set their budgets with us whereby their total spend with us is effectively constrained mainly by our ability to find enough relevant opportunities that achieve their specific return objectives. For example, for the year ended December 31, 2017 over 75% of our Revenue ex-TAC was derived from clients whose budgets were either uncapped or so large that the budget constraint did not restrict purchases of advertisements by us. In addition, existing clients continue to increase their spend with us, as illustrated by our 115% revenue retention rate10 for the year ended December 31, 2017, demonstrating our ability to drive revenue expansion within our existing client base.
Our Product Portfolio Covers the Entire Consumer Journey. With our existing product portfolio, consisting of Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA, Criteo Audience Match BETA and Criteo Sponsored Products, we help our clients cover the entire consumer journey: acquiring new prospective customers, converting them into buyers and regularly re-engaging them over the customer lifetime. We continue to build and develop compelling new products for our commerce and brand clients to help them drive sales and profits through additional marketing scenarios along the consumer journey. We believe our ability to drive sales and profits for clients according to numerous marketing objectives and scenarios across the consumer journey is a key competitive advantage on the market.
We Have a Scaled Global Presence. We do business in 98 countries and have a direct operating presence through 31 offices in 19 countries. In 2017, 40% of our revenue was derived from clients who conducted commerce marketing campaigns with us in more than one national market. We have achieved this global presence by replicating and scaling our business model across all geographic markets. Large businesses are increasingly seeking global marketing partners with comprehensive commerce marketing solutions that are effective across multiple geographies. We believe we are able to meet this demand by leveraging our scalable technology and global network of relationships and are well positioned to serve our clients in virtually every market in which they seek to drive sales.
We Offer Transparent Measurement and End-To-End Service. Our offering is end-to-end and all-inclusive, encompassing the integration of our clients' digital properties, user reach and tracking, the real-time buying of impressions on a large network of publishers, the real-time creation of customized advertisements for each specific client and its prospective end customer, the serving and delivery of the advertisements and the provision of real-time analytics on the performance of our campaigns. In addition, our clients have 24/7 access to a unified dashboard to manage their commerce marketing spend, product by product. Our platform automates most of the processes associated with executing a commerce marketing campaign, such as creative assembly, real-time buying of inventory, campaign optimization, and billing. Using our platform, our clients are able to manage their campaigns based on their specific cost of sales or return on investment objectives on large volumes, with real-time control over the price they pay. As a result, we reduce unnecessary complexity and cost associated with manual processes and multiple providers involved in the management of performance-based multi-product marketing campaigns. Further, we are able to continue to deliver these efficiencies even as marketing campaigns scale and become more complex in size and product mix. We also provide our clients with transparent and detailed reporting of key campaign metrics, and transparent standard reports showing detailed impression-level information (See the "Client Platform" description in the section about the Criteo Commerce Marketing Ecosystem). We believe the ease of use and transparency of our offering is a key strength on the market.
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10 Excluding Criteo Sponsored Products.
We Apply Best-In-Class User Privacy Standards. We are strongly committed to consumer privacy. The user information we collect relates primarily to purchase intent and is therefore not considered as information that can directly identify a user. In 2009, we were one of the first companies to include an "Ad Choices" link in all the advertisements we deliver, which gives users access to clear, transparent, detailed and user-friendly information about personalized advertisements and the data practices associated with the advertisements they receive. In addition, we provide consumers with an easy-to-use and easy-to-access mechanism to control their advertising experience and opt out of receiving targeted advertisements we deliver, either for all campaigns or for a specific client or specific period of time. We believe that this transparent consumer-centric approach to privacy empowers consumers to make better-informed decisions about our use of their data. We also actively encourage our clients and publishers to provide information to consumers about our collection and use of data relating to the advertisements we deliver and monitor. We believe our industry-leading privacy, security and safety standards for consumers and our commerce and brand clients are key competitive advantages on the market.
Our Growth Opportunities
Our goal is to drive post-click sales at scale for our clients at their targeted return on investment and across the entire consumer journey. Our vision is to build the highest performing and open Commerce Marketing Ecosystem, by connecting shoppers to the things they need and love, and by delivering the highest performance to the commerce companies and brand manufacturers who participate in our ecosystem. We are currently expanding our business and strengthening our Commerce Marketing Ecosystem through several growth opportunities, both within our core business and in new areas focused on driving client sales. The core elements of our growth strategy include:
Further Build and Leverage the Criteo Shopper Graph. Since 2015, we have been developing the Criteo Shopper Graph, which comprisesthree data collectives -the Identity Graph, the Interest Map and the Measurement Network- through data sharing among our clients. With the Criteo Shopper Graph, we are building one the world's largest data sets focused on shoppers, that offers our clients openness, transparency, security and fairness. The Criteo Shopper Graph, in particular the Identity Graph and the Interest Map, is central to our plans to bring compelling new commerce marketing products to market. We will continue to build and enhance our three data collectives that make up the Criteo Shopper Graph.
Continue to Innovate and Invest in Technology and Data. We will continue to make substantial investments in research and development with a focus on our machine-learning algorithms and further scaling our technology platform. As the rich data sets that drive performance on a real-time basis are central to the value we deliver to our clients, we intend to invest in additional data assets to extract more value from the data we collect.
Upsell New Products Across the Consumer Journey. Our broad product portfolio helps our clients cover the entire consumer journey, by acquiring new prospective customers, converting them into buyers and regularly re-engaging them along the customer lifetime. Since all of our existing products address the needs of our commerce clients, in particular retailers, we intend to continue to upsell Criteo Customer Acquisition BETA and Criteo Audience Match BETA to our existing commerce clients and to offer Criteo Sponsored Products as a key advertising channel to our retail commerce clients to generate high gross margin revenue from brands.
Broaden Quality Inventory Supply Across our Publisher Network. We currently partner with thousands of media publishers globally for Display Advertising. While we work with both real-time bidding Display Advertising exchanges and direct publishers, including premium publishers, 37% of our Revenue ex-TAC in 2017 was generated from inventory sourced from publishers with whom we have a direct, preferred relationship. We intend to maintain a high level of preferred relationships, with both premium and mid-sized publishers, including through the broader deployment of Criteo Direct Bidder, our latest header bidding technology, with large publishers. In addition, we continue to expand our supply of quality advertising inventory, especially in mobile applications, native and social inventory. With Criteo Sponsored Products, we intend to increase our publisher reach with retailers by providing a broader share of our existing commerce client base with the opportunity to monetize their inventory through brand demand.
Further Expand our Client Base Globally and Across Sizes, Including Consumer Brand Manufacturers.We have a record of entering new geographic markets, adding new clients successfully and rapidly gaining commercial traction. We intend to continue to grow our client base, both in the large client and the midmarket categories. In 2015, 2016 and 2017, we invested significantly to capture the midmarket opportunityobjective and intend to continue to investgrowing it, along with similar use cases building on audiences based on our shopper data. In addition, we are investing resources in this large market category. We plan to expandenhancing the efficacy and impact of cohort advertising on our midmarket presenceecosystem and help shape the end solution which will replace third-party cookies in the Americas, Europe,Google Chrome browser environment.
•Contextual advertising: We are also developing new solutions for contextual advertising to accompany our clients in the Middle East and Africa, or EMEA, and Asia-Pacific.fast-changing identity landscape. We believe significant opportunities remainour approach to also grow our business with large clients in geographic markets where we already operate, such as Western Europe, the United States and Japan.
Additionally we plan to undertake a significant transformation of our go-to-market approach, aiming at maximizing our commercial opportunity while becoming more strategic to large clients and scaling our midmarket operations more efficiently and profitably. This will include focusing on a multi-product sales approach, refining service levels based on client size and potential, and building self-service capabilities for the midmarket.
Criteo primarily addresses commerce marketing for companiescontextual advertising is different from what currently exists in the retail, travelmarket as we are using first-party data to add a commerce “signature” to the content consumers are reading and classifieds verticals, which we define as commerce clients. With Criteo Sponsored Products, we addresswatching across the need for measurable performanceOpen Internet. This enables us to go beyond traditional contextual inferences of brand manufacturers, who can market their products on major retail ecommerce sites.interest and intent to indicate what combinations of content are actually driving purchases.
•Omnichannel: We believe the demand for performance-based marketing from brand manufacturers represents a significant opportunity for us. We will continue to focus onare fast growing our share of brand manufacturers through the expansion of Criteo Sponsored Products toOmnichannel capabilities that help bridge offline consumer identities and shopping habits with ecommerce and online shopping. While a larger number of retail ecommerce sites.
Develop New Products for Commerce and Brand Clients. In 2007, we started delivering elements of our commerce marketing offering through Dynamic Retargeting on internet display advertisements in desktop browsers. Since then, we have expanded Dynamic Retargeting into mobile in-browser and in-app, native display, including on social media platforms, and, more recently video inventory. In parallel, we have broadened our product portfolio to include: a customer acquisition product for retailers, Criteo Customer Acquisition BETA; a customer re-engagement product for retailers, Criteo Audience Match BETA; and a performance-based product for brand clients to market their products on retail ecommerce sites, Criteo Sponsored Products. To enable our commerce and brand clients to expand their reach inside the consumer journey, we intend to invest in developing products across new marketing scenarios, while always offering a single solution priced on a transparent performance-based model. For example, we are exploring ways to expand into "look-alike" audience targeting for commerce clients, mobile applications installation for commerce clients, or performance-based campaigns for brand manufacturers outside of the retailer environment.
Grow our Omnichannel Capabilities. A large portion of our commerce client base operates physical stores and still generates a significant percentage of their sales from offline stores. While retailers extractthese stores, extracting massive amounts of sales data from their physical stores, they often lack the sophisticated technology necessary to activate this dataset for sales generation, both online and offline. As a result, retailers are increasingly interested in accessing a set of differentiated omnichannel marketingadvertising solutions that allow them to target their customers everywhere they are and bridge the gap between online and offline. We are expandingbelieve our Omnichannel offering is highly differentiated compared to traditional digital advertising players in the marketplace. We intend to further expand our solutions for omnichannel marketing,advertising, including by feeding our clients' offline CRM data into our Identity Graph, in order to further grow the match rate of offline consumers with their online profile.
•Criteo Retail Media assists retailers in generating high-margin advertising revenues from consumer brands looking to address multiple marketing goals, and to drive sales for themselves, by monetizing their audiences through personalized ads, either on their own digital store or on media owner properties on the open Internet.
◦Examples of expected business outcomes driven by Criteo Retail Media include:
▪generating advertising revenue for retailers on their online store, by providing retailers with self-service access to our technology platform for them to monetize their commerce data, traffic and audiences directly with consumer brands across various marketing goals;
▪driving sales for consumer brand clients on the site of retailer partners, by connecting consumer brands and retailers and engaging consumers on the retailer's digital property with personalized ads offering specific brand products available on the retailer's digital store and for which consumers have expressed interest (also called "onsite");
▪driving sales for consumer brand clients on the site of retailer partners, by connecting consumer brands and retailers and engaging consumers outsideof the retailer property on the open Internet with personalized ads offering specific brand products available on the retailer's digital store and for which consumers have expressed interest (also called "offsite");
◦Our retailer and brand customers respectively manage their Retail Media revenues and budgets using a self-service interface called the Retail Media Platform. The Retail Media Platform provides flexible pricing options to brands: guaranteed placement (cost-per-impression) and auction-based (cost-per-click). We charge retailers a negotiated supply-side platform fee and sometimes a technology fee, while brands pay us a negotiated demand-side platform fee. In addition, we may charge brands a managed-service fee and other fees for accessing additional insights.
In 2021, Criteo Retail Media accounted for more than 10% of our total consolidated revenue.
We believe Criteo Retail Media is a particularly differentiated offering in the marketplace with significant potential opportunities. We will continue to roll out the Retail Media Platform to new markets and move all our Retail Media campaigns to the platform, making the digital stores of large retailers a key advertising channel to generate high gross margin revenue from consumer brands. In addition, we intend to grow the number of retailers we work with in the U.S. and Europe, deepen our share of wallets with existing retailer and brand customers, accelerate our geographic expansion in Europe and enter new markets in the APAC region, grow our offsite advertising capabilities for brands across our premium publisher network on the open Internet, grow Retail Media for retailer marketplaces, bring more commerce insights to brands as a key value-added service and provide brands with an integrated view on the Retail Media spend on Walled Garden retailers.
Our Competitive Strengths
We believe the Commerce Media Platform is transforming digital marketing and media monetization for our customers. We enable brands' and retailers' growth by making their marketing and monetization efforts more efficient, effective and measurable by driving trusted and impactful business outcomes across multiple marketing goals. We believe the following competitive strengths, supported by our first-mover advantage, have enabled us and will continue to enable us to capture a significant share of our commerce media opportunity:
Shopper Data. Our First Party Media Network leverages massive amounts of granular first-party data focused on commerce and shopping behaviors, through data sharing among our clients. With an estimated 685 million unique Daily Active Users in our Identity Graph, we are building one of the largest data sets focused on shoppers, with a scope and scale among the largest in the industry. Close to $3 billion worth of daily transactions across 4 billion product SKUs from 3,500 product categories are incorporated into our graph, allowing us to analyze about 75 million daily buyer journeys. Our Buyer Index offers a comprehensive, accurate and non-identifying shopper profile for all consumers on whom we have collected information, and is the foundation for the development of compelling advertising solutions - existing and new - that help our customers span the full marketing funnel across brand awareness, audience targeting and conversion marketing goals.
Consumer Reach, Scale and Network Effects. Our large and loyal base of customers and first-party media owner partners provide for stability and positive network effects. As of December 31, 2021, we had approximately 22,000 clients, including some of the largest ecommerce companies in the world, and our client retention rate was approximately 90%. In parallel, as of the same date, we were working with direct publishers on both web and apps, in addition to all of our large global and local RTB partners. These direct integrations on both the demand and supply sides ensure privacy-compliant access to first-party data, shielding from the consequences of third-party cookie limitations. As we continue to grow our client base, we continue to grow the number of users who interact with our ads, increasing our consumer reach and allowing us to benefit from greater scale when buying inventory from publisher partners, many of whom have granted us preferred access to portions of their advertising inventory. Beyond the stability in our business that our large and loyal base of customers and media owner partners provides us, significant opportunities exist to cross-sell and up-sell our product portfolio within our large existing customer base. As clients spend more with us and we attract more media inventory and deliver more ads, our data assets grow, enabling us to deliver even more precisely targeted and personalized ads and generate a greater impact for our customers, both marketers and media owners. As a result, we believe more brands, commerce marketers and media owners may use our offering and potentially increase their spend with us. This, in turn, may enable us to increase monetization for media owners and retailers, further expanding our media network and enhancing our ability to drive performance for all customers. This cycle of self-reinforcing network effects, based on our large scale and loyal base of marketer and media owner customers and partners, may continue to fuel our business in the future.
Retail Media. Our Retail Media offering provides unique opportunities to both brands and retailers. Our Retail Media value proposition, helping retailers to monetize their data and inventory with brands, is quite unique in the marketplace outside of Amazon. It provides opportunities for brands to advertise on retailers' on-site media, while creating a new source of profitable revenues for large retailers. With the acquisition of Mabaya in 2021, we have also enhanced our retail media capabilities to best meet the unique needs of marketplaces and marketplace sellers. Criteo's Retail Media Platform is the industry's first self-service and transparent software providing an easy way for brands to manage their online marketing budgets to drive immediate, measurable commerce outcome directly where shoppers search and buy their products. We enable brands, agencies, and multiple retailers to buy and sell retail media using a common platform, thus benefiting from meaningful network effects due to our unique position as the technology supporting a multi-retailer ecosystem, whereas most competitors in the retail media space focus on supporting siloed retailer Walled Gardens. Brands and their agencies use our platform to access unique inventory at meaningful scale, and retailers get access to brand marketing budgets at a scale they would not be able to access on their own. This creates a network effect where the value for customers only increases as more brand and retailer participants join the ecosystem. In addition, our deep technical integrations with retailers, requiring meaningful engineering investment from the retailer, make us very sticky with them and enable us to offer preferred or exclusive inventory to brands and agencies, as well as a superior shopper experience to consumers. We primarily use a server-side technology to integrate our platform with retailer sites and apps. In addition, we require multi-year commitments and product ads exclusivity as part of our standard retailer services agreements. Both our unique inventory access and increasingly deep technical integrations with other advertising technology and reporting platforms provide defensible relationships with brands and agencies. For example, our API partner program embeds our technology into ad platforms that brands and agencies already use to buy search, social, and other large platforms' ad inventory. Additionally, with many major brand and agency clients, we directly connect our reporting data directly into client analytics and reporting platforms via our APIs.
Superior Insights and Measurement. We believe we have superior capabilities for Commerce Insights and measurement. Our technology provides our clients with the unique ability to measure against product sales at the product SKU level. For example, our commerce insights can bring together organic shopping data with paid media metrics for brands.
Scaled Global Presence. We do business in 96 countries and have a direct operating presence through 29 offices in 15 countries. We have achieved this global presence by replicating and scaling our effective business model across all geographic markets. Large businesses are increasingly seeking global advertising partners able to provide comprehensive offerings that are effective across multiple geographies. We believe we are able to meet this demand by leveraging our scalable AI technology and global network of relationships and are well positioned to serve our clients in virtually every market in which they seek to drive trusted, impactful and measurable business results and commerce outcomes.
Strong Financial Model. Our profitable, cash-generative financial model allows us to invest for growth while maintaining healthy profitability. Our company has a sustainable, robust profitability margin. In the year ended December 31, 2021, our operating profit margin was 6.7% of revenue and our Adjusted EBITDA as a percentage of Contribution ex-TAC was 35%. In addition, we manage our expense base in a disciplined way and focus on driving productivity through operational excellence and automation across the organization. Productivity and efficiency gains enable us to reinvest into strategic growth areas, while maintaining healthy profitability, with the goal to driving Adjusted EBITDA of 32% of Contribution ex-TAC or above. Our financial model generates a sustainable and significant amount of free cash flow. 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 used for working capital. For the year ended December 31, 2021, we generated free cash flow of $167.9 million. In addition, our company maintained a strong cash position of $515.5 million at the end of fiscal 2021, which, together with marketable securities and our Revolving Credit Facility, provides for financial liquidity of about $967 million, offering flexibility for executing on our strategic roadmap. We believe having a profitable, cash-generative financial model providing for financial flexibility and investment capacity is a strong competitive advantage, in particular compared to multiple sub-scale companies in our industry.
Our Business & Growth Opportunities
Our mission is to power the world's marketers and media owners with trusted and impactful advertising. We enable our customers’ business growth through commerce media, by providing best-in-class marketing and monetization services and driving measurable business outcomes at scale. As described throughout, 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 for the world’s marketers and media owners.
As part of our transformation, we have expanded our business through several opportunities, both within our existing suite of solutions and in new areas, always focused on driving trusted and impactful business outcomes for clients. Our overarching priority is to drive sustainable and profitable growth for our business. This involves increasing our focus even more on the fast-growing ecommerce space and broadening our value proposition to cover all commerce media marketing goals on our single Commerce Media Platform in a holistic way, while always driving measurable business outcomes to our marketer and media owner customers, including sales. In parallel, we are focused on investing into our strategic growth priorities and self-funding for these investments by driving efficiency across the organization.
While our strategic priorities focus on the three key areas of integration, differentiation and scale, the core elements of our broader business strategy include:
Strengthen the Core. We continuously strengthen our retargeting product, aimed at converting our clients' customers in both the web and apps. We intend to achieve this by leveraging our strong differentiators, including around Criteo Audience Match BETA,Buyer Index and user identification thanks to our customer re-engagementfirst-party media network, continuously improving Criteo's AI Engine technology and the strong performance of our core product allows the uploading of onlinein all environments, providing more transparency on our value proposition, and offline CRM identities, like hashed emails, to informadding new clients and run online campaigns.media owner partners. We are also workingadding multiple capabilities, like third-party measurement, through industry partnerships to enhance our core solution.
Over the past four years, the growth of retargeting has been slowing down and turned negative in 2019 and 2020, before stabilizing in 2021 despite incremental privacy headwinds. Over this period, cookie restrictions on Store-to-web several browsers have had a significant negative impact on our business on the web, including on retargeting. The COVID-19 pandemic was an additional headwind to this business in 2020 and continued to impact our clients in the Travel and Classifieds verticals in 2021. Beyond these headwinds, retargeting has proven resilient and continued to grow in the Retail vertical, which is central to our business.
We are taking several measures as part of our strategy to stabilize our retargeting campaigns,business over time, including:
•Maintaining a high level of preferred direct relationships with media owners, allowing us to grow our first-party media network and reduce our exposure to third-party cookies. We expect to continue to expand our first-party media network, sheltered from cookie restriction, including by increasing the deployment of Criteo Direct Bidder with large publishers, both on the web and on mobile apps, as well as by leveraging our Supply-Side Platform, including through the pending acquisition of IPONWEB;
•Encouraging our clients and publishers to adopt OpenPass, our open-sourced identity framework dedicated to digital advertising and respectful of users' privacy, providing a replacement to third-party cookie bearing users' consent;
•Growing our capabilities as a differentiated Demand-Side-Platform specifically for commerce, including for upper-funnel marketing on top of our strengths in lower funnel, offering more flexibility throughout the stack, and adjusting our pricing model to increase the transparency of our value proposition for our core product;
•Further expanding our global client base across customer categories. We have a track-record of entering new campaign typesgeographic markets, adding new clients successfully and rapidly gaining commercial traction. We intend to reengage offline buyerscontinue to buygrow our client base across the Strategic, Core and Tail customer categories. We believe opportunities also remain to grow our business with large customers in markets where we already operate, including in Western Europe, the U.S. and Japan; and
•Providing even more transparency and control to advertisers and their agencies through our self-service platform.
Expand Our Product Portfolio. We intend to continue to leverage our existing assets to diversify and strengthen our business outside of retargeting, continue to build and expand our suite of fast-growing marketing and monetization solutions, and build further competitive moats around our core assets.
In fiscal year 2021, our non-retargeting solutions already represented close to 30% of our total business, as measured on a Contribution ex-TAC basis, including 32% in the fourth quarter 2021. We are investing in the growth of these non-retargeting solutions and expect them to represent close to 40% of our overall business in 2022, including the pending acquisition of IPONWEB.
Explore Strategic Game Changers. We look for opportunities to extend and accelerate the growth of our business by exploring and bringing strategic assets and capabilities through partnerships and M&A, in addition to executing organically.
For example, in 2021, we entered and expanded a number of partnerships.
•We migrated our partners to the new and improved Criteo API framework and launched the Criteo Partner Marketplace, an app marketplace that empowers our partner solutions to be discovered by our global customer base;
•We built a Criteo destination within the Adobe Real-Time Customer Data Platform (CDP) to enable advertisers to onboard first party data;
•We implemented the capability to bid natively on incremental traffic from auctions with Liveramp’s RampID pseudonymous identifier;
•We built pipelines to receive the European Foundation’s netID single sign-on;
•We formed a strategic partnership with Bluecore, to provide Criteo advertisers access to Bluecore’s predictive audience capabilities to engage key shoppers through performance display across the open web;
•We extended our relationship with Oracle Advertising to leverage Oracle Contextual Intelligence, a solution providing real-time content review and pre-bid classification to clients across brand-suitable categories as we continue to scale their tools for brand safety across joint clients.
In the future, we intend to continue to collaborate with existing and new industry partners to extend the capabilities and functionalities of the Criteo Commerce Media Platform, beyond what we currently offer on a standalone basis. This may include partnerships with other Demand-Side-Platforms and other ecosystem players to extend our customer reach to new client categories or agencies. In addition, we may look at further expanding our access to video inventory, both onlinein the Web and offline.mobile apps, as well as extending our access to Connected TV inventory on a much larger scale.
Pursue Strategic Acquisitions.
We acquired six companies since our inception. We selectivelycontinue to evaluate and execute on M&A transactions, with a critical assessment on technologies and businesses that we believe have the potential to enhance, complementaccelerate our Commerce Media Platform strategy by enhancing, complementing or expandexpanding our strategic capabilities, including our technology, platformour marketing and product portfolio,monetization solutions, go-to-market, or strengthen our research and developmentR&D team. We target acquisitions that, over time, can be efficiently integrated into the Criteo Commerce Media Platform, including into our AI technology, platform, global operations and company culture, while preserving the quality and performance of our offerings.offering. Key criteria for acquisitions include demonstrated revenue traction and a proven value proposition for clients and partners and are easy to integrate. We believe we are an acquirer of choice among prospective acquisition targets thanks to our entrepreneurial culture, growth opportunity, global scale, financial profile, strong brand and market position.position enable us to be an attractive acquirer.
Strategic Relationship with Yahoo! Japan
•In August 2012,May 2021, we entered into a strategic relationship with Yahoo! Japan,acquired Mabaya, a leading providerretail media technology company that powers sponsored products and retail media monetization for major ecommerce marketplaces globally. The Mabaya Acquisition immediately enhanced our retail media capabilities to better meet the unique needs of advertising inventorymarketplaces and marketplace sellers;
•In December 2021, we executed a purchase agreement to acquire 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 Japan, which grants us privileged accessthe first quarter of 2022. The IPONWEB Acquisition is subject to their performance-based display inventory. In connectioncustomary closing conditions. This strategic acquisition is expected to accelerate our Commerce Media Platform vision by adding scale, complementary products, and stronger first-party data capabilities, further reducing our reliance on third-party cookies and other identifiers.
Drive Technology and Operations Excellence. We take a portfolio management approach to managing our business, organization and expense base: right-sizing or streamlining the parts of the business with thisstabilizing revenue in order to enable investments on the growing parts of our business into technology innovation and other strategic relationship, Yahoo! Japan investedpriorities. We intend to continue to invest in growing our business, while driving productivity and efficiency gains through operational excellence across the company and maintaining healthy profitability. We believe these investments will feed the long-term sustainable growth of Criteo. We intend to continue to make investments in our subsidiary, Criteo K.K.technology innovation and new product development, including in Retail Media, our first-party media network, Contextual advertising, online video, Connected TV and Commerce Insights. We retain 66% ownershipexpect these investments to further strengthen our Commerce Media Platform. Driving operational excellence through the company to self-fund for our investments involves increasing automation and the scalability of Criteo K.K. and Yahoo! Japan holds a 34% ownership. Yahoo! Japan has the right to require us to buy back its interest upon the occurrence of certain events (such as bankruptcy or breach of obligations), and we have the right to require them to sell their interest in Criteo K.K. under specified circumstances, such as a termination of the commercial relationship.our operations.
This strategic relationship may be terminated by either party for material breach and other customary events. The term of this strategic relationship automatically renewed to August 2018 and will continue to renew automatically thereafter for one-year terms if neither party provides advance written notice of its intent not to renew within a specified period of time.
Infrastructure
Our ability to execute depends on our highly sophisticated global technology software and hardware infrastructure. As of December 31, 2017,2021, our global infrastructure included approximately 25,500over 40,000 servers through a global network of eleven data centers, including twoone Hadoop clusters comprising 3,350cluster, that comprise to 3,000 servers hosting 800,000 processing cores, providing a storage capacity exceeding 240,000624,000 terabytes and 5306,590 terabytes of random-access memory. Our global infrastructure is divided into three independent geographic zonesareas in the Americas, Asia-Pacific and EMEA. In each of these zones,geographic areas, our services are delivered through data centers that support this zone.particular area. We generally rely on more than one data center in any given zone. Thegeographic area. Within large areas, the data centers are strategically placed within large zones to be close to our clients, publishers and users. This provides the benefit of minimizing the impact of network latency within a particular zone,geographic area, especially for time-constrained services such as RTB. In addition, we replicate data across multiple data centers to maximize availability and performance. We also generally seek to distribute workload across multiple locations to avoid overloads in our systems and increase reliability through redundancy. In addition, we consider sustainability factors as we evaluate our infrastructure footprint, including prioritizing resource efficiency and clean energy to operate sustainable data centers.
Within each data center, computing power is provided by horizontal build-outs of commodity servers arranged in multiple, highly redundant pools. Some of these pools are dedicated to handling incoming traffic and delivering advertisementsads while others are devoted to the data analytics involved in creating these advertisements.our ads. In particular, we use clusters using software specifically designed for processing large data sets, such as Hadoop, to run offline data analyzes.analyzes and to train our AI and Machine Learning models. The results are then fed back to refresh and improve our prediction and recommendation algorithms.
We use multiple-layered security controls to protect the Criteo AI Engine and our data assets, including hardware- and software-based access controls for our source code and production systems, segregated networks for different components of our production systems and centralized production systems management.
Our Clients
Our client base for Criteo Marketing Solutions consists primarily of companies in the retail, travel and classifieds verticals, which we definerefer to as commerce clients,"commerce companies" or "commerce clients", and includes some of the largest and most sophisticated commerce companies in the world. These companies range from large, global, diversified commerce companies to mid-sized regional companies. With Criteo Sponsored Products,Retail Media, we also serve consumer brand manufacturers, which we refer to as "consumer brands" or "consumer brand clients.clients". As of December 31, 2017,2021, we had more than 18,000approximately 22,000 clients (commerce(both commerce and consumer brand clients combined), representing clients who had a marketing campaign live with us on any given day over a 12 trailing-month period. In 2017,.
At the end 2021, approximately 84%70% of our client relationships11 were held directly with the client whereby there was noand the remaining 30% with advertising agencyagencies or any other third-party involved inthird-parties on the Criteo Marketing Solutions side of the business, whereas 50% of our client relationship.Criteo Retail Media revenue comes from agencies.
We believe our business is not substantially dependent on any particular client or group of clients. In 2015, 20162021, 2020 and 2017,2019, our largest client represented 1.9%7.0%, 2.0%3.5% and 1.9%2.8% of our revenue, respectively, and in 20172021, 2020 and 2019, our largest 10 clients represented 11.2%16.6%, 13.7% and 11.4% of our revenue in the aggregate.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.Criteo.
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 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 marketingadvertising campaign is conducted as the "client"“client” for purposes of this calculation. In the event a client has its marketingadvertising spend with us managed by multiple agencies, that client is counted as a single client.
Our client base is composed of twothree client categories: the largeStrategic client category, the Core client category and the midmarketTail client category. We define large clients as the top-50 or the top-100 commerce websites per vertical in a given geographic market, depending on the depth of that market, based on the number of monthly unique visitors as measured by comScore or other third-party providers of such information. We define a midmarket client as any client outside of the largeEach client category per vertical inis serviced through a given geographic market, dependingcombination of direct and indirect approaches, including through brand agencies, performance agencies and resellers for the Strategic, Core and Tail categories respectively. While Criteo historically focused on the depth of that market,serving both large (Strategic and with a certain minimum threshold number of unique monthly visitors to their digital property, as measured by comScore or other third-party providers of such information. This minimum threshold varies by market, but is generally around 40,000 unique monthly visitors for our more developed markets. The delineation between the large clientCore) and midmarket clients (midmarket being the prior name of Tail clients), our client strategy now focuses more heavily on serving the Strategic and Core categories is fluidthrough the full breadth of our Commerce Media Platform and the Company may decide, from time to time, to move some clients from one category to another.therefore places less emphasis on serving Tail clients.
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11 Excluding Criteo Sponsored Products.
Research and Development
We invest substantial resources in research and development to conduct fundamental research on artificial intelligence, machine-learning models, enhance the algorithms in ourCriteo AI Engine, develop new features and products,solutions, conduct quality assurance testing, improve our core technology and enhance our technology infrastructure. Our engineering group is primarily located in research and development centers in Paris, France;France, Grenoble, France; Palo Alto, CaliforniaFrance and Ann Arbor, Michigan. With the expected acquisition of IPONWEB, we will expand our R&D engineering centers to include Berlin, Germany, and Moscow, Russia. We expect to continue to expand capabilities of our technology in the future and to invest significantly in continued research and development and new productsolutions efforts. We had over 700682 employees primarily engaged researchResearch and developmentDevelopment and product atProduct as of December 31, 2017.2021. Research and development expenses, including expenses related to the Product group, totaled $86.8$151.8 million, $123.6$132.5 million and $173.9$172.6 million for 2015, 20162021, 2020 and 2017,2019, respectively.
Intellectual Property
Our intellectual property rights are a key component of our success. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. We generally require employees, consultants, clients, publishers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.
Intellectual property laws, together with our efforts to protect our proprietary rights, provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. The laws of certain countries do not protect proprietary rights to the same extent as the laws of France and the United StatesU.S. and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology.
Agreements with our employees and consultants may also be breached, and we may not have adequate remedies to redressaddress any breach. Further, to the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights to know-how and inventions relating thereto or resulting therefrom. Finally, our trade secrets may otherwise become known or be independently discovered by competitors and unauthorized parties may attempt to copy aspects of the Criteo Commerce Marketing EcosystemMedia Platform or obtain and use information that we regard as proprietary.
As of December 31, 2017,2021, we held five17 patents issued by the U.S. Patent and Trademark Office one patent issued by the French Patent Office, one patent issued by the European Patent Office, one patent issued by the Japan Patent Office and one patent issued by the Korean Intellectual Property Office,various foreign counterparts, and had filed 2913 non-provisional U.S. patent applications five European patent applicationsin the U.S. and one international patent application under the Patent Cooperation Treaty.Europe. We also own and use registered and unregistered trademarks on or in connection with our products and services in numerous jurisdictions. In addition, we have also registered numerous internet domain names.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the technology industry have extensive patent portfolios. From time to time, third parties, including certain of these leading companies, have asserted and may assert patent, copyright, trademark and other intellectual property rights against us, our clients or our publishers. Litigation and associated expenses may be necessary to enforce our proprietary rights.
Privacy, Data Protection and Content Control
Legal and Regulatory
Privacy and data protection laws play a significant role in our business. The regulatory environment for the collection and use of consumer data by advertising networks, advertisers and publishers is frequently evolving in the United States,U.S., Europe and elsewhere. The United StatesU.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share non-identifyingpersonal data, such as by regulating the level of consumer notice and consent required before a company can utilize cookies or other tracking technologies.
In the United States,U.S., at both the federal and state level, there are laws that govern activities such as the collection and use of data by companies like us. At the federal level, online advertising activities in the United StatesU.S. have primarily been subject to regulation by the Federal Trade Commission, or the FTC, which has regularly relied upon Section 5 of the Federal Trade Commission Act, or Section 5, to enforce against unfair and deceptive trade practices, including alleged violations of consumer privacy interests. Various states have also enacted legislation that governs these practices. For example, on September 27, 2013, the governor of California signed into law AB 370, an amendment to the California Online Privacy Protection Act of 2003, or CalOPPA. This amendment requires that we disclose in our privacy policy how we respond to web browser "do not track" signals. Our current privacy policy discloses that we do not respond to web browser "do not track" signals but that we do respond to opt-out requests made through our proprietary opt-out button or through industry opt-out platforms (namely Network Advertising Initiative and Digital Advertising Alliance). However, the U.S. privacy law framework may be subject to significant evolutions in the near future both at a federal and at a state level. At a federal level, lawmakers are currently considering the possibility of adopting a federal privacy law. In 2018, the State of California adopted the California Consumer Privacy Act, or the CCPA. The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the U.S. because its scope, and a number of the key provisions, resemble the GDPR. The CCPA establishes a new privacy framework for covered businesses by, among other requirements, creating an expanded definition of personal information, establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of personal data from minors, creating new notice obligations and new limits on the sale of personal information, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. As currently enacted, we and partners in our industry have been required to comply with these requirements since January 1, 2020, when the CCPA became effective. As with GDPR, the advertising technology marketplace may have to adapt to operating under the CCPA where it applies. Our advertising or publishing partners may impose new CCPA restrictions with which we must adapt and comply. This past November, the voters in California voted to pass the California Privacy Rights Act (“CPRA”), an Act that both amends and expands the scope of the CCPA. The CPRA will become effective on January 1, 2023, with a look back period to January 1, 2022. The CPRA creates new criteria by which businesses can be regulated, expands the definition of “personal information” to more closely match Europe, a new audit requirement, and the creation of an agency to oversee enforcement of the CPRA. The CPRA also explicitly provides an opt-out right for cross-contextual behavioral advertising. We cannot predict the timing or outcome of this adaptation or the effect on our business. Adapting our business to the CCPA and the forthcoming new requirements under the CPRA could involve substantial resources and expense, and may cause us to divert resources from other aspects of our business, all of which may adversely affect our business.
In addition, the Criteo Commerce Marketing EcosystemMedia Platform reaches users throughout the world, including in Europe, Australia, Canada, South America and Asia-Pacific. As a result, some of our activities may also be subject to the laws of foreign jurisdictions. In particular, data protection laws in Europe can be more restrictive regarding the collection and use of data than those in U.S. jurisdictions.
In the European Union, the two main pillars of the data protection legal framework are the E-Privacy Directive (Directive on Privacy and Electronic Communications), which is currently under review, and the new General Data Protection Regulation adopted(GDPR), which was implemented in April 2016.May 2018.
Directive 2002/581-EC of the European Parliament and of the Council, or the E-Privacy Directive, was amended by Directive 2009/136/EC of the European Parliament and of the Council of November 25, 2009, or the E-Privacy Directive Amendment, to require countries in the European Union to enact specific legislation requiring companies like ours, along with advertisers and publishers, to present users with an information notice and to obtain their consent prior to placing cookies or other tracking technologies for purposes of targeted advertising.
The E-Privacy Directive Amendment was intendeddirects EU member states to be implemented in all 28 countriesensure that accessing information on an Internet user’s computer, such as through a cookie and other similar technologies, is allowed only if the Internet user has been informed about such access and given his or her consent. A recent ruling by the Court of Justice of the European Union but it has been implemented differently across the European Union member states. Some member states, like the United Kingdom, permit companies to imply consent from the user’s proceeding onto the website and continuing his/her navigation after s/he has been clearly informed about how cookies are used without disabling them.
Other member states currently require, through law and/or guidance,clarified that the user’ssuch consent must be obtained prior toreflected by an affirmative act of the placementuser, and European regulators are increasingly agitating for more robust forms of cookies for targeted advertising purposes. The position regarding prior consent versus consent at the time of cookie dropping is not fully settled within the European Union.
The position regarding explicit versusconsent. These developments may result in decreased reliance on implied consent also is still not fully settled within the European Union. On October 2, 2013, the Article 29 Data Protection Working Party, a group with an advisory status composedmechanisms that have been used to meet requirements of representatives of the European Union data protection authorities and the European Commission, issued new guidance on the obtaining of consent for cookies under the E-Privacy Directive and recommended that consent be expressed by the user's positive action or other active behavior, such as clicking on a link, image or other content, based on clear information that cookies will be set due to this action. While the European Institutions are still in the process of adopting a regulation proposal to reviewsome markets. A replacement for the E-Privacy Directive there is no assurancecurrently under discussion by EU member states to complement and bring electronic communication services in line with the GDPR and force a harmonized approach across EU member states. It is possible that trackingthe proposed e-privacy regulation could further raise the bar for advertising purposes will notthe use of cookies and the fines and penalties for breach could be affected, as the mechanisms for "cookie" consent are being re-discussed.significant.
In December 2016, E.U.the EU institutions reached an agreement on a draft regulation that was formally adopted in April 2016, referred to as the General Data Protection Regulation ("GDPR").GDPR. The GDPR updates and modernizes thehas updated principles ofdrawn from the 1995 Data Protection Directive. The GDPR significantly increases the levelDirective while imposing new levels of sanctions for non-compliance. The European UnionEU data protection authorities will have thealso been granted power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller's or data processor's total worldwide global turnover for the preceding financial year, whichever is higher.
We believe that the regulation should not have ahas no material impact on our business or the way our technologies operate. However, GDPR is still a relatively recent regulation with no established case law. Therefore interpretations of the GDPR may vary, especially with respect to the articulation between GDPR (lex generali) and E-Privacy Directive (lex speciali) and the conditions for the collection of a valid "non-ambiguous""cookie" consent, and thus there can be no assurance that this will not have any particular impact on our business, technologies or practices in the medium to long term.
Further, on October 1, 2020, the French data protection authority (Commission Nationale de l'Informatique et des Libertés, or CNIL) issued the final version of its guidelines on the use of cookies and other trackers and its final recommendations on modalities for obtaining users’ consent to store or read non-essential cookies and similar technologies on their devices. The recommendations provide that, when required, consent must be indicated by a clear and positive action of the case. To illustrate this riskdata subject, such as by clicking on an “accept all” button on the first layer of different interpretations by the competent authorities,consent management platform. CNIL also noted that it should be as easy to refuse consent to the Spanish Data Protection Authority (Agencia Espanola de Proteccion de Datos) published guidance on GDPR compliance for Data Controllers in whichuse of cookies as it is stated that continuing to browseaccept consent, and a website could materialize“refuse all” button should be present on the first layer of the consent management platform, equivalent to the “accept all” button in terms of a user for cookie tracking, whilesize, position and color. Further, the UK Data Protection Authority (Information Commissioner's Office)ability to withdraw consent must be readily available at all times. The recommendations are not binding, nor are they intended to be prescriptive and exhaustive. Companies had until March 2021 to ensure compliance with these guidelines, and CNIL is listing stricter requirementscurrently auditing many websites in France to verify if they comply with its own guidance and seems to impose a very clear and specific statement of consent. The regulation will be enforced after a two-year transition period beginning in May 2018.guidelines.
