Criteo S.A.(CRTO) - 2020 Q4 - Annual Report

PART I Business Criteo S.A. is a global digital advertising technology company providing marketing and monetization services through its AI-powered Commerce Media Platform, serving over 21,000 clients Key Financial Results (2018-2020) | Metric | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $2,072.6M | $2,261.5M | $2,300.3M | | Revenue ex-TAC | $825.0M | $946.6M | $966.0M | | Net Income | $74.7M | $96.0M | $95.9M | | Adjusted EBITDA | $251.0M | $299.0M | $321.1M | - Criteo is a global technology company focused on providing marketing and monetization services on the open Internet, powered by its Commerce Media Platform and AI technology[22] - The company served over 21,000 clients as of December 31, 2020, with an average client retention rate of approximately 90% over the last three years[23] - In 2020, Criteo collected data on over $950 billion in online sales transactions and delivered 1.6 trillion targeted ads[23] The Criteo Commerce Media Platform The Criteo Commerce Media Platform, powered by AI, integrates the Criteo Shopper Graph, AI Engine, and a vast publisher network to deliver comprehensive marketing and monetization solutions - The platform is comprised of the Criteo Shopper Graph, Criteo AI Engine, and Criteo Solutions (Marketing Solutions and Retail Media), all leveraging an extensive first-party media network[32] - Criteo Shopper Graph is one of the world's largest open datasets focused on shoppers, analyzing over $950 billion in online sales transactions in 2020 and covering approximately 2.5 billion unique users globally[36][37] - The Criteo AI Engine consists of multiple algorithms for audience creation, ad recommendation, creative optimization (DCO+), and predictive bidding to maximize consumer engagement and drive results for clients[41][42][43][44] - Criteo's solutions are grouped into two families: Criteo Marketing Solutions for engaging consumers across the marketing funnel, and Criteo Retail Media for retailers to generate advertising revenue from consumer brands[53][60] Business & Growth Opportunities Criteo's growth strategy centers on strengthening core retargeting, expanding into new solutions like Retail Media, pursuing strategic partnerships, and driving operational excellence - The company's strategy includes strengthening the core retargeting business, expanding the product portfolio, exploring strategic partnerships/M&A, and driving operational excellence[89] - New solutions outside of retargeting accounted for close to 20% of total business on a Revenue ex-TAC basis in fiscal year 2020, and are expected to grow to nearly 30% in 2021[94] - Key growth areas for new solutions include Retail Media, brand awareness campaigns (including video and Connected TV), audience targeting, contextual advertising, and omnichannel capabilities[95][96][98][99] - Criteo is actively pursuing partnerships, such as joining the Unified ID 2.0 initiative and integrating with Nielsen and Oracle Data Cloud, to enhance its platform capabilities[101] Privacy, Data Protection and Content Control Criteo's operations are heavily impacted by evolving global privacy and data protection laws like GDPR and CCPA/CPRA, necessitating strict compliance and active participation in industry self-regulatory initiatives - The business is subject to evolving privacy laws in the U.S. and Europe, including California's CCPA/CPRA and the EU's GDPR and E-Privacy Directive[123][124][126] - Recent guidance from the French data protection authority (CNIL) requires clear, affirmative user consent for cookies, with an equal ease to refuse as to accept, with a compliance deadline of March 2021[131] - Criteo actively participates in self-regulatory bodies like the Network Advertising Initiative and Digital Advertising Alliance and provides an "Ad Choices" link in its advertisements for user control[133][135] Risk Factors Criteo faces significant risks from rapid technological changes, intense competition, evolving data privacy regulations, browser changes impacting data collection, and the ongoing impact of global health crises on advertising spend - The business is negatively impacted by the COVID-19 pandemic, which has caused significant reductions in ad spend from clients, particularly in the Travel and Classifieds verticals[157][158] - Regulatory developments like GDPR in the EU and CCPA/CPRA in California could adversely affect the ability to collect and use data, with potential for significant fines[182][186][189] - The ability to generate revenue is dependent on collecting data, which is being restricted by browser developers (e.g., Google phasing out third-party cookies in Chrome) and the rise of ad-blocking software[244][245][248] - The market is intensely competitive, with Criteo facing competition from large, well-established companies such as Amazon, Facebook, Google, and Microsoft[140][164] Properties Criteo's headquarters is in Paris, France, operating 29 global offices and leasing nine data centers across the U.S., Europe, and Asia - The company's headquarters is in Paris, France, and it operates 29 offices as of December 31, 2020[341] - Criteo leases space in nine data centers from third-party providers in the U.S., France, the Netherlands, Hong Kong, and Japan[110][341] Legal Proceedings Criteo is not currently involved in any legal proceedings expected to materially adversely affect its business, financial condition, or results of operations - The company is not currently involved in any legal proceedings that would have a material adverse effect on its business[342] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Criteo's ADSs are listed on Nasdaq under "CRTO", the company has never paid dividends, and completed two ADS repurchase programs totaling $110 million in 2020 - The company's ADSs have been listed on the Nasdaq Global Select Market under the symbol "CRTO" since October 30, 2013[346] - Criteo has never declared or paid cash dividends and does not anticipate doing so in the foreseeable future, intending to retain earnings to fund growth[351] - Two ADS repurchase programs were completed in 2020: an $80 million program (started July 2019, completed Feb 2020) and a $30 million program (started April 2020, completed July 2020)[353] Selected Financial Data This section provides a five-year