Criteo S.A 10-Q for FY2020 Q3
Criteo S.A. (CRTO)
10-Q
2020-10-29
For: 2020-09-30
View Original
Added on
April 08, 2026
About this 10-Q
Criteo S.A filed this 10-Q on October 29, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $470.35M
- down 10.0% from $522.61M a year earlier
- Net income
- $5.23M
- down 72.2% from net income of $18.78M a year earlier
- Diluted EPS
- $0.09
- down 67.9% from $0.28 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
for the quarterly period ended September 30, 2020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
for the transition period from _________ to _________
Commission file number: 001-36153
(Exact name of registrant as specified in its charter)
Not Applicable | |||||||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | ||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
+33 1 40 40 22 90
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
nominal value €0.025 per share | ||||||||||||||
| * | * | |||||||||||||
* Not for trading, but only in connection with the registration of the American Depositary Shares.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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.
| ☒ | Accelerated Filer | ☐ | |||||||||
| Non-accelerated Filer | ☐ | Smaller reporting company | |||||||||
Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x
As of October 29, 2020, the registrant had 60,241,537 ordinary shares, nominal value €0.025 per share, outstanding.
TABLE OF CONTENTS
General
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q, references to "$" and "US$" are to United States dollars. Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or "U.S. GAAP."
Trademarks
“Criteo,” the Criteo logo and other trademarks or service marks of Criteo appearing in this Form 10-Q are the property of Criteo. Trade names, trademarks and service marks of other companies appearing in this Form 10-Q are the property of their respective holders.
Special Note Regarding Forward-Looking Statements
This Form 10-Q 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-Q, including statements regarding our future results of operations and financial position, business strategy, plans and objectives for future operations, are forward-looking statements. When used in this Form 10-Q, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
•the impact of COVID-19 on our workforce, operations and revenue, as well as on the workforce, operations and revenue of our customers, and the effectiveness of our actions taken in response to COVID-19;
•the ability of the Criteo Engine to accurately predict engagement by a user;
•our ability to predict and adapt to changes in widely adopted industry platforms and other new technologies;
•our ability to continue to collect and utilize data about user behavior and interaction with advertisers;
•our ability to acquire an adequate supply of advertising inventory from publishers on terms that are favorable to us;
•our ability to meet the challenges of a growing and international company in a rapidly developing and changing industry, including our ability to forecast accurately;
•our ability to maintain an adequate rate of revenue growth and sustain profitability;
•our ability to manage our international operations and expansion and the integration of our acquisitions;
•the effects of increased competition in our market;
•our ability to adapt to regulatory, legislative or self-regulatory developments regarding internet privacy matters;
•our ability to protect users’ information and adequately address privacy concerns;
•our ability to enhance our brand;
•our ability to enter new marketing channels and new geographies;
•our ability to effectively scale our technology platform;
•our ability to attract and retain qualified employees and key personnel;
•our ability to maintain, protect and enhance our brand and intellectual property; and
•failures in our systems or infrastructure.
You should also refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2019, Part II, Item 1A "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and to Part II, Item 1A "Risk Factors" of this Form 10-Q, 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-Q 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. The degree to which COVID-19 may affect our results and operations will depend on future developments that are highly uncertain, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. 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-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q 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 factors.
This Form 10-Q may contain market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-Q is generally reliable, such information is inherently imprecise.
PART I
Item 1. Financial Statements.
CRITEO S.A. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
| Notes | December 31, 2019 | September 30, 2020 | ||||||||||||
| (in thousands) | ||||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | 3 | $ | $ | |||||||||||
Trade receivables, net of allowances of $ | 4 | |||||||||||||
| Income taxes | ||||||||||||||
| Other taxes | ||||||||||||||
| Other current assets | 5 | |||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Intangible assets, net | 6 | |||||||||||||
| Goodwill | 6 | |||||||||||||
| Right of use assets - operating lease | 8 | |||||||||||||
| Marketable securities | 3 | |||||||||||||
| Non-current financial assets | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Total non-current assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and shareholders' equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Trade payables | $ | $ | ||||||||||||
| Contingencies | 14 | |||||||||||||
| Income taxes | ||||||||||||||
| Financial liabilities - current portion | 3 | |||||||||||||
| Operating lease liabilities - current portion | 8 | |||||||||||||
| Other taxes | ||||||||||||||
| Employee - related payables | ||||||||||||||
| Other current liabilities | 7 | |||||||||||||
| Total current liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Retirement benefit obligation | ||||||||||||||
| Financial liabilities - non-current portion | 3 | |||||||||||||
| Operating lease liabilities - non-current portion | 8 | |||||||||||||
| Other non-current liabilities | ||||||||||||||
| Total non-current liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
| Shareholders' equity: | ||||||||||||||
Common shares, € | ||||||||||||||
Treasury stock, | ( | ( | ||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Equity-attributable to shareholders of Criteo S.A. | ||||||||||||||
| Non-controlling interests | ||||||||||||||
| Total equity | ||||||||||||||
| Total equity and liabilities | $ | $ | ||||||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
2
CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| Notes | September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||||
| (in thousands, except share per data) | |||||||||||||||||||||||||||||
| Revenue | 9 | $ | $ | $ | $ | ||||||||||||||||||||||||
| Cost of revenue: | |||||||||||||||||||||||||||||
| Traffic acquisition costs | ( | ( | ( | ( | |||||||||||||||||||||||||
| Other cost of revenue | ( | ( | ( | ( | |||||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Research and development expenses | ( | ( | ( | ( | |||||||||||||||||||||||||
| Sales and operations expenses | ( | ( | ( | ( | |||||||||||||||||||||||||
| General and administrative expenses | ( | ( | ( | ( | |||||||||||||||||||||||||
| Total operating expenses | ( | ( | ( | ( | |||||||||||||||||||||||||
| Income from operations | |||||||||||||||||||||||||||||
| Financial expense | 11 | ( | ( | ( | ( | ||||||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||||||||
| Provision for income taxes | 12 | ( | ( | ( | ( | ||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income available to shareholders of Criteo S.A. | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income available to non-controlling interests | $ | $ | $ | $ | |||||||||||||||||||||||||
| Net income allocated to shareholders of Criteo S.A. per share: | |||||||||||||||||||||||||||||
| Basic | 13 | $ | $ | $ | $ | ||||||||||||||||||||||||
| Diluted | 13 | $ | $ | $ | $ | ||||||||||||||||||||||||
| Weighted average shares outstanding used in computing per share amounts: | |||||||||||||||||||||||||||||
| Basic | 13 | ||||||||||||||||||||||||||||
| Diluted | 13 | ||||||||||||||||||||||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
3
CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Foreign currency translation differences, net of taxes | ( | ( | |||||||||||||||||||||
| Actuarial (losses) gains on employee benefits, net of taxes | ( | ( | ( | ||||||||||||||||||||
| Other comprehensive income (loss) | $ | ( | $ | $ | ( | $ | |||||||||||||||||
| Total comprehensive income (loss) | $ | ( | $ | $ | $ | ||||||||||||||||||
| Attributable to shareholders of Criteo S.A. | $ | ( | $ | $ | $ | ||||||||||||||||||
| Attributable to non-controlling interests | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
4
CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
| Share capital | Treasury Stock | Additional paid-in capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Equity - attributable to shareholders of Criteo S.A. | Non controlling interest | Total equity | |||||||||||||||||||||||||
| Common shares | Shares | |||||||||||||||||||||||||||||||
| (in thousands, except share amounts ) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2018 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | |||||||||||||||||||||||||||
| Change in treasury stocks | ( | ( | ( | — | ( | — | — | — | ||||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ( | |||||||||||||||||||||||||
| Other changes in equity | — | — | — | ( | — | — | ||||||||||||||||||||||||||
| Balance at March 31, 2019 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Change in treasury stocks | — | — | — | — | ( | — | — | — | ||||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other changes in equity | — | — | — | — | ( | ( | — | |||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Change in treasury stocks | — | — | ( | ( | — | ( | ( | ( | — | ( | ||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Effect of changes in consolidation scope | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Other changes in equity | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Balance at September, 2019 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
5
| Share capital | Treasury Stock | Additional paid-in capital | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Equity - attributable to shareholders of Criteo S.A. | Non controlling interest | Total equity | |||||||||||||||||||||||||
| Common shares | Shares | |||||||||||||||||||||||||||||||
| (in thousands, except share amounts ) | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2019 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Change in treasury stocks | — | — | ( | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other changes in equity (*) | — | — | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||
| Balance at March 31, 2020 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Change in treasury stocks | — | — | ( | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other changes in equity | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
| Net income | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of ordinary shares | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Change in treasury stocks | — | — | ( | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||
| Share-Based Compensation | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other changes in equity (**) | ( | ( | — | ( | — | — | ||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | ( | $( | $ | $( | $ | $ | $ | $ | |||||||||||||||||||||||
(*) From January 1, 2020, we adopted ASU 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 issued by the Financial Accounting Standards Board (FASB).
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
6
CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||||||||
| Non-cash and non-operating items | |||||||||||||||||||||||||||||
| - Amortization and provisions | |||||||||||||||||||||||||||||
| - Net gain or loss on disposal of non-current assets | |||||||||||||||||||||||||||||
- Equity awards compensation expense (1) | |||||||||||||||||||||||||||||
| - Change in deferred taxes | ( | ( | ( | ( | |||||||||||||||||||||||||
| - Change in income taxes | ( | ( | |||||||||||||||||||||||||||
| - Other | ( | ||||||||||||||||||||||||||||
| Changes in working capital related to operating activities | |||||||||||||||||||||||||||||
| - (Increase) / Decrease in trade receivables | ( | ||||||||||||||||||||||||||||
| - Increase / (Decrease) in trade payables | ( | ( | ( | ||||||||||||||||||||||||||
| - (Increase) / Decrease in other current assets | ( | ||||||||||||||||||||||||||||
| - Increase/ (Decrease) in other current liabilities | ( | ( | ( | ||||||||||||||||||||||||||
| - Change in operating lease liabilities and right of use assets | ( | ( | ( | ||||||||||||||||||||||||||
| Cash from operating activities | |||||||||||||||||||||||||||||
| Acquisition of intangible assets, property, plant and equipment | ( | ( | ( | ( | |||||||||||||||||||||||||
| Change in accounts payable related to intangible assets, property, plant and equipment | ( | ||||||||||||||||||||||||||||
| (Payment for) Disposal of a business, net of cash acquired (disposed) | ( | ( | ( | ||||||||||||||||||||||||||
| Change in other non-current financial assets | ( | ( | ( | ( | |||||||||||||||||||||||||
| Cash used for investing activities | ( | ( | ( | ( | |||||||||||||||||||||||||
| Proceeds from borrowings under line-of-credit agreement | |||||||||||||||||||||||||||||
| Repayment of borrowings | ( | ( | ( | ( | |||||||||||||||||||||||||
| Proceeds from capital increase | |||||||||||||||||||||||||||||
| Repurchase of treasury stocks | ( | ( | ( | ( | |||||||||||||||||||||||||
| Change in other financial liabilities | ( | ( | ( | ( | |||||||||||||||||||||||||
| Cash (used for) from financing activities | ( | ( | ( | ||||||||||||||||||||||||||
| Effect of exchange rates changes on cash and cash equivalents | ( | ( | |||||||||||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||||||||||||||||||||
| Net cash and cash equivalents at beginning of period | |||||||||||||||||||||||||||||
| Net cash and cash equivalents at end of period | $ | $ | $ | $ | |||||||||||||||||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||||||||||||||
| Cash paid for taxes, net of refunds | ( | ( | ( | ||||||||||||||||||||||||||
| Cash paid for interest | ( | ( | ( | ( | |||||||||||||||||||||||||
(1) Of which $10.8 million and $6.5 million of equity awards compensation expense consisted of share-based compensation expense according to ASC 718 Compensation - stock compensation for the quarter ended September 30, 2019 and 2020, respectively, and $35.7 million and $21.4 million for the nine months ended September 30, 2019 and 2020, respectively.