As we continue to expand into other foreign jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.
Self-Regulation
In addition to complying with extensive government regulations, we voluntarily and actively participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct relating to targeted advertising. For example, the Internet Advertising Bureau EU & US, the Network Advertising Initiative, the European Digital Advertising Alliance and the Digital Advertising Alliance have developed and implemented guidance for companies to provide notice and choice to users regarding targeted advertising.
In addition to complying with such guidance, we
We also provide consumers with notice about our use of cookies and our collection and use of data in connection with the delivery of targeted advertising, and allow them to opt out from the use of such data for the delivery of targeted advertising. In an effort to harmonize the industry’s approach to internet-based advertising, these programs facilitate a user's ability to disable services of integrated providers, but also educate users on the potential benefits of online advertising, including access to free content and display of more relevant advertisements to them. The rules and policies of the self-regulatory programs that we participate in are updated from time to time and may impose additional restrictions upon us in the future.
In 2009, weCriteo became one of the first companies to broadly include an "Ad Choices" link in all the advertisements we deliver, which gives users access to clear, transparent, detailed and user-friendly information about personalized advertisements and the data practices associated with the advertisements they receive. In addition, we provide consumers with an easy-to-use and easy-to-access mechanism to control their advertising experience and opt out of receiving targeted advertisements we deliver, either for all campaigns or for a specific client or specific period of time. deliver.
We believe that this transparent consumer-centric approach to privacy empowers consumers to make better-informed decisions about our use of their data. We also actively encourage our clients and publishers to provide information to consumers about our collection and use of data relating to the advertisements we deliver and monitor.
Content Control and Brand Safety
To protect against unlawful advertiser and publisher content, we include restrictions on content in our terms and conditions. We also take a large variety of brand safety measures to ensure that the brand equity of our clients is preserved at all times.as much as possible. These measures include determining that each publisher's inventory meets our content requirements and those of our clients to ensure that their display advertisements are not shown in inappropriate content categories. For that purpose, we use numerous internal systems and processes to filter out inventory in real time, including the list of suspect IP addresses from the Trustworthy Accountability Group and the lists of invalid traffic from several specialized external vendors. With respect to our inventory purchased through RTB exchanges, we utilize a mix of proprietary methodologies as well as third-party software to verify that inventory where the advertisement placement is shown conforms to our advertising guidelines and the content expectations and branding guidelines of our clients.
Government Regulation
In additionFurther to the laws and regulations governing privacy and data protection described above, we are subject to numerous domestic and foreign laws and regulations covering a wide variety of subject matters. New laws and regulations (or new interpretations of existing laws and regulations) may also impact our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future and any failure on our part to comply with these laws may subject us to significant liabilities and other penalties.
Competition
We compete in the commerce media market and in the broader market for commercedigital marketing and media monetization, primarily through Display Advertising. Our market is complex, rapidly evolving, highly competitive, complex and still fragmented althoughand yet rapidly consolidating. We face significant competition in this market, which we expect to intensify in the future, partially as a result of potential new entrants in our market, including but not limited to large well-established internet publishers and players.players, in particular as we continue to expand the breadth of the Criteo Commerce Media Platform. We currently compete with large, well-established companies, such as Alliance Data, Corp. ("Alliance Data")Amazon, Meta Platforms (formerly Facebook), Google, Amazon.comand Microsoft, pure play Demand-Side Platforms ("Amazon"DSPs"), Facebook, Inc. ("Facebook"such as The Trade Desk, Viant Technology or Google's DV360, pure play Supply-Side Platforms (“SSPs”), such as Magnite, PubMatic or Google Ad Manager, and pure play retail SSPs such as Microsoft's PromoteIQ or Publicis' CitrusAd, that only focus on monetizing retailers' media, as well as smaller, privately held companies. Potential competition could emerge from large enterprise marketing platforms, like Adobe Systems Inc. ("Adobe"), Oracle Corporation ("Oracle"), and Salesforce.com, Inc. ("Salesforce")., or public and private companies specialized in the Marketing Technology ("MarTech") space. In addition, web browsers, and desktop and mobile operating systems developed by large software companies like Google and Apple Inc. ("Apple") can have a significant influence and impact on the way we operate.
We believe the principal competitive factors in our industry include:
•access to granular commerce data on a large scale;
•technology-based ability to activate data, in particular commerce data, for sales generation;multiple digital marketing and media monetization goals, along the entire consumer journey;
•technology-based ability to generate advertisers' desired business outcomes, including, but not limited to, high return on marketingadvertising spend at scale;
•relevance and breadth of solutions to address numerous digital marketing and media monetization goals;
•breadth and depth of consumer reach;reach, including in all environments and devices across the open Internet;
•marketer and publisher control over the objectives, parameters and performance of their advertising campaigns through modular, flexible and easy-to-use tools and services available on a self-service interface;
•measurability of the marketingadvertising spend performance, based on clear and transparent accountabilitymeasurement metrics;
•completeness and effectiveness of solutionsolutions across digital devices, commerce and advertising environments, platforms marketingand operating systems, advertising channels and publisher networks;environments;
relevance and breadth•transparency of product portfoliopricing models, aligning with the value propositions provided to address numerous commerce marketing objectives;marketers;
•openness, transparency, security and fairness of data sharing and data management practices;
•client trust;
•global presence;
•client service and detailed, transparent client reporting;reporting available on a self-service basis;
•commitment to data protection and user privacy; and
•ease of use.
We believe that we are well positioned in commerce media with respect to all of these factors and expect to continue to grow and capture an increasing share of commercedigital marketing and media monetization budgets worldwide.
Seasonality
Our client base consists primarily of businessescommerce of companies in the digital retail, travelRetail, Travel and classifiedsClassifieds industries, which we definerefer to as commerce clients.“commerce companies” or “commerce clients”. In the digital retailRetail 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 Sponsored Products,As a result, the concentration of advertising spend in the fourth quarter of the calendar year ismay be particularly pronounced. Our retail commerceRetail clients typically conduct fewer advertising campaigns in the first and second quarters than they do in other quarters, while our travelTravel 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.nature. If the seasonal fluctuations become more pronounced, our operating cash flows could fluctuate materially from period to period.
EmployeesEmployees and Human Capital Management
We have a demonstrated history of commitment to the well-being and success of our workforce, and our company is driven by our core values of “open, together and impactful”.
As of December 31, 2017,2021, we had 2,7642,781 employees. Our employees employed by French entities (957(985 employees) are represented by a labor union and employee representative bodies (works' council, employee delegates and a health and safety committee) and covered by collective bargaining agreements. We consider labor relations to be good and have not experienced any work stoppages, slowdowns or other serious labor problems that have materially impeded our business operations.
Our Board, with assistance from our Compensation Committee, has oversight of and periodically reviews the Company's strategies, initiatives and programs with respect to the Company's culture, talent recruitment, development and retention and employee engagement.
Talent Acquisition & Development
Attracting and retaining top talent is a key objective at Criteo, and we invest significantly in talent acquisition. We are committed to offering an environment in which employees are ensured equal job opportunities and have a chance for advancement. As part of our transformation, we have undertaken a number of initiatives to enhance our employee value proposition and experience, including the recent publication of our Culture book, very flexible working practices and the renovation of our main offices to offer attractive workplaces. Our compelling employee value proposition, attractive compensation packages and vibrant culture are instrumental in our ability to attract and retain talent.
Additionally, we strive to provide exceptional training opportunities and development programs for our employees. In 2021, over 33,000 training hours were delivered to our employees. To assess and improve employee retention and engagement, we periodically survey employees, and take action to address areas of employee concern. In 2021, we carried out two employee surveys specific to COVID-19 concerns, soliciting feedback on a wide range of topics from well-being to productivity and hybrid work to social links with other employees and provided multiple services to our employees, including a hybrid way of working and several wellness interactive sessions.
Diversity, Equity & Inclusion
As a global technology company, we believe that a diverse and inclusive culture is the cornerstone for driving creative collaboration and sustainable change across the industry. We are proud that our employees can be themselves at work and we value diversity in the workforce; as of December 31, 2021, 41% of our 2,781 employees are female. As stated in our Diversity, Equity and Inclusion policy, our mission is to sustain our focus on equity, and building stronger diversity through how we hire, develop, reward, and retain all talent at Criteo. We empower our employees to impact the industry, promoting diversity, equity, and inclusion in everything we do, delivering richer experiences for all. In 2021, we achieved gender pay parity and extended our parental leave to be inclusive of our diverse workforce. Our efforts to foster a diverse and inclusive workplace are led by a dedicated Diversity, Equity and Inclusion leadership team who partner through the business and leverage our seven active Employees Resource Groups (“ERGs”) who engage with employees, support allyship and sponsorship to encourage community, networking and safe spaces for all diverse groups throughout Criteo. In 2021, over half of our employees volunteered across our seven ERGs. This work extends to our efforts to strengthen our inclusive culture and drive sustainable efforts that impact our environment and societal interests throughout and beyond Criteo.
Health, Safety and Wellness
Employee health and safety is a priority for Criteo. We devote time and effort across all of our locations to provide positive working conditions, work-life balance and a healthy office environment for our employees. In response to the COVID-19 pandemic, we immediately implemented a remote working arrangement that complied with all applicable government regulations and protected our employees while allowing them to continue to be effective in their jobs. We continue to stay updated on changes in government regulations and implement them to meet our employees’ changing health and wellness needs.
Total Rewards
We are focused on offering competitive compensation and comprehensive benefit packages designed to meet the needs of our employees and reward their efforts and contributions. We seek fairness in total compensation with reference to external comparisons, internal comparisons and the relationship between management and non-management compensation. Our total compensation package includes base pay, bonuses, equity awards, 401(k) plan, healthcare and insurance benefits, flexible spending accounts, paid time off, family leave and employee assistance programs among many others.
Financial Information about Segments and Regions
We managePrior to the fourth quarter of 2021, we managed our operations as a single reportable segment.Beginning in the fourth quarter of 2021, we report our segment 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 Mediasolutions 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.
For information about revenues, net income and total assetscontribution ex-TAC of our reporting segment,segments, please see our audited consolidated financial statements included elsewhere in this Form 10-K. For a breakdown of our revenue and non-current assets by region, please see Note 2426 to our audited consolidated financial statements included elsewhere in this Form 10-K. For information regarding risks associated with our international operations, please refer to the section entitled "Risk Factors" in Item 1A of Part I in this Form 10-K.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available, free of charge on our website, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the "SEC"). These documents may be accessed through our website at www.criteo.com under "Investors." Information contained on, or that can be accessed through, our website does not constitute a part of this Form 10-K. We have included our website address in this Form 10-K solely as an inactive textual reference.
You may also review a copy of this Form 10-K, including exhibits and any schedule filed with this Form 10-K, and obtain copies of such materials at prescribed rates, at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549-0102. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as Criteo, that file electronically with the SEC.
With respect to references made in this Form 10-K to any contract or other document of Criteo, such references are not necessarily complete and you should refer to the exhibits attached or incorporated by reference to this Form 10-K for copies of the actual contract or document.
Item 1A Risk Factors
Investing in our ADSs involves a high degree of risk. You should carefully consider the following risks and all other information contained in this Form 10-K, including our consolidated financial statements and the related notes thereto, before investing in our ADSs. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks materialize, our business, financial condition and results of operations could be materially harmed. In that case, the trading price of our ADSs could decline, and you may lose some or all of your investment.
Risks Related to Our Business and Industry
If we fail to innovate, enhance our brand, adapt and respond effectively to rapidly changing technology, our offerings may become less competitive or obsolete. Our investments in new solutions and technologies to address new marketing goals for our clients are inherently risky and may not be successful.
Our industry and business are subject to rapid and frequent changes in technology, evolving client needs and the frequent introduction by our competitors of new and enhanced offerings. Our future success will depend on our ability to continuously enhance and improve our offerings to meet client needs, build our brand, scale our technology capabilities, add functionality to and improve the performance of the Criteo Commerce Media Platform, and address technological and industry advancements. If we are unable to enhance our solutions to meet market demand in a timely manner, we may not be able to maintain our existing clients or attract new clients, and our solutions may become less competitive or obsolete. Furthermore, brand promotion activities may not yield any increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand.
Our investments in our Commerce Media Platform and new technologies are inherently risky and may not be successful. Addressing broader marketing and monetization goals, in particular customer acquisition and brand awareness, is relatively new to us, and we have had to invest substantial resources to adapt our model, pricing and organization to support this expansion. It also implies investing in new advertising channels such as Connected TV. Similarly, we do not have a long or established track record of competing successfully in this particular space. If we are not successful in expanding our solutions along broader marketing goals, our results of operations could be adversely affected. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases.
Our business, including our global operations and sales, faces risk related to public health developments, and has been, and we expect will continue to be, negatively impacted by the ongoing COVID-19 pandemic and the global attempt to contain it.
We face various risks related to public health developments and outbreaks of contagious disease, including the ongoing COVID-19 pandemic. Any outbreak of contagious diseases, and other adverse public health developments, could have a material adverse effect on our business operations. The spread of COVID-19 and the various attempts to contain it have created volatility, uncertainty and economic disruption to global society, economics, financial markets and business practices. Certain of our customers, especially those in the Travel vertical, as well as those in the Classifieds vertical and traditional brick-and-mortar retailers (specifically those without strong e-commerce channels), have seen their businesses and revenues negatively impacted by the COVID-19 pandemic. Even as efforts to contain the pandemic have made progress and some restrictions have relaxed, new variants of the virus are causing additional outbreaks. As a result, the COVID-19 pandemic has impacted, and may continue to impact, our business operations and financial position (including a potential negative impact on our revenues) as well as our employees, customers, partners and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time.
We have taken precautionary measures intended to minimize the risk of the spread of the virus to our employees, partners and clients, and the communities in which we operate. A wide range of governmental restrictions has also been imposed on our employees, clients and partners’ in an effort to limit the spread of COVID-19. There can be no assurance that precautionary measures, whether adopted by us or imposed by others, will be effective, and such measures could negatively affect our sales, marketing, and client service efforts, delay and lengthen our sales cycles, decrease our employees’, clients’, or partners’ productivity, or create operational or other challenges, any of which could harm our business and results of operations.
To the extent the COVID-19 pandemic or any other public health development or outbreak adversely impacts our business, operations and financial results, it may also result in heightening the other risks described in “Item 1A. Risk Factors” and elsewhere in this Form 10-K.
We face intense and increasing competition for employee talent, and if we do not retain and continue to attract highly skilled talent or retain our senior management team and other key employees, we may not be able to sustain our growth or achieve our business objectives.
Our future success depends on our ability to continue to attract, hire, retain and motivate highly skilled employees, particularly AI experts, software engineers, product managers and other employees with the technical skills that enable us to deliver effective advertising solutions. Competition for diverse, experienced and highly skilled employees in our industry is intense, in particular in the fields of AI and data science, and we expect certain of our key competitors, who generally are larger than us and have access to more substantial resources, to pursue top talent aggressively on a global basis.
Our future success also depends on the continued service of our senior management team. As a global team heading a global company, our management team must operate and collaborate across multiple physical locations and geographies, which can make coordinated management more challenging. Business transformation periods, changes in leadership and changes due to business reorganization may result in uncertainty, impact business performance and strategies, and retention of key personnel. We may be unable to attract or retain the management and highly skilled personnel who are critical to our success, which could hinder our ability to keep pace with innovation and technological change in our industry or result in harm to our key client and publisher relationships, loss of key information, expertise or proprietary knowledge and unanticipated recruitment and training costs.
In addition, we believe that our corporate culture fosters teamwork, impactful results and an open environment. As our organization grows and evolves, and continues to adapt to a hybrid remote working environment, we may need to implement more complex organizational management structures or adapt our corporate culture and work environments to meet changing circumstances, such as during times of a natural disaster or adverse public health development or outbreak of contagious disease (including the COVID-19 pandemic). These changes could impact our ability to compete effectively, or could have an adverse impact on our corporate culture.
The market in which we participate is intensely competitive, and we may not be able to compete successfully with our current or future competitors.
The market for digital advertising solutions is highly competitive and rapidly changing. New technologies and methods of buying advertising present a dynamic competitive challenge as market participants develop and offer multiple new products and services aimed at facilitating and/or capturing advertising spend. With the introduction of new technologies and the influx of new entrants to the market, including large established companies and companies that we do not yet know about or do not yet exist, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability.
Large and established internet and technology companies may have the power to significantly change the very nature of the digital advertising marketplaces in ways that could materially disadvantage us. Some of these companies could leverage their positions to make changes to their web browsers, mobile operating systems, platforms, exchanges, networks or other solutions or services that could be significantly harmful to our business and results of operations. Some of these companies also have significantly larger resources than we do, and in many cases have advantageous competitive positions in popular products and services such as Amazon Advertising, Google Search, YouTube, Chrome, and Meta Platforms (formerly Facebook) including Facebook and Instagram, which they can use to their advantage. Furthermore, our competitors include large and established internet and technology companies that have invested substantial resources in innovation, which could lead to technological advancements that change the competitive dynamics of our business in ways that we may not be able to predict.
In addition to competing for advertising spend, we compete with many companies for advertising inventory, some of whom also operate their own advertising networks or exchanges from which we buy advertising inventory. Some of the companies that we compete with, either for advertising spend or for advertising inventory, may also be our clients or affiliated with our clients or important sources of advertising inventory. Competitive pressure may incentivize such companies to cease to be our clients or cease to provide us with access to their advertising inventory. If this were to occur, our ability to place advertisements would be significantly impaired and our results of operations would be adversely affected. We also face competition for advertising spend from our own clients. Some large advertisers are increasingly developing retail media platforms and in-house advertising technologies, facilitated by self-service tools offered by internet and technology companies like Google and Adobe. Similarly, large enterprise marketing platforms, like Adobe, Oracle, and Salesforce.com, Inc., could create tools that offer our clients additional opportunities to allocate advertising dollars to in-house campaigns. Competition could also hinder the success of new advertising solutions that we offer in the future.
If any of these risks were to materialize, our ability to compete effectively could be significantly compromised and our results of operations could be harmed. Any of these developments would make it more difficult for us to sell our offerings and could result in increased pricing pressure, reduced gross margins, increased sales and marketing expense and/or the loss of market share.
If we fail to access a consistent supply of advertising inventory and expand our access to such inventory, our business and results of operations could be harmed.
A large part of our revenue, in particular in our Criteo Marketing Solutions offering, is derived from placing advertisements on publisher digital properties that we do not own. As a result, we do not own or control the advertising inventory upon which our business depends. We currently access advertising inventory through various channels, including through direct relationships with publishers and large retailers, advertising exchange platforms and other platforms that aggregate the supply of advertising inventory.
Since many widely used aggregators of advertising inventory are owned by companies that may compete with us for clients, competitive pressure may incentivize these companies to limit our access to advertising inventory available through their platforms. For example, in October 2019 we filed a complaint with the French Competition Authority against Meta Platforms (formerly Facebook), regarding practices which we believe impair the conditions of access to advertising inventories and to data concerning ad campaigns on Facebook under conditions that are not transparent or objective as well as "denigration" actions and difference of treatment. The fact that advertising inventory available within "walled-garden" publisher environments tends to grow faster than other advertising inventory available on the market may limit the growth of our access to advertising inventory or our mere access to it overall. In addition, industry or technological changes may affect our access to inventory or the price we pay for inventory.
Similarly, our ability to continue to purchase inventory from many of the publishers and large retailers with whom we have direct relationships depends in part on our ability to consistently pay sufficiently competitive CPMs for their advertising inventory, or in the case of some Criteo Retail Media solutions, to generate sufficient advertising revenue for retailers, as well as our ability to offer advertisements from high quality companies. As more companies compete for advertising impressions on advertising exchange platforms and other platforms that aggregate supply of advertising inventory, advertising inventory may become more expensive, which may adversely affect our ability to acquire it and to deliver advertisements on a profitable basis. We may in the future have to increasingly rely on direct relationships with strong publisher partners in order to maintain the necessary access to quality advertising inventory, and we may not be able to do so on terms that are favorable to us. In addition, to support the growth of our solutions for customer acquisition and brand awareness marketing goals, we will need to expand our access to online video and Connected TV inventory, both in the web, mobile applications, and on connected devices, the price of which may not be available on terms that are favorable to us.
Additionally, we are party to certain agreements with partners that provide us with preferred access to inventory. If the terms of those agreements change and we lose our preferred access, then our financial results could be adversely affected.
If we are not successful in these endeavors, our business and results of operations could be harmed.
The failure by the Criteo AI Engine to accurately predict engagement by a userusers could result in significant costs to us, lost revenue and diminished advertising inventory.business opportunities.
The effective delivery of our commerce marketing solutiondigital advertising solutions depends on the ability of the Criteo AI Engine to predict the likelihood that a consumer will engage with any given internet display advertisement with a sufficient degree of accuracy that our clients can achieve desirable returns on their marketingadvertising spend. We primarily chargehistorically charged our clients primarily based on a CPCcost-per-click pricing model, and our clients only paypaid us when a user engagesengaged with the advertisement, usually by clicking on it. However, for Criteo Dynamic Retargeting, CriteoCustomer Acquisition BETA and Criteo Audience Match BETA,Although we purchase advertising inventory from publishers onhave started evolving our pricing models alongside our broader suite of solutions, a cost-per-thousand-impressions,large part of our revenue is still generated through cost-per-click pricing models or CPM, basis.equivalent.
Our
Many of our agreements with clients are open-ended and often do not include a spending minimum. Similarly, our contracts with publishers generally do not include long-term obligations requiring them to make their inventory available to us.us over long periods of time. Therefore, we need to continuously deliver satisfactory results for our clients and publishers in order to maintain and increase revenue, which in turn depends in part on the optimal functioning of the Criteo AI Engine.
In addition, as we have increased the number of clients and publishers that use our offeringofferings on a global basis, we have experienced significant growth in the amount and complexity of data processed by the Criteo AI Engine and the number of advertising impressions we deliver. As the amount of data and number of variables processed by the Criteo AI Engine increase, and the calculations that the algorithms must compute become increasingly complex, the risk of errors in the type of data collected, stored, generated or accessed increases. In addition, the calculations that the algorithms must compute become increasingly complex and the likelihood of any defects or errorsalso increases.
If we were to experience significant errors or defects in the Criteo Engine, our solution could be impaired or stop working altogether, which could prevent us from purchasing any advertising inventory and generating any revenue until the errors or defects were detected and corrected. Other negative consequences from significant errors or defects in the Criteo Engine could include:
a loss of clients and publishers;
lower click-through rates;
lower conversion rates;
lower profitability per impression, up to and including negative margins;
faulty inventory purchase decisions for which we may need to bear the cost;
lower return on marketing spend for our clients;
lower price for the advertising inventory we are able to offer to publishers;
delivery of advertisements that are less relevant or irrelevant to users;
liability for damages or regulatory inquiries or lawsuits; and
harm to our reputation.
Furthermore, the ability of the Criteo Engine to accurately predict engagement by a user depends in part on our ability to continuously innovate and improve the algorithms underlying the Criteo Engine in order to deliver positive results for our clients and publishers that can be clearly attributed to the services we provide. The failure to do so could result in delivering poor performance for our clients and a reduced ability to secure advertising inventory from publishers.
If failures in the Criteo Engine or our inability to innovate and improve the algorithms underlying the Criteo Engine result in our clients and publishers ceasing to partner with us, we cannot guarantee that we will be able to replace, in a timely or effective manner, departing clients with new clients that generate comparable revenue or departing publishers with new publishers that offer similar internet advertising inventory. As a result, the failure by the Criteo Engine to accurately predict engagement of users and to continue to do so over time could result in significant costs to us, lost revenue and diminished advertising inventory.
The proper functioning of the Criteo Engine may be impaired by fraudulent or malicious activity, including non-human traffic.
It is possible that fraudulentFraudulent or malicious activity, including non-human traffic, could also impair the proper functioning of the Criteo AI Engine. For example, the use of bots or other automated or manual mechanisms to generate fraudulent clicks or misattribute clicks on advertisements we deliver could overstate the performance of our advertising. PreventingDue to the higher CPM paid for online video and combating fraud requires constant vigilance,connected TV advertisements, the risk of fraudulent traffic may increase as we increase our purchasing of online video and connected TV inventory.
If we may not always be successful in our effortswere to do so. It may be difficult to detectexperience significant errors, defects, or fraudulent or malicious activity particularly becausein Criteo AI Engine, our solution could be impaired or stop working altogether, which could prevent us from purchasing any advertising inventory and generating any revenue until the perpetrators of such activity, which may include foreign governments, may have significant resources at their disposal, may frequently change their tactics and may become more sophisticated, requiring us to improve our processes for detecting and controlling such activity. Sucherrors, defects or fraudulent or malicious activity could result inwere detected and corrected. Other negative publicity and reputational harm and requireconsequences from significant additional management time and attention. Further, if we fail to detecterrors, defects or prevent fraudulent or malicious activity in Criteo AI Engine could include:
•a loss of clients and publishers or a decrease in inventory purchased by clients;
•fewer consumer visits to our clientsclient websites or mobile applications;
•lower click-through rates or conversion rates;
•lower profitability per impression, up to and including negative margins;
•faulty inventory purchase decisions for which we may experience or perceive a reducedneed to bear the cost;
•lower return on their investmentadvertising spend for our clients;
•lower price for the advertising inventory we are able to offer to publishers;
•delivery of advertisements that are less relevant or heightened risk associated with the use of our products, resulting in irrelevant to users;
•refusals to pay, demands for refunds, loss of confidence, withdrawal of future business and potential legal claims.liability for damages or regulatory inquiries or lawsuits; and
Similarly, if we show advertising•negative publicity or inventory that is fraudulent, we may lose the trust ofharm to our clients, which would harm our brand and reputation. If potential clients perceive that the Criteo Engine is vulnerable to bots or similar non-human traffic, fraudulent clicks or other malicious activity, we may not be able to maintain our existing clients or attract new clients.
As a result, the failure by Criteo AI Engine to accurately predict engagement of users and to continue to do so over time could result in significant costs to us, lost revenue and diminished business opportunities.
Regulatory, legislative or self-regulatory developments regarding internet or online matters could adversely affect our ability to conduct our business.
Governmental authorities around the world have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising.
In the European Union, the two main pillars of the data protection legal framework are the Directive on Privacy and Electronic Communications (E-Privacy Directive) and the GDPR. The E-Privacy Directive directs EU member states to ensure that accessing information on an Internet user’s computer, such as through a cookie and other similar technologies, is allowed only if the Internet user has been informed about such access and given his or her consent. A recent ruling by the Court of Justice of the European Union clarified that such consent must be reflected by an affirmative act of the user, and European regulators are increasingly agitating for more robust forms of consent. These developments result in decreased reliance on implied consent mechanisms that have been used to meet requirements of the E-Privacy Directive in some markets. A replacement by an e-privacy regulation for the E-Privacy Directive is currently under discussion by EU member states to complement and bring electronic communication services in line with the GDPR and force a harmonized approach across EU member states. It is possible that the proposed e-privacy regulation could further impede the use of cookies and the fines and penalties for breach could be significant.
Under GDPR, data protection authorities have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year. Similarly, the e-privacy regulation, once enacted, could result in new rules and mechanisms for "cookie" consent.
Further, on October 1, 2020, the French data protection authority (Commission Nationale de l'Informatique et des Libertés, or "CNIL") issued the final version of its guidelines on the use of cookies and other trackers and its final recommendations on modalities for obtaining users’ consent to store or read non-essential cookies and similar technologies on their devices. The recommendations provide that, when required, consent must be indicated by a clear and positive action of the data subject, such as by clicking on an “accept all” button on the first layer of the consent management platform. CNIL also noted that it should be as easy to refuse consent to the use of cookies as it is to accept consent, and a “refuse all” button should be present on the first layer of the consent management platform, equivalent to the “accept all” button in terms of size, position and color. Further, the ability to withdraw consent must be readily available at all times. The recommendations are not binding, nor are they intended to be prescriptive and exhaustive. Companies had until March 2021 to ensure compliance with these guidelines, and CNIL is currently auditing many websites in France to verify if they comply with its guidelines.
In 2018, the State of California adopted the California Consumer Privacy Act of 2018, or the CCPA. The CCPA has been characterized as the first “GDPR-like” privacy statute to be enacted in the U.S. because its scope, and a number of the key provisions, resemble the GDPR. The CCPA establishes a new privacy framework for covered businesses by, among other requirements, creating an expanded definition of personal information, establishing new data privacy rights for consumers in the State of California, imposing special rules on the collection of personal data from minors, creating new notice obligations and new limits on the sale of personal information, and creating a new and potentially severe statutory damages framework for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. As currently enacted, we and partners in our industry have been required to comply with these requirements since January 1, 2020, when the CCPA became effective. As with GDPR, the advertising technology marketplace may have to adapt to operating under the CCPA where it applies. Our advertising or publishing partners may impose new CCPA restrictions with which we must adapt and comply. In November 2020, voters in California voted to pass the California Privacy Rights Act (“CPRA”), which both amends and expands the scope of the CCPA. The CPRA will become effective on January 1, 2023, with a look back period to January 1, 2022. The CPRA creates new criteria by which businesses can be regulated, expands the definition of “personal information” to more closely match European regulations, a new audit requirement, and the creation of an agency to oversee enforcement of the CPRA. The CPRA also explicitly provides an opt-out right for cross-contextual behavioral advertising. We cannot predict the timing or outcome of this adaptation or the effect on our business. Adapting our business to the CCPA and the forthcoming new requirements under the CPRA could sufferinvolve substantial resources and expense, and may cause us to divert resources from other aspects of our business, all of which may adversely affect our business.
In addition, other states in the U.S. are quickly adopting state enacted privacy laws. Recently Virginia and Colorado passed privacy laws that differ slightly from the CPRA. If other states follow suit, it could lead to a varied and complex regulatory landscape, which could result in material costs.
Clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results.
Such changes can also delay or impede the development of new solutions, result in negative publicity and reputational harm, require significant management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability.
Finally, our legal and financial exposure often depends in part on our clients’ or other third parties' adherence to and compliance with privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations.
If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our resultsclients and publisher partners may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of operations couldour clients.
In November 2018, Privacy International filed a complaint with relevant data protection authorities against Criteo and a number of other similarly situated advertising technology companies, arguing that certain of these companies' practices do not comply with the GDPR. In January 2020, CNIL opened a formal investigation into Criteo in response to this complaint, which is still ongoing as per CNIL’s notification to Criteo dated June 23, 2021, which notified the Company of the appointment of an investigator (rapporteur). Their investigation also covers another complaint against Criteo received by the CNIL from European Center for Digital Rights (NOYB). There can be materially impacted.no assurance that actions by the Company will not be required as a result of the investigation.
Our business depends on our ability to maintain the quality of content for our clients and publishers.
Our client'sclients' satisfaction depends on our ability to place advertisements with publisher content that is well-suited to the clientclient's product or service. If we are unable to keep our clients’ advertisements from being placed in unlawful or inappropriate content, our reputation and business may suffer. In particular, we could be treated as a spammer and blocked by internet service providers or regulators. In addition, if we place advertisements on websites containing content that is not permitted under the terms of the applicable agreements with a client, we may be unable to charge the client for impressions or clicks generated on those sites, the client may terminate their campaign, the client may require us to indemnify them for any resulting third party claims, or the client may allege breach of contract. Further, our publishers and exchange partners rely upon us not to place advertisements with inappropriate or unlawful content on their websites that arewebsites. As we grow our business to serve a larger number of smaller clients using self-service tools with less intervention by us, it could become more challenging to train and support such clients to use such tools and to prevent inappropriate or unlawful or inappropriate.advertisements from being shown. If we are unable to maintain the quality of our client and publisher content as the number of clients and publishers we work with continues to grow, our reputation and business may suffer and we may not be able to retain or secure additional clients or publisher relationships.
If we fail to innovate, adapt and respond effectively to rapidly changing technology, our solution may become less competitive or obsolete.
Our future success will dependdepends on our ability to continuously enhanceimplement our business transformation and improveachieve our solutionglobal business strategies.
Our business has recently undergone, and continues to meet client needs, add functionalityundergo, a significant transformation, partially in response to major changes in the advertising technology industry driven by, but not limited to, regulations such as the GDPR and restrictions on data collection and use, including those implemented by large technology companies. The components of our transformation include diversification of our services as we shift away from third-party cookies, focus on growth and investment, and certain organization adjustments and cost optimization opportunities. Our future performance and growth depends on the success of this transformation and our new business strategies, including our management team’s ability to successfully implement them.
Our ongoing transformation has resulted and may continue to result in changes to business priorities and operations, capital allocation priorities, operational and organizational structure, and increased demands on management. Such changes could result in short-term and one-time costs, lost customers, reduced sales volume, higher than expected restructuring costs, loss of key personnel and other negative impacts on our business. We may also become subject to the risks of labor unrest, negative publicity and business disruption in connection with these initiatives.
Completion of our business transformation may take longer than anticipated, and, once implemented, we may not realize, in full or in part, the anticipated benefits or such benefits may be realized more slowly than anticipated. The failure to realize benefits or savings, which may be due to our client platform,inability to execute plans, delays in the implementation of the transformation, global or local economic conditions, competition, changes in the advertising technology industry and address technologicalthe other risks described herein, could have a material adverse effect on our business, financial condition and industry advancements. If we are unable to enhanceresults of operations, as well as the trading price of our commerce marketing portfolio to meet market demand in a timely manner, wesecurities.
We may not be able to maintaineffectively integrate the businesses we acquire, which may adversely affect our existing clientsability to achieve our growth and business objectives.
We explore, on an ongoing basis, potential acquisitions of additional businesses, products, solutions, technologies or attract new clients.
For example, as ecommerceteams. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms and/or financing of the acquisition, and consumption of content continues to migrate from the desktop web to mobile and tablet devices and advertisements more frequently include video or incorporate animation, sound and/or interactivity, which we refer to as rich media content, businesses are increasingly demanding that Display Advertising solutions extend to all three screens and support video and rich media content.
In addition, as consumers spend more time watching video and playing social network games online, including within mobile applications, as opposed to browsing static web pages, businessesour due diligence may increasingly shift their advertising budgets to video and game publishers and to mobile applications or, if consumers fail to engage with advertisements displayed on smaller screens, reduce their Display Advertising budgets. Although online advertising has long facilitatedidentify all of the availabilityproblems, liabilities or other shortcomings or challenges of freean acquired business, product, solution or low-cost online content for consumers, consumers have increasingly chosentechnology, including issues related to pay for advertising-free services such as Netflix, which similarly could lead businesses to reduce their advertising budgets. In order to maintain and continue to grow ourintellectual property, product quality or architecture, employees or clients, regulatory compliance, including tax compliance, practices or revenue werecognition or other accounting practices.
Any acquisition or investment, including the contemplated IPONWEB Acquisition, may need to continue to adapt and improve our offering to offer video and rich media content advertisements and to enhance user engagement with advertisements on mobile applications. In addition, there may be developments in the way we purchase inventory that require us to adaptuse significant amounts of cash, incur debt, issue potentially dilutive equity securities or incur contingent liabilities or amortization of expenses, or impairment of goodwill and/or purchased long-lived assets, and restructuring charges, any of which could harm our technology. For example,financial condition or results. The Company has incurred and will incur significant transaction and acquisition-related costs in early 2017, we launched Criteo Direct Bidder,connection with its acquisitions, including legal, accounting, financial advisory, regulatory and other expenses. The payment of such transaction costs could have an adverse effect on our next generation header biddingfinancial condition, results of operations or cash flows. In addition, acquisitions, including our recent acquisitions such as the contemplated IPONWEB Acquisition and the Mabaya Acquisition, involve numerous risks, any of which could harm our business, including:
•difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency and market;
•the need to integrate operations across different geographies, cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
•cultural challenges associated with integrating employees from the acquired company into our organization;
•ineffectiveness, lack of scalability, or incompatibility of acquired technologies or services;
•potential loss of key employees of acquired businesses;
•inability to maintain the key business relationships and the reputation of acquired businesses;
•failure to successfully further develop the acquired technology now directly connected within order to recoup our investment;
•unfavorable reputation and perception of the ad serversacquired product or technology by the general public;
•diversion of 1,500 large publishers. Although Criteo Direct Bidder has been positively received by publishers, theremanagement’s attention from other business concerns;
•liability or litigation for activities of the acquired business, including claims from terminated employees, clients, former shareholders or other third parties;
•implementation or remediation of controls, practices, procedures and policies at acquired businesses, including the costs necessary to establish and maintain effective internal controls; and
•increased fixed costs.
There can be no assurance that we will continuebe able to adequately addresssuccessfully integrate the increased use of header biddingbusinesses that we acquire or that we will be able to leverage the acquired commercial relationships, products, technologies or teams in the publisher inventory sectormanner we anticipate. If we are unable to successfully integrate the businesses we have acquired or any business, product, solution, technology or team we acquire in the future, our business and results of the industry.
Our complete solution for personalized mobile advertising involves delivery of Display Advertising to the web browsers of mobile devices, whichoperations could suffer, and we refer to as in-browser, as well as within mobile applications, which we refer to as in-app. To date, the majority of our revenue derived from the delivery of Display Advertising on mobile devices is still from in-browser advertisements. We may not be successfulable to achieve our business and growth objectives.
Failure to complete the IPONWEB Acquisition could have an adverse effect on our business, financial condition and results of operations and could negatively impact our stock price.
The IPONWEB Acquisition is subject to certain customary conditions to closing that must be satisfied or waived (to the extent permissible), in generating comparableeach case prior to the completion of the acquisition. These conditions to the completion of the acquisition, some of which are beyond our control and that of IPONWEB, may not be satisfied or waived in a timely manner or at all, and, accordingly, the acquisition may be delayed or not completed. Any failure of the pending IPONWEB Acquisition to be completed could have an adverse effect on our business, financial condition and results of operations and could negatively impact our stock price. The current market price of our stock may reflect an assumption that the pending acquisition will occur and failure to complete the acquisition could result in a decline in our stock price.
Our international operations and expansion expose us to several risks.
As of December 31, 2021, we had a direct operating presence through 29 offices located in 15 countries and did business in 96 countries. Our current global operations and future initiatives involve a variety of risks, including, in addition to risks described elsewhere in this section:
•operational and execution risk, including localization of the product interface and systems, translation into foreign languages, adaptation for local practices, adequate coordination of timing to onboard local clients and publishers, difficulty of maintaining our corporate culture, challenges inherent to hiring and efficiently managing an increased number of employees over large geographic distances, and the increasing complexity of the organizational structure required to support expansion and operations into multiple geographies and regulatory systems;
•insufficient, or insufficiently coordinated, demand for and supply of advertising inventory in specific geographic markets processed through Criteo AI Engine, which could impair its ability to accurately predict user engagement in that market;
•compliance with (and liability for failure to comply with) applicable local laws and regulations, including, among other things, laws and regulations with respect to data protection and user privacy, tax and withholding, labor regulations, anti-corruption, environment, consumer protection, spam and content, which laws and regulations may be inconsistent across jurisdictions;
•intensity of local competition for digital advertising budgets and internet display inventory;
•changes in a specific country’s or region’s political or economic conditions;
•risks related to tariffs and trade barriers, pricing structure, payment and currency, including aligning our pricing model and payment terms with local norms, higher levels of credit risk and payment fraud, difficulties in invoicing and collecting in foreign currencies and associated foreign currency exposure, restrictions on foreign ownership and investments, and difficulties in repatriating or transferring funds from or converting currencies; and
•limited or unfavorable intellectual property protection;
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenue or profitability.
Because our functional currency is the euro, while our reporting currency is the U.S. dollar, we face exposure to fluctuations in foreign currency exchange rates. Foreign currency exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro. While we are engaging in hedging transactions to minimize the impact of uncertainty in future exchange rates on intra-company transactions and financing, we may not hedge all of our mobile in-app solutionforeign currency exchange rate risk. In addition, hedging transactions carry their own risks and costs, and could expose us to additional risks that could harm our financial condition and operating results.
If we fail to manage our growth and the shift in our client portfolio toward the midmarket effectively, we may be unable to execute our business plan or sustain revenue from our in-browser solution. maintain high levels of client and publisher satisfaction.
We have developed a “Universal Match” cross-device matching solution that allows usexperienced, and may in the future experience, rapid growth and changes in our client portfolio, which have created, and may continue to match users across devices basedcreate, challenges to the quality of our service to our clients, and which have placed, and may continue to place, significant demands on our Identity Graph. However,management and our operational and financial resources.