summary of Criteo's key financial data, showing declining trends in revenue, net income, Revenue ex-TAC, and Adjusted EBITDA from 2018 to 2020, while the client base steadily increased Consolidated Statements of Income Data (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Revenue | $2,072,617 | $2,261,516 | $2,300,314 | | Gross profit | $688,018 | $829,036 | $834,236 | | Income from operations | $108,825 | $141,214 | $147,107 | | Net income | $74,689 | $95,969 | $95,879 | Consolidated Statements of Financial Position Data (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $488,011 | $418,763 | | Total assets | $1,853,410 | $1,790,384 | | Total liabilities | $700,723 | $752,396 | | Total equity | $1,152,687 | $1,037,988 | Other Financial and Operating Data (2018-2020) | (in thousands, except clients) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Number of clients | 21,460 | 20,247 | 19,419 | | Revenue ex-TAC | $825,046 | $946,569 | $965,980 | | Adjusted EBITDA | $250,995 | $298,972 | $321,059 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section details the 8% revenue decrease in 2020, primarily due to COVID-19's $262 million impact, alongside reduced operating expenses, and highlights the company's strong liquidity and strategic focus on Revenue ex-TAC maximization and client base growth Results of Operations In 2020, revenue decreased by 8% to $2.07 billion due to COVID-19, while cost of revenue fell 3% and operating expenses significantly decreased across R&D, Sales & Operations, and G&A, leading to declines in income from operations and net income - Revenue in 2020 decreased by 8% (8% at constant currency) to $2,072.6 million, with an estimated net negative impact from COVID-19 of approximately $262 million[466][467] - Cost of revenue decreased by 3% in 2020, driven by a 5% decrease in traffic acquisition costs due to a 13% decrease in the average CPM for inventory purchased[480][481] - Research and development expenses decreased by 23% in 2020, mainly due to lower headcount-related costs following the cessation of R&D operations in Palo Alto[492] - Sales and operations expenses decreased by 12% in 2020, related to reduced headcount costs, lower share-based compensation, and discretionary spending cuts, partially offset by an increased provision for credit losses[495] Liquidity and Capital Resources Criteo maintained strong liquidity in 2020 with $488.0 million in cash and equivalents and $960 million in total financial liquidity, supported by $185.4 million in operating cash flow, while managing foreign currency risk and projecting capital expenditures around 3% of revenue for 2021 - As of December 31, 2020, the company had $488.0 million in cash and cash equivalents and total financial liquidity of approximately $960 million, including marketable securities and its Revolving Credit Facility[555][556] - Net cash provided by operating activities was $185.4 million in 2020, a decrease from $222.8 million in 2019[563][565] - Capital expenditures were $65.5 million in 2020, down from $97.9 million in 2019, and are expected to be around 3% of revenue in 2021[557] Foreign Currency Risk Sensitivity (Net Income Impact of 10% FX Change) | Currency Pair | 2020 Impact (in thousands) | | :--- | :--- | | GBP/USD | $116 | | BRL/USD | $(41) | | JPY/USD | $614 | | EUR/USD | $9,360 | Trend Information Key trends show a 4% increase in clients to over 21,000 and a 90% retention rate, despite 13% and 16% declines in Revenue ex-TAC and Adjusted EBITDA respectively in 2020, with a strategic focus on maximizing Revenue ex-TAC and maintaining a flat Adjusted EBITDA margin in 2021 - The number of clients increased by 4% to over 21,000 at the end of 2020, with a continued focus on growing the client base across all regions and categories[592] - The client retention rate was approximately 90% in 2020, 2019, and 2018, indicating a stable client base[593] - Adjusted EBITDA decreased by 16% in 2020 to $251.0 million. The company anticipates a relatively flat Adjusted EBITDA margin as a percentage of Revenue ex-TAC for 2021 compared to 2020[591] - The business experiences seasonality, with advertising spend from retail clients typically highest in the fourth quarter, while travel clients increase spending in the first and third quarters[594] Controls and Procedures As of December 31, 2020, Criteo's management concluded that both its disclosure controls and internal control over financial reporting were effective, as assessed under the COSO framework - Management, including the CEO and CFO, concluded that as of December 31, 2020, the company's disclosure controls and procedures were effective[606] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO framework[607] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information regarding directors, executive officers, and corporate governance will be included in the definitive proxy statement for the 2021 Annual Meeting of Shareholders and is incorporated by reference[613] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information regarding executive compensation will be included in the definitive proxy statement for the 2021 Annual Meeting of Shareholders and is incorporated by reference[615] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information regarding security ownership will be included in the definitive proxy statement for the 2021 Annual Meeting of Shareholders and is incorporated by reference[616] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information regarding certain relationships, related transactions, and director independence will be included in the definitive proxy statement for the 2021 Annual Meeting of Shareholders and is incorporated by reference[617] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement - Information regarding principal accounting fees and services will be included in the definitive proxy statement for the 2021 Annual Meeting of Shareholders and is incorporated by reference[618] PART IV Exhibits and Financial Statement Schedules This section lists the consolidated financial statements and various exhibits filed as part of the Form 10-K, including key agreements and Sarbanes-Oxley Act certifications - The financial statements are listed in the Index to Consolidated Financial Statements on page F-1 and are filed as part of the Form 10-K[621]