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.
7
CRITEO S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Criteo S.A. was initially incorporated as a société par actions simplifiée, or S.A.S., under the laws of the French Republic on November 3, 2005, for a period of 99 years and subsequently converted to a société anonyme, or S.A.
We are a global technology company powering the world's marketers with trusted and impactful advertising. We strive to deliver measurable business results at scale across multiple marketing goals for retailers and brands, through our Commerce Media Platform. Using shopping data, artificial intelligence ("AI") technology and extensive consumer reach, we help marketers drive awareness, consideration and conversion for their products and services, and help retailers generate advertising revenues from consumer brands. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive trusted and impactful advertising for marketers, we activate our data assets in a privacy-by-design way through proprietary AI technology to engage consumers in real time by designing, pricing and delivering highly relevant digital advertisements ("ads") across devices and environments. We price our offering on a range of pricing models and measure our value based on clear, well-defined performance metrics, making our impact on the business of our clients both transparent and easy to measure.
In these notes, Criteo S.A. is referred to as the "Parent" company and together with its subsidiaries, collectively, as "Criteo," the "Company," the "Group," or "we".
___________________________________________________
1 Driving Awareness for a brand means exposing its brand name to consumers who have not been in touch with the brand before, thereby creating brand awareness from such consumers. Driving Consideration for an advertiser's products or services means attracting prospective new consumers to consider engaging with and/or buying this advertiser's products or services. Driving Conversion for an advertisers' products or services means triggering a purchase by consumers who have already engaged with this advertisers products or services in the past.
8
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements included herein (the "Unaudited Condensed Consolidated Financial Statements") have been prepared by Criteo S.A. pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
Conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. Our actual results may differ from these estimates. U.S. GAAP requires us to make estimates and judgments in several areas, including, but not limited to: (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 severity, magnitude, duration and after effects of the COVID-19 pandemic on the general economic conditions increase uncertainty associated with these estimates, in particular those related to allowance for credit losses, assumptions used in the valuation of goodwill and estimates relating to income taxes.
Accounting Pronouncements Adopted in 2020
Effective January 1, 2020, we have adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 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. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This results in earlier recognition of credit losses.
We measure loss allowances for all trade receivables using the lifetime expected credit loss approach, as described above. The expected credit losses on these financial assets are estimated using a provision matrix based on the Company’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date.
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Effective January 1, 2020, we have adopted ASU 2017-04, Goodwill and Other (Topic 350). ASU 2017-04 simplifies the subsequent measurement of goodwill and reduces the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. The adoption of the ASU did not have an impact on our financial position or results of operations as we did not recognize an impairment loss during the period.
Effective January 1, 2020, we have adopted ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU was issued to clarify the accounting for implementation costs incurred for SaaS agreements. Previously the guidance only referred to development of internal use software and the accounting for SaaS agreements was not clarified. This ASU states that any capitalized implementation costs would be included in prepaid expenses, amortized over the term of the hosting arrangement on a straight-line basis and presented in the same line items in the Consolidated Statement of Income as the expense for fees of the associated hosting arrangements. The adoption of the standard did not have an impact on our financial position or results of operations, however, it did have a minor impact on expense classification in current and future periods.
Recent Accounting Pronouncements
In August 2018, the FASB issued ASU 2018 - 14, Compensation - Retirement Benefits - Defined Benefit Plans - General. The purpose of this update is to modify disclosure requirements for Defined Benefit Plans. It removes requirements to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year among others. It adds disclosure requirements for the items such as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. We intend to adopt the standard on the effective date of January 1, 2021. The adoption of ASU 2018-14 is not expected to have a material impact on our financial position or results of operations but may have an impact on our disclosures.
In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. We intend to adopt the standard on the effective date of January 1, 2021. The adoption of ASU 2019-12 is not expected to have a material impact on our financial position or results of operations but may have an impact on our disclosures.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s Consolidated Financial Statements upon adoption.
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Note 2. Significant Events and Transactions of the Period
Share repurchase program
On October 25, 2018, Criteo's Board of Directors authorized a share repurchase program of up to $80.0 million of the Company’s outstanding American Depositary Shares. We completed this share repurchase program in 2018. As of December 31, 2018, 3.5 million shares were held as treasury shares.
On February 8, 2019, the Board of Directors authorized the reduction of capital resulting in the formal retirement of 1.6 million treasury shares.
On July 26, 2019, Criteo's Board of Directors authorized a share repurchase program of up to $80.0 million of the Company's outstanding American Depositary Shares. As of December 31, 2019, 3.2 million shares were held as treasury shares as part of the share repurchase program authorized on July 26, 2019. We completed this share repurchase program in February 2020.
On April 23, 2020, Criteo's Board of Directors authorized a share repurchase program of up to $30.0 million of the Company's outstanding American Depositary Shares. We completed this share repurchase program in July 2020.
As of September 30, 2020, we had 6.0 million treasury shares remaining which may be used to satisfy the Company's obligations under its employee equity plans upon RSU vesting in lieu of issuing new shares, and for any potential M&A activity.
| Number of Treasury Shares | Amount (in thousands of dollars) | ||||||||||
| Balance at January 1, 2020 | $ | ||||||||||
| Treasury Shares Repurchased for RSU Vesting | |||||||||||
| Treasury Shares Issued for RSU Vesting | ( | ( | |||||||||
| Balance at September 30, 2020 | $ | ||||||||||
Restructuring
Cessation of our R&D operations in Palo Alto
On October 7, 2019, in connection with the new organization structure, the Company announced a plan to restructure its R&D activities with the closing of its R&D operations in Palo Alto. The Company incurred additional net restructuring costs of $0.06 million and $0.6 million for the three and nine months ended September 30, 2020, respectively, comprising of payroll expenses included in Research and Development expenses.
The following table summarizes restructuring activities as of September 30, 2020 included in other current liabilities on the balance sheet:
| Nine Months Ended | |||||||||||
| September 30, 2020 | |||||||||||
| (in thousands) | |||||||||||
| Restructuring liability - January 1, 2020 | $ | ||||||||||
| Restructuring costs | |||||||||||
| Restructuring costs - non cash items | |||||||||||
| Amount paid | ( | ||||||||||
| Restructuring liability - September 30, 2020 | |||||||||||
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Termination of the Palo Alto Lease
On September 30, 2020, we early terminated the Palo Alto lease, originally expiring in 2027. We incurred broker fees and termination penalties of $4.6 million in connection with this transaction. The net impact of write-offs of the right of use assets, lease liabilities, and fixed assets associated with the lease was nil.
For the three and nine months ended September 30, 2020, $1.5 million was included in Research and Development expenses, $0.8 million was included in General and Administrative expenses and $2.3 million was included in Sales and Operations expenses.
New organization structure
As part of a new organization structure designed to best support our multi-product platform strategy and accelerate execution, commenced in the twelve month period ended December 31, 2019, the Company incurred net restructuring costs of $2.8 million and $3.9 million for the three and nine month periods ended September 30, 2020, respectively, comprising of payroll expenses.
For the three and nine month periods ended September 30, 2020, respectively, nil and $0.2 million was included in Research and Development expenses, $1.3 million and $1.3 million was included in General and Administrative expenses and $1.5 million and $2.4 million was included in Sales and Operations expenses.
The following table summarizes restructuring activities as of September 30, 2020 included in other current liabilities on the balance sheet:
| Nine Months Ended | |||||||||||
| September 30, 2020 | |||||||||||
| (in thousands) | |||||||||||
| Restructuring liability - January 1, 2020 | $ | ||||||||||
| Restructuring costs | |||||||||||
| Amount paid | ( | ||||||||||
| Restructuring liability - September 30, 2020 | |||||||||||
We expect the majority of the cash outlays related to the charges incurred in 2020 will be complete within the next three months.
Changes in Group funding
In September 2015, Criteo S.A. entered into a Multicurrency Revolving Facility Agreement for general purposes of the Group including the funding of business combinations. On May 4, 2020, Criteo decided to draw €140 million ($164 million) under its RCF credit facility for general purposes. The drawdown is for an initial period of six months. In addition, the parties to the RCF agreement have agreed to extend the term of the agreement for one additional year, from March 2022 to March 2023, composed of a €350 million ($410 million) commitment through March 2022, and a €294 million ($344 million) commitment from the end of March 2022 through March 2023. The cost of the one-year extension is 0.025 % of the extended amount.
Changes in Group financial investments
In September 2020, a $20.0 million amount has been invested in a 12 months term deposit with an annual yield of 0.75 %. This new investment is classified as Cash and Cash Equivalents.
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Note 3. Financial Instruments
Financial assets
The maximum exposure to credit risk at the end of each reported period is represented by the carrying amount of financial assets and summarized in the following table:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Trade receivables, net of allowance | |||||||||||
| Other taxes | |||||||||||
| Other current assets | |||||||||||
| Non-current financial assets | |||||||||||
| Marketable Securities | |||||||||||
| Total | $ | $ | |||||||||
Credit Risk
We maintain an allowance for estimated credit losses. During the period ended December 31, 2019 and the nine month period ended September 30, 2020, our net change in allowance for credit losses was $9.9 million and $22.2 million, respectively (note 4). The primary cause of this change was the adoption of , Financial Instruments - Credit Losses (Topic 326) from January 1, 2020 resulting in an earlier recognition of credit losses, the cumulative effect of which, was recorded as an adjustment to retained earnings for $3.5 million (note 1), as well as an increase to the provision due to the expected impact of COVID-19 on the Company's future cash collection.
For our financial assets, the fair value approximates the carrying amount, given the nature of the financial assets and the maturity of the expected cash flows.
Trade Receivables
Credit risk is defined as an unexpected loss in cash and earnings if the client is unable to pay its obligations in due time. We perform internal ongoing credit risk evaluations of our clients. When a possible risk exposure is identified, we require prepayments or pause the provision of services until payment of past due receivables is made.
As of December 31, 2019 and September 30, 2020, no customer accounted for 10% or more of trade receivables.
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Financial Liabilities
| December 31, 2019 | September 30, 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Trade payables | $ | $ | |||||||||||||||||||||
| Other taxes | |||||||||||||||||||||||
| Employee-related payables | |||||||||||||||||||||||
| Other current liabilities | |||||||||||||||||||||||
| Financial liabilities | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
For our financial liabilities, the fair value approximates the carrying amount, given the nature of the financial liabilities and the maturity of the expected cash flows.
We are party to several loan agreements and a revolving credit facility, or RCF, with third-party financial institutions. There have been no significant changes from what was disclosed in Note 12 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 except as presented in note 2 relating to a drawing for a total amount of €140 million ($164 million) under the RCF credit facility for general purposes. The drawdown is for an initial period of six months. In addition, the parties to the RCF agreement have agreed to extend the term of the agreement for one additional year, from March 2022 to March 2023, composed of a €350 million ($410 million) commitment through March 2022, and a €294 344 million) commitment from the end of March 2022 through March 2023. The cost of the one-year extension is 0.025 % of the extended amount.
Fair Value Measurements
We measure the fair value of our cash equivalents and marketable securities, which include interest-bearing bank deposits, as level 2 measurements because they are valued using observable market data.