For example, over the years, the size of our business with Tail clients (previously called midmarket clients) has grown significantly as a proportion of our overall business, and it may continue to grow in the future. While we intend to put more focus on our Strategic and Core clients and therefore less emphasis on the Tail client category, should our business evolve toward the Tail category, there are several additional risks to our business, including risks relating to the financial stability of our clients and our ability to collect accounts receivable from such clients. In addition, since our business with Tail clients is comprised of thousands of smaller clients that require significant resources to support, it is currently less profitable than our business with Strategic and Core clients. Overall there may not be a direct correlation between a change in the number of sales involving multiple devices increases, there can be no assurance thatclients in a particular period and an increase or decrease in our Identity Graph will be strong enoughrevenue.
If we fail to track sales across devices, thereby impairingsuccessfully manage the anticipated changes in our client portfolio and the associated changes in employee headcount and our organizational structure, our brand and reputation may suffer, which would in turn impair our ability to properly attribute salesattract and retain clients and publishers and our results of operations.
Our future success will depend in part on our ability to expand into new industry verticals.
As we market our offering to a wider group of consumer brands and companies outside of our clients’ products being generated byhistorical key industry verticals of retail, travel and classifieds, among others, we will need to adapt our services.solutions and effectively market our value to businesses in these new industry verticals. Our successful expansion into new industry verticals will depend on various factors, including our ability to:
•accumulate sufficient data sets relevant for those industry verticals to ensure that Criteo AI Engine has sufficient quantity and quality of information to deliver efficient and effective internet display advertisements applicable to the relevant industry;
Additionally, in the fourth quarter of 2017, we released two new products in beta version, Criteo Customer Acquisition and Criteo Audience Match. Criteo Customer Acquisition BETA helps retailers acquire new customers by using their intent information across a pool of retailers, and Criteo Audience Match BETA allows retailers to accurately target and re-engage customers•design solutions that are alreadyattractive to businesses in such verticals;
•work with clients in new industry verticals through the advertising agencies that manage their CRM systemadvertising budgets
•hire personnel with relevant industry vertical experience to lead sales and product teams
•provide high returns on advertising spend in order to drive sales. There can be no assurance that these products will be successful.such industries and maintain such high returns on advertising spend at scale; and
•transparently measure the performance of such advertising spend based on clear, measurable metrics.
If we are unable to successfully develop, enhance or acquire new productsadapt our offering to continuously meet clients' needsappeal to businesses in industries other than our core verticals, or are unable to effectively market such solutions to businesses in such industries, we may not be able to achieve our growth or business objectives. Further, as we expand our client base and offering into new industry verticals, we may be unable to maintain our current client retention rates.
As we expand the market for our solutions, we may become more dependent on advertising agencies as intermediaries, which may adversely affect our ability to attract and retain business, or exert downward pressure on our margins.
As we market our solutions, we may increasingly need advertising agencies to work with us in assisting businesses in planning and purchasing for broader marketing goals. Over the second half of 2021, 50% of Criteo Retail Media's gross media spend and 29% of Criteo Marketing Solutions' gross media spend relied on advertising agencies.
Overall, we believe that accessing broader advertising budgets by partnering with advertising agencies represents a significant incremental business opportunity for us. However, an increasing exposure to advertising agencies may also represent significant risks. For example, if we have an unsuccessful engagement with an advertising agency on a particular advertising campaign, we risk losing the ability to work not only for the client for whom the campaign was run, but also for other clients represented by that agency. Further, if our business evolves such that we are increasingly working through advertising agency intermediaries, we would have less of a direct relationship with our clients. This may drive our clients to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with our clients. Additionally, our clients may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying client’s business when the client switches to a new agency.
The presence of advertising agencies as intermediaries between us and our clients thus creates a challenge to building our own brand awareness and maintaining an affinity with our clients, who are the ultimate sources of our revenue. In the event we were to become more dependent on advertising agencies as intermediaries, this may adversely affect our ability to attract and retain business. In addition, an increased dependency on advertising agencies may harm our results of operations, as a result of the increased agency fees we may be required to pay and/or as a result of longer payment terms from agencies.
Our future success will depend in part on our ability to expand into new advertising channels.
We define an advertising channel as a specific advertisement medium to engage with a user or a consumer for which we currently purchase inventory through a specific source. We started delivering elements of our offering through internet display advertisements in desktop browsers. Since then, we have expanded into mobile in-browser and in-app, native display, including on social media platforms, and online video inventory.
In the future, we may decide to broaden the spectrum of our advertising channels further, including Connected TV and Digital Out of Home, if we believe that doing so would significantly increase the value we can offer to clients. However, any future attempts to enter new advertising channels may not be successful.
Our success in expanding into any additional advertising channels will depend on various factors, including our ability to:
•identify additional advertising channels where our solutions could perform;
•accumulate sufficient data sets relevant for those advertising channels to ensure that Criteo AI Engine has a sufficient quantity and quality of information to deliver relevant personalized advertisements through those additional advertising channels;
•adapt our organizationsolutions to additional advertising channels and effectively market it for such additional advertising channels to our existing and prospective clients;
•integrate newly developed or acquired advertising channels into our pricing and measurement models, with a clear and measurable performance attribution mechanism that works across all channels, and in a manner that is consistent with our privacy standards;
•achieve client performance levels through the new advertising channels that are similar to those delivered through existing advertising channels, and in any case that are not dilutive to the overall client performance;
•identify and establish acceptable business arrangements with inventory partners and platforms to access inventories in sufficient quality and quantity for these new advertising channels;
•maintain our gross margin at a consistent level upon entering one or more additional advertising marketing channels;
•compete with new market participants active in these additional advertising channels; and
•hire and retain key personnel with relevant technology and product expertise to lead the integration of additional advertising channels onto our platform, and sales and operations teams to sell and integrate additional advertising channels.
Any decrease in the use of internet display advertisements, mobile in-browser and in-app, native display, including on social media platforms, and online video advertising, whether due to clients losing confidence in the value or effectiveness of such channels, regulatory or technology restrictions or if we are unable to successfully adapt our solutions to additional advertising channels and effectively market such offerings to our existing and prospective clients, or if we are unable to maintain our pricing and measurement models in these additional advertising channels, may prevent us from achieving our growth or business objectives.
We operate in a rapidly evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful. Our historical growth rates may not be indicative of our future growth, and we expect our operating and capital investments to continue to increase in the foreseeable future. Accordingly, we may have difficulty sustaining profitability.
We operate in a rapidly evolving industry. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth in both our business and the digital advertising market generally. We are subject to risks and uncertainties frequently experienced by growing companies in rapidly evolving industries, including challenges in forecasting accuracy, determining appropriate nature and levels of investments, assessing appropriate returns on investments, achieving market acceptance of our existing and future offerings, managing client implementations and developing new solutions. If our assumptions regarding these uncertainties, which we regularly use and update to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
You should not consider our revenue growth in past periods to be indicative of our future performance. In future periods, our revenue could decline or grow more slowly than we expect. We believe the growth of our revenue depends on a number of factors, including our ability to:
•attract new clients, and retain and expand our relationships with existing clients;
•maintain the breadth of our media owner network and attract new publishers and media owners, including large retailers, publishers of web content, mobile applications and video and social games, in order to grow the volume and breadth of advertising inventory available to us;
•broaden our solutions portfolio to include additional marketing and monetization goals (including awareness and consideration) for commerce companies and consumer brands across the open Internet, including web, apps and stores;
•adapt our offering to meet evolving needs of businesses, including to address market trends such as (i) the continued migration of consumers from desktop to mobile and from websites to mobile applications, (ii) the increasing percentage of sales that involve multiple digital devices, (iii) the increasing retailer adoption of retail media monetization solutions, (iv) the growing adoption by consumers of “ad-blocking” software on web browsers on desktop and/or on mobile devices and use or consumption by consumers of advertising-free services, (v) changes in the marketplace for and supply of advertising inventory, including the shift toward header bidding, (vi) changes in the overall ecosystem such as Apple's introduction of its Intelligent Tracking Prevention feature into its Safari browser and its App Tracking Transparency feature in its iOS14.5 mobile operating system, Microsoft’s Tracking Prevention feature in its Edge browser, and Mozilla’s introduction of Enhanced Tracking Protection into its Firefox browser and (vii) changes in consumer acceptance of tracking technologies for targeted or behavioral advertising purposes;
•maintain and increase our access to data necessary for the performance of Criteo AI Engine;
•continuously improve the algorithms underlying Criteo AI Engine and apply state-of-the-art Machine Learning approaches and hardware; and
•continue to adapt to a changing regulatory landscape governing data protection and privacy matters.
We also anticipate continuing to invest in our business to increase the scale of our solutions, existing and new, grow our headcount and expand our operations. In particular, we plan to continue to focus on maximizing our Contribution after traffic acquisition costs on an absolute basis, which we call Contribution ex-TAC, as we believe this focus fortifies a number of our competitive strengths. Our focus on maximizing Contribution ex-TAC on an absolute basis may have an adverse impact on our gross margin and we cannot be certain that this strategy will be successful or result in increased liquidity or long-term value for our shareholders.
We derive a significant portion of our revenue from companies in the retail, travel and classified industries, and any downturn in these industries or any changes in regulations affecting these industries could harm our business.
A significant portion of our revenue is derived from companies in the Retail, Travel and Classifieds industries. For example, in 2021, 2020, 2019 and 2018, 78.1%, 75.6%, 68.9% and 69.1%, respectively, of our combined revenue for Criteo Marketing Solutions was derived from advertisements placed for Retail commerce businesses. Any downturn or increased competitive pressure in any of our core industries, or other industries we may target in the future, may cause our clients to reduce their spending with us, or delay or cancel their advertising campaigns with us.
We have substantial client concentration in certain local markets and solutions, with a limited number of clients accounting for a substantial portion of our revenues in those areas.
Although our overall customer base is well-diversified, with our largest 10 clients only representing 16.6% of our revenue in the aggregate in 2021, in certain of our local markets and specific solutions we derive a substantial portion of revenues from a limited number of clients. There are inherent risks whenever a large percentage of revenues within any specific market or solution are concentrated within a limited number of clients. We cannot predict the future level of demand for our services and products that will be generated by these clients. In addition, revenues from these clients may fluctuate from time to time. Further, some of our contracts with these clients may permit them to terminate use of our products at any time (subject to notice and certain other provisions). If we fail to retain any of these clients and any of these clients terminate or reduce use of our products, our revenues within local markets or specific solutions may be negatively impacted.
We experience fluctuations in our results of operations due to a number of factors, which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly and annual results of operations fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. Fluctuations in our results of operations could cause our performance to fall below the expectations of analysts and investors, and adversely affect the price of our ADSs. You should not rely on our past results as an indication of our future performance. Factors that may affect our quarterly results of operations include:
•the nature of our clients’ products or services, including the seasonal nature of our clients’ advertising spending;
•lengthy implementation cycles resulting in substantial expenses incurred without any guarantee of revenue generation;
•demand for our offering and the size, scope and timing of digital advertising campaigns;
•the relative lack of long-term agreements with our clients and publishers;
•client and publisher retention rates;
•market acceptance of our offering and future solutions and services (i) in current industry verticals and new industry verticals, (ii) in new geographic markets, (iii) in new advertising channels, or (iv) for broader marketing goals;
•the timing of large expenditures related to expansion into new solutions, new geographic markets, new industry verticals, acquisitions and/or capital projects;
•the timing of adding support for new digital devices, platforms and operating systems;
•the amount of inventory purchased through direct relationships with publishers versus internet advertising exchanges or networks;
•our clients’ budgeting cycles;
•changes in the competitive dynamics of our industry, including consolidation among competitors;
•consumers' response to our clients’ advertisements, to online advertising in general and to tracking technologies for targeted or behavioral advertising purposes;
•our ability to control costs, including our operating expenses;
•network outages, errors in our technology or security breaches and any associated expense and collateral effects;
•foreign currency exchange rate fluctuations, as some of our foreign sales and costs are denominated in their local currencies;
•failure to successfully manage any acquisitions; and
•general economic and political conditions in our domestic and international markets.
As a result, we may become less competitivehave a limited ability to forecast the amount of future revenue and expense, and our results of operations may from time to time fall below our estimates or obsolete.the expectations of public market analysts and investors.
Risks Related to Data Privacy, Intellectual Property and Cybersecurity
Our ability to generate revenue depends on our collection of significant amounts of data from various sources, which may be restricted by consumer choice, restrictions imposed by clients, publishers, and browsers or other software, developers, changes in technology, and new developments in laws, regulations and industry standards.
Our ability to optimize the delivery of internet advertisements for our clients depends on our ability to successfully leverage data, including data that we collect from our clients, data we receive from our publisher partners and third parties, and data from our own operating history. Using cookies deviceand non-cookie based mechanisms, such as hashed emails, hashed customer log-ins, mobile phone numbers or mobile advertising identifiers, and similar tracking technologies, we collect information about the interactions of users with our clients’ and publishers’ digital properties (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our clients’ websites or advertisements). Our ability to successfully leverage such data depends on our continued ability to access and use such data, which could be restricted by a number of factors, including consumer choice, restrictions imposed by counterparties (such as clients, supply sources and publishers, who may also compete with us for advertising spend and inventory) and web browser developers or other software developers, changes in technology, including changes in web browser technology, increased visibility of consent or “do not track” mechanisms or “ad-blocking” software, and new developments in, or new interpretations of, laws, regulations and industry standards.
Consumer resistance to the collection and sharing These types of the data used to deliver targeted advertising, increased visibility of consent or "do not track" mechanisms as a result of industry regulatory and/or legal developments, the adoption by consumers of browsers settings or "ad-blocking" software and the development and deployment of new technologies could materially impact our ability to collect data or reduce our ability to deliver relevant advertisements, whichrestrictions could materially impair the results of our operations.
Further, there is a risk that web
Web browser developers, such as Apple, Mozilla Foundation, Microsoft Corp. ("Microsoft") or Google, have implemented or may implement changes in browser or device functionality that impair our ability to understand the preferences of consumers, including by limiting the use of third-party cookies or other tracking technologytechnologies or data indicating or predicting consumer preferences. Today, three major web browsers — Apple’s Safari, Mozilla’s Firefox and Microsoft’s Edge — block third party cookies by default. Internet users can also delete cookies from their computers at any time. In January 2020, Google announced that it plans to phase out support for third-party cookies in Chrome, which has since been delayed until late 2023. Google controls more than 60% of the browser market and has an even more dominant position in the digital advertising market. These web browser developers have significant resources at their disposal and command substantial market share, and any restrictions they impose could foreclose our ability to understand the preferences of a substantial number of consumers. For example, Apple launched its Intelligent Tracking Prevention ("ITP") featureAlthough we are actively in its Safari browser in September 2017, which blocks some or allthe process of moving our business away from third-party cookies by defaulttowards relying more on mobile and desktop and therefore makes it more difficult for third-party providers like Criteo to access data on Safari users. Similarly, search engines and other service providers that explicitly do not allow the tracking of data, such as DuckDuckGo, Inc., have been growing and may continue to grow in popularity. We have adapted our offering to enable us to continue to access data and deliver Display Advertising on such web browsers, but there can be no assurance that Apple or another developer will not release technology that further inhibits our ability to collect data or that regulators will not challenge the transparency of our offerings. In addition, the adaptations to our offering that we have implemented or may implement in response to browser changes like Safari's ITP feature may prove objectionable to regulators, clients, users or others, and changes in legal regulations or interpretations of legal regulations regarding data privacy could prevent or prohibit the implementation of such adaptations. Iffirst-party data-based identifiers, if we are blocked from serving advertisements to a significant portion of internet users, our business could suffer and our results of operations could be harmed.
Furthermore, by restricting our access to data, browser features such as Safari's ITP feature could cause the overall quantity of the data we collect on consumers to be diminished. If we are unable to mitigate the impacts of any such browser features on our business for a substantial period of time, as a result of such diminution in collected data, the accuracy, effectiveness and value of our offering could be materially impacted.
Similarly, Internet users are increasingly able to download free or paid “ad-blocking” software, including on mobile devices, that preventswhich prevent third-party cookies from being stored on a user’s computer and blocksblock advertisements from being displayed to such user. Although onlineIn addition, Google has introduced ad blocking software in its Chrome browser that blocks certain ads based on quality standards established under a multi-stakeholder coalition. If such a feature inadvertently or mistakenly blocks ads that are not within the established blocking standards, or if such capabilities become widely adopted and the advertising has long facilitatedtechnology industry does not collaboratively develop alternative technologies, our business could be harmed. The Interactive Advertising Bureau and Digital Advertising Alliance have also developed frameworks that allow users to opt out of the availability“sale” of freetheir personal information under the CCPA, in ways that stop or low-cost online content for consumers, consumers have increasingly chosenseverely limit the ability to pay for advertising-free servicesshow targeted ads.
In addition, search engines and other service providers that explicitly do not allow the tracking of data, such as Netflix or download free or paid “ad-blocking” software. If the availability of ad-blocking software or advertising-free services increases and their use becomes more prevalent on computers and mobile devices, fewer of our cookies or our clients’ cookiesDuckDuckGo, Inc., may be setgrowing in browsers. As a result, the number of users to whom we could serve our clients’ advertisements could be materially restricted, and the Criteo Engine would be denied the benefits of the data and impressions we could have otherwise collected from such users, which would adversely affect our business.
popularity. If a significant number of web browser users download such “ad-blocking” software or switch to advertising-free services or platforms, our business could be materially impacted.
In addition, our ability to collect and use data may be restricted or prevented by a number of other factors, including:
the failure of our network, hardware, or software systems, or the network, hardware, or software systems of our clients;
variability in user traffic on clients' websites or Further, mobile applications;
decisions by some of our clients or publishers to restrict our ability to collect data from them, third parties and users or to refuse to implement mechanisms we request to ensure compliance with our legal obligations;
changes in device functionality and settings, and other new technologies, which make it easier fordevices allow users to preventopt out of the placementuse of cookies or other tracking technology and impact our publishers’ or our clients’ ability to collect and use data;
changes by large internet and technology companies to the nature of Display Advertising (for example, any changes in Apple’s Identifiermobile device IDs for Advertising, or IDFA, that could prevent us from identifyingtargeted advertising. For in-app advertising, data regarding interactions between users and associating particular browsing behaviorsdevices are tracked mostly through stable, pseudonymous mobile device identifiers that are built into the device operating system with privacy controls that allow users to those users as they use mobile applications that run on Apple’s operating system);
changes in traffic filtering performedexpress a preference with respect to data collection for advertising, including to disable the identifier. These identifiers and privacy controls are defined by various internet service providers, causing somethe developers of the information we use for tracking to be removed before requests are sent to our servers;
our inability to develop an identity graph that is strong enough to properly match usersmobile platforms and track sales across an increasing number of devices and environments;
our inability to grow our client and publisher base in new industry verticals and geographic markets in order to obtain the critical mass of data necessary for the Criteo Engine to perform optimally in such new industry verticals or geographic markets;
malicious traffic (such as non-human traffic) that introduces "noise" in the information that we collect from clients and publishers;
interruptions, failures or defects in our data collection, mining, analysis and storage systems; and
changes in laws, rules, regulations and industry standards or increased enforcement of laws, rules, regulations and industry standards in or across any of the geographies in which we operate or may want to operate in the future.
Any of the above described limitations on our ability to successfully collect, utilize and leverage data could also materially impair the optimal performance of the Criteo Engine and severely limit our ability to reach and engage users with our advertisements, which would harm our business and adversely impact our future results of operations.
If we fail to access a consistent supply of advertising inventory and expand our access to such inventory, our business and results of operations could be harmed.
Essentially all of our revenue is derived from placing advertisements on publisher digital properties that we do not own. As a result, we do not own or control the advertising inventory upon which our business depends. We currently access advertising inventory through various channels, including through direct relationships with publishers, advertising exchange platforms (such as Google's DoubleClick Ad Exchange and Microsoft’s Ad Exchange) and other platforms that aggregate the supply of advertising inventory, such as Appnexus Inc., The Rubicon Project, Inc., PubMatic, Inc., Taboola, Inc., Baidu, Inc. and Yandex N.V.
Since our contracts with publishers with whom we have direct relationships generally do not include long-term obligations requiring them to make their inventory available to us, our ability to continue to purchase inventory from these publishers depends in part on our ability to consistently pay sufficiently competitive CPMs for their advertising inventory, or in the case of Criteo Sponsored Products to generate sufficient revenue, as well as our ability to offer advertisements from high quality companies. Similarly, as more companies compete for advertising impressions on advertising exchange platforms and other platforms that aggregate supply of advertising inventory, advertising inventory may become more expensive, which may adversely affect our ability to acquire it and to deliver internet display advertisements on a profitable basis.
Our access to advertising inventory may also be affectedchanged by the increased use of header bidding, by which impressions that would traditionally have been exposed to different potential sources of demandmobile platforms in a sequence, of which we were a part, are instead made available simultaneously to competitive bidding by multiple demand sourcesway that use header bidding tags. This may provide us with access to more advertising inventory, but there is no guarantee that selling publishers will allocate to us a header bidding slot or accept our header bidding tags or that advertising inventory will not be more expensive as a result of the increased competition in the process of header bidding. Also, as a result of header bidding, we may receive multiple bid requests for the same impression, which may result in us bidding against ourselves and create false liquidity in an auction, if we are not able to accurately determine the source of the inventory.
Many widely used aggregators of advertising inventory are owned by companies that may compete with us for clients. Competitive pressure may incentivize these companies to limit our access to advertising inventory available through their platforms. Any interference with our ability to access advertising inventory could materially impair our ability to deliver advertisements for our clients. In addition, since we rely on a limited number of companies for access to significant portions of available advertising inventory, the loss of access to advertising inventory from one of those companies could negatively impact our business. For example, Apple announced in June 2020 that it will require user opt-in before permitting access to Apple’s unique identifier, or IDFA, and implemented iOS 15 in September 2021, which allows users to hide IP address information to prevent tracking web usage on the Safari browser and to shut off marketers’ ability to deliver internet display advertisements for our clients. Any of these consequences could therefore adversely affect our results of operationssee if and financial condition.
In orderwhen an email is opened through Apple’s Mail app. This shift from enabling user opt-out to grow our publisher base, we will needan opt-in requirement is likely to expand the breadth and quality of businesses we work with. In addition, in order to grow our client base, we must expand our access to new sources of quality advertising inventory, and maintainhave a consistent supply of such quality inventory. While we have historically relied on direct relationships with publishers, as well as on advertising exchange platforms and other platforms that aggregate supply of advertising inventory, we may increasingly rely on direct relationships with strong publisher partners in order to maintain the necessary access to, and establish a greater amount of preferred access to, quality advertising inventory. In order to enter into or maintain such direct relationships, we may need to agree to terms that are unfavorable to us, including, for example, contractual minimums, bonuses and/or long-term commitments for advertising inventory. In addition, as we attempt to improve our offerings to enable businesses to place advertisements with publishers other thansubstantial impact on the web,mobile advertising ecosystem and could harm our growth in this channel.
User privacy features of other channels of programmatic advertising, such as Connected TV or over-the-top video, are still developing. Technical or policy changes, including mobile applications, video and social games, we will need to develop and improveregulation or industry self-regulation, could harm our access to publishersgrowth in those environments. Our abilitychannels.
The data we gather is important to attract new publishers on the web, mobile applications, videocontinued development and social games will depend on various factors, somesuccess of which are beyond our control.
Therefore, we cannot guarantee that we will successfully grow our direct relationships with new publishers or maintain or expand our access to quality advertising inventory through other channels and, if we are not successful, our business and results of operations could be harmed. In addition, even if we do grow our direct relationships, we cannot assure you that those direct relationships with publishers will be on terms favorable to us.
The Criteo Shopper Graph, which is a key element of the Criteo Commerce Marketing Ecosystem, is still new and may not be successful.
With the Criteo Shopper Graph, we are building one the world's largest data sets focused on shoppers. We will continue to develop the Criteo Shopper Graph, as it supports our current products and we expect it to be key to the development and launch of new products. Although we have been building elements of the data collectives that comprise the Criteo Shopper Graph since 2015, the Criteo Shopper Graph as a whole is still new and may not be successful.Media Platform. If too few of our clients provide us with the permission to share their data or if our clients choose to stop sharing their data, or if regulatory or other factors inhibit or restrict us from maintaining the data collectives underlying the Criteo Shopper Graph, the value of the Criteo Shopper Graph could be materially diminished, and our business could be materially impacted.
We may not be able to effectively integrate the businesses we acquire, which may adversely affect our ability to achieve our growth and business objectives.
Over the past four years, we have acquired HookLogic, DataPop, Inc., Monsieur Drive SAS and various other businesses. We may seek to acquire additional businesses, products, technologies or teams in the future. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms and/or financing of the acquisition, and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or architecture, employees or clients, regulatory compliance practices or revenue recognition or other accounting practices.
Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions, including our recent acquisitions, involve numerous risks, any of which could harm our business, including:
difficulties in integratingimpact the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outsideperformance of our core competency;
the need to integrate operations across different geographies, cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;
cultural challenges associated with integrating employees from the acquired company into our organization;
ineffectiveness or incompatibility of acquired technologies or services;
potential loss of key employees of acquired businesses;
inability to maintain the key business relationships and the reputation of acquired businesses;
failure to successfully further develop the acquired technology in order to recoup our investment;
unfavorable reputation and perception of the acquired product or technology by the general public;
diversion of management’s attention from other business concerns;
liability or litigation for activities of the acquired business, including claims from terminated employees, clients, former shareholders or other third parties;
implementation or remediation of controls, practices, procedures and policies at acquired businesses, including the costs necessary to establish and maintain effective internal controls; and
increased fixed costs.
In November 2016, we acquired HookLogic, a New York-based company that has developed a performance marketing exchange connecting consumer brand manufacturers with retail ecommerce sites via sponsored product ads sold by ecommerce retailers. We began integrating the HookLogic acquisition during the fourth quarter of 2016; however, there can be no assurance that the integration will be successful or that we will be able to leverage the acquired commercial relationships or technologies in the manner we anticipate.
In February 2015, we acquired DataPop, a Los Angeles-based company specializing in the optimization of shopping campaigns on large search engines. In 2015, we began integrating DataPop’s technology into our core platform, and in October 2016 we launched Criteo Predictive Search in the United States. In the third quarter of 2017, we decided to discontinue our Criteo Predictive Search offering, based on client and country-specific circumstances.
If we are unable to successfully integrate the businesses we have acquired or any business, product or technology we acquire in the future, our business and results of operations could suffer, and we may not be able to achieve our business and growth objectives.
The market in which we participate is intensely competitive, and we may not be able to compete successfully with our current or future competitors.
The market for internet advertising solutions is highly competitive and rapidly changing. New technologies and methods of buying advertising present a dynamic competitive challenge as market participants offer multiple new products and services, such as analytics, programmatic buying exchanges and header bidding technology, aimed at facilitating and/or capturing advertising spend. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harmmaterially impact our ability to increase sales and maintain our profitability.business.
We compete in the market for commerce marketing, primarily through Display Advertising. This market is rapidly evolving, highly competitive, complex and still fragmented, although rapidly consolidating. We face significant competition in this market, and we expect that competition will intensify in the future.
In addition, to competing for marketing spend, we compete with many companies for advertising inventory, some of whom also operate their own advertising networks or exchanges from which we buy advertising inventory. Some of these companies that we compete with, either for marketing spend or for advertising inventory, may also be our clients or affiliated with our clients. Competitive pressure may incentivize such companies to cease to be our clients or cease to provide us with access to their advertising inventory. If this were to occur, our ability to place advertisements would be significantly impaired and our results of operations would be adversely affected.
In addition to existing competitors and intermediaries, we may also face competition from companies newly entering the market, which may include large established companies, such as Adobe (which acquired Omniture, Inc., Efficient Frontier, Inc. and TubeMogul, Inc.), Google (which operates Google Remarketing), Verizon, Inc. (which acquired AOL, Inc., which in turn had previously acquired Platform-A, Inc. (advertising.com), Millennial Media, and Yahoo!), Alliance Data (which acquired Conversant, Inc., which in turn had previously acquired Dotomi), Ve Interactive (which acquired eBay's display retargeting business, which in turn had previously acquired both Fetchback, Inc. and GSI Commerce Inc.), Tesco plc (which acquired Sociomantic) and AdRoll, all of which currently offer, or may in the future offer, solutions that result in additional competition for marketing spend or advertising inventory. Large and established internet and technology companies, such as those mentioned above and Amazon, Apple, Facebook, Google and Microsoft, may have the power to significantly change the very nature of the Display Advertising marketplaces in ways that could materially disadvantage us. For example, Amazon, Apple, Facebook, Google and Microsoft have a significant share of widely adopted industry platforms such as web browsers, mobile operating systems and advertising exchanges and networks.
These companies could leverage their positions to make changes to their web browsers, mobile operating systems, platforms, exchanges, networks or other products or services that could be significantly harmful to our business and results of operations. These companies also have access to a significantly larger pool of data than we do and this larger pool of data may allow them to foreclose opportunities that might otherwise be available to us. In addition, changes to the method of serving advertisements with publishers, such as header bidding, present challenges to our business that could result in increased competition for advertising inventory.
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive client bases and broader publisher relationships than we have, and have longer operating histories and greater name recognition than we have. As a result, these competitors may be able to respond more quickly to new technologies, develop deeper client relationships or offer services at lower prices. We may also face competition from companies we do not yet know about. If existing or new companies develop, market or resell competitive high-value marketing products or services, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our results of operations could be harmed.
Any of these developments would make it more difficult for us to sell our offering and could result in increased pricing pressure, reduced gross margins, increased sales and marketing expense and/or the loss of market share.
Our international operations and expansion expose us to several risks.
As of December 31, 2017, we had a direct operating presence through 31 offices located in 19 countries and did business in 98 countries. Our primary research and development operations are located in France and the United States. In addition, we currently have international offices outside of France and the United States, which focus primarily on selling and implementing our offering in those regions. In the future, we may expand to other international locations. Our current global operations and future initiatives involve a variety of risks, including:
localization of the product interface and systems, including translation into foreign languages and adaptation for local practices;
compliance with (and liability for failure to comply with) applicable local laws and regulations, including, among other things, laws and regulations with respect to data protection and user privacy, consumer protection, spam and content, which laws and regulations may be inconsistent across jurisdictions;
more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;
taxation in a variety of jurisdictions with increasingly complex tax laws, the application of which can be uncertain;
intensity of local competition for digital advertising budgets and internet display inventory;
unexpected changes in laws and regulatory requirements, trade laws, tariffs, export quotas, customs duties or other trade restrictions;
labor regulations and labor laws that can be interpreted as more advantageous to employees than those in the United States, including with respect to deemed hourly wage and overtime regulations;
changes in a specific country’s or region’s political or economic conditions;
challenges inherent to hiring and efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;
risks resulting from changes in currency exchange rates and the implementation of exchange controls, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other similar trade protection regulations and measures in the United States or in other jurisdictions;
reduced ability to timely collect amounts owed to us by our clients in countries where our recourse may be more limited;
limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of our operations in other countries
restrictions on foreign ownership and investments;
limited or unfavorable intellectual property protection;
exposure to liabilities under anti-money laundering laws, international and international sanction requirements and anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and
restrictions on repatriation of earnings.
We have established operations in geographies such as China, India and Russia, and may establish operations in additional geographies in the near future, where we may face more complex regulatory environments and market conditions than those we have experienced in markets where we currently operate. If we invest substantial time and resources to expand our international operations and are unable to execute successfully or in a timely manner, our business and results of operations could suffer, and we may not be able to achieve our business and growth objectives.
Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenue or profitability.
Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect process,and use transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices andmay be restricted or prevented by a number of other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically directed at factors, including:
•the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation in this area.
In particular, legislative, judicial and regulatory developments in Europe, including the General Data Protection Regulation, or GDPR, the review of the E-Privacy Directive Amendment and country-specific laws pursuant thereto (see the section entitled “Business – Privacy, Data Protection and Content Control – Legal and Regulatory” in Item 1 of Part I in this Form 10-K), may reduce the amount of data we can collect or process, which in turn could materially impact the accuracy, effectiveness and value of the Criteo Commerce Marketing Ecosystem.
The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and can be subject to significant change. For example, the GDPR, which was agreed by E.U. institutions in 2016 and comes into effect after a two year transition period on May 25, 2018, updates and modernizes the principles of the 1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide global turnover of the preceding financial year.
In addition to the GDPR, other proposed or new legislation or regulations could significantly affect our business. For example, in October 2016, the European Parliament plenary voted to confirm its mandate to launch negotiations on the E-Privacy Regulation proposal with the Council of the European Union. This proposal for a regulation aims to strengthen users’ right to privacy and confidentiality of electronic communications and to align E-Privacy legislation with the new rules established by the GDPR. The E-Privacy Regulation would replace the E-Privacy Directive Amendment and would prevail over the GDPR in case of discrepancy. The E-Privacy Regulation could also result in new rules and mechanisms for "cookie" consent. The legislative process is not over yet and further amendments and adaptations are likely to be adopted during the negotiations phase. Therefore, it is not possible to know the final output of the text and assess its impact on our services yet.
Similarly, the legal and regulatory environment we face is uncertain. For example, because the E-Privacy Directive Amendment has been interpreted differently by various member states of the European Union, it is unclear whether a user’s consent must be obtained prior to the placement of cookies for targeted advertising purposes. The type and form of user consent required by GDPR could also be subject to interpretation. If the GDPR or E-Privacy Directive Amendment is amended or interpreted to require explicit or unambiguous consent to the use of cookies, our clients may have to implement technical solutions that could result in a significant reduction of Criteo-placed advertising and first impressions on publisher websites. Moreover, manyfailure of our competitors are able to obtain explicit user consent as a condition to letting users access valuable services such as email, social media servicesnetwork, hardware, or other services, which Criteo does not provide.
In addition to the uncertain interpretation of consent under the new European legal framework, there is an ongoing debate about whether the current guidance and approaches promulgated by industry groups in which we participate comply with E.U. law. In the past, government and other working groups have published opinions that such guidance is not sufficient to comply with applicable E.U. law. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices,software systems, or the practicesnetwork, hardware, or software systems of our publishers and clients, or conflict with the laws and regulations of the European Union or other international regulatory authorities.clients;
In addition to restricting •our collection of data, governments may also restrict the storage of information about their own citizens beyond their national borders. For example, on October 6, 2015, the European Court of Justice invalidated the E.U.-U.S. Safe Harbor framework, which we relied on to operate our data transfers both internally (for HR, CRM and other back-office data processing) and with several U.S. based partners (notably RTB platforms). Following the Safe Harbor invalidation, in July 2016, the European Commission announced the formal adoption of the "EU-US Privacy Shield." We elected to rely on the Standard Contractual Clauses of the European Commission to secure our data transfers, but we cannot anticipate whether this legal scheme will be compromised in the future.
Restrictions on our ability to export data across borders could limit our ability to utilize technology infrastructure consolidation, redundancy and load-balancing techniques, resulting in increased infrastructure costs, decreased operational efficiencies and performance, and a greater risk of failure.
In addition, although the user information we retain relates primarily to purchase intent and does not permit us to personally identify individual users, we currently do business in over 90 countries and the interpretation of "personally identifiable information" ("PII"), personal data (both directly and indirectly identifying information) and sensitive data, and our obligations relating thereto, may vary from one country to the other. In some countries, operating a local data center is compulsory for the processing of PII. Moreover, in certain countries, the legal requirements surrounding PII are so new that their impact on doing business is not yet clear. For example, the FTC staff recently appeared to expand its definition of PII to include data that can be reasonably linked to a particular person, computer, or device, although the FTC staff has not yet clarified how newly included categories of PII, if any, will be treated.
If all types of PII (whether they allow direct identification of a person or whether they only permit the singling out of a person without identifying them) are treated the same way, thus requiring an opt-in for the processing of browsing data, Criteo’s business could be materially impacted. Evolving definitions of PII may cause us to change our business practices, diminish the quality of our data and the value of our offerings, or hamper our ability to expand our offerings to new geographic markets.
Clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results. Such changes can also delay or impede the development of new products, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or products as an invasion of privacy, whether or not such practices or products are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability.
We strive to comply with all applicable laws and regulations relating to privacy and data collection, processing, use and disclosure. However, these laws and regulations are continually evolving and often unclear and inconsistent across the jurisdictions in which we do business, and the measures we take to ensure our compliance with applicable privacy laws, regulations and industry standards may not be successful. For example, our compliance depends in part on our clients’ adherence to privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We contractually require our clients to notify visitors to their websites or mobile applications about our services (i.e., that we place cookies and other tracking technologies and collect and share certain non-identifying data for purposes of targeting advertisements), and, when legally required, to obtain user consent to cookie or other tracking technology dropping, and further require that they link to pages where visitors can opt out of the collection or targeting. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations.
If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own products, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients. For example, liability for non-compliance with the guidelines issued in April 2012 by the Commission Nationale de l'Informatique et des Libertés ("CNIL") is shared between clients, publishers and networks, including us. If clients, publishers or networks on whom we rely fail to obtain the legally required consent, we could potentially be liable under these guidelines and could suffer damages, fines, penalties and reputational harm. In 2012, CNIL commenced an inquiry into our compliance with such guidelines, which was closed in July 2014 with no compliance actions for us to take.
In 2016, CNIL commenced a new inquiry into our compliance with French data privacy laws. The inquiry is still pending and focusing on the new features or products that we have deployed since the last investigation. At this stage, there can be no assurance that action will not be required by CNIL as a result of its open investigation or that there will not be further inquiries with respect to our compliance with privacy laws from CNIL or regulatory bodies in other jurisdictions.
If we fail to successfully enhance our brand, our ability to protect and expand our client base will be impaired and our financial condition may suffer.
We believe that developing and maintaining awareness of the Criteo brand is critical to achieving widespread acceptance of our existing solution and any future products, such as products directed toward capturing broader advertising budgets, and is an important element in attracting new clients and publishers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable solutions for our clients and publishers. In the past, our efforts to build our brand have involved significant expenses and they may continue to do so in the future. As a result, we may not be able to develop our brand in a cost-effective manner. Furthermore, brand promotion activities may not yield any increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand.
If we fail to successfully promote and maintain our brand we may fail to attract enough new clients or publishers or retain enough of our existing clients or publishers, and our business could suffer.
Our future success will depend in part on our ability to expand into new marketing channels.
We define a marketing channel as a specific advertisement medium to engage with a user or a consumer for which we currently purchase inventory through a specific source. We started delivering elements of our offering through internet display advertisements in desktop browsers. Since then, we have expanded into mobile in-browser and in-app, native display, including on social media platforms, search engine marketing and video inventory.
In the future, we may decide to broaden the spectrum of our marketing channels further if we believe that doing so would significantly increase the value we can offer to clients. We believe a broader platform delivering our commerce marketing solution through complementary marketing channels can enhance our value proposition for existing and prospective clients.
However, any future attempts to enter new marketing channels may not be successful. We launched our Criteo Email Retargeting offering in 2014 further to the acquisition of Tedemis SA in February 2014. In the fourth quarter of 2016, we decided to discontinue our Criteo Email Retargeting offering based on country-specific circumstances. In addition, we launched our Criteo Predictive Search offering in the fourth quarter of 2016. In the third quarter of 2017, we decided to discontinue our Criteo Predictive Search offering based on client and country-specific circumstances.
Our success in expanding into any additional marketing channels will depend on various factors, including our ability to:
identify additional marketing channels where the Criteo Commerce Marketing Ecosystem could perform;
adapt the Criteo Commerce Marketing Ecosystem to additional marketing channels and effectively market it for such additional marketing channels to our existing and prospective clients;
integrate newly developed or acquired marketing channels into our pay-for-performance model, with a clear and measurable performance attribution mechanism that works across all channels, and in a manner that is consistent with our privacy standards;
accumulate sufficient data sets relevant for those marketing channels to ensure that the Criteo Engine has a sufficient quantity and quality of information to deliver relevant personalized advertisements through those additional marketing channels;
achieve client performance levels through the new marketing channels that are similar to those delivered through existing marketing channels, and in any case that are not dilutive to the overall client performance;
identify and establish acceptable business arrangements with publishers to access inventories in sufficient quality and quantity for these new marketing channels;
maintain our gross margin at a consistent level upon entering one or more additional marketing channels;
compete with new market participants active in these additional marketing channels; and
hire and retain key personnel with relevant technology and product expertise to lead the integration of additional marketing channels onto our platform, and sales and operations teams to sell and integrate additional marketing channels.
If we are unable to successfully adapt the Criteo Commerce Marketing Ecosystem to additional marketing channels and effectively market such offerings to our existing and prospective clients, or if we are unable to maintain our pay-for-performance model in these additional marketing channels, we may not be able to achieve our growth or business objectives.
Our future success will depend in part on our ability to expand into new industry verticals.