Financial assets or liabilities include derivative financial instruments used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
Derivative Financial Instruments
Derivatives consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts in financial income (expense), and their position on the balance sheet is based on their fair value at the end of each respective period. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
| December 31, 2019 | September 30, 2020 | ||||||||||
| Derivative Liabilities: | |||||||||||
| Included in financial liabilities - current portion | $ | $ | |||||||||
For our derivative financial instruments, the fair value approximates the carrying amount, given the nature of the derivative financial instruments and the maturity of the expected cash flows.
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Cash and Cash Equivalents
The following table presents for each reporting period, the breakdown of cash and cash equivalents:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash equivalents | $ | $ | |||||||||
| Cash on hand | |||||||||||
| Total cash and cash equivalents | $ | $ | |||||||||
Cash equivalents are investments in interest–bearing bank deposits which meet ASC 230—Statement of Cash flows criteria: short-term, highly liquid investments, for which the risks of changes in value are considered to be insignificant. Interest-bearing bank deposits are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
For our cash and cash equivalents, the fair value approximates the carrying amount, given the nature of the cash and cash equivalents and the maturity of the expected cash flows.
Marketable Securities
We made a €20 million investment in a 24 months term deposit with one of the RCF parties, with a yearly yield of 0.25 %. This investment has been classified under Marketable Securities as a non-current asset as it does not meet the cash and cash equivalent criteria.
We determine the appropriate classification of our investments in marketable securities at the time of purchase and re-evaluate such designation at each balance sheet date. We have classified and accounted for our marketable debt securities as available-for-sale. After consideration of our risk versus reward objectives, as well as our liquidity requirements, management may redeem these debt securities prior to their stated maturities.
The following table presents for each reporting period, the breakdown of the fair value of marketable securities:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Term Deposits | $ | $ | |||||||||
| Marketable Securities | $ | ||||||||||
The gross unrealized gains on our marketable securities were not material as of September 30, 2020.
For our marketable securities, the fair value approximates the carrying amount, given the nature of the term deposit and the maturity of the expected cash flows. The term deposit is considered a level 2 financial instruments as it is measured using valuation techniques based on observable market data.
The following table classifies our marketable securities by contractual maturities:
| September 30, 2020 | |||||
| (in thousands) | |||||
| Due in one year | $ | ||||
| Due in one to five years | $ | ||||
| Total | $ | ||||
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Note 4. Trade Receivables
The following table shows the breakdown in trade receivables net book value for the presented periods:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Trade accounts receivables | $ | $ | |||||||||
| (Less) Allowance for credit losses | ( | ( | |||||||||
| Net book value at end of period | $ | $ | |||||||||
Changes in allowance for credit accounts are summarized below:
| 2019 | 2020 | ||||||||||
| (in thousands) | |||||||||||
| Balance at January 1 | $ | ( | $ | ( | |||||||
| Allowance for credit losses through retained earnings (*) | ( | ||||||||||
| Allowance for credit losses | ( | ( | |||||||||
| Reversal of provision | |||||||||||
| Currency translation adjustment | ( | ||||||||||
| Balance at September 30 | $ | ( | $ | ( | |||||||
(*) From January 1, 2020, we adopted ASU 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 issued by the Financial Accounting Standards Board (FASB). ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This results in earlier recognition of credit losses. We adopted ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings (note 1).
The amount charged to allowance for credit losses for the nine months ended September 30, 2020 increased compared to the same period in the prior year due to the application of the expected credit loss model beginning on January 1, 2020 as well as an increase to the provision due to the expected impact of COVID-19 on the Company's future cash collections caused by the downturn in the economy which has led to financial difficulties for some of our customers, particularly those operating in the retail sector. In times of the global economic turmoil, brought about by COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods.
The reversal of provision decreased during the nine month period ended September 30, 2020, mainly due to lower payments received and lower write-offs of long outstanding receivables already reserved for which it is certain we will not collect the receivable. During the nine month period ended September 30, 2020, the Company recovered $2.8 million previously written off, accounted for as a reversal of provision.
The Company mitigates its credit risk with respect to accounts receivables by performing credit evaluations and monitoring agencies and advertisers' accounts receivables balances.
We write off accounts receivable balances once the receivables are no longer deemed collectible.
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Note 5. Other Current Assets
The following table shows the breakdown in other current assets net book value for the presented periods:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Prepayments to suppliers | $ | $ | |||||||||
| Other debtors | |||||||||||
| Prepaid expenses | |||||||||||
| Gross book value at end of period | |||||||||||
| Net book value at end of period | $ | $ | |||||||||
Prepaid expenses mainly consist of office rental advance payments.
Note 6. Intangible Assets and Goodwill
There have been no significant additions to intangible assets or goodwill since December 31, 2019.
In addition, no events or circumstances have occurred during the three months ended September 30, 2020 that would indicate impairment of intangible assets and goodwill.
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
| Software | Technology and customer relationships | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| From October 1 to December 31, 2020 | $ | $ | $ | ||||||||||||||
| 2021 | |||||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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Note 7. Other Current Liabilities
Other current liabilities are presented in the following table:
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Clients' prepayments | $ | $ | |||||||||
| Credit notes | |||||||||||
| Accounts payable relating to capital expenditures | |||||||||||
| Other creditors | |||||||||||
| Deferred revenue | |||||||||||
| Total | $ | $ | |||||||||
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Note 8. Leases
We have adopted Topic 842 effective January 1, 2019 on a modified retrospective basis and elected not to restate comparative periods. We chose to use certain practical expedients offered by the standard including:
•We did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or the initial direct costs for any existing leases,
•We do not recognize a lease liability or right of use asset for leases with a term of 12 months or less, and
•We used hindsight in determining the lease term.
We lease space under non-cancellable operating leases for our offices as well as our data centers. Our office leases typically include free rent periods or rent escalation periods, and may also include leasehold improvement incentives. Leases for data centers may also include free rent periods or rent escalation periods. These leases typically do not include residual value guarantees. Both office and data center leases may contain both lease components (rent) and non-lease components (maintenance, electrical costs, and other service charges). Non-lease components are accounted for separately.
Both office and data center leases typically contain options to renew, and/or early terminate. Options have been included in the lease term if management has determined it is reasonably certain it will be exercised.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to determine the present value of future payments. We have a centralized treasury function, and the majority of our leases are negotiated and signed by representatives of Criteo SA. As such, the incremental borrowing rate of Criteo SA is used for all of our contracts. It is then adjusted in consideration of the currency of the lease and the lease term as of the lease commencement date.
Lease expense is recognized for minimum lease payments on a straight-line basis over the lease term. Variable costs are expensed in the period incurred. Variable expenses include changes in indexation. Leases for data centers may have variable costs based on electrical usage.
The components of lease expense are as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Offices | Data Centers | Total | Offices | Data Centers | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease expense | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short term lease expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total operating lease expense | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||||||||||
| Offices | Data Centers | Total | Offices | Data Centers | Total | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Lease expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Short term lease expense | ||||||||||||||||||||||||||||||||
| Variable lease expense | ||||||||||||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Total operating lease expense | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
As of September 30, 2020, we had future minimum lease payments as follows:
| September 30, 2020 | |||||||||||||||||
| Offices | Data Centers | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Remainder of 2020 | $ | $ | $ | ||||||||||||||
| 2021 | |||||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total minimum lease payments | |||||||||||||||||
| Impact of Discount Rate | ( | ( | ( | ||||||||||||||
| Total Lease Liability | $ | $ | $ | ||||||||||||||
The weighted average remaining lease term and discount rates as of September 30, 2020 are as follows:
| September 30, 2019 | September 30, 2020 | |||||||
| Weighted average remaining lease term (years) | ||||||||
| Offices | ||||||||
| Data Centers | ||||||||
| Weighted average discount rate | ||||||||
| Offices | % | % | ||||||
| Data Centers | % | % | ||||||
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Supplemental cash flow information related to our operating leases is as follows for the three and nine months ended September 30, 2020:
| Three Months Ended | ||||||||||||||
| September 30, 2019 | September 30, 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Cash flow for operating activities | $ | ( | $ | ( | ||||||||||
| Right of use assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||||||||
| Nine Months Ended | ||||||||||||||
| September 30, 2019 | September 30, 2020 | |||||||||||||
| (in thousands) | ||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | ||||||||||||||
| Cash flow for operating activities | $ | ( | $ | ( | ||||||||||
| Right of use assets obtained in exchange for new operating lease liabilities | $ | $ | ||||||||||||
As of September 30, 2020, we have additional operating leases, that have not yet commenced which will result in additional operating lease liabilities and right of use assets:
| Offices | Data Centers | |||||||||||||
| (in thousands) | ||||||||||||||
| Additional operating lease liabilities | $ | $ | ||||||||||||
| Additional right of use assets | $ | $ | ||||||||||||
These operating leases will commence during the fiscal year ending December 31, 2021.
During the three and nine months ended September 30, 2020, we incurred an impairment loss of $1.6 0.2 million, Sales and Operations expenses $1.1 million, and General and Administrative expenses $0.3 million.
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Note 9. Revenue
Revenue Recognition
We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies. Historically, the Criteo model has focused solely on converting our clients' website visitors into customers, enabling us to charge our clients only when users engage with an ad we deliver, usually by clicking on it. More recently, we have expanded our solutions to address a broader range of marketing goals for our clients.
•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.
In conjunction with broadening our solutions, we have also started expanding our pricing models to now include a combination of cost-per-install and cost-per-impression for selected new solutions, in addition to cost-per-click.
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.
For campaigns priced on a cost-per-click and cost-per-install basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognize revenue when a user clicks on an advertisement or installs an application.
For campaigns priced on a cost-per-impression basis, we bill our clients based on the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed.
For the majority of our revenue, we act as principal in our arrangements because (i) we control the advertising inventory (spaces on websites) before it is transferred to our clients; (ii) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and (iii) we have full discretion in establishing prices. Therefore, based on these factors, we report revenue earned and the related costs incurred on a gross basis.
Disaggregation of revenue
The following tables disclose our consolidated revenue for each geographical area for each of the reported periods. Revenue by geographical area is based on the location of advertisers’ campaigns.
The following table presents our revenues disaggregated by geographical area:
| Americas | EMEA | Asia-Pacific | Total | ||||||||||||||||||||
| For the three months ended | (in thousands) | ||||||||||||||||||||||
| September 30, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
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| Americas | EMEA | Asia-Pacific | Total | ||||||||||||||||||||
| For the nine months ended | (in thousands) | ||||||||||||||||||||||
| September 30, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Customer Credit Notes
We offer credit notes to certain customers as a form of incentive, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and they are recognized as a reduction of revenue. We believe that there will not be significant changes to our estimates of variable consideration.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance. Our payment terms vary depending on the service or the type of customer. For certain customers, we require payment before the services are delivered.
Practical Expedients
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and operating expenses.
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Note 10. Share-Based Compensation
The board of directors has been authorized by the general meeting of the shareholders to grant employee warrants (Bons de Souscription de Parts de Créateur d’Entreprise or "BSPCEs"), share options (Options de Souscription d'Actions or "OSAs"), restricted share units ("RSUs") and non-employee warrants (Bons de Souscription d'Actions or "BSAs").
During the nine months ended September 30, 2020, there were four grants of RSUs and one grant of OSAs under the Employee Share Option Plan 12 as defined in Note 20 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.
On March 2, 2020, 40,240 RSUs were granted to Criteo employees subject to continued employment and 43,217 RSUs and 43,217 PSUs were granted to a member of the management subject to continued employment.
On April 23, 2020, 72,411 RSUs were granted to Criteo employees subject to continued employment and 140,513 OSAs were granted to a member of management subject to continued employment.
On June, 22, 2020, 1,626,850 RSUs were granted to Criteo employees, to certain senior managers and members of management subject to continued employment.
On July, 23, 2020, 43,480 RSUs were granted to Criteo employees subject to continued employment.
There have been no changes in the vesting and method of valuation of the BSPCEs, OSAs, RSUs, or BSAs from what was disclosed in Note 20 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020.
Change in Number of BSPCE/OSA/RSU/BSA
| OSA/BSPCE | RSU/PSU | BSA | Total | ||||||||||||||||||||
| Balance at January 1, 2020 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised (OSA/BSPCE/BSA) | ( | ( | ( | ||||||||||||||||||||
| Vested (RSU) | ( | ( | |||||||||||||||||||||
| Forfeited | ( | ( | ( | ( | |||||||||||||||||||
| Expired | ( | ( | |||||||||||||||||||||
| Balance at September 30, 2020 | |||||||||||||||||||||||
Breakdown of the Closing Balance
| OSA/BSPCE | RSU | BSA | |||||||||||||||
| Number outstanding | |||||||||||||||||
| Weighted-average exercise price | € | NA | € | ||||||||||||||
| Number vested | — | ||||||||||||||||
| Weighted-average exercise price | € | NA | € | ||||||||||||||
| Weighted-average remaining contractual life of options outstanding, in years | NA | ||||||||||||||||
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Reconciliation with the Unaudited Consolidated Statements of Income
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| R&D | S&O | G&A | Total | R&D | S&O | G&A | Total | ||||||||||||||||||||||||||||||||||||||||
| RSUs | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Share options / BSPCE | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total share-based compensation | ( | ( | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||
| BSAs | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Total equity awards compensation expense | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| R&D | S&O | G&A | Total | R&D | S&O | G&A | Total | ||||||||||||||||||||||||||||||||||||||||
| RSUs | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
| Share options / BSPCE | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Total share-based compensation | ( | ( | ( | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||
| BSAs | ( | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||||
| Total equity awards compensation expense | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||||||||||
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Note 11. Financial Income and Expenses
The condensed consolidated statements of income line item “Financial income (expense)” can be broken down as follows:
| Three Months Ended | |||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Financial income from cash equivalents | $ | $ | |||||||||
| Interest and fees | ( | ( | |||||||||
| Interest on debt | ( | ( | |||||||||
| Fees | ( | ( | |||||||||
| Foreign exchange gain (loss) | ( | ||||||||||
| Other financial expense | ( | ( | |||||||||
| Total financial expense | $ | ( | $ | ( | |||||||
| Nine Months Ended | |||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Financial income from cash equivalents | $ | $ | |||||||||
| Interest and fees | ( | ( | |||||||||
| Interest on debt | ( | ( | |||||||||
| Fees | ( | ( | |||||||||
| Foreign exchange gain (loss) | ( | ( | |||||||||
| Other financial expense | ( | ( | |||||||||
| Total financial expense | $ | ( | $ | ( | |||||||
The $0.5 million and the $1.8 million financial expenses for the three and nine months ended September 30, 2020, respectively, were driven by the up-front fees amortization, the non-utilization costs and the financial expense relating to the €140 million ($163.9 million) drawdown performed in May 2020 (note 2) as part of our available Revolving Credit Facility (RCF) financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging.
We manage our exposure to foreign currency risk at Criteo S.A. level and hedge using foreign currency swaps or forward purchases or sales of foreign currencies.
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Note 12. Income Taxes
Breakdown of Income Taxes
The tax provision for interim periods is determined using an estimate of our annual effective tax rate (“AETR”), adjusted for discrete items arising in the period. To calculate our estimated AETR, we estimate our income before taxes and the related tax expense or benefit for the full fiscal year (total of expected current and deferred tax provisions), excluding the effect of significant unusual or infrequently occurring items or comprehensive income items not recognized in the statement of income. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated annual tax rate does change, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors including our ability to accurately predict our income (loss) before provision for income taxes in multiple jurisdictions and the changes in foreign exchange rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside of France.
The condensed consolidated statements of income line item “Provision for income taxes” can be broken down as follows:
| Nine Months Ended | |||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Current income tax | $ | ( | $ | ( | |||||||
| Net change in deferred taxes | |||||||||||
| Provision for income taxes | $ | ( | $ | ( | |||||||
For the nine months ended September 30, 2019 and 2020, we used an annual estimated tax rate of 30 30 % for the nine months ended September 30, 2019 and 2020, respectively. Discrete items were immaterial for the nine months ended September 30, 2020 resulting in no material difference between the annual estimated tax rate and the effective tax rate.
Current tax assets and liabilities
The total amount of current tax assets consists mainly of prepayments of income taxes and credits of Criteo SA, Criteo Corp, Criteo Gmbh and Criteo K.K.
Update on tax inspection in the United States
On September 27, 2017, we received a draft notice of proposed adjustment (NOPA) 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. We disagreed with the IRS's position and contested it. On August 24, 2020, the IRS and the Company agreed to a settlement and closed the income tax audit for the year ended December 31, 2014. The settlement provides for a disallowance of Criteo Corp's. Net Operating Losses (NOLs) amounting to $9.2 million.
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Note 13. Earnings Per Share
Basic Earnings Per Share
We calculate basic earnings per share by dividing the net income for the period attributable to shareholders of the Parent by the weighted average number of shares outstanding.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| Net income attributable to shareholders of Criteo S.A. | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of shares outstanding | |||||||||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | |||||||||||||||||||
Diluted Earnings Per Share
We calculate diluted earnings per share by dividing the net income attributable to shareholders of the Parent by the weighted average number of shares outstanding plus any potentially dilutive shares not yet issued from share-based compensation plans (see Note 10). There were no other potentially dilutive instruments outstanding as of September 30, 2019 and September 30, 2020. Consequently, all potential dilutive effects from shares are considered.
For each period presented, a contract to issue a certain number of shares (i.e. share option, non-employee warrant, restricted stock unit ("RSU") or employee warrant ("BSPCE") is assessed as potentially dilutive if it is “in the money” (i.e., the exercise or settlement price is lower than the average market price).
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| Net income attributable to shareholders of Criteo S.A. | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of shares outstanding of Criteo S.A. | |||||||||||||||||||||||
| Dilutive effect of : | |||||||||||||||||||||||
| Restricted share awards ("RSUs") | |||||||||||||||||||||||
| Share options and BSPCE | |||||||||||||||||||||||
| Share warrants | |||||||||||||||||||||||
| Weighted average number of shares outstanding used to determine diluted earnings per share | |||||||||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | |||||||||||||||||||
The weighted average number of securities that were anti-dilutive for diluted EPS for the periods presented but which could potentially dilute EPS in the future are as follows:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| Restricted share awards | |||||||||||||||||||||||
| Share options and BSPCE | |||||||||||||||||||||||
| Weighted average number of anti-dilutive securities excluded from diluted earnings per share | |||||||||||||||||||||||
28
Note 14. Commitments and contingencies
Commitments
Revolving Credit Facilities "RCF", Credit Line Facilities and Bank Overdrafts
As mentioned in Notes 2 and 3, we are party to an RCF with a syndicate of banks which allows us to draw up to an additional €210.0 million ($245.9 million).
We are also party to short-term credit lines and overdraft facilities with HSBC plc, BNP Paribas and LCL with an authorization to draw up to a maximum of €21.5 million ($25.2 million) in the aggregate under the short-term credit lines and overdraft facilities. As of September 30, 2020, we had not drawn on any of these facilities. Any loans or overdrafts under these short-term facilities bear interest based on the one month EURIBOR rate or three month EURIBOR rate. As these facilities are exclusively short-term credit and overdraft facilities, our banks have the ability to terminate such facilities on short notice.
Contingencies
Changes in provisions during the presented periods are summarized below:
| Provision for employee-related litigation | Other provisions | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ||||||||||||||
| Increase | |||||||||||||||||
| Provision used | ( | ( | ( | ||||||||||||||
| Provision released not used* | ( | ( | |||||||||||||||
| Currency translation adjustments | ( | ( | |||||||||||||||
| Other** | $ | ( | ( | ||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ||||||||||||||
| - of which current | |||||||||||||||||
*Due to changes in management's best estimates of the future outflow
**Transfer to Other liabilities due to tax notification received confirming the amount owed
**Transfer to Other liabilities due to tax notification received confirming the amount owed
The amount of the provisions represents management’s best estimate of the future outflow.
29
Note 15. Breakdown of Revenue and Non-Current Assets by Geographical Areas
The Company operates in the following three geographical markets:
• Americas (North and South America);
• EMEA (Europe, Middle-East and Africa); and
• Asia-Pacific.
The following tables disclose our consolidated revenue for each geographical area for each of the reported periods. Revenue by geographical area is based on the location of advertisers’ campaigns.
| Americas | EMEA | Asia-Pacific | Total | ||||||||||||||||||||
| For the three months ended: | (in thousands) | ||||||||||||||||||||||
| September 30, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Revenue generated in France, the country of incorporation of Parent, amounted to $33.5 million and $30.7 million for the three months ended September 30, 2019 and 2020, respectively.
| Americas | EMEA | Asia-Pacific | Total | ||||||||||||||||||||
| For the nine months ended: | (in thousands) | ||||||||||||||||||||||
| September 30, 2019 | $ | $ | $ | $ | |||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | |||||||||||||||||||
Revenue generated in France amounted to $106.2 million and $90.0 million for the nine month ended September 30, 2019 and 2020, respectively.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Americas | ||||||||||||||||||||
| United States | $ | $ | $ | $ | ||||||||||||||||
| EMEA | ||||||||||||||||||||
| Germany | $ | $ | $ | $ | ||||||||||||||||
| United Kingdom | $ | $ | $ | $ | ||||||||||||||||
| Asia-Pacific | ||||||||||||||||||||
| Japan | $ | $ | $ | $ | ||||||||||||||||
As of September 30, 2019 and 2020, our largest client represented 2.7 % and 1.2 %, respectively, of our consolidated revenue.
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Other Information
For each reported period, non-current assets (corresponding to the net book value of tangible and intangible assets, excluding right of use assets related to lease agreements) are presented in the table below. The geographical information includes results from the locations of legal entities.
| Of which | Of which | ||||||||||||||||||||||||||||||||||||||||||||||
| Holding | Americas | United States | EMEA | Asia-Pacific | Japan | Singapore | Total | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2019 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
Note 16. Related Parties
There were no significant related-party transactions during the period nor any change in the nature of the transactions as described in Note 25 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 except as follows:
On September 3, 2020, the Group announced the appointment of Sarah Glickman as the Company's Chief Financial Officer, effective September 8, 2020, replacing Dave Anderson.
The Executive Officers as of September 30, 2020 were:
•Megan Clarken - Chief Executive Officer;
•Sarah Glickman - Chief Financial Officer; and
•Ryan Damon - General Counsel and Corporate Secretary.
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Note 17. Subsequent Events
Given the ongoing impact that the COVID-19 pandemic is having on the Company's clients' business, it will remain a factor in our analysis of estimates residing in the financial statements, including, but not limited to, estimates related to receivable reserves calculated under the CECL model, the impairment analysis, and the income tax calculation. These estimates involve projections and assumptions regarding the future economic environment and as such it is possible that events may occur rapidly or unexpectedly that could lead to their changes. We will continue to closely monitor the effects of the COVID-19 pandemic, and continuously evaluate its impact on our key estimates.
The Company evaluated all other subsequent events that occurred after September 30, 2020 through the date of issuance of the unaudited condensed consolidated financial statements and determined there are no other significant events that require adjustments or disclosures.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the Securities and Exchange Commission, or "SEC", on March 2, 2020.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report filed on Form 10-K for the year ended December 31, 2019. Please refer to Note 1,"Summary of Significant Accounting Policies," of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the changes in accounting policies due to the adoption of this standard.