As we market our offering to a wider group of potential clients outside of our three key industry verticals of retail, travel and classifieds, which we define as commerce clients, including businesses in the automotive, telecommunications, consumer goods and finance industries, we will need to adapt our products and effectively market our value to businesses in these new industry verticals. Our success into new industry verticals will depend on various factors, including our ability to:
design products and solutions that are attractive to businesses in such industries;
provide high returns on marketing spend in such industries and maintain such high returns on marketing spend at scale;
transparently measure the performance of such marketing spend based on accountable metrics;
hire personnel with relevant industry vertical experience to lead sales and product teams;
work with clients in new industry verticals through the advertising agencies that manage their advertising budgets; and
accumulate sufficient data sets relevant for those industry verticals to ensure that the Criteo Engine has sufficient quantity and quality of information to deliver efficient and effective internet display advertisements within the relevant industry.
For example, with the acquisition of HookLogic in November 2016 and the introduction of Criteo Sponsored Products, we expanded our offering to benefit consumer brand manufacturers. However, historically, we have had very limited experience working with consumer brand manufacturers and there can be no assurance that we will be able to maintain the client base built by HookLogic or that we will be able to expand the Criteo Sponsored Products business successfully.
If we are unable to successfully adapt our offering to appeal to businesses in industries other than our core verticals, or are unable to effectively market such solutions to businesses in such industries, we may not be able to achieve our growth or business objectives. Further, as we expand our client base and solution into new industry verticals, we may be unable to maintain our current client retention rates.
Our revenue would decline if we fail to effectively coordinate the demand for and supply of advertising inventory in a specific geographic market.
The performance of the Criteo Engine in a specific geographic market depends on having sufficient clients implemented and utilizing our offering, and our ability to coordinate the demand for and supply of advertising inventory with the publishers in that market. Since we cannot consistently predict the demand for advertising inventory by our clients or the advertising inventory available to us, including on a priority basis, the demand for and supply of advertising inventory in that market may not be sufficient or sufficiently coordinated for the Criteo Engine to function optimally. As such, as we target new geographic markets, we will need to adequately coordinate the timing to onboard local clients and publishers. A failure to effectively manage demand for, and the supply of, advertising inventory processed through the Criteo Engine could impair its ability to accurately predict user engagement in that market, which could result in:
a reduction in the amount of inventory our publishers make available to us in the future;
a loss of existing clients or publishers;
changes in the priority given to our advertisements by publishers;
an adverse effect on our ability to attract new publishers willing to give us preferred access;
harm to our reputation;
increased cost; and
lost revenue.
Our sales efforts with both potential clients and publishers require significant time and expense, and our success will depend on effectively expanding and integrating our sales and marketing operations and activities to grow our base of clients and publishers.
Attempting to increase our base of clients and publishers is a key component of our growth strategy. However, attracting clients and publishers requires substantial time and expense, and it may be difficult to identify, engage and market to potential clients that are unfamiliar with Criteo and our offering, particularly as we seek to address new marketing objectives for clients, or enter new marketing channels or new industry verticals. Furthermore, many potential clients require input from multiple internal constituencies to make advertising decisions, or delegate advertising decisions to advertising agencies. As a result, we must identify those involved in the purchasing decision and devote a sufficient amount of time to presenting our offering to those individuals (including providing demonstrations and comparisons of our value to other available solutions), which can be a costly and time-consuming process.
Our abilityinability to grow our client and publisher base will dependin new industry verticals and geographic markets in order to a significant extentobtain the critical mass of data necessary for Criteo AI Engine to perform optimally in such new industry verticals or geographic markets;
•malicious traffic (such as non-human traffic) that introduces "noise" in the information that we collect from clients and publishers; and
•interruptions, failures or defects in our data collection, mining, analysis and storage systems.
Any of the above described limitations could also harm our business and adversely impact our future results of operations.
The third parties upon which we rely for access to data and revenue opportunities may implement technical restrictions that impede our access to such data and revenue opportunities, which could materially impact our business and results of operations.
A substantial portion of the data we rely on comes from our publisher partners and other third parties, including advertising exchange platforms (including supply-side platforms, or “SSPs”, such as Google's Ad Manager). Similarly, we rely on our publisher partners, advertising exchange platforms and other third parties for opportunities to serve advertisements through which we generate our revenue. Our ability to successfully leverage such data and successfully generate revenue from such opportunities could be impacted by restrictions imposed by or on our publisher partners or other third parties, including restrictions on our ability to effectively expand our sales, marketing and publisher support operations. In particular, as we target new industry verticals, we will need to attract sales and publisher support personnel that are familiar with the relevant industries and geographic markets. We believe that there is significant competition for direct sales and support personnel with the sales skills and technical knowledge that we require.
Therefore,use or read cookies or other tracking features or our ability to grow our client and publisher base will depend,use real-time bidding networks or other bidding networks.
For example, in large part, on our success in recruiting, training and retaininglight of the sales and publisher support personnel we require. We have recently hired a number of new sales personnel and expanded our marketing department. However, we cannot be sure that newly hired personnel will be integrated effectively, and such personnel may require significant training and may not become productive as quickly as we would like, or at all. If we are not successful in recruiting and training our client sales and publisher support personnel and streamlining our sales and business development processes to cost-effectively grow our client and publisher base, our ability to grow our business and our results of operations could be adversely affected.
If we do not retain our senior management team and key employees, or attract additional highly skilled talent, we may not be able to sustain our growth or achieve our business objectives.
Our future success is substantially dependent on the continued service of our senior management team. Our management team is currently spread across multiple physical locations and geographies, which can strain the organization and make coordinated management more challenging. Our future success also dependsGDPR, some SSPs imposed restrictions on our ability to continuebid on opportunities to attract, retainserve ads. Third-party publishers are responsible under GDPR for gathering necessary user consents and motivate highly skilled employees, particularly employeesindicating to SSPs that Criteo has been approved by the applicable users. As part of their efforts to comply with the technical skills that enable us to deliver effective marketing solutions, client sales and publisher support representatives with experience in commerce marketing, in particular in Display Advertising, and more broadly employees that are highly qualified in their areas of expertise to support and grow our operations. Competition for highly skilled employees in our industry is intense. As a result, we may be unable to attract or retain the management and highly skilled personnel who are critical to our success, which could result in harm to our key client and publisher relationships, loss of key information, expertise or proprietary knowledge and unanticipated recruitment and training costs. The lossunderstanding of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.
If we are unable to protect our proprietary information or other intellectual property, our business could be adversely affected.
We rely largely on trade secret law to protect our proprietary information and technology. We generally seek to protect our proprietary information through confidentiality, non-disclosure and assignment of invention agreements with our employees, contractors and parties with which we do business. However, we may not execute these agreements with every party who has access to our confidential information or contributes to the development of our intellectual property. In addition, those agreements may be breached, and we may not have adequate remedies for any such breach.
Breachesrequirements of the security of our data center systemsGDPR, which are subject to interpretation, certain SSPs that run advertising exchanges have required actions from such third party publishers with respect to such consents that appear to be stricter than what the regulations require. Similarly, SSPs and infrastructure or other IT resources could expose us to a risk of loss of proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology or information. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors, and in these situations, we may have no or limited rights to stop their use of our information. To the extent that our employees, contractors or otherrelevant third parties with whom we do business use intellectual property owned by othersmay take similar actions in their work for us, disputes may arise asresponse to the rights to such intellectual property. If, for any of the above reasons, our intellectual property is disclosednew legislation or misappropriated, it would harm our ability to protect our rights and may have an adverse effect on our business.
Although we also rely on copyright laws to protect works of authorship created by us, including software, we do not register the copyrights in any of our copyrightable works. U.S. copyrights must be registered before the copyright owner may bring an infringement suit in the United States, and must be registered within three months of the publication of the underlying work if the copyright owner wants to seek statutory damagesregulatory developments or attorney’s fees in any U.S. enforcement action. Accordingly, if one of our unregistered U.S. copyrights is infringed by a third party, we will need to register the copyright before we can file an infringement suit in the United States, and our remedies in any such infringement suit may be limited.
As of December 31, 2017, we held five patents issued by the U.S. Patent and Trademark Office, one patent issued by the French Patent Office, one patent issued by the Japan Patent Office and one patent issued by the Korean Intellectual Property Office, and had filed 29 non-provisional U.S. patent applications, five European patent applications and one international patent application under the Patent Cooperation Treaty. We also own and use registered and unregistered trademarks on or in connection with our products and services in numerous jurisdictions. In addition, we have also registered numerous domain names and are also pursuing the registration of trademarks and service marks in the United States and in certain locations outside the United States. Effective trademark, domain name and patent protection are expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights, and there may be certain areas of our business that we cannot protect through the use of trademarks, domain names or patents.
Any of our existing or future patents, trademarks or other intellectual property rights may not provide sufficient protection for our business as currently conducted or may be challenged by others or invalidated through administrative process or litigation. In addition, in the event that our trademarks are successfully challenged, we could be forced to rebrand our offering, which could result in loss of brand recognition and could require us to devote resources to advertising and marketing our new brand. Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks.
Our existing patents and any patents issuedinterpretations in the future, may be successfully challenged, invalidatedin response to perceived user preferences, or circumvented byfor other reasons.
If third parties may give rise to ownership claims or to claims for the payment of additional remuneration of fair price by the persons having participated in the creation of the inventions and may not be of sufficient scope or strength to provide us with any meaningful protection or competitive advantage. Further, as we continue to expand our business geographically, it may become desirable for us to protect our intellectual property in an increasing number of jurisdictions, which is expensive and may not be successful, andon which we mayrely for data or opportunities to serve advertisements impose similar restrictions or are not pursue.
Once we file a patent application in one country, we have a limited period of timeable to file it in allcomply with restrictions imposed by other countries in which we want to have patent protection over a certain invention. If we fail to file in those other countries, we will be precluded from having patent protection for that invention in those countries. Without patent protection, others will be free to utilize that invention in those countries. Even if we obtain patent protection, we cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.
Additionally, in the United States, the Leahy-Smith America Invents Act, or AIA, switched U.S. patent rights from the former “first-to-invent” system to a “first inventor-to-file” system. This may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions, which may favor larger competitors that have the resources to file more patent applications.
Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions,ecosystem participants, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.
To protect or enforce our intellectual property rights, we may initiate litigation against third parties. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may unintentionally provoke third parties to assert claims against us. These claims could invalidate or narrow the scope of our own intellectual property. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. The occurrence of any of these events may adversely affect our business, financial condition and results of operations.
Our business may suffer if it is alleged or determined that our technology or another aspect of our business infringes the intellectual property rights of others.
The online and mobile advertising industries are characterized by the existence of large numbers of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in these industries are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use.
Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse consequences. From time to time, we may be the subject of claims that our products and underlying technology infringe or violate the intellectual property rights of others, particularly as we expand the scope and complexity of our business.
Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property rights could:
subject us to significant liabilities for monetary damages, which may be tripled in certain instances;
prohibit us from developing, commercializing or continuing to provide some or all of our offering unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, who may not be willing to offer them on terms that are acceptable to us, or at all;
subject us to indemnification obligations or obligations to refund fees to, and adversely affect our relationships with, our current or future clients, advertising agencies, media networks and exchanges or publishers;
cause delays or stoppages in providing our offering;
cause clients, potential clients, advertising agencies, media networks and exchanges or publishers to avoid working with us;
divert the attention and resources of management and technical personnel;
harm our reputation; and
require technology or branding changes to our offering that would cause us to incur substantial cost and that we may be unable to execute effectively or at all.
In addition, we may be exposed to claims that the content contained in advertising campaigns violates the intellectual property or other rights of third parties. Such claims could be made directly against us or against the advertising agencies we work with, and media networks and exchanges and publishers from whom we purchase advertising inventory. Generally, under our agreements with advertising agencies, media networks and exchanges and publishers, we are required to indemnify the advertising agencies, media networks and exchanges and publishers against any such claim with respect to an advertisement we served. We generally require our clients to indemnify us for any damages from any such claims. There can be no assurance, however, that our clients will havelose the ability to satisfy their indemnification obligations to us, and pursuing any claims for indemnification may be costlyaccess data, bid on opportunities, or unsuccessful.purchase digital ad space, which could have a substantial impact on our revenue.
As a result, we may be required to satisfy our indemnification obligations to advertising agencies, media networks and exchanges and publishers or claims against us with our assets. This result could harm our reputation, business, financial condition and results of operations.
Our business involves the use, transmission and storage of personal data and confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.
Our business involves the use, storage and transmission of confidential consumer, client and publisher information and personal data, including certain purchaser data, as well as proprietary software and financial, employee and operational information. Security breaches could expose us to unauthorized disclosure of this information, litigation and possible liability, as well as damage to our relationships with our clients and publishers. If our security measures are breached as a result of third-party action, employee or contractor error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to our data or the data of consumers, our clients, publishers, employees or other third parties, our reputation could be damaged, our business may suffer and we could incur significant liability.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability to provide service. As a result of our prominence, the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information and intellectual property, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware/ransomware, viruses, unauthorized access or system compromises and hacking by sophisticated actors have become more prevalent in our industry. Our products embed open source software. There may be vulnerabilities in open source software that may make our products susceptible to cyberattacks. Security incidents have occurred on our systems in the past, and will likely occur on our systems in the future.
Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may beare unable to anticipate some of these techniques or to implement adequate preventative measures.measures for such techniques. In addition, the perpetrators of such activity often are very sophisticated, and can include foreign governments and other parties with significant resources at their disposal.
Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we have developed systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, such measures have not provided, and cannot be expected to provide, absolute security, and we may incur significant costs in protecting against and remediating cyber-attacks. We may also have to expend considerable resources on determining the nature and extent of such attacks.
If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose both clients and revenue. Any significant violations of data privacy or other security breaches could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a high profile security breach occurs with respect to another provider of commerce marketingdigital advertising solutions, our clients and potential clients may lose trust in the security of providers of commerce marketingdigital advertising in general, and Display Advertising solutions in particular, which could adversely impact our ability to retain existing clients or attract new ones.
Additionally, third parties may attempt to fraudulently induce employees, consumers, our clients, our publishers or third-party providers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data, our clients’ data or our publishers’ data, which could result in significant legal and financial exposure and a loss of confidence in the security of our offering and, ultimately, harm to our future business prospects. A party who is able to compromise the security of our facilities, including our data centers or office facilities, or any device, such as a smartphone or laptop, connected to our systems could misappropriate our proprietary information or the proprietary information of consumers, our clients and/or our publishers, or cause interruptions or malfunctions in our operations or those of our clients and/or publishers. We may be required to expendhave expended significant resources to protect against such threats orand to alleviate problems caused by breaches in security. Finally, computer viruses or malwaresecurity and may harm our systems or cause the loss or alteration of data, and the transmission of computer viruses or malware via the Criteo technology could expose ushave to litigation and a loss of confidenceexpend additional resources for such purposes in the security of our technology.future. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.
Our efforts to address undesirable activity on our platform may also increase the risk of retaliatory attacks. As a result, we may suffer significant legal, reputational, or financial exposure, which could adversely affect our business and results of operations.
Failures in ourthe systems and infrastructure supporting the Criteo Commerce Marketing Ecosystemour solutions and operations, including as we scale our offerings, could significantly disrupt our operations and cause us to lose clients.
In addition to the optimal performance of the Criteo AI Engine, our business relies on the continued and uninterrupted performance of our software and hardware infrastructures. We currently place close to fourfive billion advertisements per day and each of those advertisements can be placed in under 100 milliseconds.
Sustained or repeated system failures of our software or hardware infrastructures (such as massive and sustained data center outages) or of the software or hardware infrastructures of our third-party providers, which interrupt our ability to deliver advertisements quickly and accurately, our ability to serve and track advertisements, our ability to process consumers’ responses to those advertisements or otherwise disrupt our internal operations, could significantly reduce the attractiveness of our offering to clients and publishers, reduce our revenue or otherwise negatively impact our financial situation, impair our reputation and subject us to significant liability.
Additionally, if, for any reason, our arrangement with one or more data centers is terminated, we could experience additional expense in arranging for new facilities and support. Any steps we take to increase the security, reliability and redundancy of our systems supporting the Criteo technology or operations may be expensive and may not be successful in preventing system failures. Similarly, advancements in machine learning approaches and other technology may require us to upgrade or replace essential hardware (such as graphics processing units), which could involve substantial resources and could be difficult to implement.
In addition, while we seek to maintain excess capacity to facilitate the rapid provision of new client deployments and the expansion of existing client deployments, we may need to increase data center hosting capacity, bandwidth, storage, power or other elements of our system architecture and our infrastructure as our client base and/or our traffic continues to grow. The expansion and improvement of our systems and infrastructure may require us to commit substantial financial, operational and technical resources, with no assurance our business will increase. Our existing systems may not be able to scale up in a manner satisfactory to our existing or prospective clients, and may not be adequately designed with the necessary reliability and redundancy of certain critical portions of our infrastructure to avoid performance delays or outages that could be harmful to our business.
Our failure to continuously upgrade or increase the reliability and redundancy of our infrastructure to meet the demands of a growing base of global clients and publishers could adversely affect the functioning and performance of our technology and could in turn affect our results of operations.
Finally, our systems and the systems of our third-party providers are vulnerable to damage from a variety of sources, some of which are outside of our control, including telecommunications failures, natural disasters, terrorism, power outages, a variety of other possible outages affecting data centers, a decision to close any data center or the facilities of any other third-party provider without adequate notice, and malicious human acts, including hacking, computer viruses, malwaremalware/ransomware and other security breaches. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate some of these techniques or to implement adequate preventive measures.
Any steps we take to increase the security, reliability and redundancy of our systems supporting the Criteo technology or operations may be expensive and may not be successful in preventing system failures.
If we are unable to prevent system failures, the functioning and performance of the Criteo Solutionour solutions could suffer, which in turn could interrupt our business and harm our results of operations.
As we expand the market for the Criteo Commerce Marketing Ecosystem, we may become more dependent on advertising agencies as intermediaries, which may adversely affect our ability to attract and retain business.
As we market the Criteo Commerce Marketing Ecosystem, we may increasingly need advertising agencies to work with us in assisting businesses in planning and purchasing for broader advertising objectives. In particular, many of our Criteo Sponsored Products clients, whom we have started working with since our acquisition of HookLogic, work with us through advertising agencies. Historically, however, direct relationships with our clients accounted for 71%, 76% and 84% of our revenue for 2015, 2016 and 2017, respectively, for Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA and Criteo Audience Match BETA. In contrast, 72% of our revenue for Criteo Sponsored Products in 2017 relied on advertising agencies.
If we have an unsuccessful engagement with an advertising agency on a particular advertising campaign, we risk losing the abilityare unable to work not only for the client for whom the campaign was run, but also forprotect our proprietary information or other clients represented by that agency. Further, ifintellectual property, our business evolves such thatcould be adversely affected.
Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets for us. Various events outside of our control pose a threat to our intellectual property rights, as well as to our products, services, and technologies. For example, effective intellectual property protection may not be available in every country in which we are increasingly working through advertising agency intermediaries, we would have less of a direct relationship withoperate or intend to operate our clients. Thisbusiness. Third parties may driveknowingly or unknowingly infringe our clients to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with our clients. Additionally, our clients may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying client’s business when the client switches to a new agency. The presence of advertising agencies as intermediaries betweenproprietary rights or challenge proprietary rights held by us, and our clients thus creates a challenge to building our own brand awarenesspending and maintaining an affinity with our clients, who are the ultimate sources of our revenue. In the event we were to become more dependent on advertising agencies as intermediaries, this may adversely affect our ability to attractfuture trademark and retain business. In addition, an increased dependency on advertising agencies may harm our results of operations, as a result of the increased agency fees we may be required to pay and/or as a result of longer payment terms from agencies.
We are a growing company in a rapidly evolving industry, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful. Our recent growth ratespatent applications may not be indicative ofapproved. Although we seek to obtain patent protection for our future growth, and we expect our operating expenses to continue to increase in the foreseeable future. Accordingly, we may have difficulty sustaining profitability.
We are a growing company in a rapidly evolving industry. Our ability to forecast our future operating resultsinnovations, it is subject to a number of uncertainties, including our ability to plan for and model future growth in both our business and the commerce marketing market generally, and the Display Advertising market in particular. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly evolving industries, including challenges in forecasting accuracy, determining appropriate investments, achieving market acceptance of our existing and future offerings, managing client implementations and developing new products. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations and our business could suffer.
While our revenue has increased substantially since our inception,possible we may not be able to sustain revenue growth consistent with our recent history,protect some of these innovations in a sufficient or at all. You shouldeffective manner. Moreover, we may not consider our revenue growth in recent periodshave adequate patent or copyright protection for certain innovations that later turn out to be indicativeimportant. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.
Breaches of the security of our future performance. In future periods, our revenuedata center systems and infrastructure or other IT resources could decline or grow more slowly than we expect. We believealso result in the growthexposure of our revenue depends on a number of factors, includingproprietary information. Additionally, our ability to:
attract new clients, and retain and expand our relationships with existing clients;
maintain the breadth of our publisher network and attract new publishers, including publishers of web content, mobile applications and video and social games, in order to grow the volume and breadth of advertising inventory available to us;
adapt our offering to meet evolving needs of businesses, including to address market trends such as (i) the migration of consumers from desktop to mobile and from websites to mobile applications, (ii) the increasing percentage of sales that involve multiple digital devices, (iii) the growing adoption by consumers of “ad-blocking” software on web browsers on desktop and/or on mobile devices and use or consumption by consumers of advertising-free services such as Netflix, (iv) changes in the marketplace for and supply of advertising inventory, including the shift toward header bidding; and (v) changes in consumer acceptance of tracking technologies for targeted or behavioral advertising purposes;
maintain and increase our access to data necessary for the performance of the Criteo Engine;
continuously improve the algorithms underlying the Criteo Engine; and
continue to adapt to a changing regulatory landscape governing data protection and privacy matters.
We also anticipate that our operating expenses will continue to increase as we scale our business, grow our headcount and expand our operations. In particular, we plan to continue to focus on maximizing our revenue after traffic acquisition costs on an absolute basis, or the revenue we derive after deducting the costs we incur to purchase advertising inventory, which we call Revenue ex-TAC, as we believe this focus fortifies a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance. As part of this focus, we are continuing to invest in (i) building relationships with direct publishers on both web and mobile application properties, (ii) increasing access to leading advertising exchanges on both web and mobile application properties, and (iii) enhancing the liquidity of our advertising inventory supply, which may include purchasing advertising inventory that may result in lower margin on an individual impression basis andtrade secrets may be less effective in generating clicks and driving sales for our clients. In addition, we are experiencing, and expect to continue to experience, increased competition for advertising inventory purchased on a programmatic basis. Our focus on maximizing the growth of Revenue ex-TAC on an absolute basis may have an adverse impact on our gross margin and weindependently developed by competitors. We cannot be certain that this strategythe steps we have taken to protect our trade secrets and proprietary information will prevent unauthorized use or reverse engineering of our trade secrets or proprietary information.
To protect or enforce our intellectual property rights, we may initiate litigation against third parties. Any lawsuits that we initiate could be successfulexpensive, take significant time and divert management’s attention from other business concerns. We may not prevail in any lawsuits that we initiate and the damages or resultother remedies awarded, if any, may not be commercially valuable. Any increase in increased liquiditythe unauthorized use of our intellectual property may adversely affect our business, financial condition and results of operations.
Our business may suffer if it is alleged or long-term valuedetermined that our technology or another aspect of our business infringes the intellectual property rights of others.
The online and mobile advertising industries are characterized by the existence of large numbers of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse consequences. From time to time, we may be the subject of claims that our solutions and underlying technology infringe or violate the intellectual property rights of others, particularly as we expand the scope and complexity of our business.
Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend, and the outcome of any litigation is inherently uncertain. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property rights could subject us to significant liabilities for monetary damages, interfere with or delay our shareholders.development, commercialization or provision of our offerings on acceptable terms, harm our reputation or require us to make technology or branding changes to our offerings.
In addition, as our business expands, we may not be ableexposed to maintainclaims that the content contained in advertising campaigns violates the intellectual property or other rights of third parties. Such claims could be made directly against us or against the advertising agencies we work with, and media networks and exchanges and publishers from whom we purchase advertising inventory.
Under our current profitability margin or to achieve our long-term profitability margin target. For example, our midmarket business is currently less profitable than our large client business,agreements with larger partners, including advertising agencies, media networks and as a result, if the size of our midmarket business continues to grow as a proportion of our overall business, our profitabilityexchanges and publishers, we may be negatively affected. Similarly, asrequired to indemnify such partners against claims with respect to an advertisement we transitionserved. We generally require our clients to a multi-product company, with products availableindemnify us for any damages from any such claims. There can be no assurance, however, that our clients will have the ability to clients across several marketing channels, such new productssatisfy their indemnification obligations to us, and pursuing any claims for indemnification may require additional investments in sales, business development and marketing, for example in product sales specialist resourcesbe costly or similar resources to enable sales. unsuccessful.
As a result, of such additional investments, our new productswe may be less profitable thanrequired to satisfy our existing businessindemnification obligations to advertising agencies, media networks and therefore drive downexchanges and publishers or claims against us with our overall profitability.
Our future success depends on our ability to scale our solution as our business grows.
As our business grows, it may become increasingly difficult to maintain the proper functioning of the Criteo Engine as we continue to collect increasing amounts of data from new geographic markets, new marketing channels, new industry verticals and a growing base of clients. We currently process 250 terabytes of additional compressed data every day, with total storage capacity of 240,000 terabytes and 530 terabytes of random-access memory. However, future growthassets. This result could exceed these rates, and there is the risk that our ability to scale our solution to keep pace with the amount of data we process may be impaired by failure of software, hardware (including storage, processing, support and security infrastructure). As a result, our operations might suffer from unanticipated system disruptions or slow processing or reporting which could negatively affectharm our reputation, and ability to attract and retain clients. In addition, the expansion and improvement of our systems and infrastructure may require us to commit substantialbusiness, financial operational and technical resources, with no assurance our business will increase. If we fail to respond to technological change or to adequately maintain, expand, upgrade and develop our systems and infrastructure in a timely fashion, our growth prospectscondition and results of operations, could be adversely affected. Moreover, even if we are able to expand our computing and other infrastructure to keep pace with our growth, it may be too costly for us to continue to provide services under our current business model and capital expense assumptions and our profitability and results of operations may suffer.
In periods of economic uncertainty, businesses may delay or reduce their spending on marketing, which could materially harm our business.
General worldwide economic conditions have been significantly unstable in recent years, especially in the European Union where we generated 35% of our revenue for 2017. Unstable conditions make it difficult for our clients and us to accurately forecast and plan future business activities, and could causeimpact our clients to reducerelationships with advertising agencies, media networks and exchanges, or delay their marketing spending with us. Historically, economic downturns have resulted in overall reductions in advertising spending, and businesses may curtail spending both on advertising in general and on a solution such as ours. We cannot predict the timing, strength or duration of any economic slowdown or recovery. Any macroeconomic deterioration in the future, especially further deterioration in the European Union and some emerging markets, such as Brazil and Russia, could impair our revenue and results of operations.clients.
In addition, even if the overall economy improves, we cannot assure you that the market for commerce marketing and Display Advertising will experience growth or that we will experience growth. Furthermore, we generally sell through insertion orders with our clients. These insertion orders generally do not include long-term obligations and are cancellable upon short notice and without penalty. Any reduction in advertising spending could limit our ability to grow our business and negatively affect our results of operations.
We derive a significant portion of our revenue from commerce businesses, especially in the retail, travel and classified industries, and downturn in these industries or any changes in regulations affecting these industries could harm our business.
A significant portion of our revenue is derived from commerce businesses in the retail, travel and classifieds industries. For example, in 2015, 2016 and 2017, 67.0%, 66.8% and 67.8%, respectively, of our combined revenue for Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA and Criteo Audience Match BETA was derived from advertisements placed for retail commerce businesses. While we expect to grow our client base in additional industries, any downturn or increased competitive pressure in any of our core industries, or other industries we may target in the future, may cause our clients to reduce their spending with us, or delay or cancel their marketing campaigns with us.
Furthermore, our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws by federal, state and foreign governmental or regulatory agencies which would impose taxes on goods and services provided over the internet. To the extent such taxes discourage the use of the internet as a means of commercial marketing or reduce the amount of products and services offered through ecommerce websites, online advertising spending may decline and the use or attractiveness of our offering by our clients or potential clients may be adversely affected.
Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.
Our technology platform and internal systems incorporate software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our technology offering to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our solution,solutions, which licenses may not be available on terms that are acceptable to us, or at all.
Alternatively, we may need to re-engineer our offering or discontinue using portions of the functionality provided by our technology. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable terms, such as by precluding us from charging license fees or by requiring us to disclose our source code. Any such restriction on the use of our own software, or our inability to use open source or third-party software, could result in disruptions to our business or operations, or delays in our development of future offerings or enhancements of our existing platform, which could impair our business.
If we fail to manage our growth and the shift in our client profile effectively, we may be unable to execute our business plan or maintain high levels of client and publisher satisfaction.
We have experienced, and may in the future experience, rapid growth and organizational change, which have created, and may continue to create, challenges to the quality of our service to our clients and publishers, and which have placed, and may continue to place, significant demands on our management and our operational and financial resources.
For example, the number of clients from which we collect revenue has increased from under 350 located in eight countries as of January 1, 2010 to over 18,000 located in 98 countries as of December 31, 2017. While our client count has increased over time, this metric can also fluctuate from quarter to quarter due to the seasonal trends in advertising spending by our clients and the timing and amounts of revenue contributions from new clients.
Therefore, there is not necessarily a direct correlation between a change in the number of clients in a particular period and an increase or decrease in our revenue.
For example, the size of our midmarket business has grown significantly as a proportion of our overall business, and we expect it to continue to do so in the future. As our business shifts toward the midmarket category, there are several additional risks to our business, including risks relating to the financial stability of our clients in the midmarket category and our ability to collect from such clients. In addition, since our midmarket business is comprised of thousands of smaller clients which require significant resources to support, it is currently less profitable than our large client business. We will need to continue automating certain of our processes to service the midmarket category as it continues to grow globally. However, there can be no assurance that we will be able to successfully adjust to these shifting dynamics and remain profitable.
Another part of the challenge that we expect to face in the course of our continued expansion is maintaining a high level of service to ensure client and publisher satisfaction. To the extent our client and publisher base grows, we will need to expand our account management, publisher support and other personnel in order to continue to provide personalized account management and services. We will therefore require significant expenses and capital expenditures and will need to allocate valuable management resources to maintain the quality of our client service that has been central to our growth to date, especially as we continue to seek to attract larger clients and publishers. If we fail to manage our anticipated growth in a manner that preserves our attention to our clients, our brand and reputation may suffer, which would in turn impair our ability to attract and retain clients and publishers.
Over the past few years, we have significantly expanded and we expect to continue to expand our international operations in the future. As such, our organizational structure is becoming more complex as we grow our managerial, research and development, marketing and sales, operational and administrative, legal, financial and other functions in order to support our expanding business. Furthermore, our rapid international expansion and the increasing geographic diversity of our workforce has placed, and is expected to continue to place, a significant strain on the corporate culture of rapid innovation and teamwork that has been central to our growth.
If we are unable to successfully manage our geographic expansion, and the associated growth in employee headcount and changes to our organizational structure, our results of operations could suffer.
We experience quarterly fluctuations in our results of operations due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.
Our quarterly results of operations fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. If our revenue or results of operations fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of our ADSs could decline substantially.
Our operating results and cash flows from operations may vary from quarter to quarter due to the seasonal nature of our clients’ spending. For example, many businesses in the online retail industry devote the largest portion of their marketing spend to the fourth quarter of the calendar year, and many of our commerce retail and travel clients typically conduct fewer marketing campaigns in the second quarter than they do in other quarters. With respect to Criteo Sponsored Products, the concentration of marketing spend in the fourth quarter of the year is particularly pronounced. If, and to the extent that, seasonal fluctuations are significant, our operating cash flows could fluctuate materially from period to period as a result.
Additionally, implementing the Criteo Commerce Marketing Ecosystem for a client can be a long process, which generally requires clients to integrate software code on their digital property. This process can be complex and time-consuming, and can delay the deployment and use of our offering by a client even after the client has signed up to utilize it.
Depending upon the time and resources that a client is willing to devote to the integration of our technology with their digital property and the nature and complexity of a client’s network and systems, the actual implementation of our solution may occur long after a client has signed up to use our solution.
As a result, we may incur substantial expenses in one period without any guarantee of revenue generation in the near term, or at all. This possibly lengthy implementation cycle may result in difficulty in predicting our future results of operations.
We also plan to continue to substantially increase our investment in research and development, product development and sales and marketing, as we seek to continue to expand geographically, into new marketing objectives, into new products, into new marketing channels and into new industry verticals to capitalize on what we see as a growing global opportunity for us. Our general and administrative expenses may also increase to support our growing operations and due to the increased costs of operating as a public company. For the foregoing reasons or other reasons we may not anticipate, historical patterns should not be considered as indicative of our future quarterly results of operations.
Other factors that may affect our quarterly results of operations include:
the nature of our clients’ products or services;
demand for our offering and the size, scope and timing of commerce marketing campaigns;
the lack of long-term agreements with our clients and publishers;
client and publisher retention rates;
market acceptance of our offering and future products and services (i) in current industry verticals and new industry verticals, (ii) in new geographic markets, (iii) in new marketing channels, or (iv) for broader marketing objectives;
the timing of large expenditures related to expansion into new products, new geographic markets, new industry verticals, acquisitions and/or capital projects;
the timing of adding support for new digital devices, platforms and operating systems;
the amount of inventory purchased through direct relationships with publishers versus internet advertising exchanges or networks;
our clients’ budgeting cycles;
changes in the competitive dynamics of our industry, including consolidation among competitors;
consumers' response to our clients’ advertisements, to online marketing in general and to tracking technologies for targeted or behavioral advertising purposes;
our ability to control costs, including our operating expenses;
network outages, errors in our technology or security breaches and any associated expense and collateral effects;
foreign currency exchange rate fluctuations, as some of our foreign sales and costs are denominated in their local currencies;
failure to successfully manage any acquisitions; and
general economic and political conditions in our domestic and international markets.
As a result, we may have a limited ability to forecast the amount of future revenue and expense, and our results of operations may from time to time fall below our estimates or the expectations of public market analysts and investors.
Interruptions or delays in services provided by third-party providers that we rely upon could impair the performance of the Criteo technologyor operations and harm our business.
We currently lease space from third-party data center hosting facilities for our servers and/or networking equipment located in the United States (California, New York, Virginia), France, The Netherlands, Hong Kong and Japan. All of our data gathering and analytics are conducted on, and the advertisements we deliver are processed through, our servers and network equipment located in these facilities.
We also rely on bandwidth providers and internet service providers to deliver advertisements. Any damage to, or failure of, the systems or facilities of our third-party providers could adversely impact our ability to deliver technology offering to our clients. If, for any reason, our arrangement with one or more data centers is terminated, we could experience additional expense in arranging for new facilities and support.
The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close any data center or the facilities of any other third-party provider without adequate notice, or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our technology or operations. Our testing of our services in actual disasters or similar events has been limited. If any such event were to occur, our business, results of operations and financial condition could be adversely affected.
We are exposed to foreign currency exchange rate fluctuations.
The functional currency of the Company is the euro, while our reporting currency is the U.S. dollar. Since we incur large portions of our expenses and derive significant revenues in currencies other than the euro, we are exposed to foreign currency exchange risk to the extent that our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign currency exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro.
The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statement of income, statement of comprehensive income and statement of cash flow of such consolidated entities are translated at the average period to date exchange rate. The resulting translation adjustments are included in equity under the caption “Accumulated Other Comprehensive Income” in the consolidated statement of changes in equity.
While we are engaging in hedging transactions to minimize the impact of uncertainty in future exchange rates on intra-company transactions and financing, we may not hedge all of our foreign currency exchange rate risk. In addition, hedging transactions carry their own risks and costs, including the possibility of a default by the counterparty to the hedge transaction. There can be no assurance that we will be successful in managing our foreign currency exchange rate risk. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash flows.
Our failure to maintain certain tax benefits applicable to French technology companies may adversely affect our results of operations.
As a French technology company, we have benefited from certain tax advantages, including, for example, a reduced tax rate in France on technology royalty income received from subsidiaries and the French research tax credit (crédit d’impôt recherche), or CIR. The CIR is a French tax credit aimed at stimulating research and development. The CIR can be offset against French corporate income tax due and the portion in excess (if any) may be refunded at the end of a three fiscal-year period.
The CIR is calculated based on our claimed amount of eligible research and development expenditures in France and represented $3.4 million, $4.9 million and $6.3 million for 2015, 2016 and 2017, respectively and is classified as a reduction of our research and development expenses.
The French tax authority, with the assistance of the Research and Technology Ministry, may audit each research and development program in respect of which a CIR benefit has been claimed and assess whether such program qualifies, in their view, for the CIR benefit. If the French tax authority determines that our research and development programs do not meet the requirements for the CIR benefit, or challenges our calculations with respect to the CIR benefit, we could be liable for additional corporate tax, and penalties and interest related thereto, which could have a significant impact on our results of operations and future cash flows.
Furthermore, if the French Parliament decides to modify the regime of the reduced tax rate on technology royalty income or to reduce the scope or the rate of the CIR benefit, which it could decide to do at any time, our results of operations could be adversely affected.
We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions as a result of new taxes or laws, or revised interpretations thereof, which may negatively affect our business.
As a multinational organization operating in multiple jurisdictions we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations.
For example, many of the jurisdictions in which we conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The tax authorities in these jurisdictions could challenge whether our related party transfer pricing policies are at arm’s length and, as a consequence, challenge our tax treatment of corresponding expenses and income. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these tax authorities were successful in challenging our transfer pricing policies, we may be liable for additional corporate income tax, and penalties, fines and interest related thereto, which may have a significant impact on our effective tax rate, results of operations and future cash flows.
Risks Related to Ownership of Our Shares and the ADSs and the Trading of the ADSs
The market price for the ADSs have been and may continue to be volatile or may decline regardless of our operating performance.
The trading price of the ADSs has significantly fluctuated, and is likely to continue to fluctuate, substantially. The trading price of the ADSs depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. Since the ADSs were sold at our initial public offering in October 2013 at a price of $31.00 per share, the price per ADS has ranged as low as $22.00$5.89 and as high as $60.95 through December 31, 2017.2021. The market price of the ADSs has fluctuated and may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:
•actual or anticipated fluctuations in our revenue and other results of operations;
•the guidance we may provide to the public, any changes in this guidance or our failure to meet this guidance;
•investor perception of risks in our industry, including but not limited to the competitive concentration of supply inventory or risks of fraudulent or malicious activity;
•failure of securities analysts to initiate or maintain coverage of us and our securities, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
•announcements by us, our competitors or large influential technology companies of significant technical innovations or changes, acquisitions, strategic partnerships, joint ventures or capital commitments;
•changes in operating performance and stock market valuations of advertising technology or other technology companies, or those in our industry in particular;
•investor sentiment with respect to our competitors, our business partners or our industry in general;
investor perception of risks in our industry, including but not limited to the competitive concentration of supply inventory or risks of fraudulent or malicious activity;
•price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
•additional ADSs being sold into the market by us or the Company's insiders;
•media coverage of our business and financial performance;
•developments in anticipated or new legislation or new or pending lawsuits or regulatory actions;
•other events or factors, including those resulting from natural disasters or weather events, cyberattacks, pandemics, war, incidents of terrorism or other catastrophic events or responses to these events; and
•any other risks identified in this Form 10-K.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. Because of the past and the potential future volatility of our stock price, we may become the target of securities litigation in the future. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.
If securities or industry analysts cease publishing research or publish inaccurate or unfavorable research about our business or our industry, the price and trading volume of the ADSs could decline.
The trading market for the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades the ADSs or publishes incorrect or unfavorable research about our business, the price of the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for the ADSs could decrease, which could cause the price of the ADSs or trading volume to decline.
Our business could be negatively impacted by the activities of predatory hedge funds or short sellers.
There is the risk that we may be subject, from time to time, to challenges arising from the activities of predatory hedge funds, short sellers or similar individuals who domay not have the best interests of shareholders or the Company in mind. Reports or other publications prepared and disseminated by such hedge funds or short sellers may cause significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business, and could cause the price of our ADSs or trading volume to decline. Furthermore, responding to such activities could be costly and time-consuming and may be intended to, and may in fact, divert the attention of our board of directors and senior management from the pursuit of our business strategies and adversely affect our business.
We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.
We currently have a senior unsecured revolving credit facility under which we may borrow up to €350 million (or its equivalent in U.S. dollars or, subject to the satisfaction of certain conditions, other optional currencies) for general corporate purposes, including the funding of business combinations (the "General RCF"). While we anticipate that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If adequate funds are not available on acceptable terms, we may be unable to fund the expansion of our research and development and sales and marketing efforts, increase working capital, take advantage of acquisition or other opportunities, or adequately respond to competitive pressures which could seriously harm our business and results of operations.
We currently have a senior unsecured revolving credit facility under which we may borrow up to €350 million (or its equivalent in U.S. dollars or, subject to the satisfaction of certain conditions, other optional currencies) for general corporate purposes, including the funding of business combinations (the "General RCF"). As of December 31, 2017, nothing had been drawn on this facility.
However, to the extent we draw on the General RCF or incur new debt, the debt holders have rights senior to shareholders to make claims on our assets, and the terms of such debt could restrict our operations, including our ability to pay dividends on our ordinary shares. In addition, pursuant to the terms of our credit facilities, we may be restricted in the use of such facilities to fund capital expenditures and information technology-related expenses may be restricted. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.
Furthermore, if we issue additional equity securities, shareholders will experience dilution, and the new equity securities could have rights senior to those of our ordinary shares.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our shareholders bear the risk of our future securities offerings reducing the market price of the ADSs and diluting their interest.
We do not currently intend to pay dividends on our securities and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of the ADSs. In addition, French law may limit the amount of dividends we are able to distribute.
We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth, both organic and inorganic. In addition, we could , from time to time, decide to usehave used a portion of our available liquidity to repurchase our Company's shares.shares in the past, and may continue to do so from time to time in the future.
Further, the credit agreement for the General RCF (as defined herein) contains restrictions on our ability to pay dividends.
In addition, to the extent any dividends are paid in the future, under French law, payment of such dividends may subject us to additional taxes, and the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our statutory financial statements prepared and presented in accordance with accounting principles generally accepted in France. Therefore, we may be more restricted in our ability to declare dividends than companies not based in France.
Please see the section entitled “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities-Taxation-French Tax Consequences” in Item 5 of Part II in this Form 10-K for further details on the limitations on our ability to declare and pay dividends and the taxes that may become payable by us if we elect to pay a dividend.
Finally, exchange rate fluctuations may affect the amount of euros that we are able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. These factors could harm the value of the ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of the ADSs.
Because you are not likely to receive any dividends on your ADSs for the foreseeable future, the success of an investment in ADSs will depend upon any future appreciation in their value. Consequently, investors may need to sell all or part of their holdings of ADSs after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
We currently have not publicly announced or adopted a share buyback plan or program. If we adopt such a program in the future, the actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, applicable SEC rules, federal and state regulatory restrictions, cash availability and various other factors. If we were to adopt a share buyback program, there would be no guarantee that it would enhance shareholder value. Any share repurchases could increase volatility in the trading price of our ADSs and could diminish our available cash. Any share buyback program we adopt may also be suspended or terminated at any time, which may result in a decrease in the trading price of our ADSs.
Our credit agreement contains, and future debt agreements may contain, restrictions that may limit our flexibility in operating our business.
The credit agreement for the General RCF contains, and documents governing our future indebtedness may contain, numerous covenants that limit the discretion of management with respect to certain business matters. These covenants place restrictions on, among other things, our ability and the ability of our subsidiaries to incur or guarantee additional indebtedness, pay dividends and make other distributions and restricted payments, make certain acquisitions and other investments, sell certain assets or engage in mergers, acquisitions and other business combinations, and create liens. Our credit agreement also requires, and documents governing our future indebtedness may require, us or our subsidiaries to meet certain financial ratios and tests in order to incur certain additional debt, make certain loans, acquisitions or other investments, or pay dividends or make other distributions or restricted payments. To the extent we draw on the General RCF or incur new debt, the debt holders have rights senior to shareholders to make claims on our assets.
Our ability and the ability of our subsidiaries to comply with these and other provisions of our debt agreements are dependent on our future performance, which will be subject to many factors, some of which are beyond our control. The breach of any of these covenants or noncompliance with any of these financial ratios and tests could result in an event of default under the applicable debt agreement, which, if not cured or waived, could result in acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that may contain cross-acceleration or cross-default provisions.
Our by-laws and French corporate law contain provisions that may delay or discourage a sale of the Company.
Provisions contained in our by-laws and the corporate laws of France, the country in which we are incorporated, could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our shareholders. In addition, provisions of our by-laws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. These provisions include, but are not limited to, the following:
•our ordinary shares are in registered form only and we must be notified of any transfer of our shares in order for such transfer to be validly registered;
•under French law, certain investments in any entity governed by a non-resident ofFrench law relating to certain strategic industries and activities (such as data processing, transmission or storage activities) by individuals or entities not French, not resident in France as well as any French entityor controlled by non-French residents may haveentities not French or not resident in France are subject to file a declaration for statistical purposes withprior authorization of the BankMinister of France (Banque de France) following the date of certain direct or indirect investments in usEconomy (see the section entitled "Exchangeentitled" Exchange Controls & Ownership by Non-French Residents" in Item 5 to Part II in this Form 10-K);
•provisions of French law allowing the owner of 95%90% of the share capital or voting rights of a public company to force out the minority shareholders following a tender offer made to all shareholders are only applicable to companies listed on a stock exchange of the European Union and will therefore not be applicable to us;
a merger of our company into a company incorporated outside of the European Union would require the unanimous approval of our shareholders;
•a merger (i.e., in a French law context, a stock-for-stock exchange following which our company would be dissolved into the acquiring entity and our shareholders would become shareholders of the acquiring entity) of our company into a company incorporated outside of the European Union would require the unanimous approval of our shareholders;
•a merger of our company into a company incorporated in the European Union would require the approval of our board of directors as well as a two-thirds majority of the votes held by the shareholders present, represented by proxy or voting by mail at the relevant extraordinary shareholders' meeting;
•under French law, a cash merger is treated as a share purchase and would require the consent of each participating shareholder; and
our shareholders have granted and may grant in the future our board of directors broad authorizations to increase our share capital or to issue additional ordinary shares or other securities (for example, warrants) to our shareholders, the public or qualified investors, including as a possible defense following the launching of a tender offer for our shares;
•our shareholders have preferential subscription rights proportionally to their shareholding in our company on the issuance by us of any additional securities for cash or a set-off of cash debts, which rights may only be waived by the extraordinary general meeting (by a two-thirds majority vote) of our shareholders or on an individual basis by each shareholder;shareholder.
our board of directors has the right to appoint directors to fill a vacancy created by the resignation or death of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;
our board of directors can only be convened by its chairman or, when no board meeting has been held for more than two consecutive months, by directors representing at least one third of the total number of directors;
our board of directors meetings can only be regularly held if at least half of the directors attend either physically or by way of videoconference or teleconference enabling the directors’ identification and ensuring their effective participation in the board’s decisions;
approval of at least a majority of the votes held by shareholders present, represented by a proxy, or voting by mail at the relevant ordinary shareholders’ general meeting, is required to remove directors with or without cause;
advance notice is required for nominations to the board of directors or for proposing matters to be acted upon at a shareholders’ meeting, except that a vote to remove and replace a director can be proposed at any shareholders’ meeting without notice; and
pursuant to French law, the sections of the by-laws relating to the number of directors and election and removal of a director from office may only be modified by a resolution adopted by a two-thirds majority of the votes of our shareholders present, represented by a proxy or voting by mail at the shareholders' meeting.
You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.
Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement.agreement, as amended from time to time. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (1) the notice of the meeting or solicitation of consent or proxy sent by us and (2) a statement as to the manner in which instructions may be given by the holders.
You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary shares so that you can vote them yourself.
If the depositary does not receive timely voting instructions from you, it may give a proxy to a person designated by us to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.
Your right as a holder of ADSs to participate in any future preferential subscription rights or to elect to receive dividends in shares may be limited, which may cause dilution to your holdings.
According to French law, if we issue additional securities for cash, current shareholders will have preferential subscription rights for these securities proportionally to their shareholding in our company unless they waive those rights at an extraordinary meeting of our shareholders (by a two-thirds majority vote) or individually by each shareholder.
However, our ADS holders in the United StatesU.S. will not be entitled to exercise or sell such rights unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available.
In addition, the deposit agreement provides that the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act.
Further, if we offer holders of our ordinary shares the option to receive dividends in either cash or shares, under the deposit agreement the depositary may require satisfactory assurances from us that extending the offer to holders of ADSs does not require registration of any securities under the Securities Act before making the option available to holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act.
Accordingly, ADS holders may be unable to participate in our rights offerings or to elect to receive dividends in shares and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.
You may be subject to limitations on the transfer of your ADSs and the withdrawal of the underlying ordinary shares.
Your ADSs, which may be evidenced by ADRs,American Depositary Receipts, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares.
Temporary delays in the cancellation of your ADSs and your withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares.
In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities.
U.S. investors may have difficulty enforcing civil liabilities against our company and directors and senior management.
Certain of our directors and members of senior management, and those of certain of our subsidiaries, are non-residents of the U.S., and all or a substantial portion of our assets and the assets of such persons are located outside the U.S. As a result, it may not be possible to serve process on such persons or us in the U.S. or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the U.S. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the U.S.
Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a U.S. securities law claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim.
Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and procedural rules would still be governed by the law of the jurisdiction in which the foreign court resides. In particular, there is some doubt as to whether French courts would recognize and enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, damages exceeding the actual damages in actions brought in the U.S. or elsewhere, such as punitive damages, may be unenforceable in France.
The enforceability of any judgment in France will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The U.S. and France do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters; therefore the recognition and enforcement of any such judgment would be subject to French procedural law and may not be granted.
The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the U.S.
We are a French company with limited liability. Our corporate affairs are governed by our by-laws and by the laws governing companies incorporated in France. The rights of shareholders and the responsibilities of members of our board of directors are in many ways different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions.
For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder.
General Risk Factors
In periods of economic uncertainty, businesses may delay or reduce their spending on advertising, and we are exposed to the credit risk of some of our clients and customers, which could materially harm our business.
General worldwide economic conditions have been significantly unstable in recent years, especially in the European Union where we generated 30% of our revenue for 2021. Unstable conditions make it difficult for our clients and us to accurately forecast and plan future business activities, and could cause our clients to reduce or delay their advertising spending with us. Historically, economic downturns, including conditions such as inflation, recessions, or other changes in economic conditions have resulted in overall reductions in advertising spending, and businesses may curtail spending both on advertising in general and on a solution such as ours. We cannot predict the timing, strength or duration of any economic slowdown or recovery. Any macroeconomic deterioration in the future could impair our revenue and results of operations.
Furthermore, we have expanded our offerings to serve a larger number of smaller clients, and have expanded into emerging markets. Our changing client portfolio exposes us to additional credit risk, which could result in further exposure in the event of economic uncertainty or an economic downturn, including conditions such as inflation, recession, pandemic or other changes in economic conditions.
Additionally, our exposure to credit risks relating to our financing activities may increase if our customers are adversely affected by periods of economic uncertainty, including inflation, recession, pandemic, or other changes in economic conditions, or a global economic downturn. These losses have significantly impacted, and could continue to significantly impact, our operating results and financial condition.
If we fail to maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of the ADSs may, therefore, be adversely impacted.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control.
In addition, we are required to submit a report by management to the Audit Committee and external auditors on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting when required, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the ADSs may be adversely impacted, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.
U.S. investors
Our failure to maintain certain tax benefits applicable to French technology companies may adversely affect our results of operations.
As a French technology company, we have difficulty enforcing civil liabilities against our company and directors and senior management.
Certain of our directors and members of senior management, and those ofbenefited from certain of ourtax advantages, including, for example, a reduced tax rate in France on technology royalty income received from global subsidiaries are non-residents of the United States, and all or a substantial portion of our assets and the assetsFrench research tax credit (crédit d’impôt recherche), or CIR. The French tax authority may audit these tax incentives and challenge the benefits. Therefore, we could be liable for additional corporate tax, and penalties and interest related thereto, which could have a significant impact on our results of such persons are located outsideoperations and future cash flows. Furthermore, the United States.
As a result, ittax laws may not be possible to serve process on such persons or uschange, and could remove these incentives in the United Statesfuture or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States.reduce their benefits.
Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a U.S. securities law claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides. In particular, there is some doubt as to whether French courts would recognize and enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in France.
An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered but is intended to punish the defendant. The enforceability of any judgment in France will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and France do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.
The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.
We are a Frenchmultinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions as a result of new taxes or laws, or revised interpretations thereof, which may negatively affect our business.
As a multinational organization operating in multiple jurisdictions we are subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations. For instance, several countries have proposed or enacted Digital Services Taxes ("DST"), many of which would apply to revenues derived from digital services. We will continue to assess the ongoing impact of DSTs that we pay in certain jurisdictions, as we anticipate that many jurisdictions may sign an agreement with the Organization for Economic Co-operation and Development in the coming years and that DSTs could be eliminated.
U.S. holders of our ADSs may suffer adverse tax consequences if we are treated as a "passive foreign investment company" for U.S. federal income tax purposes.
A non-U.S. corporation will be considered a passive foreign investment company, or PFIC, for U.S. federal income tax purposes, for any taxable year if either (1) at least 75% of its gross income for such year is passive income or (2) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during such year) is attributable to assets that produce or are held for the production of passive income. For purposes of the above calculations, we will be treated as if we hold our proportionate share of the assets of, and receive directly our proportionate share of the income of, any other corporation in which we directly or indirectly own at least 25%, by value, of the shares of such corporation. Passive income includes, among other things, dividends, interest, certain non-active rents and royalties, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets, and our goodwill and other unbooked intangibles are taken into account. Based on the value and composition of our assets, although not free from doubt, we do not believe we were a PFIC for the taxable year ended December 31, 2021, and we do not expect to be a PFIC in the current taxable year or the foreseeable future. The determination of whether we are a PFIC is a fact-intensive determination that must be made on an annual basis applying principles and methodologies that are in some circumstances unclear. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year. If we are a PFIC for any taxable year during which a U.S. holder holds ADSs, we would continue to be treated as a PFIC with limited liability. Ourrespect to that U.S. person for such taxable year and, unless the U.S. person makes certain elections, for future years even if we cease to be a PFIC. The U.S. holder may be subject to adverse tax consequences, including (1) the treatment of all or a portion of any gain on disposition of our ADSs as ordinary income (and therefore ineligible for the preferential rates that apply to capital gains with respect to non-corporate U.S. persons), (2) the application of an interest charge with respect to such gain and on the receipt of certain dividends on our ADSs and (3) required compliance with certain reporting requirements. Each U.S. holder is strongly urged to consult its tax advisor regarding the application of these rules and the availability of any potential elections. For further information regarding the U.S. federal income tax considerations relevant to our potential status as a PFIC, please see the section entitled “Taxation—U.S. Federal Income Tax Considerations for U.S. Holders—Passive Foreign Investment Company, or PFIC, Rules” in our Annual Report.
If a U.S. person is treated as owning at least 10% of our ADSs, such person may be subject to adverse U.S. federal income tax consequences.
If a United States person is treated as owning (directly, indirectly, or constructively through attribution) at least 10% of the total value of our stock or at least 10% of the total combined voting power of all classes of our stock entitled to vote, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation” in our group (if any). We do not believe we are currently a controlled foreign corporation. However, no assurances can be given that we are not a controlled foreign corporation or that we will not become a controlled foreign corporation in the future. Because our group includes one or more U.S. corporations, certain of our non-U.S. corporate affairssubsidiaries could be treated as controlled foreign corporations (regardless of whether or not we are governedtreated as a controlled foreign corporation). A U.S. shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income,” and investments of earnings in U.S. property by controlled foreign corporations, regardless of whether we make any distributions to our by-lawsshareholders. Subpart F income generally includes dividends, interest, certain non-active rents and byroyalties, gains from the laws governing companies incorporatedsale of securities and income from certain transactions with related parties, and “global intangible low-taxed income” generally consists of net income of the controlled foreign corporation, other than Subpart F income and certain other types of income, in France. The rightsexcess of certain thresholds. In addition, a U.S. shareholder that realizes gain from the sale or exchange of shares in a controlled foreign corporation may be required to classify a portion of such gain as dividend income rather than capital gain. If we are classified as both a controlled foreign corporation and a PFIC (as discussed above), we generally will not be treated as a PFIC with respect to those U.S. holders that are U.S. shareholders during the period in which we are a controlled foreign corporation. Failure to comply with such reporting requirements could result in adverse tax effects for U.S. shareholders and potentially significant monetary penalties. An individual that is a U.S. shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a U.S. shareholder that is a U.S. corporation. The determinations of controlled foreign corporation status and U.S. shareholder status are complex and includes attribution rules, the responsibilitiesapplication of memberswhich are not entirely certain. We cannot provide any assurances that we will assist investors in determining whether any of our board of directors are in many ways different fromnon-U.S. subsidiaries is treated as a controlled foreign corporation or whether any investor is a U.S. shareholder, or that we will furnish to any U.S. shareholders information that may be necessary to comply with the rights and obligations of shareholders in companies governed byaforementioned obligations. A U.S. investor should consult its advisors regarding the laws of U.S. jurisdictions.
For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that somepotential application of these parties will have interests that are different from, orrules to an investment in addition to, your interests as a shareholder.our ADSs.
Item 1B. Unresolved Staff Comments
We do not have any unresolved comments from the SEC staff.
Item 2. Properties
Our headquarters are located in Paris, France, in an approximately 16,0008,089 square meter facility, under a lease agreement expiring on June 14, 2023.July, 2030. In addition, we had 3129 offices in 15 countries as of December 31, 2017.2021. We currently lease space in data centers tofrom third-party hosting providers for our hosting services forto operate our servers located in the United States (California, New York,U.S. (Texas, Virginia), France, the Netherlands, Hong Kong,China Singapore and Japan. The properties are used by both our marketing solutions and retail media segments. We believe that our facilities are adequate for our current needs.
Item 3. Legal Proceedings
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
TheOur ADSs have been listed on the Nasdaq Global Select Market ("Nasdaq") under the symbol “CRTO” since October 30, 2013. Prior to that date, there was no public trading market for ADSs or our ordinary shares. Our initial public offering was priced at $31.00 per ADS on October 29, 2013. The following table sets forth for the periods indicated the high and low sales prices per ADS as reported on the Nasdaq Global Select Market:
|
| | | | | | |
| Per ADS |
| High | Low |
2016 | | |
First quarter | $ | 41.50 |
| $ | 24.23 |
|
Second quarter | $ | 47.81 |
| $ | 37.75 |
|
Third quarter | $ | 47.09 |
| $ | 34.29 |
|
Fourth quarter | $ | 44.14 |
| $ | 32.83 |
|
2017 | | |
First quarter | $ | 52.87 |
| $ | 41.20 |
|
Second quarter | $ | 56.00 |
| $ | 44.30 |
|
Third quarter | $ | 53.79 |
| $ | 37.74 |
|
Fourth quarter | $ | 47.57 |
| $ | 22.00 |
|
Holders
As of January 31, 2018,2022, there were 4035 holders of record of our ordinary shares and 138 participants in DTC that held our ADSs. The actual number of holders is greater, and includes beneficial owners whose ADSs are held in street name by brokers and other nominees. This number of holders of record and DTC participants also does not include holders whose shares may be held in trust by other entities.
ADS Performance Graph
The following graph shows a comparison from October 30, 2013 (the datematches our cumulative five-year total shareholder return on our ADSs commenced trading on the Nasdaq Global Select Market) through December 31, 2017 ofwith the cumulative total return for our ADSs,returns of the Russell 2000 Index and the Nasdaq Internet Index. The graph assumes thattracks the performance of a $100 was invested at the market close on October 30, 2013investment in our ADSs and in each index (with the Russell 2000 Indexreinvestment of all dividends) from December 31, 2016 to December 31, 2021. The returns shown are based on historical results and the Nasdaq Internet Index and data for the Russell 2000 Index and the Nasdaq Internet Index assumes reinvestments of dividends. The stock price performance of the following graph isare not necessarily indicative ofintended to suggest future stock price performance.
The foregoing performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
Dividends
We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying cash dividends on our equity securities in the foreseeable future and intend to retain all available funds and any future earnings to fund our growth.
Subject to the requirements of French law and our by-laws, dividends may only be distributed from our statutory retained earnings. Dividend distributions, if any, will be made in euros and converted into U.S. dollars with respect to the ADSs, as provided in the deposit agreement. In addition, under the General RCF, we may not declare, make or pay dividends if our net debt to Adjusted EBITDA leverage ratio exceeds 2.0x.
Purchases of Equity Securities Authorized for Issuance Under Equity Compensation Plansby the Issuer and Affiliated Purchasers
The following table provides information asWe completed our ADS repurchase program of $100 million in December 31, 2017 regarding compensation plans under which our2021.
Recent Sales of Unregistered Securities and Use of Proceeds
There were no unregistered sales of equity securities
are authorized for issuance. |
| | | | | | |
| (a) | (b) | (c) |
Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights(1) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
Equity compensation plans approved by security holders | 7,591,492 |
| $32.00(2) |
| 2,408,259 |
|
Equity compensation plans not approved by security holders | — |
| — |
| — |
|
Total | 7,591,492 |
| $32.00(2) | 2,408,259 |
|
(1) The weighted-average exercise price does not reflect the ordinary shares that will be issued in connection with the vesting of free shares, since free shares have no exercise price.
(2) The weighted-average exercise price was €28.33 and has been converted to U.S. dollars based on the average exchange rate for the year ended December 31, 2017 of €1.00=$1.129354.
during 2021.
Exchange Controls & Ownership by Non-French Residents
Under current French foreign exchange control regulations there are no limitations on the amount of cash payments that we may remit to residents of foreign countries. Laws and regulations concerning foreign exchange controls do, however, require that all payments or transfers of funds made by a French resident to a non-resident, such as dividend payments, be handled by an accredited intermediary. All registered banks and substantially all credit institutions in France are accredited intermediaries.
Neither the French Commercial Code nor our by-laws presently impose any restrictions on the right of non-French residents or non-French shareholders to own and vote shares. However, non-French residents must file a declaration for statistical purposes with the Bank of France (Banque de France) within 20 working days following the date of certain direct foreign investments in us, including any purchase of our ADSs. In particular, such filings are required in connection with investments exceeding €15,000,000 that lead to the acquisition of more thanat least 10% of our outstanding ordinary shares or crossvoting rights or the crossing of either such 10% threshold of shareholding.threshold. Violation of this filing requirement may be sanctioned by five years of imprisonment and a fine of up to twice the amount of the relevant investment. This amount may be increased fivefold if the violation is made by a legal entity.
Further, any investment (i) by (a) an non-French citizen, (b) any French citizen not residing in France, (c) any non-French entity or (d) any French entity controlled by one of the aforementioned persons or entities, (ii) that will result in the relevant investor (a) acquiring control of any entity registered in France, (b) acquiring all or part of a business line of an entity registered in France, or (c) for non-EU or non-EEA investors crossing, directly or indirectly, alone or in concert, a 25% threshold of voting rights in an entity registered in France, and (iii) made in certain strategic industries, such as telecommunication, cybersecurity, data collection or storage.
If an investment requiring the prior authorization of the French Minister of Economy is completed without such authorization having been granted, the relevant investment shall be deemed null and void and the French Minister of Economy further might direct the relevant investor to nonetheless (i) submit a request for authorization, (ii) have the previous situation restored at its own expense or (iii) amend the investment. The relevant investor further may be found criminally liable and may be sanctioned with a fine not to exceed the greater of the following amounts: (i) twice the amount of the relevant investment, (ii) 10% of the annual turnover before tax of the target company or (iii) €5 million (for a company) or €1 million (for a natural person).
Further, (a) any non-French citizen, (b) any French citizen not residing in France, (c) any non- French entity or (d) any French entity controlled by one of the aforementioned persons or entities may have to file a declaration for statistical purposes with the Bank of France (Banque de France) within twenty working days following the date of certain direct foreign investments in us, including any purchase of our ADSs. In particular, such filings are required in connection with investments exceeding €15,000,000 that lead to the acquisition of at least 10% of our share capital or voting rights or cross such 10% threshold. Violation of this filing requirement may be sanctioned by five years of imprisonment and a fine of up to twice the amount of the relevant investment. This amount may be increased fivefold if the violation is made by a legal entity.
Taxation
French Tax Consequences
The following describes the material French income tax consequences to U.S. Holders (as defined below) of purchasing, owning and disposing of the ADSs and ordinary shares, or the Securities as in force on the date of this Form 10-K.
This discussion does not purport to be a complete analysis or listing of all potential tax effects of the acquisition, ownership or disposition of our securities to any particular investor, and does not discuss tax considerations that arise from rules of general application or that are generally assumed to be known by investors. All of the following is subject to change. Such changes could apply retroactively and could affect the consequences described below.
In 2011, France introduced a comprehensive set of new tax rules applicable to French assets that are held by or in foreign trusts. These rules, among other things, provide for the inclusion of trust assets in the settlor’s net assets for purpose of applying the French wealth tax, for the application of French gift and death duties to French assets held in trust, for a specific tax on capital on the French assets of foreign trusts not already subject to the French wealth tax and for a number of French tax reporting and disclosure obligations. The following discussion does not address the French tax consequences applicable to securities held in trusts. If securities are held in trust, the grantor, trustee and beneficiary are urged to consult their own tax adviser regarding the specific tax consequences of acquiring, owning and disposing of securities.
The description of the French income tax and wealth tax consequences set forth below is based on the Convention Between the Government of the United States of America and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994, or the Treaty, which came into force on December 30, 1995 (as amended by any subsequent protocols, including the protocol of January 13, 2009), and the tax guidelines issued by the French tax authorities in force as of the date of this Form 10-K.
For the purposes of this discussion, the term “U.S. Holder” means a beneficial owner of securities that is (1) an individual who is not a French tax resident under French domestic rules / applicable double tax treaty provisions and who is a U.S. citizen or resident for U.S. federal income tax purposes, or (2) a U.S. domestic corporation or certain other entities created or organized in or under the laws of the United StatesU.S. or any state thereof, including the District of Colombia,Columbia, or (3) otherwise subject to U.S. federal income taxation on a net income basis in respect of securities.
If a partnership (or any other entity treated as a partnership for U.S. federal income tax purposes) holds securities, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. If a U.S. Holder is a partner in a partnership that holds securities, such holder is urged to consult its own tax adviser regarding the specific tax consequences of acquiring, owning and disposing of securities.
This discussion applies only to investors that hold our securities as capital assets that have the U.S. dollar as their functional currency, that are entitled to Treatytreaty benefits under the “Limitation on Benefits” provision contained in the Treaty,tax treaty between the Government of the U.S. and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital dated August 31, 1994, as amended by additional protocols of December 8, 2004 and January 13, 2009 ("The Treaty"), and whose ownership of the securities is not effectively connected to a permanent establishment or a fixed base in France.
Certain U.S. Holders (including, but not limited to, U.S. expatriates, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, banks, insurance companies, regulated investment companies, tax-exempt organizations, financial institutions, persons subject to the alternative minimum tax, persons who acquired the securities pursuant to the exercise of employee share options or otherwise as compensation, persons that own (directly, indirectly or by attribution) 5% or more of our voting stock or 5% or more of our outstanding share capital, dealers in securities or currencies, persons that elect to mark their securities to market for U.S. federal income tax purposes and persons holding securities as a position in a synthetic security, straddle or conversion transaction) may be subject to special rules not discussed below.
U.S. Holders are urged to consult their own tax advisers regarding the tax consequences of the purchase, ownership and disposition of securities in light of their particular circumstances, especially with regard to the “Limitations on Benefits” provision.
Estate
Furthermore, specific rules apply in France with respect to French assets that are held by or in foreign trusts. These rules, among other things, provide for the inclusion of trust assets in the settlor’s net assets for purpose of applying the French real estate wealth tax, for the application of French gift and Gift Taxes and Transfer Taxes
In general,inheritance tax to French assets held in trust, for a transferspecific tax on capital on the French assets of securities by gift or by reason of death of a U.S. Holder that would otherwise beforeign trusts not already subject to the French gift or inheritancereal estate wealth tax respectively, will not be subject to suchand for a number of French tax by reason of the Convention between the Government of the United Statesreporting and the Government ofdisclosure obligations. The following discussion does not address the French Republic fortax consequences applicable to securities held in trusts.
If securities are held in trust, the Avoidancesettlor, trustee and beneficiary are urged to consult their own tax adviser regarding the specific tax consequences of Double Taxationacquiring, owning and the Preventiondisposing of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Gifts, dated November 24, 1978, unless the donor or the transferor is domiciled in France at the time of making the gift or at the time of his or her death, or the securities were used in, or held for use in, the conduct of a business through a permanent establishment or a fixed base in France.securities.
Purchasing Consequences
Financial Transactions Tax
Pursuant to Article 235 ter ZD of the Code général des impôts (FrenchFrench Tax Code or FTC)("FTC"), purchases of shares or ADSs of a French company listed on a regulated market of the European Union or an exchange formally acknowledged by the French Financial Market Authority (AMF)("AMF") are subject to a 0.3% French tax on financial transactions provided that the issuer’s market capitalization exceeds €1 billion as of December 1 of the year preceding the taxation year.
A list of companies whose market capitalization exceeds €1 billion as of December 1 of the year preceding the taxation year within the meaning of Article 235 ter ZD of the French Tax Code used to beFTC is published annually by the French Ministry of Economy. It is now published by the French tax authorities, and could be amended at any time.authorities. Pursuant to Regulations BOI‑ANNX‑000467‑2017122120201223 issued on December 21, 2017,23, 2020, Criteo is currently not included in such list. Please note that such list may be updated from time to time, or may not be published anymore in the future.
Furthermore, Moreover, Nasdaq, on which Criteo's ADSs are listed for trading, is not currently acknowledged by the French AMF but this may change in the future.
Consequently, Criteo’s securities should not fall within the scope of the tax on financial transactions described above. In the future, purchasesabove and purchasers of Criteo’sCriteo's securities may becomein 2021 should not be subject to suchthe tax if Nasdaq is acknowledged by the French AMF.on financial transactions.
Registration Duties
In the case where Article 235 ter ZD of the FTC is not applicable, (i) transfers of shares issuedwhich are not listed on a regulated market of the European Union or an exchange formally acknowledged by a listed French companythe AMF are subject to uncapped registration duties at the rate of 0.1% if the transfer is evidenced by a written statement (“acte”) executed either in France or outside France, whereas (ii) transfers. As ordinary shares of shares whichCriteo are not listed areon an exchange formally acknowledged by the AMF, their transfer should be subject to uncapped registration duties at the rate of 0.1% notwithstanding the existence of a written statement (“acte”). As ordinary shares of Criteo are not listed, their transfer is subject to uncapped registration duties at the rate of 0.1% notwithstanding the existence of a written agreement (“acte”).
AlthoughHowever, although the official guidelines published by the French tax authorities are silent on this point, transfer of ADSs should remain outside of the scope of the aforementioned 0.1% registration duties.duties as they cannot be considered as French shares.
Wealth Tax
The French wealth tax (impôt de solidarité sur la fortune) applies only to individuals and does not generally apply to securities held by a U.S. resident, as defined pursuant to the provisions of the Treaty, provided that such U.S. Holder does not own directly or indirectly more than 25% of the issuer’s financial rights. The French 2018 Finance Bill has changed the French wealth tax scope to a French Real Estate Wealth tax as from January 1st, 2018. The French Real Estate wealth tax only applies to real estate assets and certain assets deemed to be real estate assets.Ownership Consequences
Taxation of Dividends
Dividends paid by a French corporation to non-residents of France wereare generally subject to French withholding tax at a rate of 30% until December 31st, 2017. Since January 1st, 2018, the withholding tax rate25% or 12.8% for Dividends paid to certain non-resident individuals is reduced to 12.8%, while the 30% rate is still applicable for non-resident companies.individuals. Dividends paid by a French corporation in a non-cooperative State or territory, as definedset out in the list referred to in Article 238-0 A of the FTC, will generally be subject to French withholding tax at a rate of 75%., except to the extent this French corporation can prove that the main purpose and effect of the distribution is not transfer such dividend income in a non-cooperative State or territory with a view to avoiding taxes. However, eligible U.S. Holders entitled to Treaty benefits under the “Limitation on Benefits” provision contained in the Treaty who are U.S. tax residents, as defined pursuant to the provisions of the Treaty will not be subject to the 12.8%, 30% or 75% withholding tax rate, but may be subject to the withholding tax at a reduced rate (as described below).
Under the Treaty, the rate of French withholding tax on dividends paid to an eligible U.S. Holder who is a U.S. tax resident as defined pursuant to the provisions of the Treaty, who is the ultimate owner of the distributed dividends, and whose ownership of the ordinary shares or ADSs is not effectively connected with a permanent establishment or fixed base that such U.S. Holder has in France, is generally reduced to 15%, or to 5% if such U.S. Holder is a corporation and owns directly or indirectly at least 10% of the share capital of the issuer; such U.S. Holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rates of 15% or 5%, if any.issuer, subject to certain procedural requirements discussed below.
For U.S. Holders that are not individuals but are U.S. residents, as defined pursuant to the provisions of the Treaty, the requirements for eligibility for Treaty benefits, including the reduced 5%15% or 15%5% withholding tax rates contained in the “Limitation on Benefits” provision of the Treaty, are complicated, and certain technical changes were made to these requirements by the protocol of January 13, 2009. U.S. Holders are advised to consult their own tax advisers regarding their eligibility for Treaty benefits in light of their own particular circumstances.
Dividends paid to an eligible U.S. Holder may immediately be subject to the reduced rates of 5%15% or 15%5% provided that such holder establishes before the date of payment that it is a U.S. resident under the Treaty by completing and providing the depositary with athe applicable treaty formforms (Form 5000)5000 and Form 5001).
Dividends paid to a U.S. Holder that has not filed the Form 5000 before the dividend payment date will be subject to French withholding tax at the rate of 12.5%12.8%, 30%,25% in 2022, or 75% if paid in a non-cooperative State or territory (as defined in Article 238-0 A of the FTC). Such U.S. Holder may claim a refund from the French tax authorities of the amount withheld in excess of the Treaty rates of 15% or 5%, and then reduced at a later date to 5% or 15%,if any, provided that such holder duly completes and provides the French tax authorities with the treaty forms Form(Form 5000 and Form 50015001) before December 31 of the second calendar year following the year during which the dividend is paid. Certain qualifying pension funds and certain other tax-exempt entities are subject to the same general filing requirements as other U.S. Holders except that they may have to supply additional documentation evidencing their entitlement to these benefits.
Form 5000 and Form 5001, together with instructions, will be provided by the depositary to all U.S. Holders registered with the depositary. The depositary will arrange for the filing with the French Tax authorities of all such forms properly completed and executed by U.S. Holders of ordinary shares or ADSs and returned to the depositary in sufficient time so that they may be filed with the French tax authorities before the distribution in order to obtain immediately a reduced withholding tax rate.
The withholding tax refund, if any, ordinarily occurs within 12 months from filing the applicable French Treasury Form, butwill not occur before January 15 of the year following the calendar year in which the related dividend was paid.
Tax on Sale or Other DispositionSubject to certain conditions, corporations can obtain a full refund of the withholding tax if they are in loss-making position. In such case, the taxation is deferred and will occur if and when profits are made.
As a matter of principle,Because the withholding tax rate applicable under French domestic law to U.S. holders who are individuals does not exceed the cap provided in the Treaty (i.e. 15%), the domestic 12.8% withholding tax law,rate will generally apply to dividends paid to those U.S. holders, as opposed to the rate provided under the Treaty.
Wealth Tax
As from January 1, 2018, French wealth tax (impôt de solidarité sur la fortune) has been replaced by a new real estate wealth tax (impôt sur la fortune immobilière) which applies only to individuals owning French real estate assets or rights, directly or indirectly through one or more legal entities, and whose net taxable assets amount to at least 1,300,000 euros. Generally, real estate assets allocated to an operational activity are excluded from the scope of the real estate wealth tax, depending on the structuring. Shares of an operating company holding French real estate assets in which the relevant individual holds, directly and indirectly, less than 10% of the share capital or voting rights, are also exempt from real estate wealth tax.
The Treaty does not prevent the application of real estate wealth tax to a U.S. Holder who would be a U.S. tax resident. However, based on the above domestic provisions and considering that Criteo SA is an operating company, the owning of ADSs or ordinary shares should not be subject to anyreal estate wealth tax.
Disposition
Taxation on sale or other disposition
Generally, under French tax law, a foreign shareholder who is not a French tax resident for French tax purposes is not be subject to French tax on any capital gain from the sale, exchange, repurchase or redemption by us of ordinary shares or ADSs, provided that all of the following apply to such U.S. Holder:
U.S. Holder is not a French tax resident for French tax purposes; and,
U.S. Holderforeign shareholder either (i) has not held more than 25% of our dividend rights, known as “droits aux bénéfices sociaux” at any time during the preceding five years, either directly or indirectly, and, as relates to individuals, alone or with relatives; and,
U.S. Holder has not transferred ordinary shares or ADSs as part of redemption by Criteo, in which case the proceeds may under certain circumstances be partially or fully characterized as dividends under French domestic law and, as result, be subject to French dividend withholding tax. Asrelatives (as an exception, a U.S Holder,foreign shareholder established, domiciled or incorporated in a non-cooperative State or territory as defined in Article 238-0 A of the FTC should be subject to a 75% withholding tax in France on any such capital gain, regardless of the fraction of the dividend rights it holds.
In case an applicable double tax treaty between France andholds) or (ii) the U.S. holder countryissuer of residence contains more favorable provisions, a U.S. Holder may not be subject to any French income tax or capital gains tax in case of sale or disposal of any ordinarythe relevant shares or ADSs of Criteo even if one or moreis a company at least 50% of the above mentioned statements are not applicable.assets of which consist of real estate located in France, or derives at least 50% of its value, directly or indirectly, from real estate located in France.
Particularly,
However, based on the Treaty, a U.S. Holder who is a U.S. tax resident resident for purposes of the Treaty, has no permanent establishment or fixed base in France within the meaning of the Treaty, and is entitled to Treaty benefitbenefits will notonly be subject to French tax on any such capital gain unlessresulting from the sale of shares, units or rights in a company at least 50% of the assets of which consist of real estate located in France, or derives at least 50% of its value, directly or indirectly, from real estate located in France. Criteo SA is not expected to meet this standard. Pursuant to these provisions, capital gain resulting from the sale or other disposition of ADSs and ordinary shares or the ADSs form part of the business property of a permanent establishment or fixed base that the U.S. Holder hasshould not be subject to taxation in France.
U.S. Holders who own ordinary shares or ADSs through U.S. partnerships that are not residents for Treaty purposes are advised to consult their own tax advisors regarding their French tax treatment and their eligibility for Treaty benefits in light of their own particular circumstances.
A U.S. Holder who owns ordinary shares or ADSs through U.S. partnerships that are not residents for Treaty purposes are advised to consult their own tax advisors regarding their French tax treatment and their eligibility for Treaty benefits in light of their own particular circumstances.
A U.S. Holder that is not a U.S. resident for Treaty purposes or is not entitled to Treaty benefitbenefits (and in both cases is not resident, established or incorporated in a non-cooperative State or territory as defined in Article 238-0 A of the FTC) and has held more than 25% of ourCriteo's dividend rights known as “droits aux bénéfices sociaux” at anytimeany time during the preceding five years, either directly or indirectly, and, as relates to individuals, alone or with relatives will be subject to a levy in France at the rate of (i) 25% if such U.S. Holder is a corporate body or a legal entity, or (ii) 12.8% for individuals and at the corporate income tax rate in force for corporations since January 1st 2018. Before that date, the applicable rate was 45% for individuals and corporations.if such U.S. Holder is an individual.
Special rules apply to U.S. Holders who are residents of more than one country.
Gift and Inheritance Tax
Recent SalesGenerally, under French tax law, the following assets are subject to gift and inheritance tax:
•all movable or immovable property located in France or outside France when the donor or the deceased had his or her tax residence in France within the meaning of Unregistered Securities; UseArticle 4 B of Proceeds From Registered Securitiesthe FTC;
There were•movable or immovable property located in France (including French real estate assets held indirectly), when the donor or the deceased is not domiciled for tax purposes in France;
•movable and immovable property located in France or outside France received from a donor or deceased domiciled outside France by an heir, donee or legatee who is domiciled for tax purposes in France within the meaning of Article 4 B of the FTC and has been so domiciled for at least six years during the last ten years preceding the year in which he or she receives the property.
However, under the Convention between the Government of the U.S. and the Government of the French Republic for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Estates, Inheritances and Gifts, dated November 24, 1978 (as amended by the protocol of December 8, 2004), if the U.S. Holder is domiciled in the U.S. and is a U.S. tax resident for purposes of the Treaty, has no unregistered salespermanent establishment or fixed base in France within the meaning of equitythe Treaty, and is entitled to Treaty benefits, only French real estate assets and shares, units or other interests in a company or legal entity whose assets consist, directly or through one or more other companies or legal entities, of at least 50% of real property located in France or of rights relating to such property can be subject to gift and inheritance tax.