Recently Issued Pronouncements
See "Recently Issued Accounting Standards" under Note 1, "Summary of Significant Accounting Policies," of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been issued during 2020.
Use of Non-GAAP Financial Measures
This Form 10-Q includes the following financial measures defined as non-GAAP financial measures by the SEC: Revenue ex-TAC, Adjusted EBITDA and Adjusted Net Income. These measures are not calculated in accordance with U.S. GAAP.
Revenue ex-TAC is our revenue excluding traffic acquisition costs ("TAC") generated over the applicable measurement period and Revenue ex-TAC by Region reflects our Revenue ex-TAC by our core geographies. Revenue ex-TAC, Revenue ex-TAC by Region and Revenue ex-TAC margin are key measures used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our core business and across our core geographies. Accordingly, we believe that Revenue ex-TAC, Revenue ex-TAC by Region and Revenue ex-TAC margin provide useful information to investors and the market generally in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA is our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration. During the period, we have broadened the definition of Adjusted EBITDA to exclude costs related to restructuring and transformation costs, in addition to restructuring charges previously excluded. Adjusted EBITDA 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- and long-term operational plans. In particular, we believe that by eliminating equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration, Adjusted EBITDA can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.
33
Adjusted Net Income is our net income adjusted to eliminate the impact of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring related and transformation costs, acquisition-related costs and deferred price consideration, and the tax impact of these adjustments. Adjusted Net Income and Adjusted Net Income per diluted share are key measures 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 by eliminating equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring related and transformation costs, acquisition-related costs and deferred price consideration and the tax impact of these adjustments, Adjusted Net Income and Adjusted Net Income per diluted share can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted Net Income and Adjusted Net Income per diluted share provide useful information to investors and the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.
Please refer to the supplemental financial tables provided for a reconciliation of Revenue ex-TAC to revenue, Adjusted EBITDA to net income, and Adjusted Net Income to net income in each case, the most comparable U.S. GAAP measurement. Our use of non-GAAP financial measures 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: (1) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; and (2) other companies may report Revenue ex-TAC, Adjusted EBITDA, Adjusted Net Income, or similarly titled measures but calculate them differently or over different regions, which reduces their usefulness as comparative measures. Because of these and other limitations, you should consider these measures alongside our U.S. GAAP financial results, including revenue and net income.
34
Condensed Consolidated Statements of Income Data (Unaudited):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||||||||||||
| Revenue | $ | 522,606 | $ | 470,345 | $ | 1,608,876 | $ | 1,411,335 | ||||||||||||||||||
Cost of revenue (2) | ||||||||||||||||||||||||||
| Traffic acquisition costs | (301,901) | (284,401) | (928,559) | (839,463) | ||||||||||||||||||||||
| Other cost of revenue | (31,101) | (34,608) | (86,205) | (102,328) | ||||||||||||||||||||||
| Gross profit | 189,604 | 151,336 | 594,112 | 469,544 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
Research and development expenses (2) | (41,414) | (30,954) | (132,006) | (99,716) | ||||||||||||||||||||||
Sales and operations expenses (2) | (85,985) | (83,659) | (277,397) | (244,414) | ||||||||||||||||||||||
General and administrative expenses (2) | (32,835) | (28,672) | (102,372) | (83,772) | ||||||||||||||||||||||
| Total operating expenses | (160,234) | (143,285) | (511,775) | (427,902) | ||||||||||||||||||||||
| Income from operations | 29,370 | 8,051 | 82,337 | 41,642 | ||||||||||||||||||||||
| Financial expense | (900) | (491) | (4,228) | (1,828) | ||||||||||||||||||||||
| Income before taxes | 28,470 | 7,560 | 78,109 | 39,814 | ||||||||||||||||||||||
| Provision for income taxes | (7,913) | (2,267) | (23,614) | (11,943) | ||||||||||||||||||||||
| Net income | $ | 20,557 | $ | 5,293 | $ | 54,495 | $ | 27,871 | ||||||||||||||||||
Net income available to shareholders of Criteo S.A. (1) | $ | 18,778 | $ | 5,227 | $ | 48,721 | $ | 26,402 | ||||||||||||||||||
| Net income available to shareholders of Criteo S.A. per share: | ||||||||||||||||||||||||||
| Basic | $ | 0.29 | $ | 0.09 | $ | 0.75 | $ | 0.43 | ||||||||||||||||||
| Diluted | $ | 0.28 | $ | 0.09 | $ | 0.74 | $ | 0.43 | ||||||||||||||||||
| Weighted average shares outstanding used in computing per share amounts: | ||||||||||||||||||||||||||
| Basic | 64,868,545 | 60,080,598 | 64,600,869 | 61,059,345 | ||||||||||||||||||||||
| Diluted | 66,067,045 | 61,027,795 | 65,916,219 | 61,644,827 | ||||||||||||||||||||||
(1) For the three months ended September 30, 2019 and 2020, this excludes $1.8 million and $0.1 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK. For the nine months ended September 30, 2019 and 2020, this excludes $5.8 million and $1.5 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK.
(2) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense, restructuring related and transformation costs, acquisition-related costs and deferred price consideration as follows:
35
Detailed Information on Selected Items (unaudited):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Equity awards compensation expense | ||||||||||||||||||||||||||
| Research and development expenses | $ | 3,230 | $ | 3,333 | $ | 11,458 | $ | 7,771 | ||||||||||||||||||
| Sales and operations expenses | 4,398 | 3,190 | 16,292 | 8,380 | ||||||||||||||||||||||
| General and administrative expenses | 4,142 | 280 | 12,293 | 6,314 | ||||||||||||||||||||||
| Total equity awards compensation expense | $ | 11,770 | $ | 6,803 | $ | 40,043 | $ | 22,465 | ||||||||||||||||||
| Pension service costs | ||||||||||||||||||||||||||
| Research and development expenses | 188 | 286 | 572 | 824 | ||||||||||||||||||||||
| Sales and operations expenses | 71 | 101 | 214 | 291 | ||||||||||||||||||||||
| General and administrative expenses | 129 | 185 | 387 | 534 | ||||||||||||||||||||||
Total pension service costs (a) | $ | 388 | $ | 572 | $ | 1,173 | $ | 1,649 | ||||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||||||||||||
| Cost of revenue | 12,193 | 14,712 | 32,175 | 40,581 | ||||||||||||||||||||||
Research and development expenses (b) | 4,249 | 1,721 | 11,260 | 9,029 | ||||||||||||||||||||||
Sales and operations expenses (c) | 4,178 | 4,176 | 14,151 | 12,737 | ||||||||||||||||||||||
| General and administrative expenses | 1,768 | 1,143 | 5,413 | 3,751 | ||||||||||||||||||||||
| Total depreciation and amortization expense | $ | 22,388 | $ | 21,752 | $ | 62,999 | $ | 66,098 | ||||||||||||||||||
| Acquisition-related costs | ||||||||||||||||||||||||||
| General and administrative expenses | 112 | 112 | ||||||||||||||||||||||||
| Total acquisition-related costs | $ | — | $ | 112 | $ | — | $ | 112 | ||||||||||||||||||
Restructuring related and transformation costs (1) | ||||||||||||||||||||||||||
| Research and development expenses | 172 | 1,985 | 296 | 3,493 | ||||||||||||||||||||||
| Sales and operations expenses | 131 | 5,357 | 2,196 | 6,793 | ||||||||||||||||||||||
| General and administrative expenses | — | 4,839 | 429 | 5,320 | ||||||||||||||||||||||
Total Restructuring related and transformation costs (1) | $ | 303 | $ | 12,181 | $ | 2,921 | $ | 15,606 | ||||||||||||||||||
(a) Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income.
(b) Includes acquisition-related amortization of intangible assets of $2.7 million and $0.7 million for the three months ended September 30, 2019 and 2020, respectively, and $8.1 million and $6.1 million for nine months ended September 2019, 2020, respectively.
(c) Includes acquisition-related amortization of intangible assets of $2.7 million and $2.2 million for the three months ended September 30, 2019 and 2020, respectively and $8.2 million and $6.5 million for the nine months ended September 30, 2019 and 2020, respectively.
36
(1) For the three and nine months ended September 2019, and September 2020, respectively, the Company recognized restructuring-related and transformation charges following its new organizational structure implemented to support its multi-product platform strategy and office right sizing policy:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| (Gain) from forfeitures of share-based compensation awards | (606) | — | (3,284) | — | ||||||||||||||||||||||
| Depreciation and amortization expense | — | — | 1,228 | — | ||||||||||||||||||||||
| Facilities and impairment related costs | — | 7,023 | 1,647 | 8,817 | ||||||||||||||||||||||
| Payroll related costs | 909 | 2,858 | 3,330 | 4,489 | ||||||||||||||||||||||
| Consulting costs related to transformation | — | 2,300 | — | 2,300 | ||||||||||||||||||||||
| Total restructuring related and transformation costs | 303 | 12,181 | 2,921 | 15,606 | ||||||||||||||||||||||
For the Three Months Ended and the Nine Months Ended September 30, 2020, the cash outflows related to restructuring related and transformation costs were $6.2 million, and $13.0 million respectively, and were mainly compromised of payroll costs, broker fees and termination penalties related to facilities.
Consolidated Statements of Financial Position Data (unaudited):
| December 31, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash and cash equivalents | $ | 418,763 | $ | 626,744 | |||||||
| Total assets | 1,790,384 | 1,843,368 | |||||||||
Trade receivables, net of credit losses | 481,732 | 335,583 | |||||||||
| Total financial liabilities | 4,405 | 167,077 | |||||||||
| Total liabilities | 752,396 | 781,456 | |||||||||
| Total equity | $ | 1,037,988 | $ | 1,061,912 | |||||||
Other Financial and Operating Data (unaudited):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||
| (in thousands, except client data) | ||||||||||||||||||||||||||
| Number of clients | 19,971 | 20,565 | 19,971 | 20,565 | ||||||||||||||||||||||
Revenue ex-TAC (3) | $ | 220,705 | $ | 185,944 | $ | 680,317 | $ | 571,872 | ||||||||||||||||||
Adjusted Net Income (4) | $ | 35,446 | $ | 24,302 | $ | 105,881 | $ | 73,037 | ||||||||||||||||||
Adjusted EBITDA (5) | $ | 64,219 | $ | 49,471 | $ | 189,473 | $ | 147,572 | ||||||||||||||||||
37
(3) We define Revenue ex-TAC (Traffic Acquisition Costs) as our revenue excluding traffic acquisition costs, or TAC, generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC in this Form 10-Q 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 TAC from revenue can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC 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) 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 or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC alongside our other U.S. GAAP financial results, including revenue. The following table presents a reconciliation of Revenue ex-TAC to revenue, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Revenue | $ | 522,606 | $ | 470,345 | $ | 1,608,876 | $ | 1,411,335 | ||||||||||||||||||
| Adjustment: | ||||||||||||||||||||||||||
| Traffic acquisition costs | (301,901) | (284,401) | (928,559) | (839,463) | ||||||||||||||||||||||
| Revenue ex-TAC | $ | 220,705 | $ | 185,944 | $ | 680,317 | $ | 571,872 | ||||||||||||||||||
38
(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 related and transformation costs, acquisition-related costs and deferred price consideration, and the tax impact of the foregoing adjustments. Adjusted Net Income is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted Net Income in this Form 10-Q 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, amortization of acquisition-related intangible assets, restructuring related and transformation costs, acquisition-related costs and deferred price consideration, and the tax impact 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 under 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 other U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income | $ | 20,557 | $ | 5,293 | $ | 54,495 | $ | 27,871 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Equity awards compensation expense | 11,770 | 6,803 | 40,043 | 22,465 | |||||||||||||||||||
| Amortization of acquisition-related intangible assets | 5,456 | 2,899 | 16,393 | 12,594 | |||||||||||||||||||
| Acquisition-related costs | — | 112 | — | 112 | |||||||||||||||||||
Restructuring related and transformation costs (1) | 303 | 12,181 | 2,921 | 15,606 | |||||||||||||||||||
| Tax impact of the above adjustments | (2,640) | (2,986) | (7,971) | (5,611) | |||||||||||||||||||
| Adjusted Net Income | $ | 35,446 | $ | 24,302 | $ | 105,881 | $ | 73,037 | |||||||||||||||
(1) For the three and nine months ended September 2019, and September 2020, respectively, the Company recognized restructuring-related and transformation charges following its new organizational structure implemented to support its multi-product platform strategy and office right sizing policy, as detailed below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| (Gain) from forfeitures of share-based compensation awards | (606) | — | (3,284) | — | |||||||||||||||||||
| Depreciation and amortization expense | — | — | 1,228 | — | |||||||||||||||||||
| Facilities and impairment related costs | — | 7,023 | 1,647 | 8,817 | |||||||||||||||||||
| Payroll related costs | 909 | 2,858 | 3,330 | 4,489 | |||||||||||||||||||
| Consulting costs related to transformation | — | 2,300 | — | 2,300 | |||||||||||||||||||
| Total restructuring related and transformation costs | 303 | 12,181 | 2,921 | 15,606 | |||||||||||||||||||
For the Three Months Ended and the Nine Months Ended September 30, 2020, the cash outflows related to restructuring related and transformation costs were $6.2 million, and $13.0 million respectively, and were mainly compromised of payroll costs, broker fees and termination penalties related to facilities.
39
(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 related and transformation 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-Q 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 and long-term operational plans. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, restructuring related and transformation costs,, acquisition-related costs and deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our 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:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net income | $ | 20,557 | $ | 5,293 | $ | 54,495 | $ | 27,871 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Financial expense | 900 | 491 | 4,228 | 1,828 | |||||||||||||||||||
| Provision for income taxes | 7,913 | 2,267 | 23,614 | 11,943 | |||||||||||||||||||
| Equity awards compensation expense | 11,770 | 6,803 | 40,043 | 22,465 | |||||||||||||||||||
| Pension service costs | 388 | 572 | 1,173 | 1,649 | |||||||||||||||||||
| Depreciation and amortization expense | 22,388 | 21,752 | 62,999 | 66,098 | |||||||||||||||||||
| Acquisition-related costs | — | 112 | — | 112 | |||||||||||||||||||
Restructuring related and transformation costs (1) | 303 | 12,181 | 2,921 | 15,606 | |||||||||||||||||||
| Total net adjustments | 43,662 | 44,178 | 134,978 | 119,701 | |||||||||||||||||||
| Adjusted EBITDA | $ | 64,219 | $ | 49,471 | $ | 189,473 | $ | 147,572 | |||||||||||||||
(1) For the three and nine months ended September 2019, and September 2020, respectively, the Company recognized restructuring related and transformation charges following its new organizational structure implemented to support its multi-product platform strategy and office right sizing policy, as detailed below:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | September 30, 2019 | September 30, 2020 | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| (Gain) from forfeitures of share-based compensation awards | (606) | — | (3,284) | — | |||||||||||||||||||
| Depreciation and amortization expense | — | — | 1,228 | — | |||||||||||||||||||
| Facilities and impairment related costs | — | 7,023 | 1,647 | 8,817 | |||||||||||||||||||
| Payroll related costs | 909 | 2,858 | 3,330 | 4,489 | |||||||||||||||||||
| Consulting costs related to transformation | — | 2,300 | — | 2,300 | |||||||||||||||||||
| Total restructuring related and transformation costs | 303 | 12,181 | 2,921 | 15,606 | |||||||||||||||||||
For the Three Months Ended and the Nine Months Ended September 30, 2020, the cash outflows related to restructuring related and transformation costs were $6.2 million, and $13.0 million respectively, and were mainly compromised of payroll costs, broker fees and termination penalties related to facilities.
40
Results of Operations for the Periods Ended September 30, 2019 and 2020 (Unaudited)
Revenue
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | |||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenue as reported | $ | 522,606 | $ | 470,345 | (10) | % | |||||||||||
| Conversion impact U.S. dollar/other currencies | (3,800) | ||||||||||||||||
Revenue at constant currency (1) | 522,606 | 466,545 | (11) | % | |||||||||||||
| Americas | |||||||||||||||||
| Revenue as reported | 213,937 | 204,618 | (4) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | 3,631 | ||||||||||||||||
Revenue at constant currency (1) | 213,937 | 208,249 | (3) | % | |||||||||||||
| EMEA | |||||||||||||||||
| Revenue as reported | 185,556 | 167,800 | (10) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | (6,365) | ||||||||||||||||
Revenue at constant currency (1) | 185,556 | 161,435 | (13) | % | |||||||||||||
| Asia-Pacific | |||||||||||||||||
| Revenue as reported | 123,113 | 97,927 | (20) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | (1,066) | ||||||||||||||||
Revenue at constant currency(1) | $ | 123,113 | $ | 96,861 | (21) | % | |||||||||||
(1) Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2019 average exchange rates for the relevant period to 2020 figures. We have included revenue at constant currency in this Form 10-Q 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.
Revenue for the three months ended September 30, 2020 decreased (10)% (or decreased by (11)% on a constant currency basis, as defined in footnote 1 directly above), compared to the three months ended September 30, 2019.
The COVID-19 pandemic impacted our business during the whole quarter, with an estimated impact on revenue of approximately $80 million for the three months ended September 30, 2020, or approximately 15 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 business in Marketing Solutions, in particular in the Travel, Classifieds and brick-and-mortar Retail verticals. However, we believe that client spending from Retail clients in the midmarket and in our Retail Media solutions was supported by consumer trends emerging from the COVID-19 pandemic.
In particular, 51% of the year-over-year decrease in revenue was driven by the lower contribution from our existing clients while 49% was caused by client churn, offsetting the positive contribution from new clients, both of which we attribute to the COVID-19 outbreak. We added 594 net new clients year-over-year across regions, while revenue from existing clients decreased by 6% at constant currency over the period, of which approximately 15 points were estimated to be attributable to disruption caused by the pandemic.
Revenue in the Americas region decreased (4)% (or (3)% on a constant currency basis, and (4)% in the U.S.) to $204.6 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This decline was driven by an estimated revenue impact from COVID-19 of $28 million, in particular with large customers in the broader Classifieds vertical in the U.S., partially offset by the strong momentum of new products, in particular Retail Media in the U.S.
41
Revenue in EMEA decreased (10)% (or decreased (13)% on a constant currency basis) to $167.8 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. This decrease at constant currency includes an estimated $26 million revenue impact from COVID-19 in the region, mostly in the Travel and Classifieds verticals, although Retail and midmarket proved resilient. New clients business was healthy across EMEA, with success across both direct clients and ad agencies.
Revenue in the Asia-Pacific region decreased (20)% (or decreased (21)% on a constant currency basis) to $97.9 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. The decrease at constant currency included an estimated $26 million revenue impact from the COVID-19 pandemic, especially with Large Clients and mostly in the Travel and Classifieds verticals, and was also driven by a weak macro economy in Japan, our largest market in the region.
Additionally, our $470.3 million of revenue for the three months ended September 30, 2020 was impacted by $(3.8) million as a result of changes in foreign currency against the U.S. dollar compared to the three months ended September 30, 2019.
The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average cost-per-click charged to advertisers, partly driven by the evolution of our revenue mix, and partially offset by the increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | |||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Revenue as reported | $ | 1,608,876 | $ | 1,411,335 | (12) | % | |||||||||||
| Conversion impact U.S. dollar/other currencies | 11,732 | ||||||||||||||||
| Revenue at constant currency (1) | 1,608,876 | 1,423,067 | (12) | % | |||||||||||||
| Americas | |||||||||||||||||
| Revenue as reported | 645,904 | 582,037 | (10) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | 8,727 | ||||||||||||||||
| Revenue at constant currency (1) | 645,904 | 590,764 | (9) | % | |||||||||||||
| EMEA | |||||||||||||||||
| Revenue as reported | 589,558 | 517,535 | (12) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | 3,855 | ||||||||||||||||
| Revenue at constant currency (1) | 589,558 | 521,390 | (12) | % | |||||||||||||
| Asia-Pacific | |||||||||||||||||
| Revenue as reported | 373,414 | 311,763 | (17) | % | |||||||||||||
| Conversion impact U.S. dollar/other currencies | (850) | ||||||||||||||||
| Revenue at constant currency(1) | $ | 373,414 | $ | 310,913 | (17) | % | |||||||||||
(1) Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2019 average exchange rates for the relevant period to 2020 figures. We have included revenue at constant currency in this Form 10-Q 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.
Revenue for the nine months ended September 30, 2020 decreased (12)% (or (12)% on a constant currency basis), to $1.4 billion (as defined in footnote 1 directly above), compared to the nine months ended September 30, 2019.
42
The COVID-19 pandemic started having an impact on our revenue from mid-February. Overall, the negative impact of COVID-19 on our revenue for the first nine months of 2020 was estimated at approximately $205 million, or more than 13 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us.
The year-over-year decrease in revenue was entirely driven by the lower contribution from our existing clients as a result of the COVID-19 outbreak, which exceeded revenues derived from new clients over the period. We added 594 net new clients year-over-year across regions.
Revenue in the Americas region decreased (10)% (or (9)% on a constant currency basis), including (9)% in the U.S., to $582.0 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decline was driven by an estimated revenue impact from COVID-19 of $74 million, in particular with large customers in the broader Classifieds vertical in the U.S.
Revenue in EMEA decreased (12)% (or (12)% on a constant currency basis) to $517.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. This decrease at constant currency includes an estimated $75 million revenue impact from the COVID-19 in the region, in part due to the fact that EMEA is the region with the highest exposure to the Travel vertical, which was most hit by COVID-19, declining by 66% globally compared to the same period in 99%. In this difficult context, our performance in the Retail vertical and in the midmarket across the region remained solid and resilient.
Revenue in the Asia-Pacific region decreased (17)% (or (17)% on a constant currency basis) to $311.8 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease at constant currency included an estimated $55 million revenue impact from the COVID-19 pandemic, mostly in the Travel and Classifieds verticals, and was also driven by a weak economic climate in Japan, our largest market in the region.
Additionally, our $1.4 billion of revenue for the nine months ended September 30, 2020 was negatively impacted by $11.7 million as a result of changes in foreign currency against the U.S. dollar compared to the nine months ended September 30, 2019.
The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average cost-per-click charged to advertisers, partly driven by the evolution of our revenue mix, and partially offset by the increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us.
Cost of Revenue
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | |||||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | ||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Traffic acquisition costs | $ | (301,901) | $ | (284,401) | (6)% | |||||||||||||||
| Other cost of revenue | $ | (31,101) | $ | (34,608) | 11% | |||||||||||||||
| Total Cost of Revenue | $ | (333,002) | $ | (319,009) | (4)% | |||||||||||||||
| % of revenue | (64) | % | (68) | % | ||||||||||||||||
| Gross profit % | 36 | % | 32 | % | ||||||||||||||||
Cost of revenue for the three months ended September 30, 2020 decreased $(14.0) million, or (4)%, compared to the three months ended September 30, 2019. This decrease was primarily the result of a decrease of $(17.5) million, or (6)% (or (7)% on a constant currency basis) in traffic acquisition costs, partially offset by an increase of $3.5 million, or 11% (or 12% on a constant currency basis) in other cost of revenue.