U.S. Federal Income Tax Considerations for U.S. Holders
The following section is a summary of the U.S. federal income tax considerations generally applicable to U.S. Holders, as defined below, of owning and disposing of ADSs or ordinary shares.
This section applies only to a U.S. Holder that holds ADSs or ordinary shares as capital assets (generally, property held for investment) for U.S. federal income tax purposes. This section does not address the U.S. federal estate, gift or other non-income tax considerations or any state, local or non-U.S. tax considerations relating to the ownership or disposition of ADSs or ordinary shares. In addition, it does not set forth all of the U.S. federal income tax considerations that may be relevant in light of the U.S. Holder’s particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) known as the Medicare contribution tax and tax consequences applicable to U.S. Holders subject to special rules, such as:
•certain banks and other financial institutions;
•dealers in securities during 2017.or currencies;
Issuer Purchases•traders that elect to use a mark-to-market method of Equity Securitiesaccounting;
None.•persons holding ADSs or ordinary shares as part of a hedging transaction, straddle, wash sale, conversion transaction or other integrated transaction or persons entering into a constructive sale with respect to the ADSs or ordinary shares;
•persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
•entities or arrangements classified as partnerships for U.S. federal income tax purposes;
•insurance companies;
Item 6. Selected Financial Data•pension plans;
Our audited consolidated•cooperatives;
•regulated investment companies;
•real estate investment trusts;
•tax-exempt entities, including private foundations and “individual retirement accounts” or “Roth IRAs”;
•certain former U.S. citizens or long-term residents;
•persons who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation;
•persons required for U.S. federal income tax purposes to conform the timing of income accruals with respect to the ADSs or ordinary shares to their financial statements under Section 451(b) of the Code;
•persons that directly, indirectly or constructively own 10% or more of our shares (by vote or value); or
•persons holding ADSs or ordinary shares in connection with a trade or business conducted outside of the U.S.
If an entity or arrangement that is classified as a partnership for U.S. federal income tax purposes holds ADSs or ordinary shares, the U.S. federal income tax treatment of a partner will depend on the status of the partner and the activities of the partnership. Partnerships holding ADSs or ordinary shares and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the ADSs or ordinary shares.
Each U.S. Holder should consult its tax advisor as to the U.S. federal, state, local and non-U.S. tax considerations relevant to it with respect to the ownership and disposition of our ADSs or ordinary shares in light of its particular circumstances.
This section is based on the Code, administrative pronouncements, judicial decisions, final Treasury regulations, and the income tax treaty between France and the U.S. (the “Treaty”), all as of the date hereof, any of which is subject to change or differing interpretations, possibly with retroactive effect.
A “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of ADSs or ordinary shares and who is:
•a citizen or individual resident of the U.S.;
•a corporation, or other entity classified as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the U.S., any state thereof or the District of Columbia;
•an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
•a trust if a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons has or have the authority to control all of the trust’s substantial decisions, or the trust has validly elected to be treated as a domestic trust for U.S. federal income tax purposes.
In general, it is expected that a U.S. Holder who owns ADSs will be treated as the owner of the underlying shares represented by those ADSs for U.S. federal income tax purposes. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated in this manner. Accordingly, no gain or loss will be recognized if a U.S. Holder exchanges ADSs for the underlying shares represented by those ADSs.
U.S. Holders should consult their tax advisers concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of ADSs or ordinary shares in their particular circumstances.
Taxation of Distributions
We do not currently expect to make distributions on our ADSs or ordinary shares. If we are not and have not been prepareda PFIC (as discussed below in the section entitled “—Passive Foreign Investment Company, or PFIC, Rules”), in the event that we do make distributions of cash or other property, the following rules would apply. The gross amount of any distributions paid on ADSs or ordinary shares, other than certain pro rata distributions of ADSs or ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent such amount is treated as a dividend, it will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in the case of ADSs. If distributions exceed our current and accumulated earnings and profits, such excess distributions will generally constitute a return of capital to the extent of the U.S. Holder’s tax basis in its ADSs or ordinary shares and will result in a reduction thereof. To the extent such excess exceeds a U.S. Holder’s tax basis in the ADSs or ordinary shares, such excess will generally be subject to tax as capital gain. Because we do not intend to determine our earnings and profits in accordance with U.S. GAAP. We derivedfederal income tax principles, the selected consolidated statementsfull amount of any distribution we pay is generally expected to be treated as a dividend for U.S. federal income datatax purposes. Dividends received on our ADSs or ordinary shares will not be eligible for the yearsdividends received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Individuals and other non-corporate U.S. Holders will be subject to tax at the lower capital gains tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or ordinary shares on which the dividends are paid are readily tradable on an established securities market in the U.S., or we are eligible for the benefit of the Treaty, (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend is paid or the preceding taxable year, and (3) certain holding period requirements are met.
If we are eligible for benefits under the Treaty, dividends we pay on our ADSs or ordinary shares, regardless of whether such ADSs or shares are considered readily tradable on an established securities market in the U.S., would be eligible for the reduced rates of taxation described in the preceding paragraph, provided the other conditions described above are satisfied. Further, as discussed below under “—Passive Foreign Investment Company, or PFIC, Rules”, although there can be no assurance that we will be considered a PFIC for any taxable year, we believe we were not a PFIC for our 2021 taxable year and we do not anticipate that we will be a PFIC in the current and future taxable years. U.S. Holders should consult their tax advisors regarding the availability of the reduced tax rate on dividends in their particular circumstances.
For U.S. foreign tax credit purposes, dividends paid on our ADSs or ordinary shares generally will be treated as income from foreign sources and generally will constitute passive category income. The amount of any dividend income paid in euro will be the U.S. dollar amount calculated by reference to the exchange rate in effect on the date of actual or constructive receipt, regardless of whether the payment is in fact converted into U.S. dollars at that time.
If the foreign currency received as a dividend is converted into U.S. dollars on the date it is received, a U.S. Holder will generally not be required to recognize foreign currency gain or loss in respect of the dividend income. If the foreign currency received as a dividend is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the foreign currency will be treated as U.S. source ordinary income or loss.
Sale or Other Disposition of ADSs or Ordinary Shares
Subject to the discussion below under “—Passive Foreign Investment Company, or PFIC, Rules”, gain or loss realized on the sale or other disposition of ADSs or ordinary shares will be capital gain or loss, and will be long-term capital gain or loss if the U.S. Holder held the ADSs or ordinary shares for more than one year. The amount of the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ADSs or ordinary shares disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars. Long-term capital gain of individuals and certain other non-corporate U.S. Holders will generally be eligible for a reduced rate of taxation. The deductibility of a capital loss may be subject to limitations. Any capital gain or loss will generally be treated as U.S.-source gain or loss for U.S. foreign tax credit purposes, which will generally limit the availability of foreign tax credits.
Passive Foreign Investment Company, or PFIC, Rules
Under the Code, we will be a PFIC for any taxable year in which either (i) 75% or more of our gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of our assets consist of assets that produce, or are held for the production of, “passive income.” For purposes of the above calculations, we will be treated as if we hold our proportionate share of the assets of, and receive directly our proportionate share of the income of, any other corporation in which we directly or indirectly own at least 25%, by value, of the shares of such corporation.
Passive income includes, among other things, interest, dividends, certain non-active rents and royalties, net gains from the sale or exchange of property producing such income and net foreign currency gains. For this purpose, cash and assets readily convertible into cash are categorized as passive assets, and our goodwill and other unbooked intangibles are taken into account.
The determination of whether we are a PFIC is a fact-intensive determination that must be made on an annual basis applying principles and methodologies that are in some circumstances unclear. Based on the value and composition of our assets, although not free from doubt, we do not believe we were a PFIC for the taxable year ended December 31, 2015, 20162021, and 2017we do not expect to be a PFIC in the current taxable year or the foreseeable future. Since a separate factual determination as to whether we are or have become a PFIC must be made each year (after the close of such year), we cannot assure you that we will not be or become a PFIC in the current year or any future taxable year.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or ordinary shares, the PFIC rules discussed below generally will apply to such U.S. Holder for such taxable year, and selected consolidated statementsunless the U.S. Holder makes certain elections, will apply in future years even if we cease to be a PFIC.
If we were a PFIC for any taxable year during which a U.S. Holder held ADSs or ordinary shares (assuming such U.S. Holder has not made a timely mark-to-market or QEF election, as described below), gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of financial position data as of December 31, 2016 and 2017 from our audited consolidated financial statements included in Part IV, Item 15 “Exhibits and Financial Statements” of this Form 10-K. The selected consolidated statements of income datathe ADSs or ordinary shares would be allocated ratably over the U.S. Holder’s holding period for the years ended December 31, 2013 and 2014 andADSs or ordinary shares. The amounts allocated to the selected consolidated financial position data as of December 31, 2013, 2014 and 2015 have been derived from our audited consolidated financial statements and notes thereto which are not included in this Form 10-K. This data should be read together with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our audited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-K. Our historical results are not necessarily indicativetaxable year of the resultssale or other disposition and to any year before we became a PFIC would be expectedtaxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an additional tax based on the future.
Consolidated Statementsinterest charge generally applicable to underpayments of Income Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands, except share and per share data) |
Revenue | $ | 589,418 |
|
| $ | 988,249 |
|
| $ | 1,323,169 |
|
| $ | 1,799,146 |
|
| $ | 2,296,692 |
|
| | | | | | | | | |
Cost of revenue (1): | | | | | | | | | |
Traffic acquisition costs | (351,759 | ) |
| (585,492 | ) |
| (789,152 | ) |
| (1,068,911 | ) |
| (1,355,556 | ) |
Other cost of revenue | (29,150 | ) |
| (47,948 | ) |
| (62,201 | ) |
| (85,260 | ) |
| (121,641 | ) |
Gross profit | 208,509 |
| | 354,809 |
| | 471,816 |
| | 644,975 |
| | 819,495 |
|
| | | | | | | | | |
Operating expenses | | | | | | | | | |
Research and development expenses (1) | (42,716 | ) |
| (60,075 | ) |
| (86,807 | ) |
| (123,649 | ) |
| (173,925 | ) |
Sales and operations expenses (1) | (109,953 | ) |
| (176,927 | ) |
| (229,530 | ) |
| (282,853 | ) |
| (380,649 | ) |
General and administrative expenses (1) | (41,681 | ) |
| (64,723 | ) |
| (79,145 | ) |
| (117,469 | ) |
| (127,077 | ) |
Total operating expenses | (194,350 | ) | | (301,725 | ) | | (395,482 | ) | | (523,971 | ) | | (681,651 | ) |
Income from operations | 14,159 |
| | 53,084 |
| | 76,334 |
| | 121,004 |
| | 137,844 |
|
Financial income (expense) | (9,117 | ) |
| 11,390 |
|
| (4,541 | ) |
| (546 | ) |
| (9,534 | ) |
Income before taxes | 5,042 |
| | 64,474 |
| | 71,793 |
| | 120,458 |
| | 128,310 |
|
Provision for income taxes | (3,203 | ) |
| (17,578 | ) |
| (9,517 | ) |
| (33,129 | ) |
| (31,651 | ) |
Net income | $ | 1,839 |
| | $ | 46,896 |
| | $ | 62,276 |
| | $ | 87,329 |
| | $ | 96,659 |
|
Net income available to shareholders of Criteo S.A. (2) | $ | 1,404 |
|
| $ | 45,556 |
|
| $ | 59,553 |
|
| $ | 82,272 |
|
| $ | 91,214 |
|
Net income available to shareholders per share: | | | | | | | | | |
Basic | $ | 0.03 |
| | $ | 0.77 |
| | $ | 0.96 |
| | $ | 1.30 |
| | $ | 1.40 |
|
Diluted | $ | 0.03 |
| | $ | 0.72 |
| | $ | 0.91 |
| | $ | 1.25 |
| | $ | 1.34 |
|
Weighted average shares outstanding used in computing per share amounts: | | | | | | | | | |
Basic | 48,692,148 |
|
| 58,928,563 |
|
| 61,835,499 |
|
| 63,337,792 |
|
| 65,143,036 |
|
Diluted | 53,748,108 |
|
| 63,493,260 |
|
| 65,096,486 |
|
| 65,633,470 |
|
| 67,851,971 |
|
(1)Costtax would be imposed on the amount allocated to that taxable year. Further, to the extent that any distribution received by a U.S. Holder on its ADSs or ordinary shares exceeds 125% of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense, acquisition-related costs, restructuring costs and deferred price consideration as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands) |
Equity awards compensation expense | | | | | | | | | |
Research and development expenses | $ | 2,721 |
|
| $ | 3,682 |
|
| $ | 6,520 |
|
| $ | 12,108 |
|
| $ | 21,093 |
|
Sales and operations expenses | 3,719 |
|
| 12,291 |
|
| 11,678 |
|
| 16,838 |
|
| 31,386 |
|
General and administrative expenses | 2,690 |
|
| 3,628 |
|
| 5,791 |
|
| 14,313 |
|
| 19,872 |
|
Total equity awards compensation expense (b) | 9,130 |
| | 19,601 |
| | 23,989 |
| | 43,259 |
| | 72,351 |
|
Pension service costs | | | | | | | | | |
Research and development expenses | 145 |
|
| 167 |
|
| 163 |
|
| 211 |
|
| 621 |
|
Sales and operations expenses | 139 |
|
| 187 |
|
| 153 |
|
| 144 |
|
| 247 |
|
General and administrative expenses | 100 |
|
| 150 |
|
| 125 |
|
| 169 |
|
| 363 |
|
Total pension service costs | 384 |
| | 504 |
| | 441 |
| | 524 |
| | 1,231 |
|
Depreciation and amortization expense | | | | | | | | | |
Cost of revenue | 10,417 |
|
| 21,455 |
|
| 29,866 |
|
| 38,469 |
|
| 53,988 |
|
Research and development expenses (a) | 1,215 |
|
| 4,949 |
|
| 7,995 |
|
| 7,211 |
|
| 11,226 |
|
Sales and operations expenses | 2,379 |
|
| 3,664 |
|
| 5,178 |
|
| 7,757 |
|
| 19,844 |
|
General and administrative expenses | 752 |
|
| 1,145 |
|
| 1,526 |
|
| 3,342 |
|
| 5,738 |
|
Total depreciation and amortization expense | 14,763 |
| | 31,213 |
| | 44,565 |
| | 56,779 |
| | 90,796 |
|
Acquisition-related costs | | | | | | | | | |
General and administrative expenses | — |
|
| — |
|
| — |
|
| 2,921 |
|
| 6 |
|
Total acquisition-related costs | — |
| | — |
| | — |
| | 2,921 |
| | 6 |
|
Acquisition-related deferred price consideration |
| |
| |
| |
| |
|
Research and development expense | 3,137 |
|
| 950 |
|
| 324 |
|
| 85 |
|
| — |
|
Sales and operations expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
General and administrative expenses | — |
|
| — |
|
| (2,218 | ) |
| — |
|
| — |
|
Total acquisition-related deferred price considerations | 3,137 |
| | 950 |
| | (1,894 | ) | | 85 |
| | — |
|
Restructuring | | | | | | | | | |
Cost of revenue | — |
|
| — |
|
| — |
|
| — |
|
| 2,497 |
|
Research and development expenses | — |
|
| — |
|
| — |
|
| — |
|
| 2,911 |
|
Sales and operations expenses | — |
|
| — |
|
| — |
|
| — |
|
| 1,825 |
|
General and administrative expenses | — |
|
| — |
|
| — |
|
| — |
|
| 123 |
|
Total Restructuring | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,356 |
|
(a) Includes acquisition-related amortizationthe average of intangible assets of $3.9 million, $6.3 million, $4.1 million and $17.7 million as of December 31, 2014, 2015, 2016 and 2017 respectively.
(b) Excludes $0.7 million disclosed as restructuring costs as of December 31, 2017.
(2) For the annual distributions on the ADSs or ordinary shares received during the preceding three years ended December 31, 2013, 2014, 2015, 2016 and 2017, this excludes $0.4 million, $1.3 million, $2.7 million, $5.1 million and $5.4 million, respectively, of net income availableor the U.S. Holder’s holding period, whichever is shorter, that distribution would be subject to non-controlling interests in our Japanese subsidiary held by Yahoo! Japan.
Reconciliation from Non-GAAP Operating Expenses to Operating Expenses under GAAP:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands) |
Research and development expenses | $ | (42,716 | ) | | $ | (60,075 | ) | | $ | (86,807 | ) | | $ | (123,649 | ) | | $ | (173,925 | ) |
Equity awards compensation expense | 2,721 |
| | 3,682 |
| | 6,520 |
| | 12,108 |
| | 21,093 |
|
Depreciation and amortization expense | 1,215 |
| | 4,949 |
| | 7,995 |
| | 7,211 |
| | 11,226 |
|
Pension service costs | 145 |
| | 167 |
| | 163 |
| | 211 |
| | 621 |
|
Acquisition-related deferred price consideration | 3,137 |
| | 950 |
| | 324 |
| | 85 |
| | — |
|
Restructuring | — |
| | — |
| | — |
| | — |
| | 2,911 |
|
Non-GAAP - Research and development expenses | $ | (35,498 | ) | | $ | (50,327 | ) | | $ | (71,805 | ) | | $ | (104,034 | ) | | $ | (138,074 | ) |
Sales and operations expenses | (109,953 | ) | | (176,927 | ) | | (229,530 | ) | | (282,853 | ) | | (380,649 | ) |
Equity awards compensation expense
| 3,719 |
| | 12,291 |
| | 11,678 |
| | 16,838 |
| | 31,386 |
|
Depreciation and amortization expense | 2,379 |
| | 3,664 |
| | 5,178 |
| | 7,757 |
| | 19,844 |
|
Pension service costs | 139 |
| | 187 |
| | 153 |
| | 144 |
| | 247 |
|
Restructuring | — |
| | — |
| | — |
| | — |
| | 1,825 |
|
Non-GAAP - Sales and operations expenses | (103,716 | ) | | (160,785 | ) | | (212,521 | ) | | (258,114 | ) | | (327,347 | ) |
General and administrative expenses | (41,681 | ) | | (64,723 | ) | | (79,145 | ) | | (117,469 | ) | | (127,077 | ) |
Equity awards compensation expense
| 2,690 |
| | 3,628 |
| | 5,791 |
| | 14,313 |
| | 19,872 |
|
Depreciation and amortization expense | 752 |
| | 1,145 |
| | 1,526 |
| | 3,342 |
| | 5,738 |
|
Pension service costs
| 100 |
| | 150 |
| | 125 |
| | 169 |
| | 363 |
|
Acquisition-related costs | — |
| | — |
| | — |
| | 2,921 |
| | 6 |
|
Acquisition-related deferred price consideration | — |
| | — |
| | (2,218 | ) | | — |
| | — |
|
Restructuring | — |
| | — |
| | — |
| | — |
| | 123 |
|
Non-GAAP - General and administrative expenses | (38,139 | ) | | (59,800 | ) | | (73,921 | ) | | (96,724 | ) | | (100,975 | ) |
Total Operating expenses | (194,350 | ) | | (301,725 | ) | | (395,482 | ) | | (523,971 | ) | | (681,651 | ) |
Equity awards compensation expense
| 9,130 |
| | 19,601 |
| | 23,989 |
| | 43,259 |
| | 72,351 |
|
Depreciation and Amortization expense | 4,346 |
| | 9,758 |
| | 14,699 |
| | 18,310 |
| | 36,808 |
|
Pension service costs
| 384 |
| | 504 |
| | 441 |
| | 524 |
| | 1,231 |
|
Acquisition-related costs | — |
| | — |
| | — |
| | 2,921 |
| | 6 |
|
Acquisition-related deferred price consideration | 3,137 |
| | 950 |
| | (1,894 | ) | | 85 |
| | — |
|
Restructuring | — |
| | — |
| | — |
| | — |
| | 4,859 |
|
Total Non-GAAP Operating expenses | $ | (177,353 | ) | | $ | (270,912 | ) | | $ | (358,247 | ) | | $ | (458,872 | ) | | $ | (566,396 | ) |
Non-GAAP Operating Expenses are our consolidated operating expenses adjusted to eliminate the impact of depreciation and amortization, equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. We believe Non-GAAP Operating Expenses reflects our ongoing operating expenses in a manner that allows for meaningful period-to-period comparisons and analysis of trends in our business. As a result, we believe that Non-GAAP Operating Expenses provides useful information to investors in understanding and evaluating our core operating performance and trendstaxation in the same manner as gain, described immediately above.
If we are a PFIC for any taxable year during which a U.S. Holder holds our managementADSs or ordinary shares and any of our non-U.S. affiliated entities are also PFICs, the holder will be treated as owning a proportionate amount (by value) of the shares of each such non-U.S. affiliate classified as a PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiaries.
A U.S. Holder can avoid certain of the adverse rules described above by making a mark-to-market election with respect to its ADSs or ordinary shares, provided that the ADSs or ordinary shares are “marketable.” ADSs or ordinary shares will be marketable if they are traded in comparing financial results across periods.other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a “qualified exchange” or other market within the meaning of applicable Treasury regulations. We expect that our ADSs, but not our ordinary shares, will continue to be listed on the Nasdaq Global Select Market, which is a qualified exchange for these purposes, but no assurances may be given in this regard. Consequently, assuming that our ADSs are regularly traded, if a U.S. Holder holds our ADSs, it is expected that the mark-to-market election would be available to such holder were we to be or become a PFIC. In addition, Non-GAAP Operating Expenses isbecause, as a key componenttechnical matter, a mark-to-market election cannot be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such holder’s indirect interest in calculating Adjusted EBITDA, which is oneany investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
If a U.S. Holder makes the mark-to-market election, it will recognize as ordinary income any excess of the key measures we use to provide its quarterlyfair market value of the ADSs or ordinary shares at the end of each taxable year over their adjusted tax basis, and annual business outlookwill recognize an ordinary loss in respect of any excess of the adjusted tax basis of the ADSs or ordinary shares over their fair market value at the end of the taxable year (but only to the investment community.
Consolidated Statementsextent of Financial Position Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| (in thousands) |
Cash and cash equivalents | $ | 323,182 |
|
| $ | 351,827 |
|
| $ | 353,537 |
|
| $ | 270,317 |
|
| $ | 414,111 |
|
Total assets | $ | 539,380 |
|
| $ | 686,510 |
|
| $ | 841,719 |
|
| $ | 1,211,186 |
|
| $ | 1,531,300 |
|
Trade receivables, net of allowances for doubtful accounts | $ | 120,868 |
|
| $ | 192,595 |
|
| $ | 261,581 |
|
| $ | 397,244 |
|
| $ | 484,101 |
|
Total financial liabilities | $ | 15,605 |
|
| $ | 14,780 |
|
| $ | 10,428 |
|
| $ | 85,580 |
|
| $ | 3,657 |
|
Total liabilities | $ | 173,819 |
|
| $ | 270,155 |
|
| $ | 362,696 |
|
| $ | 601,309 |
|
| $ | 633,602 |
|
Total equity | $ | 365,561 |
|
| $ | 416,355 |
|
| $ | 479,023 |
|
| $ | 609,877 |
|
| $ | 897,698 |
|
OtherFinancialthe net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes the election, the U.S. Holder’s tax basis in the ADSs or ordinary shares will be adjusted to reflect the income or loss amounts recognized. Any gain recognized on the sale or other disposition of ADSs or ordinary shares in a year when we are a PFIC will be treated as ordinary income and Operating Data:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands, except number of clients) |
Number of clients | 5,072 |
|
| 7,190 |
|
| 10,198 |
|
| 14,468 |
|
| 18,118 |
|
Revenue ex-TAC (3) | $ | 237,659 |
|
| $ | 402,757 |
|
| $ | 534,017 |
|
| $ | 730,235 |
|
| $ | 941,136 |
|
Adjusted net income (4) | $ | 14,472 |
|
| $ | 70,846 |
|
| $ | 89,835 |
|
| $ | 136,777 |
|
| $ | 183,311 |
|
Adjusted EBITDA (5) | $ | 41,573 |
|
| $ | 105,352 |
|
| $ | 143,435 |
|
| $ | 224,572 |
|
| $ | 309,584 |
|
(3) We define Revenue ex-TAC (Traffic Acquisition Costs)any loss will be treated as our revenue excluding traffic acquisition costs, or TAC, generated overan ordinary loss (but only to the applicable measurement period. Revenue ex-TAC isextent of the net amount of income previously included as a result of the mark-to-market election). If a U.S. Holder makes such a mark-to-market election, tax rules that apply to distributions by corporations which are not a measure calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC in this Form 10-K because it is a key measure usedPFICs would apply to distributions by our management and board of directors to evaluate operating performance and generate future operating plans. In particular, we believeus (except that the elimination of TAC from revenue can providelower applicable capital gains rate for qualified dividend income would not apply).If a useful measure for period-to-period comparisons of our core business. Accordingly,U.S. Holder makes a valid mark-to-market election, and we believe that Revenue ex-TAC provides useful informationsubsequently cease to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC has limitations as an analytical tool, and you should not consider it in isolation orbe classified as a substitute for analysis of our financial results as reported underPFIC, such U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may addressHolder will not be required to take into account the impact of TAC differently; and (b) other companies may report Revenue ex-TACmark-to-market income or similarly titled measures but calculate them differently, which reduces their usefulnessloss described above during any period that we are not classified as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC alongside our other U.S. GAAP financial results, including revenue . The following table presents a reconciliation of Revenue ex-TACPFIC.
In addition, in order to revenue,avoid the most directly comparable U.S. GAAP measure, for each of the periods indicated:
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands) |
Revenue | $ | 589,418 |
|
| $ | 988,249 |
|
| $ | 1,323,169 |
|
| $ | 1,799,146 |
|
| $ | 2,296,692 |
|
Adjustment: | | | | | | | | | |
Traffic acquisition costs | (351,759 | ) |
| (585,492 | ) |
| (789,152 | ) |
| (1,068,911 | ) |
| (1,355,556 | ) |
Revenue ex-TAC | $ | 237,659 |
| | $ | 402,757 |
| | $ | 534,017 |
| | $ | 730,235 |
| | $ | 941,136 |
|
(4) We define Adjusted Net Income as our net income adjusted to eliminate the impact of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration and the tax impactapplication of the foregoing adjustments. Adjusted Net Income is notrules, a measure calculatedU.S. person that owns shares in accordancea PFIC for U.S. federal income tax purposes may make a “qualified electing fund” (“QEF”) election with respect to such PFIC, if the PFIC provides the information necessary for such election to be made. If a U.S. GAAP. We have included Adjusted Net Income in this Form 10-K because it isperson makes a key measure used by our managementQEF election with respect to a PFIC, the U.S. person will be currently taxable on its pro rata share of the PFIC’s ordinary earnings and board of directors to evaluate operating performance, generate future operating plansnet capital gain (at ordinary income and make strategic decisions regarding the allocation of capital. In particular, we believecapital gain rates, respectively) for each taxable year that the elimination of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costsentity is classified as a PFIC and deferred price considerationwill not be required to include such amounts in income when actually distributed by the PFIC. No assurances can be given that we will provide holders with the information necessary for U.S. Holders to make a QEF election.
In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns ADSs or ordinary shares during any year in which we are a PFIC, the U.S. Holder must file annual reports, containing such information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, with the U.S. Holder’s federal income tax return for that year, unless otherwise specified in the instructions with respect to such form.
U.S. Holders should consult their tax advisers concerning our potential PFIC status and the tax impactpotential application of the foregoing adjustments in calculating Adjusted Net Income can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Net Income provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported underPFIC rules.
THE PRECEDING SUMMARY OF U.S. GAAP. Some of these limitations are: (a) Adjusted Net Income does not reflect the potentially dilutive impact of equity-based compensation or the impact of certain acquisition related costs; and (b) other companies, including companies in our industry, may calculate Adjusted Net Income or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted Net Income alongside our otherFEDERAL INCOME TAX CONSIDERATIONS IS INTENDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE TAX ADVICE. U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparableHOLDERS SHOULD CONSULT THEIR TAX ADVISORS AS TO THE U.S. GAAP measure, for each of the periods indicated:FEDERAL, STATE, LOCAL, AND NON-U.S. TAX CONSIDERATIONS GENERALLY APPLICABLE TO THEM OF THE OWNERSHIP AND DISPOSITION OF OUR ADSs OR ORDINARY SHARES IN THEIR PARTICULAR CIRCUMSTANCES.
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands) |
Net income | $ | 1,839 |
|
| $ | 46,896 |
|
| $ | 62,276 |
|
| $ | 87,329 |
|
| $ | 96,659 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity awards compensation expense (a) | 9,130 |
|
| 19,601 |
|
| 23,989 |
|
| 43,259 |
|
| 72,351 |
|
Amortization of acquisition-related intangible assets | 464 |
|
| 3,902 |
|
| 6,342 |
|
| 4,131 |
|
| 17,731 |
|
Acquisition-related costs | — |
|
| — |
|
| — |
|
| 2,921 |
|
| 6 |
|
Acquisition-related deferred price consideration | 3,137 |
|
| 950 |
|
| (1,894 | ) |
| 85 |
|
| — |
|
Restructuring costs | — |
|
| — |
|
| — |
|
| — |
|
| 7,356 |
|
Tax impact of the above adjustments | (98 | ) |
| (503 | ) |
| (878 | ) |
| (948 | ) |
| (10,792 | ) |
Adjusted net income | $ | 14,472 |
| | $ | 70,846 |
| | $ | 89,835 |
| | $ | 136,777 |
| | $ | 183,311 |
|
(a) Excludes $0.7 million disclosed as restructuring costs as of December 31, 2017.
(5) We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted EBITDA in this Form 10-K because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated: |
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| (in thousands) |
Net income | $ | 1,839 |
|
| $ | 46,896 |
|
| $ | 62,276 |
|
| $ | 87,329 |
|
| $ | 96,659 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
Financial expense (income) | 9,117 |
|
| (11,390 | ) |
| 4,541 |
|
| 546 |
|
| 9,534 |
|
Provision for income taxes | 3,203 |
|
| 17,578 |
|
| 9,517 |
|
| 33,129 |
|
| 31,651 |
|
Equity awards compensation expense (a) | 9,130 |
|
| 19,601 |
|
| 23,989 |
|
| 43,259 |
|
| 72,351 |
|
Pension service costs | 384 |
|
| 504 |
|
| 441 |
|
| 524 |
|
| 1,231 |
|
Depreciation and amortization expense | 14,763 |
|
| 31,213 |
|
| 44,565 |
|
| 56,779 |
|
| 90,796 |
|
Acquisition-related costs | — |
|
| — |
|
| — |
|
| 2,921 |
|
| 6 |
|
Acquisition-related deferred price consideration | 3,137 |
|
| 950 |
|
| (1,894 | ) |
| 85 |
|
| — |
|
Restructuring costs | — |
|
| — |
|
| — |
|
| — |
|
| 7,356 |
|
Total net adjustments | 39,734 |
| | 58,456 |
| | 81,159 |
| | 137,243 |
| | 212,925 |
|
Adjusted EBITDA | $ | 41,573 |
| | $ | 105,352 |
| | $ | 143,435 |
| | $ | 224,572 |
| | $ | 309,584 |
|
(a) Excludes $0.7 million disclosed as restructuring costs as of December 31, 2017.Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K.
Overview
We are a global technology company 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 technology company.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 helphave 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 companiesoutcomes for our customers – in the form of product sales for retailers, brands and brand manufacturers acquire, convertmarketers and re-engage their customers, using shopping data, predictive technology and massive consumer reach.advertising revenues for media owners. We strive to deliver post-click salesdifferentiate 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 our clientsreach and engage consumers in real time with highly relevant digital advertisements ("ads") across different marketing objectives to meet to their targeted return on investment.all stages of the consumer journey. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive sales for our clients, we activate our data assets through proprietary machine-learning algorithms to engage consumers in real time through the pricing and delivery of highly relevant digital advertisements, across devices and environments. By pricing our offering
Our focus is on a cost-per-click and measuring our value based on post-click sales, we make the return on investment transparent and easy to measure for our clients.
commerce media. Our clients include somemany of the largest and most sophisticated consumer brands, commerce companies and media owners in the world, along with world-class brand manufacturers.world. We partner with them to capture user activity on their websites and/orand mobile applications ("apps"), which we define as digital properties, and optimizeleverage that data to deliver superior ad performance to help marketers, brands and agencies reach their campaign objectives. This includes powering the performanceretail media ecosystem as we enable brands to reach shoppers with relevant ads near the digital point of their advertisements basedsale on that activityretailer and other data. marketplace websites while enabling retailers to add a new revenue stream.
Demonstrating the depth and scale of our data, we collected data on over $615 billion$1 trillion in online sales transactions1 on our clients' digital properties in the year ended December 31, 2017, whether or not a consumer saw or clicked on an advertisement displayed by Criteo.2021. Based on this data and our other assets, we delivered 1.8 trillion targeted advertisements that generated over 10 billion clicks1ads in the year ended December 31, 2017. Based on these clicks, our clients generated approximately $29 billion in post-click sales1 during this period. A post-click sale is defined as a purchase made by a user from one of our clients' digital properties within a certain period of time following the user clicking on an advertisement we delivered for that client. This period of time varies by client, but is a maximum of 30 days. We believe post-click sales are a key performance indicator that our clients generally use to measure the effectiveness of our offering in driving sales and the return on their marketing investment.
2021. As of December 31, 2017,2021, we served more than 18,000close to 22,000 clients and, in each of the last three years, our average client retention rate, as measured on a quarterly basis, was approximately 90%1.We.
We serve a wide range of clients and our revenue is not concentrated within any single client or group of clients. In 2015, 20162021, 2020 and 2017,2019, our largest client represented 1.9%7.0, 3.5%, 2.0% and 1.9%2.8% of our revenue, respectively, and in 2017,2021, 2020 and 2019, our largest 10 clients represented 11.2%16.6%, 13.7% and 11.4% of our revenue in the aggregate.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.
Our commerce marketing product portfolio is currently comprised of four products: Criteo Dynamic Retargeting, Criteo Customer AcquisitionBETA, Criteo Audience MatchBETA and Criteo Sponsored Products. In the third quarter of 2017, we decided to discontinue our Criteo Predictive Search offering, based on client and country-specific circumstances. All products leverage the same technology in the Criteo Engine, which is comprised of three key components: Product Recommendation, Predictive Bidding and Kinetic Design.
We operate in 9896 countries through a network of 3129 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 93.5%93.2% of our revenue for year ended December 31, 2017.
___________________________________________________
1 Excluding Criteo Sponsored Products.
2021.
The Company's foreign currency risk exposure to the British pound, the Japanese yen, the Brazilian real and the U.SU.S. dollar against the euro (the euro still remains the Group'sCompany's functional currency) is described in Note BItem 7 note B. Liquidity and Capital resourcesResources to our Management's Discussion and Analysis included elsewhere in this Form 10-K.
1 Excluding Criteo Retail Media
Our financial results include:
revenue•Revenue of $1,323.2$2,254.2 million, $1,799.1$2,072.6 million and $2,296.7$2,261.5 million for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively;
revenue excluding traffic acquisition costs, which we refer to as Revenue•Gross profit of $781.9 million, $688.0 million and $829.0 million for the years ended December 31, 2021, 2020 and 2019, respectively;
•Contribution ex-TAC, which is a non-U.S. GAAP financial measure, of $534.0$920.8 million, $730.2$825.0 million and $941.1$946.6 million for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively;
net income•Net Income of $62.3$137.6 million, $87.3$74.7 million and $96.7$96.0 million for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively; and
•Adjusted EBITDA, which is a non-U.S. GAAP financial measure, of $143.4$322.5 million, $224.6$251.0 million and $309.6$299.0 million for the years ended December 31, 2015, 20162021, 2020 and 2017,2019, respectively.
Please see footnotes 3note that reconciliations of Gross Profit to Contribution ex-TAC and 5 to the Other Financial and Operating Data table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue ex-TAC to revenue, Adjusted EBITDA to net income and Adjusted Net Income to net income,Adjusted EBITDA - in each case the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP.generally accepted accounting principles in the United States or "U.S. GAAP," are presented below.
We are focused on maximizing RevenueContribution ex-TAC. We believe this focus builds sustainable long-term value for our business and fortifies a number of our competitive strengths, including a highly liquid marketplace for Display Advertising.digital advertising inventory. As part of this focus, we seek to maximize our percentage of overall marketing spend in the Display Advertisingdigital advertising market over the long-term. In addition, this focus enriches liquidity for both advertisers and publishers resulting in more effective advertising for clients, better monetization for publishers and more relevant advertisements for consumers. We believe our results of operations reflect this focus.
Acquisitions
On November 9, 2016,May 18, 2021, we completed the acquisition of all of the outstanding shares of Hooklogic,Doobe In Site Ltd. ("Mabaya"), a New York-basedleading retail media technology company connecting many of the world's largestthat powers sponsored products and retail media monetization for major ecommerce retailers with consumer brand manufacturers. We now offer HookLogic's products under the "Criteo Sponsored Products" name.marketplaces globally.
On May 31, 2016, we acquired all of the outstanding shares of Monsieur Drive, a Paris-based company building advertising products for the consumer packaged goods vertical.
In February 2015,December 2021, we acquired DataPop,executed a Los Angeles-basedpurchase agreement to acquire the business of IPONWEB Holding Limited ("IPONWEB"), a market-leading AdTech company specializing in the optimizationwith world-class media trading capabilities, for $380 million comprised of shopping campaigns on large search engines. We launched Criteo Predictive Search in October 2016.
In April 2014, we completed the acquisition of AdQuantic, a bidding technology company headquartered in Paris. Through the acquisition of AdQuantic, we added a team of seven experts in bidding technology, reinforcing our focus on research and development.
In February 2014, we acquired Tedemis, a provider of real-time personalized e-mail marketing solutions that help advertisers turn web visitors into customers.
Transition to U.S. GAAP and Change in Reporting Currency
As of June 30, 2015, we no longer met the requirements to qualify as a foreign private issuer under the Exchange Act. As a result, we began reporting as a domestic registrant as of January 1, 2016 and we are required under current SEC rules to prepare our financial statements in accordance with U.S. GAAP, rather than IFRS, and to present our financial information in U.S. dollars instead of euros. The transition from consolidated financial statements under IFRS to U.S. GAAP only impacted the presentation of our consolidated statement of financial position (order of liquidity) and of our consolidated statementmix of cash flows (effect of exchange rate changes on cash and cash equivalents). The functional currencytreasury shares of the Company, remains the euro, while our reporting currency changed from the euro to the U.S. dollar. Consequently, since we incur portions of our expenses and derive revenues in currencies other than the euro, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign exchange risk exposure also arises from intra-company transactionscertain adjustments including for working capital, other current assets and financingcurrent liabilities and net indebtedness, with subsidiaries that have a functional currency different than the euro.
The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statements of income, statements of comprehensive income and statements of cash flow of such consolidated entities are translated at the average periodtransaction expected to date exchange rate. The resulting translation adjustments are included in equity under the caption “accumulated other comprehensive income”close in the consolidated statementsfirst quarter of changes in equity.2022. The transaction is subject to customary closing conditions.
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A. | Operating Results.
A.Operating Results. |
Basis of Presentation
The key elements of our results of operations include:
Revenue
We sell personalized display advertisements on Display Advertising featuring product-level recommendations either directly to clients or to advertising agencies, which we collectively refer to asagencies. Historically, the Criteo model has focused solely on converting our clients. We generate revenue generally when a user clicks on a banner advertisement of one of our clients. While accessing the supply of inventory in sufficient quantity and quality from our publisher partners is a critical requirement forclients' website visitors into customers, enabling us to successfully conductcharge our business,clients only when users engage with an ad we do not generate any revenue directly fromdeliver, usually by clicking on it. More recently, we have expanded our relationships with publishers.solutions to address a broader range of marketing goals for our clients.
We recognize revenueoffer 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 the delivery of advertisementsconsumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on Display Advertising in the period in which the advertisements are delivered. Specifically, we recognize revenue once the consumer clickstheir own digital property or on the personalized banner displayed by us on the client’s website. Revenue is valued at the fair value of the amount received. Rebates and discounts granted to clients, along with free or extended advertising campaigns, are recorded as a deduction from revenue. Essentially all of our revenue in each of 2015, 2016 and 2017 was derived from advertising campaigns sold on a CPC basis. In the specific case of Criteo Sponsored Products, we generally act as principal and as a result, we report revenue earned and costs incurred related to these transactions on a gross basis. When we do not (i) set the price, (ii) select the publisher site the advertisement is placed on, (iii) take responsibility for the acceptability of the service and (iv) bear the credit risk, we report revenue earned and costs incurred related to these transactions on a net basis.open Internet, that address multiple marketing goals.
We sell commerce marketing campaignsalso have multiple pricing models which now include percentage of spend models in addition to clients generally through insertion orders that are cancellable upon short noticecost-per-click, cost-per-install and without penalty. We generally bill our clients on a monthly basis for each campaign run during the prior month. The monthly fee is based on the campaign’s various real-time CPCs for that month multiplied by the number of clicks generated by users for that month for such CPCs.
As we further expand our geographic footprint, acquire new clients and grow our business with existing clients in all markets, address new marketing objectives for clients, develop new products and expand our business into new marketing channels and industry verticals, we expect our revenue to continue to increase.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.Costs. Traffic acquisition costs consist primarily of purchases of impressions from publishers.publishers on a CPM basis. We purchase impressions directly from publishers or third-party intermediaries, such as advertisingadvertisement 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 statementsConsolidated Statements of financial positionFinancial Position as accounts payable and accrued expenses.
For our Criteo Dynamic Retargeting, Criteo Customer Acquisition BETA and Criteo Audience Match BETA products, we purchase inventory programmatically from our direct publisher partners, through standard terms and conditions for the purchase of Display Advertising inventory. Pursuant to such arrangements, we purchase impressions on a CPM basis for users that Criteo recognizes on the publishers’ network. Such arrangements are cancellable upon short notice and without penalty. As a general rule, our agreements with publishers do not contain spend commitments. We may only enter in commitments to purchase a defined volume of impressions if such commitments are specifically subject to corresponding performance commitments from the publisher. We may require our publishers to deliver higher volumes of impressions, with our commitment to buy being linked to specified performance commitments from the publisher. We may also require our publishers to call us first for the advertising serving, thereby granting us privileged access to qualified digital display advertising inventory, and we may sign more exclusive deals with publishers.
Over the past few years, real-time automated buying platforms and bidding exchanges have gained significant traction in the Display Advertising market, resulting in a significant increase in the supply of inventory available through such platforms. As part of this expansion, we have integrated our buying technology with the leading advertising exchanges, developed our own comprehensive inventory management platform, and more recently deployed our own header bidding technology with large publishers, that we call Criteo Direct Bidder. We believe the combination of our extensive direct publisher relationships and access to leading advertising exchanges enhances the breadth and depth of our accessible advertising inventory and results in deep liquidity for us. We believe that this contributes to increasing the strength of our offering with our clients.trade payables.
For solutions within Criteo Sponsored Products,Retail Media, we pay for the inventory of publisherour retailer partners based on a revenue share,sharing basis, effectively paying the publishersretailers a portion of the click-based revenue generated by potential customers clickinguser 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—RevenueTrends - Contribution ex-TAC" in Item 7.D—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, andthe cost of data purchased from third parties that we leverage in our offerings. We intend to continue to invest additional resources in increasing the capacity of our hosting services infrastructure, and as we enter new markets, we may make additional investments in the acquisition of relevant third-party data.digital taxes. The Company does not build or operate its own data centers and none of its researchResearch and development personnel isDevelopment employments are dedicated to revenue generating activities. As a result, we do not include the costs of such personnel in other cost of revenue.
Operating Expenses
Operating expenses consist of research and development, sales and operations, and general and administrative expenses. Salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs are the most significant components of each of these expense categories. We grewThe number of employees increased from 1,3002,755 employees at January 1, 20152020 to 2,7642,781 employees at December 31, 2017, and we expect to continue to hire a significant number of new employees in order to support our anticipated revenue growth.2021.
We include equity awards compensation expense in connection with grants of share options, warrants, and restricted share units ("RSUs") in the applicable operating expense category based on the respective equity award recipient’s function (Research and development, Sales and operations, General and administrative).
Research and Development Expense. Research and development expense consists primarily of personnel-related costs for our employees working in the engine, platform, site reliability engineering, scalability, infrastructure, engineering program management, product, analytics and other teams, including salaries, bonuses, equity awards compensation and other personnel related costs. Our research and development function was supplemented in January 2013 to include a dedicated product organization following the appointment of our Chief Product Officer. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third-party development resources, allocated overhead, including internal IT and depreciation and amortization costs. These expenses are partially offset by the French research tax credit that is conditional upon the level of our expenditures in research and development. For additional discussion of the French research tax credit, see the discussion below titled “—Provision for Income Taxes.”
Our research and development efforts are focused on enhancing the performance of our solution and improving the efficiency of the services we deliver to our clients and publisher partners. All development costs, principally headcount-related costs, are expensed as management determines that technological feasibility is reached, shortly before the release of the developed products or features. As a result, the development costs incurred after the establishment of technological feasibility and before the release of those products or features are not material and, accordingly, are expensed as incurred.
The number of employees in research and development functions grewincreased from 250681 at January 1, 20152020 to 701682 at December 31, 2017. We expect research and development expenses to continue to increase in absolute dollars but remain fairly constant as a percentage of our revenue. 2021.
We believe our continued investment in research and development to be critical to maintaining and improving our technology within the Criteo Commerce Marketing Ecosystem,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 grewincreased from 8331,578 at January 1, 20152020 to 1,5951,596 at December 31, 2017.2021. In order to continue to growexpand our business, geographic footprint and brand awareness, we expect to continue to investmake targeted investments in our resources in some areas of our sales and operations, in particular by increasing the number of sales and account strategy teams in low penetrated geographic markets and in our midmarket organization. As a result,operations. Yet, we expect sales and operations expenses to increase in absolute dollars as we invest to acquire new clients, retain existing ones and grow revenue from existing clients, but to decreaseremain fairly flat as a percentage of revenue over time as we scale and automate our operational processes, and increase the productivity of our sales and operations teams.
General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs for our administrative, legal, information technology, human resources, facilities and finance teams. Additional expenses included in this category include travel-related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated overhead, including internal IT and depreciation and amortization costs.
The number of employees in general and administrative functions grewincreased from 217496 at January 1, 20152020 to 468503 at December 31, 2017.2021. We expect our general and administrative expense to increase in absolute dollars as we continue to support our growth, but to decrease as a percentage of revenue over time as we scale and increase the productivity of our general and administrative teams.
Financial and Other Income (Expense)
Financial income (expense)and Other Income (Expense) primarily consists of:
exchange differences arising on the balance of proceeds of our initial public offering completed in October 2013, received in U.S. dollars that have been hedged through put and collar instruments since 2013 and which we used and sold in 2015. The translation of the U.S. dollar proceeds into euros (the Company's functional currency) according to the closing foreign exchange rate generated an exchange difference partially offset by the cost of the related hedging instruments. This net exchange difference in euro was then translated into U.S. dollars (the Company's reporting currency) according to the average euro/U.S. dollar exchange rate for the periods ended December 31, 2013 and 2014.
•exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros (the Company's functional currency). We are exposed to changes in exchange rates primarily in the United States,U.S., the United Kingdom, Japan, Korea and Brazil. The U.S. dollar, the British pound, the Korean won, the Japanese yen and the Brazilian real are our most significant foreign currency exchange risks. At December 31, 2017,2021, our exposure to foreign currency risk was centralized at parent company level and hedged. These exchange differences in euro are then translated into U.S. dollars (the Company's reporting currency) according to the average euro/U.S. dollar exchange rate.
•interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt loan agreements and revolving credit facilities.facilities ("RCFs").
•Proceeds from sale of data center equipment to third-parties, made as part of Criteo's data center update program.
•Dividends received from an investment made in 2018.
We monitor foreign currency exposure and look to mitigate exposures through normal business operations and hedging strategies.
Provision for Income Taxes
We are subject to potential income taxes in France, the United StatesU.S. and numerous other jurisdictions. We recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable.
Our effective tax rates differ from the statutory rate applicable to us primarily due to valuation allowance on deferred tax assets, differences between domestic and foreign jurisdiction tax rates, Research Tax Credit (RTC) offsets, which are non-taxable items, potential tax audit provision settlements, share-based compensation expenses that are non-deductible in some jurisdictions under certain circumstances, and transfer pricing adjustments. We license access to our technology to our subsidiaries and charge a royalty fee to these subsidiaries for such access. In France, we benefit from a reduced tax rate of 15%10% on a large portion of this technology royalty income.
In 2011,Although we underwent abelieve that we have adequately reserved for our uncertain tax inspection bypositions (including net interest and penalties), we can provide no assurance that the Frenchfinal tax authorities covering fiscal years 2008 and 2009. At the endoutcome of 2011, we received athese matters will not be materially different. No uncertain tax assessment notice for which a provision has been recognized for $0.5 million. Pursuant to another tax inspection in 2013, no significant reassessment was received. The provision was released upon reception of the tax notificationpositions were identified as of December 31, 2015.
On September 27, 2017, we received a draft notice of proposed adjustment from the Internal Revenue Service ("IRS") audit of Criteo Corp. for the year ended December 31, 2014, confirmed by the definitive notice dated February 8, 2018. If the IRS prevails in its position, it could result in an additional federal tax liability of an estimated maximum aggregate amount of $15.0 million, excluding relative fees, interest and penalties. We strongly disagree with the IRS's position as asserted in the draft notice of proposed adjustment and intend to contest it.2021.
Critical Accounting Policies and Significant Judgments and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most
An accounting policy is deemed to be critical if it requires an accounting policiesestimate to be made on assumptions about matters that are summarized below.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 11. 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 sell commerce marketing campaigns on Display Advertising, featuring personalized product-level recommendations, eitherrecognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients. For all our commerce marketing products,clients, in an amount that reflects the consideration to which we generate revenue generally when a user clicks on the banner advertisement we deliverexpect to be entitled to in exchange for our clients. We generally price our campaigns on a CPC model based on the number of clicks generated by users on the advertisement we deliver in each campaign.
Revenue is recognized when the related services are delivered based on the specific terms of the contract, which are primarily based on specified CPCs and related campaign budgets. We recognize revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the client reflecting the terms and conditions under which the services will be provided; (2) services have been provided or delivery has occurred; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. Collectability is assessed based on a number of factors, including the creditworthiness of a client, the size and nature of a client’s digital property and transaction history. Amounts billed or collected in excess of revenue recognized are included as deferred revenue. An example of this deferred revenue would be arrangements where clients request or are required by us to pay in advance of delivery.those services.
For all our products,revenue generated from arrangements that involve third-party publishers, there is judgment in evaluating whether we recognizeare the principal, and report revenue from the delivery of advertisements on Display Advertising in the period in which the advertisements are delivered. Specifically, we recognize revenue once the consumer clicks on the personalized banner displayed by us on the client’s website. Revenue is valued at the fair value of the amount received. Rebates and discounts granted to clients, along with free or extended advertising campaigns, are recorded as a deduction from revenue. Essentially all of our revenue in each of 2015, 2016 and 2017 was derived from advertising campaigns sold on a CPC basis.
The determination of whether revenue should be reported on a gross basis, or the agent, and report revenue on a net basis is based on anbasis. 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 acting asconsidered the principal or an agent in our transactions. In determining whether we act as the principal or an agent, we follow the accounting guidance for principal-agent considerations. The determination of whether we are acting as a principal or an agent in a transaction involves judgmentcould impact our revenue and is based on an evaluationcost of the terms of each arrangement. While none of the factors individually are considered presumptive or determinative, because we are the primary obligor and are responsible for (1) identifying and contracting with third-party clients, (2) establishing the selling prices of the display advertisements sold, (3) performing all billing and collection activities, including retaining credit risk, and (4) bearing sole responsibility for fulfillment of the advertising and the inventory risk, we act as the principal in these arrangements and therefore report revenue earned and costs incurred related to these transactions on a gross basis. In the specific case of Criteo Sponsored Products, we may act as the principal or as the agent dependingrecognized on the typeconsolidated statements of service sold to the brand manufacturer client. As a result, depending on the service sold through Criteo Sponsored Products, we report revenue earned and costs incurred related to these transactions either on a gross basis or on a net basis.income.
Trade Receivables, Net of Allowances for Doubtful Accounts
We carry ourapply Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost that an entity does not expect to collect over the asset's contractual life, considering past events, current conditions, and reasonable and supportable forecasts of future economic conditions.
For accounts receivable measured at net realizable value. On a periodic basis, our management evaluates our accounts receivableamortized cost, we use aging analysis, and determines whetherprobability of default methods to provide an allowance or if any accounts should be written downevaluating and charged to expense as a bad debt. The evaluation is based on a past history of collections, currentestimating the expected credit conditions, the length of time the trade receivable is past due and a past history of write downs. A trade receivable is considered past due if we have not received payments based on agreed-upon terms. A higher default rate than estimated or a deterioration in our major clients’ creditworthiness could have an adverse impact on our future results. Allowances for doubtful accounts on trade receivables are recorded in “Sales and Operations” in our consolidated statements of income. We generally do not require any security or collateral to support our trade receivables. The amount of allowance for doubtful accounts charged to our consolidated statements of income for the years ended December 31, 2015, 2016 and 2017 was $2.7 million, $9.9 million and $13.3 million, respectively and represented 1.1%, 2.5% and 2.7% of our trade receivables, net of allowances, as of December 31, 2015, 2016, and 2017, respectively.losses.
Deferred Tax Assets
Deferred taxes are recorded on all temporary differences between the financial reporting and tax bases of assets and liabilities, and on tax losses, using the liability method. Differences are defined as temporary when they are expected to reverse within a foreseeable future. We may only recognize deferred tax assets if, based on the projected taxable incomes within the next three years, we determine that it is probable that future taxable profit will be available against which the unused tax losses and tax credits can be utilized. As a result, the measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. If future taxable profits are considerably different from those forecasted that support recording deferred tax assets, we will have to revise downwards or upwards the amount of the deferred tax assets, which wouldcould 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.
Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As at December 31, 2015, 2016 and 2017, the valuation allowance against net deferred taxes amounted to $24.0 million, $19.9 million and $35.1 million, respectively. It mainly related to Criteo Corp. including Hooklogic, Inc. ($12.4 million, $0.9 million and $14.7 million, respectively), Criteo do Brasil ($3.9 million, $3.6 million and nil, respectively), Criteo Ltd including Hooklogic Ltd (United Kingdom) ($4.7 million, $4.7 million and $6.3 million, respectively), Criteo China ($1.4 million, $3.7 million and $6.5 million, respectively) and Criteo France ($0.6 million, $3.0 million and $2.9 million, respectively).
Uncertain Tax Positions
In accordance with ASC 740, weWe recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, our estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for ourassessed all potential uncertain tax positions, (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves
Goodwill
Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In the course of 2021, the Company has reassessed its operating and reportable segments in accordance with the income tax accounting guidance when factsASC 280 and circumstances change, suchnow reports its results of operations through two segments: Marketing Solutions and Retail Media. Goodwill has been allocated to these two segments using a relative fair value allocation approach.
The Company has selected December 31 as the closingdate to perform its annual impairment test. The test is performed at the reporting unit level, which we have determined to be Marketing Solutions and Retail Media. In the impairment assessment of a tax audit orits goodwill, the refinement ofCompany performs an estimate. To the extent that the final tax outcome of these matters is differentimpairment test, which involves assumptions regarding estimated future cash flows to be derived from the amounts recorded, such differences will affectreporting unit. The estimated future cash flows are used to derive the provision for income taxesfair value of the reporting unit, which is then compared to its net book value, including goodwill . If these estimates or their related assumptions change in the period in which such determinationfuture, 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 made, and could have a material impact on our financial condition and operating results.
Impact of tax reformalso significant judgement in the U.S.
The U.S. Tax Cuts and Jobs Act (Tax Act) was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. statutory tax rate from 35% to 21% and creates new taxes on certain related-party payments, referred to as a base erosion anti-avoidance tax, or “BEAT”. The BEAT provisions in the Tax Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax. We expect to be subject to this tax in future years and are currently performing an analysis of projected tax that could be owed in future periods as a resultallocation of the new provisions. The Tax Act also modifiesnet book value of the limitation onCompany to each of its segments, as many of the amount of deductible interest expense andassets are not directly attributable to the limitation on the deductibility of certain executive compensation. Our future effective tax rate will be affected by the Tax Act.Company's operating segments.
Goodwill and Intangible Assets
Acquired intangible assets are accounted for at acquisition cost, less accumulated amortization and any impairment loss.amortization. Acquired intangible assets are composed of software, technology and customer relationships amortized on a straight-line basis over their estimated useful lives ofcomprised between one to fiveand three years on a straight-line method.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 financial and economic environmentbusiness climate indicate that the carrying amount of an asset may be impaired.
Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as a single reporting unit and has selected December 31 as the dateSoftware development costs also include costs to perform its annual impairment test.
In the impairment assessment of its goodwill, the Company performs a two-step impairment test, which involves assumptions regarding estimated future cash flowsdevelop software to be derived from the Company. If these estimates or their related assumptions change in the future, the Company may be requiredused solely to record impairment for these assets.
The first step of the impairment test involves comparing the fair value of the reporting unitmeet internal needs and cloud based applications used to its net book value, including goodwill. If the net book value exceeds its fair value, then the Company would perform the second step of the goodwill impairment test to determine the amount of the impairment loss. The impairment loss to be recognized would be calculated by comparing the implied fair value of the Company to its net book value. In calculating the implied fair value of the Company’s goodwill, the fair value of the Company would be allocated to all of the other assets and liabilities based on their fair values. The excess of the fair value of the Company over the amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized in the Consolidated Statement of Income when the carrying amount of goodwill exceeds its implied fair value.
There has been no impairment of goodwill during the years ended December 31, 2015, 2016 and 2017, as the Company's reporting unit's fair value was substantially in excess of the carrying value based on the annual goodwill impairment test.
Internal-Use Software
Costsdeliver our services. We capitalize development costs related to customized internal-usethese software that have reached the application development stage are capitalized. Capitalization of such costs begins whenapplications once the preliminary project stage is complete and stops whenit is probable that the project is substantially completewill be completed and is ready for its intended purpose. In making this determination, several analyses for each phase are performed, including analysis of the feasibility, availability of resources, intentionsoftware will be used to use and future economic benefits.perform the function intended. Amortization of these costs begins when capitalization stopsassets are placed in service and is calculated on a straight-line basis over the assets’ useful lives estimated at three to five years. Costs incurred during the preliminary development stage, as well as maintenance and training costs, are expensed as incurred.
Equity Awards Compensation
We account for share-based compensation in accordance with ASC 718 - Compensation - Stock Compensation. Under the fair value recognition provisions of this guidance, share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award.
Determining the fair value of share-based awards at the grant date requires judgment. The determination of the grant date fair value of RSUs is based on the share price on the grant date. We use the Black-Scholes option-pricing model to determine the fair value of share options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated ordinary share fair value as well as assumptions regarding a number of other complex and subjective variables.
These variables include the fair value of our ordinary shares, the exercise price of the option, the expected term of the options, our expected share price volatility, risk-free interest rates, and expected dividends, which are estimated as follows:
•Fair value of our ordinary shares. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on the Nasdaq on the date of grant for purposes of determining the fair value of ordinary sharesshares.
•Exercise price of the option. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on Nasdaq on the date of grant for purposes of determining the exercise price with a floor value of 95% of the average of the closing sales price per ADS for the 20 trading days preceding the grant.
•Expected term. The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the ordinary share option awards granted, we have based our expected term on the simplified method, which represents the average period from vesting to the expiration of the award.
•Expected volatility. Prior to our initial public offering, as we did not have a trading history for our ordinary shares, the expected share price volatility for our ordinary shares was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the ordinary share option grants. From the initial public offering, the expected share price volatility takes into account the Criteo closing share price from the initial public offering date to the grant date and closing share price of industry peers for the remaining expected term of the ordinary share option grant.
•Risk-free rate. The risk-free interest rate is based on the yields of France Treasury securities with maturities similar to the expected term of the options for each option group.
•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 weighted-averagerange of assumptions used to estimate the fair value of options granted during the periods presented: |
| | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2016 | | 2017 |
Volatility | 39.4% - 40.6% |
|
| 40.4%-40.6% |
|
| 41.3% |
|
Risk-free interest rate | 0% - 0.52% |
|
| 0.00% |
|
| 0.00% |
|
Expected life (in years) | 6 years |
|
| 6 years |
|
| 6 years |
|
Dividend yield | — | % |
| — | % |
| — | % |
| | | | | | | | | | | | | | | | | |
| 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 December 31, 2021.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements applicable to us, see Note 1 to our audited consolidated financial statements beginning on page F-1.
Results of Operations for the Years Ended December 31, 2015, 20162021, 2020 and 20172019
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 | 2020 vs 2019 |
| (in thousands) | | |
Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | 9 | % | (8) | % |
Conversion impact U.S. dollar/other currencies | (19,713) | | | 3,239 | | | 51,373 | | | |
Revenue at constant currency (1) | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | 8 | % | (8) | % |
| | | | | | | |
Marketing Solutions as reported | $ | 2,007,239 | | | $ | 1,806,431 | | | $ | 2,092,590 | | 11 | % | (14) | % |
Conversion impact U.S. dollar/other currencies | $ | (16,511) | | | $ | 4,364 | | | $ | 49,668 | | | |
Marketing Solutions at constant currency (1) | $ | 1,990,728 | | | $ | 1,810,795 | | | $ | 2,142,258 | | 10 | % | (13) | % |
| | | | | | | |
Retail Media as reported (2) | $ | 246,996 | | | $ | 266,186 | | | $ | 168,926 | | (7) | % | 58 | % |
Conversion impact U.S. dollar/other currencies | $ | (3,202) | | | $ | (1,125) | | | $ | 1,705 | | | |
Retail Media at constant currency (1) | $ | 243,794 | | | $ | 265,061 | | | $ | 170,631 | | (8) | % | 57 | % |
(1) Information herein with respect to results presented on a constant currency basis is computed by applying prior period average exchange rates to current period results. We have included results on a constant currency basis because it is a key measure used by our management and board of directors to evaluate operating performance. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. The table above reconciles the actual results presented in this section with the results presented on a constant currency basis.
(2) Criteo operates as two reportable segments from December 31, 2021. The table above presents the operating results of our Marketing Solutions and Retail Media segments. A strategic building block of Criteo’s Commerce Media Platform, the Retail Media Platform, introduced in June 2020, and reported under the retail media segment, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements running on this platform, Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. We expect most clients using Criteo’s legacy Retail Media solutions to transition to this platform by the second half of 2022. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Contribution ex-TAC margin will increase. Contribution ex-TAC will not be impacted by this transition.
2021 Compared to 2020
Revenue in 2021 increased $181.6 million, or 9% (or 8% on a constant currency basis) to $2,254.2 million compared to 2020.
84% of the year-over-year increase in revenue was driven by the contribution from our existing clients, and 16% of the year-over-year increase was driven by the contribution from new clients. We added 285 net new clients year-over-year across regions.
The year-over-year increase in revenue on a constant currency basis was largely attributable to the increase in the average price charged to advertisers, and partially offset by the decreased number of impressions delivered by us.
Marketing Solutions revenue increased 11% (or 10% on a constant currency basis) to $2,007.2 million for 2021, reflecting increased spend from Retail clients, both on our retargeting, audience targeting and omnichannel solutions, partially offset by incremental identity and privacy changes, as expected.
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands) | | | | |
Revenue as reported | $ | 1,323,169 |
|
| $ | 1,799,146 |
|
| $ | 2,296,692 |
| | 36 | % | | 28 | % |
Conversion impact U.S dollar/other currencies |
|
| (5,022 | ) |
| (4,809 | ) | | | | |
Revenue at constant currency (*) | 1,323,169 |
| | 1,794,124 |
| | 2,291,883 |
| | 36 | % | | 27 | % |
| | | | | | | | | |
Americas | | | | | | | | | |
Revenue as reported | $ | 505,653 |
|
| $ | 730,873 |
|
| $ | 990,424 |
| | 45 | % | | 36 | % |
Conversion impact U.S dollar/other currencies |
|
| 3,952 |
|
| (6,812 | ) | | | | |
Revenue at constant currency (*) | $ | 505,653 |
| | $ | 734,825 |
| | $ | 983,612 |
| | 45 | % | | 35 | % |
| | | | | | | | | |
EMEA | | | | | | | | | |
Revenue as reported | $ | 541,105 |
|
| $ | 660,523 |
|
| $ | 808,961 |
| | 22 | % | | 22 | % |
Conversion impact U.S dollar/other currencies |
|
| 18,976 |
|
| (7,179 | ) | | | | |
Revenue at constant currency (*) | $ | 541,105 |
| | $ | 679,499 |
| | $ | 801,782 |
| | 26 | % | | 21 | % |
| | | | | | | | | |
Asia-Pacific | | | | | | | | | |
Revenue as reported | $ | 276,411 |
|
| $ | 407,750 |
|
| $ | 497,307 |
| | 48 | % | | 22 | % |
Conversion impact U.S dollar/other currencies |
|
| (27,950 | ) |
| 9,186 |
| | | | |
Revenue at constant currency (*) | $ | 276,411 |
| | $ | 379,800 |
| | $ | 506,493 |
| | 37 | % | | 24 | % |
Retail Media revenue decreased (7)% (or (8)% on a constant currency basis) to $246.9 million for 2021, as the strong performance with large retailers across the U.S. and EMEA was more than offset by the technical and transitory impact related to the ongoing client migration to the RMP. Criteo's RMP accounts for a fast-growing share of Retail Media revenue, or about 50% for the year ended December 31, 2021, and its revenue is accounted for on a net basis. In 2020, less than 5% of Retail Media revenue was accounted for on a net basis, and as a result of this transition to a full RMP business, the growth of Retail Media revenue is temporarily impacted. Reflecting the underlying economic performance, Retail Media's Contribution ex-TAC increased 59% (or 58% on a constant currency basis) in the year ended December 31, 2021, driven by continued strength in Retail Media onsite, in particular in the U.S. market, and growing network effects of the RMP.
2020 compared to 2019
Revenue in 2020 decreased $(188.9) million, or (8)% (or (8)% on a constant currency basis) to $2,072.6 million compared to 2019.
The COVID-19 pandemic impacted our business during most of the year, with an estimated net negative impact on revenue of approximately $262 million for the twelve months ended December 31, 2020, or approximately 12 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us. The COVID-19 headwind impacted our large customers in our Marketing Solutions business, in particular in the Travel, Classifieds verticals and some large brick-and-mortar Retail clients. However, we believe that client spending from Retail clients in the midmarket and in our Retail Media solutions was supported by stronger ecommerce shopping trends emerging from the COVID-19 pandemic.
The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average price charged to advertisers, partly driven by the evolution of our revenue mix over the period, and partially offset by the increased number of impressions delivered by us and the increased number of clicks delivered on the advertising banners displayed by us.
The year-over-year decrease in revenue was also driven by the lower contribution from our existing clients and some churning clients, both of which we largely attribute to the COVID-19 outbreak, offsetting the positive contribution from new clients. We added 1,213 net new clients year-over-year across regions.
Marketing Solutions revenue decreased (14)% (or (13)% on a constant currency basis) to $1,806.4 million for 2020, reflecting decreased spend from large clients, primarily as a result of the COVID-19 pandemic impact, which we consider as retail bankruptcies and softness with our Travel and Classifieds clients Retail clients, as well as incremental identity and privacy changes, as expected.
Retail Media revenue increased 58% (or 57% on a constant currency basis) to $266.2 million for 2020, reflecting the strong adoption by large retailers across the U.S. and EMEA.
Revenue breakdown by region
Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands) | | | | |
Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | | 9 | % | | (8) | % |
Conversion impact U.S. dollar/other currencies | $ | (19,713) | | | $ | 3,239 | | | 51,373 | | | | | |
Revenue at constant currency (*) | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | | 8 | % | | (8) | % |
| | | | | | | | | |
| | | | | | | | | |
Americas | | | | | | | | | |
Revenue as reported | $ | 916,825 | | | $ | 894,854 | | | $ | 952,154 | | | 2 | % | | (6) | % |
Conversion impact U.S. dollar/other currencies | 1,380 | | | 12,770 | | | 4,584 | | | | | |
Revenue at constant currency (*) | $ | 918,205 | | | $ | 907,624 | | | $ | 956,738 | | | 3 | % | | (5) | % |
| | | | | | | | | |
| | | | | | | | | |
EMEA | | | | | | | | | |
Revenue as reported | $ | 844,312 | | | $ | 749,672 | | | $ | 806,197 | | | 13 | % | | (7) | % |
Conversion impact U.S. dollar/other currencies | (24,324) | | | (4,528) | | | 44,478 | | | | | |
Revenue at constant currency (*) | $ | 819,988 | | | $ | 745,144 | | | $ | 850,675 | | | 9 | % | | (8) | % |
| | | | | | | | | |
| | | | | | | | | |
Asia-Pacific | | | | | | | | | |
Revenue as reported | $ | 493,098 | | | $ | 428,091 | | | $ | 503,165 | | | 15 | % | | (15) | % |
Conversion impact U.S. dollar/other currencies | 3,231 | | | (5,003) | | | 2,311 | | | | | |
Revenue at constant currency (*) | $ | 496,329 | | | $ | 423,088 | | | $ | 505,476 | | | 16 | % | | (16) | % |
| | | | | | | | | |
(*) Growth 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.
20172021 Compared to 2016
Revenue for 2017 increased $497.5 million, or 28% (or 27% on a constant currency basis) to $2,296.7 million, compared to 2016. Revenue from net new clients contributed 29.3% to the global year-over-year revenue growth while revenue from existing clients contributed 70.7% to the global year-over-year revenue growth. This increase in revenue was primarily driven by continued technology innovation, a broader and improved access to quality publisher inventory, and the addition of clients across regions, client categories and products. Improved technology, better access to inventory through Criteo Direct Bidder, our proprietary header bidding technology, and the launch of our Criteo Customer Acquisition BETA and Criteo Audience Match BETA products in the fourth quarter of 2017, helped generate more revenue per client, in particular from existing clients. Our ability to drive a large portion of our business from clients that have uncapped budgets continued to be a key driver in growing our revenue per existing client.
The year-over-year increase was the result of our rapid growth across all geographies.2020
Our revenue in the Americas region increased 36%$22.0 million, or 2% (or 35%3% on a constant currency basis) to $990.4$916.8 million for 20172021 compared to 2016.2020. This increase was driven by the acquisition of newcontinued positive retail trends, in particular with large clientscustomers across Marketing Solutions, and our ability to increase their spend with us through the year, the continued increase in revenue from existing large clients, continued strong traction from midmarketperformance 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 acrosstransitioning to the region, and the increasing contribution of Criteo Sponsored Products, in particular in the fourth quarter of 2017.
RMP.
Our revenue in the EMEA region increased 22%$94.6 million, or 13% (or 21%9% on a constant currency basis) to $809.0$844.3 million for 20172021 compared to 2016.2020. This increase was driven by the addition of several new large and midmarket clients acrosspositive retail trends in our main markets, in the region and the continued growth of our revenue from existing clients, in particular in Germany and emerging markets, positive traction with large customers across our retargeting and new solutions, and continued strong performance of Retail Media across the retail and travel verticals, across large and midmarket clients and geographic markets. In 2017, we also significantly expanded the commercial presence of Criteo Sponsored Products in Europe, which contributed to the regional revenue growth.region.
Our revenue in the Asia-Pacific region increased 22%$65.0 million, or 15% (or 24%16% on a constant currency basis) to $497.3$493.1 million for 20172021 compared to 2016. This2020. The increase was driven by the continued expansionrecovery of our business with existing large clients,customers in the region, in particular in Japan, the addition of newas well as positive contributions from Retail clients in the large client and midmarket categories across all Asian markets, and continued solid growth across South-East Asian markets, largely supported by continued growth in in-app inventory .Asia.
Additionally, our $2,296.7$2,254 million of revenue for 20172021 was positively impacted by $4.8$(19.7) million of currency fluctuations, particularly as a result of the strengtheningdepreciation of the Turkish Lira, Russian Ruble, Japanese yenYen and the Brazilian real, partially offset by the appreciation of the Euro and the British pound partially offset by the depreciation of the Brazilian real and the Euro,sterling, compared to the U.S. dollar.
Over 100% of the year-over-year growth in revenue on a constant currency basis was attributable to an increase in the volume of clicks delivered on the advertisements displayed by us.
The release of Apple’s Intelligent Tracking Prevention feature in Apple's Safari browser, or ITP, on September 19, 2017 had a net negative impact on our Revenue ex-TAC in the third and fourth quarters of 2017 of less than $1.0 million and $25 million, respectively. Given the iOS 11 roll out and our coverage of Safari users, we expect Safari's ITP feature will continue to have a net negative impact on Revenue ex-TAC, as reflected in our 2018 projections. Refer to Part II Item 1A. “Risk Factors”.
2020 Compared to 20152019
Revenue for 2016 increased $476.0 million, or 36% (or 36% on a constant currency basis), compared to 2015. Excluding the contribution of Criteo Sponsored Products (formerly HookLogic) for the period from November 9, 2016 until December 31, 2016, revenue increased $430.8 million, or 33% (or 32% on a constant currency basis). Excluding Criteo Sponsored Products, revenue from net new clients contributed 35.7% to the global year-over-year revenue growth while revenue from existing clients contributed 64.3% to the global year-over-year revenue growth. This increase in revenue was primarily due to technology improvements, broader access to quality display impressions including new sources of native inventory, and our ability to engage seamlessly with end-customers across desktop and mobile devices, which helped generate more revenue per client, in particular from existing clients. Our continuing ability to convert a large portion of our clients to uncapped budgets continued to be a key driver of the increase in revenue per client.
The year-over-year increase was the result of our growth across all geographies. Our revenue in the Americas region increased 45%decreased $(57.3) million, or (6)% (or 45%(5)% on a constant currency basis) to $730.9$894.9 million for 20162020 compared to 2015, as we engaged2019. This decline was driven by an estimated revenue impact from COVID-19 of approximately $90 million, in particular with new large clients, continued to increase revenue from existing large clients, saw continued strong traction from midmarket clients across the region, and benefited from the contribution of Criteo Sponsored Productscustomers in the fourth quarter of 2016.broader Classifieds vertical and some large brick-and-mortar Retail clients in the U.S.
Our revenue in the EMEA region increased 22%decreased $(56.5) million, or (7)% (or 26%(8)% on a constant currency basis) to $660.5$749.7 million for 20162020 compared 2015, as we signed several large and midmarket clients across marketsto 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 and continuedhad the highest exposure to grow our revenue from existing clients across large and midmarket clients and geographic markets.the Travel vertical prior to the pandemic, which was most impacted by COVID-19.
Our revenue in the Asia-Pacific region increased 48%decreased $(75.1) million, or (15)% (or 37%(16)% on a constant currency basis) to $407.8$428.1 million for 20162020 compared to 2015, as we continued to expand our business with new existing clients across2019. The decrease at constant currency included an estimated $76 million revenue impact from the region,COVID-19 pandemic, mostly in particularthe Travel and Classifieds verticals, and was also driven by a weak economic climate in Japan, and Korea, and saw continued solid growth across South-East Asian markets.our largest market in the region.
Additionally, our $1,799.1$2,073 million of revenue for 20162020 was positivelynegatively impacted by $5.0$ $3.2 million of currency fluctuations, particularly as a result of the strengtheningdepreciation of the Turkish Lira, Russian Ruble, the Brazilian real, partially offset by the appreciation of the Japanese Yen and the Euro, compared to the U.S. dollar partially offset by the depreciation of the Brazilian real, and the British pound .dollar.
Over 100% of this year-over-year growth in revenue on a constant currency basis excluding Criteo Sponsored Products was attributable to an increased volume of clicks delivered on the advertising banners displayed by us.
Cost of Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percentages) | | | | |
Traffic acquisition costs | $ | (1,333,440) | | | $ | (1,247,571) | | | $ | (1,314,947) | | | 7% | | (5)% |
Other cost of revenue | (138,851) | | | (137,028) | | | (117,533) | | | 1% | | 17% |
Total cost of revenue | $ | (1,472,291) | | | $ | (1,384,599) | | | $ | (1,432,480) | | | 6% | | (3)% |
% of revenue | (65) | % | | (67) | % | | (63) | % | | | | |
Gross profit % | 35 | % | | 33 | % | | 37 | % | | | | |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percentages) | | | | |
Traffic acquisition costs | $ | (789,152 | ) |
| $ | (1,068,911 | ) |
| $ | (1,355,556 | ) | | 35% | | 27% |
Other cost of revenue | (62,201 | ) |
| (85,260 | ) |
| (121,641 | ) | | 37% | | 43% |
Total cost of revenue | $ | (851,353 | ) | | $ | (1,154,171 | ) | | $ | (1,477,197 | ) | | 36% | | 28% |
% of revenue | (64 | )% | | (64 | )% | | (64 | )% | | | | |
Gross profit % | 36 | % | | 36 | % | | 36 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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)% |
2017(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 20162020
Cost of revenue for 20172021 increased $323.0$87.7 million, or 28%6%, compared to 2016.2020. This increase was primarily the result of a $286.6$85.9 million, or 27%7% increase in traffic acquisition costs (or 27%6% on a constant currency basis), increase in traffic acquisition costs and by a $36.4$1.8 million, or 43%1% (or 44%2% on a constant currency basis), increase in other cost of revenue.
The 14% increase in Marketing Solutions' traffic acquisition costs related primarily to anthe 6% increase of 29.1%(and 5% increase on a constant currency basis) in the totalaverage 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, partlyreflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns.
Traffic acquisition costs in Retail Media decreased by 35% reflecting the technical and transitory impact related to the ongoing client migration due to the transitioning of our RMP. Because we recognize revenue on a net basis in all arrangements running on the RMP, we expect our Traffic acquisition costs for Retail Media to decrease over time as all of our clients are transitioned to the RMP.
The increase in other cost of revenue includes a $(5.2) million increase in allocated depreciation and amortization expense, $(3.0) million increase in other cost of sales mainly due to the digital tax, partially offset by $5.7 million in hosting costs and $0.8 million in data acquisition costs.
2020 Compared to 2019
Cost of revenue for 2020 decreased $(47.9) million, or (3)%, compared to 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 1.8%$19.5 million, or 17%(or 18% on a constant currency basis), increase in other cost of revenue.
The decrease (or 1.9%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. TheThis was partly driven by lower global demand for advertising inventory, despite the increase in online traffic globally caused by the volumelockdown imposed in COVID-19 affected areas, making the unit price of purchased impressions reflects our expanding relationships with existing and new publisher partners to supportinventory relatively cheaper than in the growth in our client demand for commerce marketing campaigns. The year-over-year decrease in average CPMpre-pandemic period. This was also driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process, as well as ofprocess. This decrease was not entirely offset by the growing share of in-app inventory in our business, which inventory cost tends to be lower than that10% increase in the web browser environment.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 a $15.9$(11.1) million increase in hosting costs, a $15.8 million increase inthe allocated depreciation and amortization expense, $(4.2) million in hosting costs, $(2.6) million in data acquisition and a $4.7$(1.6) million increase in other cost of sales.
Contribution excluding Traffic Acquisition Costs
We consider RevenueContribution ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing the growth of our RevenueContribution ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo AI Engine’s performance, allowing it to deliver more relevant advertisements at scale. As part of this focus, we continue to invest in building preferred relationships with direct publishers and pursue access to leading advertising exchanges. Our performance-based business model provides us with significant control over our level of Revenue ex-TAC margin, which we seek to optimize in order to maximize Revenue ex-TAC growth on an absolute basis in accordance with our strategic focus.
2016 Compared to 2015
Cost of revenue for 2016 increased $302.8 million, or 36%, compared to 2015. This increase was primarily the result of a $279.8 million, or 35% (or 35% on a constant currency basis), increase in traffic acquisition costs and a $23.1 million, or 37% (or 37% on a constant currency basis), increase in other cost of revenue.
The increase in traffic acquisition costs related primarily to an increase of 24.8% in the number of impressions we purchased, as well as a 4.8% increase in the average CPM for inventory purchased. The increase in impressions purchased was driven by impressions bought through real-time bidding exchanges, as more quality inventory became available on these platforms, and to a lesser extent by the publishers with whom we have a direct relationship, including PuMP. The year-over-year increase in average CPM remained largely driven by the improving quality and evolving formats of ad units available to us on an individual basis, more than the price dynamics prevalent in the marketplace. The increase in other cost of revenue includes a $11.5 million increase in hosting costs, a $8.6 million increase in allocated depreciation and amortization expense and a $3.0 million increase in other cost of sales.
Research and Development Expenses
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percent of revenue) | | | | |
Research and development expenses | $ | (86,807 | ) |
| $ | (123,649 | ) |
| $ | (173,925 | ) | | 42% | | 41% |
% of revenue | (7 | )% | | (7 | )% | | (8 | )% | | | | |
2017 Compared to 2016
Research and development expenses for 2017 increased $50.3 million, or 41%, compared to 2016. This increase was primarily the result of a $40.6 million increase in salaries, bonuses, share-based compensation, and other personnel costs primarily due to a 16% increase in headcount, a $4.7 million increase in subcontracting and other headcount-related costs, a $0.5 million increase in allocated rent and facilities costs, a $6.2m increase in allocated depreciation and amortization expense of assets, a $0.5 million decrease in other costs partially offset by a $1.3 million increase in the French Research Tax Credit.