43
The decrease in traffic acquisition costs on a constant currency basis related primarily to the lower average cost per thousand impressions (or "CPM"), which decreased by (12)% (or (13)% on a constant currency basis). This was partly driven by lower global demand for advertising inventory, despite the increase in online traffic globally caused by the lockdown imposed in COVID-19 affected areas, making the unit price of inventory cheaper. This was also driven by the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process. This decrease was not entirely offset by the 7% increase in the number of impressions we purchased, reflecting higher volumes of inventory available and our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns.
The increase in other cost of revenue includes a $2.5 million increase in allocated depreciation and amortization expense following the acquisitions of servers and other equipment used in our data centers, a $0.4 million increase in hosting costs and a $0.6 million increase in other costs.
We consider Revenue ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing the growth of our Revenue ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance, allowing it to deliver more relevant advertisements at scale. As a part of this focus, we continue to invest in building relationships with direct publishers and pursuing 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.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Traffic acquisition costs | $ | (928,559) | $ | (839,463) | (10)% | ||||||||||||
| Other cost of revenue | $ | (86,205) | $ | (102,328) | 19% | ||||||||||||
| Total Cost of Revenue | $ | (1,014,764) | $ | (941,791) | (7)% | ||||||||||||
| % of revenue | (63) | % | (67) | % | |||||||||||||
| Gross profit % | 37 | % | 33 | % | |||||||||||||
Cost of revenue for the nine months ended 30 September, 2020 decreased $(73.0) million, or (7)%, compared to the nine months ended September 30, 2019. This decrease was primarily the result of a decrease of $(89.1) million, or (10)% (or (9)% on a constant currency basis) in traffic acquisition costs, partially offset by an increase of $16.1 million, or 19% (or 20% on a constant currency basis) in other cost of revenue.
The decrease in traffic acquisition costs on a constant currency basis related primarily to the lower average cost per thousand impressions (or "CPM"), which decreased by (17)% (or (16)% on a constant currency basis). This was partly driven by lower global demand for advertising inventory, despite the increase in online traffic caused by the lockdown imposed in COVID-19 affected areas, making the unit price of inventory cheaper. This was also driven by the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process. This decrease was not entirely offset by the 9% increase in the number of impressions we purchased, reflecting higher volumes of inventory available and our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns.
The increase in other cost of revenue includes a $8.4 million increase in allocated depreciation and amortization expense following the acquisitions of servers and other equipment used in our data centers, a $4.9 million increase in hosting costs and a $2.8 million increase in other costs, including the provision for Digital Taxes.
44
We consider Revenue ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing the growth of our Revenue ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance, allowing it to deliver more relevant advertisements at scale. As a part of this focus, we continue to invest in building relationships with direct publishers and pursuing 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.
45
Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region
The following table sets forth our revenue, traffic acquisition costs and Revenue ex-TAC by geographic region, including the Americas (North and South America), Europe, Middle East and Africa, or EMEA, and Asia-Pacific.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| Region | September 30, 2019 | September 30, 2020 | Year over Year Change | September 30, 2019 | September 30, 2020 | Year over Year Change | |||||||||||||||||||||||||||||||||||
| Revenue: | (amounts in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||
| Americas | $ | 213,937 | $ | 204,618 | (4) | % | $ | 645,904 | $ | 582,037 | (10) | % | |||||||||||||||||||||||||||||
| EMEA | 185,556 | 167,800 | (10) | % | 589,558 | 517,535 | (12) | % | |||||||||||||||||||||||||||||||||
| Asia-Pacific | 123,113 | 97,927 | (20) | % | 373,414 | 311,763 | (17) | % | |||||||||||||||||||||||||||||||||
| Total | 522,606 | 470,345 | (10) | % | 1,608,876 | 1,411,335 | (12) | % | |||||||||||||||||||||||||||||||||
| Traffic acquisition costs: | |||||||||||||||||||||||||||||||||||||||||
| Americas | (129,047) | (130,756) | 1 | % | (390,083) | (366,095) | (6) | % | |||||||||||||||||||||||||||||||||
| EMEA | (103,899) | (97,272) | (6) | % | (328,591) | (295,822) | (10) | % | |||||||||||||||||||||||||||||||||
| Asia-Pacific | (68,955) | (56,373) | (18) | % | (209,885) | (177,546) | (15) | % | |||||||||||||||||||||||||||||||||
| Total | (301,901) | (284,401) | (6) | % | (928,559) | (839,463) | (10) | % | |||||||||||||||||||||||||||||||||
Revenue ex-TAC (1): | |||||||||||||||||||||||||||||||||||||||||
| Americas | 84,890 | 73,862 | (13) | % | 255,821 | 215,942 | (16) | % | |||||||||||||||||||||||||||||||||
| EMEA | 81,657 | 70,528 | (14) | % | 260,967 | 221,713 | (15) | % | |||||||||||||||||||||||||||||||||
| Asia-Pacific | 54,158 | 41,554 | (23) | % | 163,529 | 134,217 | (18) | % | |||||||||||||||||||||||||||||||||
| Total | $ | 220,705 | $ | 185,944 | (16) | % | $ | 680,317 | $ | 571,872 | (16) | % | |||||||||||||||||||||||||||||
(1) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region are not measures calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region in this Form 10-Q because they are key measures used by our management and board of directors to evaluate operating performance and generate future operating plans. In particular, we believe that the elimination of TAC from revenue and review of these measures by region can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region 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 Revenue ex-TAC and Revenue, Traffic Acquisition Costs 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, Traffic Acquisition Costs and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report Revenue ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC and Revenue, Traffic Acquisition Costs 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 2—Management's Discussion and Analysis" of this Form 10-Q for a reconciliation of revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.
46
Constant Currency Reconciliation
Information in this Form 10-Q with respect to results presented on a constant currency basis was calculated by applying the 2019 average exchange rates for the relevant period to 2020 figures. We have included information with respect to our results presented 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. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | YoY Change | September 30, 2019 | September 30, 2020 | YoY Change | |||||||||||||||||||||||||||||||||
| (amounts in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||
| Revenue as reported | $ | 522,606 | $ | 470,345 | (10) | % | $ | 1,608,876 | $ | 1,411,335 | (12) | % | ||||||||||||||||||||||||||
| Conversion impact U.S. dollar/other currencies | (3,799) | 11,733 | ||||||||||||||||||||||||||||||||||||
| Revenue at constant currency | $ | 522,606 | $ | 466,546 | (11) | % | $ | 1,608,876 | $ | 1,423,068 | (12) | % | ||||||||||||||||||||||||||
| Traffic acquisition costs as reported | $ | (301,901) | $ | (284,401) | (6) | % | $ | (928,559) | $ | (839,463) | (10) | % | ||||||||||||||||||||||||||
| Conversion impact U.S. dollar/other currencies | 2,183 | (6,473) | ||||||||||||||||||||||||||||||||||||
| Traffic Acquisition Costs at constant currency | $ | (301,901) | $ | (282,218) | (7) | % | $ | (928,559) | $ | (845,936) | (9) | % | ||||||||||||||||||||||||||
| Revenue ex-TAC as reported | $ | 220,705 | $ | 185,944 | (16) | % | $ | 680,317 | $ | 571,872 | (16) | % | ||||||||||||||||||||||||||
| Conversion impact U.S. dollar/other currencies | (1,616) | 5,260 | ||||||||||||||||||||||||||||||||||||
| Revenue ex-TAC at constant currency | $ | 220,705 | $ | 184,328 | (16) | % | $ | 680,317 | $ | 577,132 | (15) | % | ||||||||||||||||||||||||||
| Revenue ex-TAC/Revenue as reported | 42 | % | 40 | % | 42 | % | 41 | % | ||||||||||||||||||||||||||||||
| Other cost of revenue as reported | $ | (31,101) | $ | (34,608) | 11 | % | $ | (86,205) | $ | (102,328) | 19 | % | ||||||||||||||||||||||||||
| Conversion impact U.S. dollar/other currencies | (303) | (1,271) | ||||||||||||||||||||||||||||||||||||
| Other cost of revenue at constant currency | $ | (31,101) | $ | (34,911) | 12 | % | $ | (86,205) | $ | (103,599) | 20 | % | ||||||||||||||||||||||||||
| Adjusted EBITDA as reported | $ | 64,219 | $ | 49,471 | (23) | % | $ | 189,473 | $ | 147,572 | (22) | % | ||||||||||||||||||||||||||
| Conversion impact U.S. dollar/other currencies | (2,399) | (182) | ||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA at constant currency | $ | 64,219 | $ | 47,072 | (27) | % | $ | 189,473 | $ | 147,390 | (22) | % | ||||||||||||||||||||||||||
47
Research and Development Expenses
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Research and development expenses | $ | (41,414) | $ | (30,954) | (25)% | ||||||||||||
| % of revenue | (8) | % | (7) | % | |||||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Research and development expenses | $ | (132,006) | $ | (99,716) | (24)% | ||||||||||||
| % of revenue | (8) | % | (7) | % | |||||||||||||
Research and development expenses for the three months ended September 30, 2020, and the nine months ended September 30, 2020 respectively decreased $(10.5) million and $(32.3) million, or (25)% and (24)%, compared to the three months ended September 30, 2019 and the nine months ended September 30, 2019. The decrease for the three and nines ended mainly related to a decrease in headcount-related costs following the cease of our R&D operations in Palo Alto in 2019, and a lower share-based compensation expense partially offset by an increase in the French Research Tax Credit.
48
Sales and Operations Expenses
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Sales and operations expenses | $ | (85,985) | $ | (83,659) | (3)% | ||||||||||||
| % of revenue | (16) | % | (18) | % | |||||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Sales and operations expenses | $ | (277,397) | $ | (244,414) | (12)% | ||||||||||||
| % of revenue | (17) | % | (17) | % | |||||||||||||
Sales and operations expenses for the three months ended September 30, 2020 and the nine months ended September 30, 2020, respectively decreased $(2.3) million and $(32.9) million or (3)% and (12)%, compared to the three months ended September 30, 2019 and the nine months ended September 30, 2019. The decrease for the three and nine months ended mainly related to a reduction in headcount-related costs, a lower share-based compensation expense, and discretionary spend measures on marketing and events partially offset by an increase in provision for doubtful receivables.
49
General and Administrative Expenses
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| General and administrative expenses | $ | (32,835) | $ | (28,672) | (13)% | ||||||||||||
| % of revenue | (6) | % | (6) | % | |||||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| General and administrative expenses | $ | (102,372) | $ | (83,772) | (18)% | ||||||||||||
| % of revenue | (6) | % | (6) | % | |||||||||||||
General and administrative expenses for the three months ended September 30, 2020 and the nine months ended September 30, 2020, respectively decreased $(4.2) million and $(18.6) million or (13)% and (18)%, compared to the three months ended September 30, 2019 and the nine months ended September 30, 2019. The decrease for the three and nine months ended September 30, 2020 is mainly related to 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.
50
Financial Expense
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Financial expense | $ | (900) | $ | (491) | (45)% | ||||||||||||
| % of revenue | (0.2) | % | (0.1) | % | |||||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Financial expense | $ | (4,228) | $ | (1,828) | (57)% | ||||||||||||
| % of revenue | (0.3) | % | (0.1) | % | |||||||||||||
Financial expense for the three and nine months ended September 30, 2020, respectively, decreased by $(0.4) million and $(2.4) million, or (45)% and (57)%, compared to the three months ended September 2019 and the nine months ended September 2019. The $0.5 million financial expense for the three months ended September 30, 2020 and the $1.8 million financial expense for the nine months ended September 30, 2020, were driven by the up-front fees amortization, the non-utilization costs and the financial expense relating to the €140 million ($163.9 million) drawing performed in May 2020 (note 2) as part of our available Revolving Credit Facility (RCF) financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. We manage our exposure to foreign currency risk at the Criteo S.A. level and hedge using foreign currency swaps or forward purchases or sales of foreign currencies.