2016 Compared to 2015
Research and development expenses for 2016 increased $36.8 million, or 42%, compared to 2015. This increase was primarily the result of a $29.9 million increase in salaries, bonuses, share-based compensation, and other personnel costs primarily due to a 51% increase in headcount, due in part to Criteo Sponsored Products, a $2.1 million increase in subcontracting and other headcount-related costs, a $3.8 million increase in allocated rent and facilities costs, a $2.0 million increase in consulting and professional fees and a $1.3 million increase in other costs partially offset by a $1.5 million increase in the French Research Tax Credit and a $0.8 million decrease in amortization and depreciation of assets.
Sales and Operations Expenses
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | % change |
| | 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| | | | | | | | | | |
| | (in thousands, except percent of revenue) | | | | |
Sales and operations expenses | | $ | (229,530 | ) |
| $ | (282,853 | ) |
| $ | (380,649 | ) | | 23% | | 35% |
% of revenue | | (17 | )% | | (16 | )% | | (17 | )% | | | | |
2017 Compared to 2016
Sales and operations expenses for 2017 increased $97.8 million, or 35%, compared to 2016. This increase was primarily a result of a $60.4 million increase in salaries, bonuses, share-based compensation, and other personnel-related costs primarily due to the 7% increase in headcount, a $6.6 million increase in subcontracting and other headcount-related costs, a $5.4 million increase in events, a $3.8m in consulting and professional fees, a $12.1 million increase in allocated depreciation and amortization expense, a $3.0 million increase in allocated rent and facilities costs, a $3.1 million increase in provisions for doubtful accounts, and a $3.4 million increase in other expenses mainly related to bad debts and other operating taxes.
2016 Compared to 2015
Sales and operations expenses for 2016 increased $53.3 million, or 23%, compared to 2015. This increase was primarily a result of a $34.6 million increase in salaries, bonuses, share-based compensation, and other personnel-related costs primarily due to the 32% increase in headcount, due in part to Criteo Sponsored Products, a $1.3 million increase in subcontracting and other headcount-related costs, a $2.9 million increase in events, a $2.6 million increase in allocated depreciation and amortization expense, a $4.5 million increase in allocated rent and facilities costs, a $2.8 million increase in provisions for doubtful accounts, and a $4.6 million increase in other expenses mainly related to other operating taxes.
General and Administrative Expenses
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percent of revenue) | | | | |
General and administrative expenses | $ | (79,145 | ) |
| $ | (117,469 | ) |
| $ | (127,077 | ) | | 48% | | 8% |
% of revenue | (6 | )% | | (7 | )% | | (6 | )% | | | | |
2017 Compared to 2016
General and administrative expenses for 2017 increased $9.6 million, or 8%, compared to 2016. This increase was primarily a result of a $13.5 million increase in salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs primarily in connection with the 14% increase in headcount, a $0.3 million increase in allocated rent and facilities costs, a $2.4 million increase in allocated depreciation and amortization expense, and a $2.4 million increase in other operating expenses partially offset by a $7.3 million decrease in subcontracting and other headcount-related costs and a $1.6 million decrease in consulting and professional fees, primarily as a result of prior year exceptional expenses related to litigation and business combinations.
2016 Compared to 2015
General and administrative expenses for 2016 increased $38.3 million, or 48%, compared to 2015. This increase was primarily a result of a $23.2 million increase in salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs primarily in connection with the 29% increase in headcount, due in part to Criteo Sponsored Products, a $2.8 million increase in subcontracting and other headcount-related costs, a $3.0 million increase in allocated rent and facilities costs, a $1.8 million increase in allocated depreciation and amortization expense, a $5.6 million increase in consulting and professional fees, primarily as a result of exceptional expenses related to litigation and business combinations, and a $1.9 million increase in other operating expenses explained primarily by a prior release of accrued deferred price consideration in relation with the Tedemis acquisition.
Financial Income (Expense)
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percent of revenue) | | | | |
Financial income (expense) | $ | (4,541 | ) | | $ | (546 | ) | | $ | (9,534 | ) | | (88)% | | 1,646% |
% of revenue | (0.3 | )% | | — | % | | (0.4 | )% | | | | |
2017 Compared to 2016
Financial income (expense) for 2017 decreased by $(9.0) million, or 1,646% compared to 2016. The $9.5 million financial expense for the period ended December 31, 2017 resulted from the interest incurred as a result of the $75.0 million drawn on the revolving credit facility entered into in September 2015 (as amended in March 2017) and the hedging cost related to an intra-group position between Criteo S.A. and its U.S. subsidiary, both in the context of the funding of the HookLogic acquisition in November 2016, as well as the non-utilization fees incurred as part of our available RCF financing. At December 31, 2017, our exposure to foreign currency risk is centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
2016 Compared to 2015
Financial income (expense) for 2016 increased by $4.0 million, or (88)% compared to 2015. The $0.5 million financial expense for the period ended December 31, 2016 resulted from the interest incurred from drawing $75.0 million on the General RCF to partially fund the HookLogic acquisition in November 2016, the negative impact of foreign exchange reevaluations and related hedging mainly recorded during the first quarter, partially offset by the foreign exchange gain realized on the hedging of the U.S. dollar denominated consideration paid for the HookLogic acquisition. At December 31, 2016, our exposure to foreign currency risk is centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
Provision for Income Taxes
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percent information) | | | | |
Provision for income taxes | $ | (9,517 | ) |
| $ | (33,129 | ) |
| $ | (31,651 | ) | | 248% | | (4)% |
% of revenue | (1 | )% | | (2 | )% | | (1 | )% | | | | |
Effective tax rate | 13.3 | % | | 27.5 | % | | 24.7 | % | | | | |
2017 Compared to 2016
The provision for income taxes for 2017 decreased by $(1.5) million, or 4%, compared to 2016. The annual effective tax rate for 2017 was 24.7%, compared to an annual effective tax rate of 27.5% for 2016. Generally, the annual effective tax rates differ from statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain of our foreign subsidiaries and equity awards compensation expense.
In 2017, our income before taxes increased by $7.9 million to $128.3 million, compared to 2016, generating a $44.2 million theoretical income tax expense at a nominal standard French tax rate of 34.43%. This theoretical tax expense is impacted primarily by the following items contributing to a $31.6 million effective tax expense and a 24.7% effective tax rate: $14.4 million of deferred tax assets on which we recognized a valuation allowance mainly related to Criteo Ltd, Criteo Corp., Criteo Pty (Australia) and Criteo Advertising (Beijing) Co. Ltd tax losses, $11.9 million in taxes related to our equity awards compensation expense, for which no deferred taxes are recognized, $2.9 million related to the French business tax Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, $13.1 million relating to the decrease of the American federal income tax rate on deferred tax assets positions offset by $6.4 million relating to deferred tax liabilities recognized on Hooklogic intangible assets transferred from Criteo Corp. to Criteo entities at local income tax rates, a $11.3 million tax deduction on share options exercised during the period by U.K. and U.S. residents, a $29.4 million tax deduction resulting from technology royalty income we received from our subsidiaries, $4.6 million Criteo Corp. Research and Development tax credit and the recognition or reversal of valuation allowance on deferred tax assets for $4.9 million (mainly for Criteo Brazil.) and a $1.8 million relating to other tax adjustments. Please see Note 20 to our audited consolidated financial statements for more detailed information on the provision for income taxes.
Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As at December 31, 2017, the valuation allowance against deferred tax assets amounted to $35.1 million. It mainly related to Criteo Corp including Hooklogic ($14.7 million), Criteo Ltd ($6.3 million), Criteo China ($6.6 million) and Criteo France ($3.0 million).
2016 Compared to 2015
The provision for income taxes for 2016 increased by $(23.6) million, or (248)%, compared to 2015. The annual effective tax rate for 2016 was 27.5%, compared to an annual effective tax rate of 13.3% for 2015. Generally, the annual effective tax rates differ from statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain of our foreign subsidiaries and equity awards compensation expense.
In 2016, our income before taxes increased by $48.7 million to $120.5 million, compared to 2015, generating a $41.5 million theoretical income tax expense at a nominal standard French tax rate of 34.43%. This theoretical tax expense is impacted primarily by the following items contributing to a $33.1 million effective tax expense and a 27.5% effective tax rate: $7.8 million of deferred tax assets on which we recognized a valuation allowance mainly related to Criteo Ltd, Criteo Singapore Pte. Ltd (United Kingdom), Criteo Pty (Australia) and Criteo Advertising (Beijing) Co. Ltd tax losses, $13.8 million in taxes related to our equity awards compensation expense, for which no deferred taxes are recognized, $3.2 million related to the French business tax Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, offset by a $4.8 million tax deduction on share options exercised during the period by U.K. and U.S. residents, a $20.0 million tax deduction resulting from technology royalty income we received from our subsidiaries and the recognition or reversal of valuation allowance on deferred tax assets for $13.4 million (mainly for Criteo Corp.). Please see note 20 to our audited consolidated financial statements for more detailed information on the provision for income taxes.
Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As at December 31, 2016, the valuation allowance against deferred tax assets amounted to $19.9 million. It mainly related to Criteo do Brasil ($3.6 million), Criteo Ltd ($4.7 million), Criteo China ($3.7 million) and Criteo France ($3.0 million).
Net Income
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands, except percent of revenue) | | | | |
Net income | $ | 62,276 |
|
| $ | 87,329 |
|
| $ | 96,659 |
| | 40% | | 11% |
% of revenue | 5 | % | | 5 | % | | 4 | % | | | | |
2017 Compared to 2016
Net income for 2017 increased $9.3 million, or 11% compared to 2016. This increase was the result of the factors discussed above, in particular a $16.8 million increase in income from operations and a $9.0 million decrease in financial income (expense) offset by a $1.5 million increase in provision for income taxes compared to 2016.
2016 Compared to 2015
Net income for 2016 increased $25.1 million, or 40% compared to 2015. This increase was the result of the factors discussed above, in particular a $44.7 million increase in income from operations and a $4.0 million increase in financial income (expense) offset by a $23.6 million increase in provision for income taxes compared to 2015.
Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region
The following table sets forth our revenue and Contribution ex-TAC by segment:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Segment | | 2021 | | 2020 | | 2019 |
| | | (in thousands) |
Revenue | Marketing Solutions | | $ | 2,007,239 | | | $ | 1,806,431 | | | $ | 2,092,590 | |
| Retail Media | | 246,996 | | | 266,186 | | | 168,926 | |
| Total | | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | |
| | | | | | | |
Contribution ex-TAC(1) | Marketing Solutions | | $ | 796,152 | | | $ | 746,751 | | | $ | 895,107 | |
| Retail Media | | 124,643 | | | 78,295 | | | 51,462 | |
| Total | | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | |
(1)We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and Revenue ex-TAC by region, includingreconciled to gross profit through the Americas (North and South America), Europe, Middle East and Africa, or EMEA, and Asia-Pacific: |
| | | | | | | | | | | | | |
| | | Year Ended December 31, |
| Region | | 2015 | | 2016 | | 2017 |
| | | (in thousands) |
Revenue | Americas | | $ | 505,653 |
|
| $ | 730,873 |
|
| $ | 990,424 |
|
| EMEA | | 541,105 |
|
| 660,523 |
|
| 808,961 |
|
| Asia-Pacific | | 276,411 |
|
| 407,750 |
|
| 497,307 |
|
| Total | | $ | 1,323,169 |
| | $ | 1,799,146 |
| | $ | 2,296,692 |
|
Traffic acquisition costs | Americas | | $ | (308,427 | ) |
| $ | (451,774 | ) |
| $ | (619,393 | ) |
| EMEA | | (313,928 | ) |
| (373,664 | ) |
| (450,297 | ) |
| Asia-Pacific | | (166,797 | ) |
| (243,473 | ) |
| (285,866 | ) |
| Total | | $ | (789,152 | ) | | $ | (1,068,911 | ) | | $ | (1,355,556 | ) |
Revenue ex-TAC (1) | Americas | | $ | 197,226 |
|
| $ | 279,099 |
|
| $ | 371,031 |
|
| EMEA | | 227,177 |
|
| 286,859 |
|
| 358,664 |
|
| Asia-Pacific | | 109,614 |
|
| 164,277 |
|
| 211,441 |
|
| Total | | $ | 534,017 |
| | $ | 730,235 |
| | $ | 941,136 |
|
(1) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue ex-TAC by Region are not measures calculated in accordance with U.S. GAAP.exclusion of other cost of revenue. We have included RevenueContribution ex-TAC and Revenue ex-TAC by Region in this Form 10-K because they areit is a key measures used by our management and board of directors to evaluate operating performance and generate future operating plans. In particular, we believe that the elimination of TAC from revenue and review of these measures by regionthis can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that RevenueContribution ex-TAC and Revenue ex-TAC by Region provideprovides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of RevenueContribution ex-TAC and Revenue ex-TAC by Region has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Revenue ex-TAC and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report RevenueContribution ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider RevenueContribution ex-TAC and Revenue ex-TAC by Region alongside our other U.S. GAAP financial results, including revenue. The above table provides a reconciliation of Revenue ex-TAC by region to revenue by region. Please also refer to footnote 3 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.gross profit.
Constant Currency Reconciliation
Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands) | | | | |
Revenue as reported | $ | 2,254,235 | | | $ | 2,072,617 | | | $ | 2,261,516 | | | 9% | | (8)% |
Conversion impact U.S. dollar/other currencies | (19,713) | | | 3,239 | | | 51,373 | | | | | |
Revenue at constant currency | $ | 2,234,522 | | | $ | 2,075,856 | | | $ | 2,312,889 | | | 8% | | (8)% |
| | | | | | | | | |
| | | | | | | | | |
Gross profit as reported | $ | 781,944 | | | $ | 688,018 | | | $ | 829,036 | | | 14% | | (17)% |
Conversion impact U.S. dollar/other currencies | (7,822) | | | 467 | | | 20,686 | | | | | |
Gross profit at constant currency | $ | 774,122 | | | $ | 688,485 | | | $ | 849,722 | | | 13% | | (17)% |
| | | | | | | | | |
Traffic acquisition costs as reported | $ | (1,333,440) | | | $ | (1,247,571) | | | $ | (1,314,947) | | | 7% | | (5)% |
Conversion impact U.S. dollar/other currencies | 12,263 | | | (1,605) | | | (28,831) | | | | | |
Traffic acquisition cost at constant currency | $ | (1,321,177) | | | $ | (1,249,176) | | | $ | (1,343,778) | | | 6% | | (5)% |
| | | | | | | | | |
| | | | | | | | | |
Contribution ex-TAC as reported | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | | | 12% | | (13)% |
Conversion impact U.S. dollar/other currencies | (7,450) | | | 1,634 | | | 22,542 | | | | | |
Contribution ex-TAC at constant currency | $ | 913,345 | | | $ | 826,680 | | | $ | 969,111 | | | 11% | | (13)% |
| | | | | | | | | |
| | | | | | | | | |
Other cost of revenue as reported | $ | (138,851) | | | $ | (137,028) | | | $ | (117,533) | | | 1% | | 17% |
Conversion impact U.S. dollar/other currencies | (372) | | | (1,167) | | | (1,856) | | | | | |
Other cost of revenue at constant currency | $ | (139,223) | | | $ | (138,195) | | | $ | (119,389) | | | 2% | | 18% |
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2015 | | 2016 | | 2017 | | 2015 vs 2016 |
| 2016 vs 2017 |
| (in thousands) | | | | |
Revenue as reported | $ | 1,323,169 |
| | $ | 1,799,146 |
| | $ | 2,296,692 |
| | 36% | | 28% |
Conversion impact U.S. dollar/other currencies | 152,061 |
| | (5,022 | ) | | (4,809 | ) | | | | |
Revenue at constant currency | $ | 1,475,230 |
| | $ | 1,794,124 |
| | $ | 2,291,883 |
| | 36% | | 27% |
| | | | | | | | | |
Traffic acquisition costs as reported | $ | (789,152 | ) | | $ | (1,068,911 | ) | | $ | (1,355,556 | ) | | 35% | | 27% |
Conversion impact U.S. dollar/other currencies | (90,002 | ) | | 3,852 |
| | 2,186 |
| | | | |
Traffic acquisition cost at constant currency | $ | (879,154 | ) | | $ | (1,065,059 | ) | | $ | (1,353,370 | ) | | 35% | | 27% |
| | | | | | | | | |
Revenue ex-TAC as reported | $ | 534,017 |
| | $ | 730,235 |
| | $ | 941,136 |
| | 37% | | 29% |
Conversion impact U.S. dollar/other currencies | 62,059 |
| | (1,170 | ) | | (2,624 | ) | | | | |
Revenue ex-TAC at constant currency | $ | 596,076 |
| | $ | 729,065 |
| | $ | 938,512 |
| | 37% | | 29% |
| | | | | | | | | |
Other cost of revenue as reported | $ | (62,201 | ) | | $ | (85,260 | ) | | $ | (121,641 | ) | | 37% | | 43% |
Conversion impact U.S. dollar/other currencies | (4,589 | ) | | (40 | ) | | (990 | ) | | | | |
Other cost of revenue at constant currency | $ | (66,790 | ) | | $ | (85,300 | ) | | $ | (122,631 | ) | | 37% | | 44% |
Research and Development Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | |
Research and development expenses | $ | (151,817) | | | $ | (132,513) | | | $ | (172,591) | | | 15% | (23)% |
% of revenue | (7) | % | | (6) | % | | (8) | % | | | |
2021 Compared to 2020
Research and development expenses for 2021 increased $19.3 million, or 15%, compared to 2020. This increase mainly related to an increase in headcount-related expenses driven by the negative impact of our increasing stock price.
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 in Palo 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.
General and Administrative Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
General and administrative expenses | $ | (152,634) | | | $ | (116,395) | | | $ | (139,754) | | | 31% | | (17)% |
% of revenue | (7) | % | | (6) | % | | (6) | % | | | | |
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 $(23.4) million, or (17)%, compared to 2019. This decrease was mostly driven by a decrease in headcount-related costs, a lower share-based compensation expense and a decrease in rent and facilities costs, following the right-sizing of our real estate footprint, partially offset by transformation fees.
Financial and Other Income (Expense)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | % change |
| 2021 | | 2020 | | 2019 | | 2021 vs 2020 | | 2020 vs 2019 |
| (in thousands, except percent of revenue) | | | | |
Financial and Other Income (Expense) | $ | 1,939 | | | $ | (1,939) | | | $ | (5,749) | | | (200)% | | (66)% |
% of revenue | 0.1 | % | | (0.1) | % | | (0.3) | % | | | | |
2021 Compared to 2020
Financial and Other Income for 2021 decreased by $(3.9) million, or (200)% compared to 2020. The $(1.9) million financial and other income for the period ended December 31, 2021 was mainly driven by the financial expense relating to our $350 million available Revolving Credit Facility (RCF), including up-front fees amortization and non-utilization costs, partially offset by income from cash and cash equivalent. Financial and Other income for 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 ended December 31, 2020 was mainly driven by the financial expense relating to the €140 million drawing from May 2020 to November 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. At December 31, 2020, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
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 at December 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 to Criteo 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) and Criteo 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.
Amounts recognized in our Consolidated Financial Statements are calculated at the level of each subsidiary within our Consolidated Financial Statements. As at December 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 to Criteo 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) and Criteo 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.
Non-GAAP Financial Measure Reconciliation
Reconciliation of Contribution ex-TAC to Gross Profit
We define Contribution ex-TAC as a profitability measure akin to gross profit. It is calculated by deducting traffic acquisition costs from revenue and reconciled to gross profit through the exclusion of other cost of revenue. Contribution ex-TAC is not a measure calculated in accordance with U.S. GAAP. We have included Contribution ex-TAC because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions. In particular, we believe that this measure can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Contribution ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Contribution ex-TAC has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Contribution ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Contribution ex-TAC alongside our other U.S. GAAP financial result measures. The below table provides a reconciliation of Contribution ex-TAC to gross profit:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| December 31, |
| 2021 | | 2020 | | 2019 |
| | (in thousands) |
Gross Profit | | 781,944 | | | 688,018 | | | 829,036 | |
| | | | | | |
Other Cost of Revenue | | 138,851 | | | 137,028 | | | 117,533 | |
| | | | | | |
Contribution ex-TAC | | $ | 920,795 | | | $ | 825,046 | | | $ | 946,569 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Reconciliation of Adjusted EBITDA to Net Income
We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, acquisition-related costs and restructuring related and transformation costs. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted EBITDA because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short-term and long-term operational plans. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, and restructuring related and transformation costs in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our U.S. GAAP financial results, including net income.
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| | (in thousands) |
Net income | | $ | 137,647 | | | $ | 74,689 | | | $ | 95,969 | |
Adjustments: | | | | | | |
Financial (Income) expense | | 1,044 | | | 1,939 | | | 5,749 | |
Provision for income taxes | | 16,169 | | | 32,197 | | | 39,496 | |
Equity awards compensation expense | | 44,955 | | | 31,425 | | | 49,132 | |
Research and development | | 16,334 | | | 10,253 | | | 15,036 | |
Sales and operations | | 13,023 | | | 12,042 | | | 19,301 | |
General and administrative | | 15,598 | | | 9,130 | | | 14,795 | |
Pension service costs | | 1,324 | | | 2,232 | | | 1,556 | |
Research and development | | 686 | | | 1,114 | | | 760 | |
Sales and operations | | 207 | | | 394 | | | 283 | |
General and administrative | | 431 | | | 724 | | | 513 | |
Depreciation and amortization expense | | 88,402 | | | 88,238 | | | 93,488 | |
Cost of revenue (data center equipment) | | 61,119 | | | 55,935 | | | 44,866 | |
Research and development | | 9,484 | | | 10,741 | | | 16,508 | |
Sales and operations | | 14,780 | | | 16,770 | | | 24,914 | |
General and administrative | | 3,019 | | | 4,792 | | | 7,200 | |
Acquisition-related costs | | 11,256 | | | 286 | | | — | |
| | | | | | |
| | | | | | |
General and administrative | | 11,256 | | | 286 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Restructuring related and transformation (gain) costs (1) | | 21,698 | | | 19,989 | | | 13,582 | |
| | | | | | |
Research and development | | 5,751 | | | 4,240 | | | 2,000 | |
Sales and operations | | 9,380 | | | 9,398 | | | 8,810 | |
General and administrative | | 6,567 | | | 6,351 | | | 2,772 | |
Total net adjustments | | 184,848 | | | 176,306 | | | 203,003 | |
Adjusted EBITDA | | $ | 322,495 | | | $ | 250,995 | | | $ | 298,972 | |
(1) For the Twelve Months Ended December 2021, 2020 and 2019, respectively, the Company recognized restructuring related and transformation costs following its new organizational structure implemented to support its Commerce Media Platform strategy:
| | | | | | | | | | | | | | | | | | | | |
| | Twelve Months Ended |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
(Gain) from forfeitures of share-based compensation awards | | (427) | | | (2,655) | | | (8,133) | |
Depreciation and amortization expense | | — | | | — | | | 1,161 | |
Facilities related (gain) costs | | 16,020 | | | 12,975 | | | 11,080 | |
Payroll related (gain) costs | | 4,480 | | | 5,911 | | | 9,474 | |
Consulting costs related to transformation | | 1,625 | | | 3,758 | | | — | |
Total restructuring related and transformation (gain) costs | | $ | 21,698 | | | $ | 19,989 | | | $ | 13,582 | |
For the twelve months ended December 31, 2021 and December 31, 2020, respectively, the cash outflows related to restructuring related and transformation costs were $3.9 million and $16.9 million respectively, and were mainly comprised of payroll costs, broker and termination penalties related to real-estate facilities and other consulting fees.
Unaudited Quarterly Results of Operations
The following tables set forth our unaudited consolidated statement of income data for the last eight quarters, as well as the percentage of revenue for each line item shown. We derived this information from our unaudited interim consolidated financial information, which, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. The quarterly results of operations have been prepared by, and are the responsibility of, our management and have not been audited or reviewed by our independent registered public accounting firm. You should read this information together with our audited consolidated financial statements and related notes beginning on page F-1.
| | | | Three Months Ended | | Three Months Ended |
| | March 31, 2016 |
| June 30, 2016 |
| September 30, 2016 |
| December 31, 2016 |
| March 31, 2017 |
| June 30, 2017 |
| September 30, 2017 |
| December 31, 2017 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| | (in thousands) (unaudited) | | (in thousands) |
Consolidated Statements of Income Data: | Consolidated Statements of Income Data: | | | | | | | | | | | | | | | | Consolidated Statements of Income Data: | |
| Revenue | $ | 401,253 |
|
| $ | 407,201 |
|
| $ | 423,867 |
|
| $ | 566,825 |
|
| $ | 516,667 |
|
| $ | 542,022 |
|
| $ | 563,973 |
|
| $ | 674,031 |
| | Revenue | $ | 653,267 | | | $ | 508,580 | | | $ | 551,311 | | | $ | 541,077 | | | $ | 661,282 | | | $ | 470,345 | | | $ | 437,614 | | | $ | 503,376 | |
| Cost of revenue (1) | | | | | | | | | | | | | | | | | Cost of revenue (1) | |
| | Traffic acquisition costs | (238,755 | ) |
| (240,969 | ) |
| (247,310 | ) |
| (341,877 | ) |
| (306,693 | ) |
| (322,200 | ) |
| (329,576 | ) |
| (397,087 | ) | | Traffic acquisition costs | (377,076) | | | (297,619) | | | (331,078) | | | (327,667) | | | (408,108) | | | (284,401) | | | (257,698) | | | (297,364) | |
| | Other cost of revenue | (18,338 | ) |
| (20,279 | ) |
| (22,332 | ) |
| (24,309 | ) |
| (27,155 | ) |
| (32,808 | ) |
| (29,951 | ) |
| (31,727 | ) | | Other cost of revenue | (31,840) | | | (34,935) | | | (37,364) | | | (34,712) | | | (34,700) | | | (34,608) | | | (33,914) | | | (33,806) | |
| Gross profit | 144,160 |
| | 145,953 |
| | 154,225 |
| | 200,639 |
| | 182,819 |
| | 187,014 |
| | 204,446 |
| | 245,217 |
| | Gross profit | 244,351 | | | 176,026 | | | 182,869 | | | 178,698 | | | 218,474 | | | 151,336 | | | 146,002 | | | 172,206 | |
| Operating expenses (1): | | | | | | | | | | | | | | | | | Operating expenses (1) | | | | | | | | | | | | | | | |
| | Research and development expenses | (27,162 | ) |
| (30,235 | ) |
| (30,701 | ) |
| (35,552 | ) |
| (39,521 | ) |
| (43,611 | ) |
| (43,860 | ) |
| (46,933 | ) | | Research and development expenses | (44,860) | | | (33,345) | | | (41,915) | | | (31,697) | | | (32,797) | | | (30,954) | | | (31,247) | | | (37,515) | |
| | Sales and operations expenses | (64,473 | ) |
| (69,225 | ) |
| (68,164 | ) |
| (80,991 | ) |
| (90,730 | ) |
| (97,900 | ) |
| (95,184 | ) |
| (96,834 | ) | | Sales and operations expenses | (89,892) | | | (75,619) | | | (80,751) | | | (79,354) | | | (85,871) | | | (83,659) | | | (75,781) | | | (84,974) | |
| | General and administrative expenses | (24,737 | ) |
| (28,610 | ) |
| (32,492 | ) |
| (31,630 | ) |
| (31,516 | ) |
| (32,239 | ) |
| (32,389 | ) |
| (30,934 | ) | | General and administrative expenses | (43,855) | | | (34,877) | | | (40,474) | | | (33,428) | | | (32,623) | | | (28,672) | | | (29,185) | | | (25,915) | |
| | Total operating expenses | (116,372 | ) | | (128,070 | ) | | (131,357 | ) | | (148,173 | ) | | (161,767 | ) | | (173,750 | ) | | (171,433 | ) | | (174,701 | ) | | Total operating expenses | (178,607) | | | (143,841) | | | (163,140) | | | (144,479) | | | (151,291) | | | (143,285) | | | (136,213) | | | (148,404) | |
| Income from operations | 27,788 |
| | 17,883 |
| | 22,868 |
| | 52,466 |
| | 21,052 |
| | 13,264 |
| | 33,013 |
| | 70,516 |
| | Income from operations | 65,744 | | | 32,185 | | | 19,729 | | | 34,219 | | | 67,183 | | | 8,051 | | | 9,789 | | | 23,802 | |
| Financial income (expense) | (1,317 | ) |
| (94 | ) |
| (570 | ) |
| 1,435 |
|
| (2,333 | ) |
| (2,094 | ) |
| (2,886 | ) |
| (2,221 | ) | | Financial and Other income (expense) | 3,330 | | | (154) | | | (519) | | | (718) | | | (111) | | | (491) | | | (1,003) | | | (334) | |
| Income before taxes | 26,471 |
| | 17,789 |
| | 22,298 |
| | 53,901 |
| | 18,719 |
| | 11,170 |
| | 30,127 |
| | 68,295 |
| | Income before taxes | 69,074 | | | 32,031 | | | 19,210 | | | 33,501 | | | 67,072 | | | 7,560 | | | 8,786 | | | 23,468 | |
| Provision for income taxes | (7,944 | ) |
| (4,450 | ) |
| (7,574 | ) |
| (13,161 | ) |
| (4,201 | ) |
| (3,665 | ) |
| (7,858 | ) |
| (15,927 | ) | | Provision for income taxes | 5,864 | | | (7,801) | | | (4,181) | | | (10,051) | | | (20,254) | | | (2,267) | | | (2,636) | | | (7,040) | |
| Net income | $ | 18,527 |
| | $ | 13,339 |
| | $ | 14,724 |
| | $ | 40,740 |
| | $ | 14,518 |
| | $ | 7,505 |
| | $ | 22,269 |
| | $ | 52,368 |
| | Net income | $ | 74,938 | | | $ | 24,230 | | | $ | 15,029 | | | $ | 23,450 | | | $ | 46,818 | | | $ | 5,293 | | | $ | 6,150 | | | $ | 16,428 | |
| Net income available to shareholders of Criteo S.A. | 17,131 |
|
| 12,200 |
|
| 13,539 |
|
| 39,403 |
|
| 12,442 |
|
| 5,970 |
|
| 19,774 |
|
| 53,030 |
| | Net income available to shareholders of Criteo S.A. | 73,765 | | | 23,481 | | | 14,804 | | | 22,406 | | | 45,277 | | | 5,227 | | | 5,716 | | | 15,459 | |
Other Financial Data: | Other Financial Data: | | | | | | | | | | | | | | | | Other Financial Data: | |
Revenue ex-TAC (2) | $ | 162,498 |
| | $ | 166,232 |
| | $ | 176,557 |
| | $ | 224,948 |
| | $ | 209,974 |
| | $ | 219,822 |
| | $ | 234,397 |
| | $ | 276,944 |
| |
Contribution ex-TAC (2) | | Contribution ex-TAC (2) | $ | 276,191 | | | $ | 210,961 | | | $ | 220,233 | | | $ | 213,410 | | | $ | 253,174 | | | $ | 185,944 | | | $ | 179,916 | | | $ | 206,012 | |
Adjusted EBITDA (3) | Adjusted EBITDA (3) | $ | 48,843 |
|
| $ | 39,201 |
|
| $ | 53,532 |
|
| $ | 82,995 |
|
| $ | 56,454 |
|
| $ | 54,086 |
|
| $ | 79,116 |
|
| $ | 119,928 |
| Adjusted EBITDA (3) | $ | 110,867 | | | $ | 68,430 | | | $ | 67,269 | | | $ | 79,929 | | | $ | 103,423 | | | $ | 49,471 | | | $ | 38,911 | | | $ | 59,190 | |
(1) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense and acquisition-related costs and deferred price consideration as follows:
| | | Three Months Ended | | Three Months Ended |
| March 31, 2016 |
| June 30, 2016 |
| September 30, 2016 |
| December 31, 2016 |
| March 31, 2017 |
| June 30, 2017 |
| September 30, 2017 |
| December 31, 2017 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| (in thousands) (unaudited) | | (in thousands) |
Equity awards compensation expense | | | | | | | | | | | | | | | | Equity awards compensation expense | |
Research and development expenses | $ | 2,402 |
|
| $ | 2,179 |
|
| $ | 4,667 |
|
| $ | 2,860 |
|
| $ | 3,916 |
|
| $ | 4,461 |
|
| $ | 6,361 |
|
| $ | 6,355 |
| Research and development expenses | 4,762 | | | 4,858 | | | 4,218 | | | 2,496 | | | 2,482 | | | 3,333 | | | 2,068 | | | 2,370 | |
Sales and operations expenses | 3,390 |
|
| 2,488 |
|
| 5,143 |
|
| 5,816 |
|
| 6,710 |
|
| 6,401 |
|
| 9,897 |
|
| 8,377 |
| Sales and operations expenses | 3,143 | | | 3,875 | | | 3,636 | | | 2,369 | | | 3,662 | | | 3,190 | | | 1,572 | | | 3,618 | |
General and administrative expenses | 2,578 |
|
| 3,028 |
|
| 4,155 |
|
| 4,553 |
|
| 4,314 |
|
| 4,056 |
|
| 5,770 |
|
| 5,732 |
| General and administrative expenses | 4,209 | | | 4,557 | | | 3,815 | | | 3,017 | | | 2,816 | | | 280 | | | 3,519 | | | 2,515 | |
Total equity awards compensation expense (a) | $ | 8,370 |
| | $ | 7,695 |
| | $ | 13,965 |
| | $ | 13,229 |
| | $ | 14,940 |
| | $ | 14,918 |
| | $ | 22,028 |
| | $ | 20,464 |
| Total equity awards compensation expense (a) | 12,114 | | | 13,290 | | | 11,669 | | | 7,882 | | | 8,960 | | | 6,803 | | | 7,159 | | | 8,503 | |
| | | | | | | | | | | | | | | | | |
Pension service costs | | | | | | | | | | | | | | | | Pension service costs | |
Research and development expenses | $ | 52 |
|
| $ | 53 |
|
| $ | 55 |
|
| $ | 52 |
|
| $ | 146 |
|
| $ | 151 |
|
| $ | 161 |
|
| $ | 162 |
| Research and development expenses | 166 | | | 170 | | | 175 | | | 175 | | | 290 | | | 286 | | | 269 | | | 269 | |
Sales and operations expenses | 34 |
|
| 35 |
|
| 38 |
|
| 37 |
|
| 59 |
|
| 60 |
|
| 65 |
|
| 63 |
| Sales and operations expenses | 49 | | | 52 | | | 53 | | | 53 | | | 103 | | | 101 | | | 95 | | | 95 | |
General and administrative expenses | 43 |
|
| 43 |
|
| 39 |
|
| 44 |
|
| 85 |
|
| 88 |
|
| 94 |
|
| 96 |
| General and administrative expenses | 104 | | | 108 | | | 109 | | | 110 | | | 190 | | | 185 | | | 175 | | | 174 | |
Total pension service costs | $ | 129 |
| | $ | 131 |
| | $ | 132 |
| | $ | 133 |
| | $ | 290 |
| | $ | 299 |
| | $ | 320 |
| | $ | 321 |
| Total pension service costs | 319 | | | 330 | | | 337 | | | 338 | | | 583 | | | 572 | | | 539 | | | 538 | |
| | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | | | | | | | | | | | | | | Depreciation and amortization expense | |
Cost of revenue | $ | 8,220 |
|
| $ | 9,220 |
|
| $ | 10,407 |
|
| $ | 10,623 |
|
| $ | 11,091 |
|
| $ | 13,003 |
|
| $ | 14,320 |
|
| $ | 15,575 |
| Cost of revenue | 14,611 | | | 15,520 | | | 15,744 | | | 15,244 | | | 15,354 | | | 14,712 | | | 13,098 | | | 12,771 | |
Research and development expenses | 2,007 |
|
| 1,457 |
|
| 1,640 |
|
| 2,106 |
|
| 2,944 |
|
| 3,092 |
|
| 2,822 |
|
| 2,369 |
| Research and development expenses | 2,967 | | | 2,557 | | | 2,207 | | | 1,753 | | | 1,712 | | | 1,721 | | | 1,658 | | | 5,650 | |
Sales and operations expenses | 1,771 |
|
| 2,019 |
|
| 1,813 |
|
| 2,153 |
|
| 4,961 |
|
| 4,925 |
|
| 5,102 |
|
| 4,856 |
| Sales and operations expenses | 3,579 | | | 3,545 | | | 3,702 | | | 3,954 | | | 4,033 | | | 4,176 | | | 4,221 | | | 4,340 | |
General and administrative expenses | 518 |
|
| 604 |
|
| 911 |
|
| 1,308 |
|
| 1,171 |
|
| 1,286 |
|
| 1,511 |
|
| 1,770 |
| General and administrative expenses | 599 | | | 679 | | | 838 | | | 903 | | | 1,041 | | | 1,143 | | | 1,231 | | | 1,377 | |
Total depreciation and amortization expense | $ | 12,516 |
| | $ | 13,300 |
| | $ | 14,771 |
| | $ | 16,190 |
| | $ | 20,167 |
| | $ | 22,306 |
| | $ | 23,755 |
| | $ | 24,570 |
| Total depreciation and amortization expense | 21,756 | | | 22,301 | | | 22,491 | | | 21,854 | | | 22,140 | | | 21,752 | | | 20,208 | | | 24,138 | |
| | | | | | | | | | | | | | | | | |
Acquisition-related costs | | | | | | | | | | | | | | | | Acquisition-related costs | |
General and administrative expenses | $ | — |
|
| $ | 148 |
|
| $ | 1,793 |
|
| $ | 980 |
|
| $ | 6 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| General and administrative expenses | 6,118 | | | 2,091 | | | 3,047 | | | — | | | 174 | | | 112 | | | — | | | — | |
Total depreciation and amortization expense | $ | — |
| | $ | 148 |
| | $ | 1,793 |
| | $ | 980 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Acquisition-related deferred price consideration | | | | | | | | | | | | | | | | |
Total acquisition-related costs | | Total acquisition-related costs | 6,118 | | | 2,091 | | | 3,047 | | | — | | | 174 | | | 112 | | | — | | | — | |
| | Restructuring related and transformation costs | | Restructuring related and transformation costs | |
| Research and development expenses | $ | 40 |
|
| $ | 44 |
|
| $ | 3 |
|
| $ | (3 | ) |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| Research and development expenses | 513 | | | (1,029) | | | 4,831 | | | 1,436 | | | 747 | | | 1,985 | | | 513 | | | 995 | |
Sales and operations expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| Sales and operations expenses | 568 | | | (106) | | | 1,551 | | | 7,367 | | | 2,605 | | | 5,357 | | | 415 | | | 1,021 | |
General and administrative expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| General and administrative expenses | 752 | | | (632) | | | 3,614 | | | 2,833 | | | 1,031 | | | 4,839 | | | 288 | | | 193 | |
Total acquisition-related deferred price consideration | $ | 40 |
| | $ | 44 |
| | $ | 3 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Restructuring | | | | | | | | | | | | | | | | |
Cost of revenue | $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 2,497 |
|
| $ | — |
|
| $ | — |
| |
Research and development expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,911 |
| |
Sales and operations expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 690 |
|
| — |
|
| 1,135 |
| |
General and administrative expenses | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 112 |
|
| — |
|
| 11 |
| |
Total restructuring | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,299 |
| | $ | — |
| | $ | 4,057 |
| |
Total restructuring related and transformation costs (b) | | Total restructuring related and transformation costs (b) | $ | 1,833 | | | $ | (1,767) | | | $ | 9,996 | | | $ | 11,636 | | | $ | 4,383 | | | $ | 12,181 | | | $ | 1,216 | | | $ | 2,209 | |
We are mainly exposed to changes of foreign currency exchange rate fluctuations.
The functional currency of the Company is the euro, while our reporting currency is the U.S. dollar. Consequently, as a first step, sinceBecause we incur portionssome of our expenses and derive revenues in currencies other than the euro, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro. The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statement of income, statement of comprehensive income and statement of cash flow of such consolidated entities are translated at the average period to date exchange rate. The resulting translation adjustments are included in equity under the caption “Accumulated Other Comprehensive Income” in the Consolidated Statement of Changes in Equity.
Since 2013, the Company has had a foreign currency risk management policy in place. At December 31, 2017,2021, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
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.
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.
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 in Paris, Grenoble, France Palo Alto, California and Ann 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 701682 employees primarily engaged in research and development at December 31, 2017.2021. Research and development expense totaled $86.8$151.8 million, $123.6$132.5 million and $173.9$172.6 million for 2015, 20162021, 2020 and 2017,2019, respectively.