51
Provision for Income Taxes
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Provision for income taxes | $ | (7,913) | $ | (2,267) | (71)% | ||||||||||||
| % of revenue | (2) | % | (0.5) | % | |||||||||||||
| Effective tax rate | 28 | % | 30 | % | |||||||||||||
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Provision for income taxes | $ | (23,614) | $ | (11,943) | (49)% | ||||||||||||
| % of revenue | (1) | % | (1) | % | |||||||||||||
| Effective tax rate | 30 | % | 30 | % | |||||||||||||
For the three and nine months ended September 30, 2019 and September 30, 2020, respectively, we used an annual estimated tax rate of 30% to calculate the provision for income taxes. The effective tax rate was 28% and 30% for the three and nine months ended September 30, 2019 and 30% for the three and nine months ended September 30, 2020. The difference between the annual estimated tax rate and the effective tax rate is mainly due to the tax impact of discrete items such as share-based compensation in the United States.
52
Net Income
Three months ended September 30, 2020 compared to the three months ended September 30, 2019
| Three Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Net income | $ | 20,557 | 5,293 | (74)% | |||||||||||||
| % of revenue | 4 | % | 1 | % | |||||||||||||
Net income for the three months ended September 30, 2020, decreased $(15.3) million, or (74)%, compared to the three months ended September 30, 2019. This decrease was the result of the factors discussed above, in particular, a $(21.3) million decrease in income from operations, partially offset by a $0.4 million decrease in financial expense and a $5.6 million decrease in provision for income taxes compared to the three months ended September 30, 2019.
Nine months ended September 30, 2020 compared to the nine months ended September 30, 2019
| Nine Months Ended | % change | ||||||||||||||||
| September 30, 2019 | September 30, 2020 | 2019 vs 2020 | |||||||||||||||
| (in thousands, except percentages) | |||||||||||||||||
| Net income | $ | 54,495 | 27,871 | (49)% | |||||||||||||
| % of revenue | 3 | % | 2 | % | |||||||||||||
Net income for the nine months ended September 30, 2020, decreased $(26.6) million, or (49)%, compared to the nine months ended September 30, 2019. This decrease was the result of the factors discussed above, in particular, a $(40.7) million decrease in income from operations partially offset by a $2.4 million decrease in financial expense and a $11.7 million decrease in provision for income taxes compared to the nine months ended September 30, 2019.
53
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operating activities. 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. In 2018, we completed an $80 million share repurchase program. In July 2019, the Board of Directors authorized a new share repurchase program of up to $80 million of the Company’s outstanding American Depositary Shares, which we completed in February 2020. In April 2020, the Board of Directors authorized a new share repurchase program of up to $30 million of the Company's outstanding American Depositary Shares, which we completed in July 2020. Other than these repurchase programs, we intend to retain all available funds from any future earnings to fund our growth. As discussed in Note 3 to the unaudited condensed consolidated financial statements in Item 1 to this Form 10-Q, we are party to several loan agreements and revolving credit facilities with third-party financial institutions.
Our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return. Our cash and cash equivalents at September 30, 2020 were held for working capital and general corporate purposes, which could include acquisitions, and amounted to $626.7 million as of September 30, 2020. The $208.0 million increase in cash and cash equivalents compared with December 31, 2019 primarily resulted from $141.3 million in cash from operating activities and a $111.8 million in cash from financing activities partially offset by $(63.8) million in cash used for investing activities over the period. The cash from financing activities is mainly related to $157.5 million cash from the scheduled drawing from our available Revolving Credit Facility, partially offset by $(43.7) million cash used for the share repurchase programs. In addition, the increase in cash includes a $18.7 million positive impact of changes in foreign exchange rates on our cash position over the period. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return.
Furthermore, the Company has immediate access to an additional €210 million from the Revolving Credit Facility, which, combined with its cash position as of September 30, 2020, provides total liquidity in excess of $870 million. Overall, we believe that our current financial liquidity, combined with our expected cash-flow generation in 2020, enables financial flexibility.
Operating and Capital Expenditure Requirements
For the nine months ended September 30, 2019 and 2020, our capital expenditures were $80.4 million and $43.2 million, respectively. During the nine months ended September 30, 2020, these capital expenditures were primarily related to the acquisition of data center and server equipment, and IT systems. We expect our capital expenditures to remain at, or slightly above, 3% of revenue for 2020, as we plan to continue to build and maintain additional data center equipment capacity in all regions and significantly increase our redundancy capacity to strengthen our infrastructure.
We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.
Our future working capital requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in personnel and capital equipment, and the timing and extent of our introduction of new products and product enhancements.
If our cash and cash equivalents balances and cash flows from operating activities are insufficient to satisfy our liquidity requirements, we may need to raise additional funds through equity, equity-linked or debt financings to support our operations, and such financings may not be available to us on acceptable terms, or at all. We may also need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies, assets or products.
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.
54
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Historical Cash Flows
The following table sets forth our cash flows for the nine month period ended September 30, 2019 and 2020:
| Nine Months Ended | |||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||
| (in thousands) | |||||||||||
| Cash from operating activities | $ | 163,473 | $ | 141,276 | |||||||
| Cash used for investing activities | $ | (86,351) | $ | (63,799) | |||||||
| Cash from (used for) financing activities | $ | (18,638) | $ | 111,758 | |||||||
Operating Activities
Cash provided by operating activities is primarily impacted by the increase in the number of clients using our solution and by the amount of cash we invest in personnel to support the anticipated growth of our business. Cash provided by operating activities has typically been generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating items such as depreciation, amortization and share-based compensation, deferred tax assets and income taxes.
For the nine months ended September 30, 2020, net cash provided by operating activities was $141.3 million and consisted of net income of $27.9 million, $105.7 million in adjustments for certain non-cash and non-operating items and changes in working capital of $7.7 million. Adjustments for certain non-operating items primarily consisted of depreciation and amortization expense of $79.6 million, equity awards compensation expense of $22.5 million, $2.7 million on disposal of non-current assets, $7.4 million change in income taxes and a $1.2 million on other non-operating items, partially offset by a $7.7 million changes in deferred tax assets. The $7.7 million increase in cash from changes in working capital primarily consisted of a $122.5 million decrease in trade receivables, a $2.3 million decrease in other current assets including prepaid expenses and VAT receivables, partially offset by a $1.7 million change in lease liabilities and right of use assets, a $95.3 million decrease in trade payables, and a $20.1 million decrease in other current liabilities such as payroll and payroll related expenses and value-added tax ("VAT") payables.
Investing Activities
Our investing activities to date have consisted primarily of purchases of servers and other data-center equipment and business acquisitions. For the nine months ended September 30, 2020, net cash used for investing activities was $63.8 million and primarily consisted of $43.2 million in capital expenditures, mainly comprised of purchases of servers and other data-center equipment, and a $20.6 million change in other non-current financial assets resulting from the investment in Marketable Securities (notes 2 and 3).
Financing Activities
For the nine months ended September 30, 2020, net cash from financing activities was $111.8 million, resulting mainly from a $157.5 million drawing from our available Revolving Credit Facilities (note 1), partially offset by $43.7 million for our share repurchase program (note 1) and a $2.0 million change in other financial liabilities.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
We are mainly exposed to foreign currency exchange rate fluctuations. There have been no material changes to our exposure to market risk during the nine months ended September 30, 2020.
For a description of our foreign exchange risk, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - B. Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2019.
A 10% increase or decrease of the Pound Sterling, the Euro, the Japanese yen or the Brazilian real against the U.S. dollar would have impacted the Condensed Consolidated Statements of Income as follows:
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| GBP/USD | +10% | -10% | +10% | -10% | |||||||||||||||||||
| Net income impact | $ | (789) | $ | 789 | $ | (10) | $ | 10 | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| BRL/USD | +10% | -10% | +10% | -10% | |||||||||||||||||||
| Net income impact | $ | (49) | $ | 49 | $ | (37) | $ | 37 | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| JPY/USD | +10% | -10% | +10% | -10% | |||||||||||||||||||
| Net income impact | $ | 1,226 | $ | (1,226) | $ | 302 | $ | (302) | |||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||
| September 30, 2019 | September 30, 2020 | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| EUR/USD | +10% | -10% | +10% | -10% | |||||||||||||||||||
| Net income impact | $ | 8,703 | $ | (8,703) | $ | 7,416 | $ | (7,416) | |||||||||||||||
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Credit Risk and Trade receivables
For a description of our credit risk and trade receivables, please see "Note 3. Financial instruments" and "Note 4. Trade Receivables" in the Notes to the Consolidated Financial Statements.
The Company has observed a delay in payments from customers in geographic regions that are most affected by COVID-19 from the last part of the three month period ended March 31, 2020. The expected credit losses model, adapted by the Company on January 1, 2020, requires us to look at how current and future economic conditions impact the amount of expected credit losses. As such, we have increased the provision for credit losses, due to the expected impact of COVID-19 on the Company's future cash collections caused by the downturn in the economy which has led to financial difficulties for some of our customers, particularly those operating in the retail sector. In times of the global economic turmoil, brought about by COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Based on their evaluation as of September 30, 2020, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to provide reasonable assurance that (i) the information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
Limitation on Effectiveness of Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Criteo have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error of fraud may occur and not be detected.
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PART II
Item 1. 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, financial condition, results of operations 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 1A. Risk Factors.
You should carefully consider the risks described under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. These risks and uncertainties 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 such risks materialize, our business, financial condition and results of operations could be materially harmed and the trading price of our American Depositary Shares could decline. These risks are not exclusive and 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. There have been no material changes to the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the issuer and Affiliated Purchasers
The following table provides certain information with respect to our purchases of our ADSs during the third fiscal quarter of 2020:
| Period | Total Number of Shares Purchased(1) | Average Price Paid per Share(2) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs(1) | ||||||||||||||||||||||
| July 1 to 31, 2020 | 832,576 | $ | 12.67 | 832,576 | — | |||||||||||||||||||||
| August 1 to 31, 2020 | — | — | — | — | ||||||||||||||||||||||
| September 1 to 30, 2020 | — | — | — | — | ||||||||||||||||||||||
| Total | 832,576 | $ | 12.67 | 832,576 | — | |||||||||||||||||||||
(1) On April 29, 2020, Criteo's Board of Directors authorized a share repurchase program of up to $30.0 million of the Company's outstanding American Depositary Shares. The Company intends to use repurchased shares to satisfy employee equity plan vesting in lieu of issuing new shares, and potentially in connection with M&A transactions. The repurchase program commenced in May 2020 and concluded in July 2020.
(2) Average price paid per share excludes any broker commissions paid.
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Item 6. Exhibits.
Exhibit Index
| Incorporated by Reference | ||||||||||||||||||||||||||||||||
| Exhibit | Description | Schedule/ Form | File Number | Exhibit | File Date | |||||||||||||||||||||||||||
| 8-K | 001-36153 | 10.1 | September 3, 2020 | |||||||||||||||||||||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||||||||||||||||||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||||||||
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |||||||||||||||||||||||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||||||||
| 104. | Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101. | |||||||||||||||||||||||||||||||
# Filed herewith.
* Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| CRITEO S.A. | ||||||||
| (Registrant) | ||||||||
| By: | /s/ Sarah Glickman | |||||||
| Date: October 29, 2020 | Name: | Sarah Glickman | ||||||
| Title: | Chief Financial Officer | |||||||
| (Principal financial officer and duly authorized signatory) | ||||||||
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