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(Exact name of registrant as specified in its charter)
iFrance
Not
Applicable
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
i32 Rue Blanche
iParis
iFrance
i75009
(Address
of principal executive offices)
(Zip Code)
+i33 1 i40i40
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
iAmerican
Depositary Shares, each representing one Ordinary Share, nominal value €0.025 per share
iCRTO
iNasdaq Global Select Market
iOrdinary
Shares, nominal value €0.025 per share
*
iNasdaq Global Select Market
*
* 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. iYes☒ 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). iYes☒ 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.
iLarge
Accelerated Filer
☒
Accelerated Filer
☐
Non-accelerated Filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not 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 i☐ No x
As of May 5, 2021, the registrant had i60,727,589
ordinary shares, nominal value €0.025 per share, outstanding.
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 ongoing effect of the novel coronavirus pandemic ("COVID-19"), including its macroeconomic effects, on our business, operations, and financial results; and the effect of governmental lockdowns, restrictions and new regulations on our operations and processes;
•the ability of the Criteo Artificial Intelligence (AI) 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, including without limitation the proposed changes to and enhancements of the Chrome browser announced by Google;
•our ability to continue to collect and utilize data about user behavior and interaction with advertisers and publishers;
•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, 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. 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
2
CRITEO S.A. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
Trade
receivables, net of allowances of $i38.7 million and $i39.9 million at March
31, 2021 and December 31, 2020, respectively
4
i416,910
i474,055
Income
taxes
i12,750
i11,092
Other
taxes
i69,692
i69,987
Other
current assets
5
i22,494
i21,405
Marketable
securities - current portion
3
i17,586
i—
Total
current assets
i1,059,492
i1,064,550
Property,
plant and equipment, net
i168,036
i189,505
Intangible
assets, net
i79,440
i79,744
Goodwill
i322,821
i325,805
Right
of use assets - operating lease
7
i96,266
i114,012
Marketable
securities - non current portion
3
i28,281
i41,809
Non-current
financial assets
i14,788
i18,109
Deferred
tax assets
i13,511
i19,876
Total
non-current assets
i723,143
i788,860
Total
assets
$
i1,782,635
$
i1,853,410
Liabilities
and shareholders' equity
Current liabilities:
Trade payables
$
i347,209
$
i367,025
Contingencies
14
i1,773
i2,250
Income
taxes
i1,201
i2,626
Financial
liabilities - current portion
3
i2,114
i2,889
Operating
lease liabilities - current portion
7
i44,501
i48,388
Other
taxes
i56,192
i58,491
Employee
- related payables
i71,450
i85,272
Other
current liabilities
6
i32,693
i33,390
Total
current liabilities
i557,133
i600,331
Deferred
tax liabilities
i4,066
i5,297
Retirement
benefit obligation
8
i5,621
i6,167
Financial
liabilities - non-current portion
3
i371
i386
Operating
lease liabilities - non-current portion
7
i61,874
i83,007
Other
non-current liabilities
i9,807
i5,535
Total
non-current liabilities
i81,739
i100,392
Total
liabilities
i638,872
i700,723
Commitments
and contingencies
i
i
Shareholders' equity:
Common
shares,€ii0.025/
par value, iii66,391,906//
and iii66,272,106//
shares authorized, issued and outstanding at March 31, 2021, and December 31, 2020, respectively.
(*)
On February 5, 2021, Criteo's Board of Directors authorized a share repurchase program of up to $i100.0 million of the Company's outstanding American Depositary Shares. The change in treasury stocks is comprised of i149,960
shares repurchased at an average price of $i32.9 offset by i184,895
treasury shares used for RSUs vesting.
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)
-
Net gain or loss on disposal of non-current assets
i3,945
i2,266
-
Equity awards compensation expense (1)
i7,215
i8,502
-
Change in deferred taxes
i4,998
(i2,678)
-
Change in income taxes
(i3,379)
(i2,329)
-
Other
i13
i23
Changes
in working capital related to operating activities
i23,895
i7,487
-
(Increase) / Decrease in trade receivables
i47,226
i99,388
-
Increase / (Decrease) in trade payables
(i10,640)
(i81,679)
-
(Increase) / Decrease in other current assets
(i5,050)
(i10,398)
-
Increase/ (Decrease) in other current liabilities
(i4,527)
(i945)
-
Change in operating lease liabilities and right of use assets
(i3,114)
i1,121
Cash
from operating activities
i77,362
i56,743
Acquisition
of intangible assets, property, plant and equipment
(i11,953)
(i11,258)
Change
in accounts payable related to intangible assets, property, plant and equipment
(i1,827)
(i479)
Change
in other non-current financial assets
(i3,252)
i889
Cash
used for investing activities
(i17,032)
(i10,848)
Repayment
of borrowings
(i182)
(i170)
Proceeds
from capital increase
i2,074
i4
Repurchase
of treasury stocks
(i4,930)
(i18,241)
Change
in other financial liabilities
(i378)
(i354)
Cash
used for financing activities
(i3,416)
(i18,761)
Effect
of exchange rates changes on cash and cash equivalents
(i24,865)
(i9,391)
Net
increase in cash and cash equivalents
i32,049
i17,743
Net
cash and cash equivalents at beginning of period
i488,011
i418,763
Net
cash and cash equivalents at end of period
$
i520,060
$
i436,506
Supplemental
disclosures of cash flow information
Cash paid for taxes, net of refunds
(i8,432)
(i12,047)
Cash
paid for interest
(i367)
(i349)
(1)
Of which $i6.8 million and $i8.1 million of equity awards compensation expense consisted of share-based compensation
expense according to ASC 718 Compensation - stock compensation for the quarter ended March 31, 2021 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 operate at the intersection of ecommerce, digital marketing and media monetization. We enable brands' and retailers' growth by providing best-in-class marketing and monetization services on the open Internet. We do this by activating commerce data through artificial intelligence ("AI") technology, reaching consumers on an extensive scale across all stages of the consumer journey, and generating advertising revenues from consumer brands for large retailers. Our vision is to build the world's leading Commerce Media Platform to deliver measurable
business outcomes at scale for global brands, agencies and retailers across multiple marketing goals. Our data is pooled among our clients and publishers and offers deep insights into consumer intent and purchasing habits. To drive trusted and impactful advertising, we activate our data assets in a privacy-by-design way through proprietary AI technology to engage consumers in real time with highly relevant digital advertisements ("ads") across devices and environments.
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".
8
Note
1. iSummary of Significant Accounting Policies
i
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, 2020, filed with the SEC on February 26, 2021. 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 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.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, except for the update to our existing accounting policy described below:
i
Revenue
Recognition
Principal vs Agent:
For certain customer arrangements, related to transactions using our Retail Media Platform, a new self-service solution providing transparency, measurement and control to our brand and retailer customers, we act as agent, because we (i) do not control the advertising inventory before it is transferred to our clients, (ii) do not have inventory risks because we do not purchase the inventory upfront and (iii) have limited discretion in establishing prices as we charge a platform fee based on a percentage of the digital advertising inventory purchased through the use of the platform. Therefore, based on these and other factors, we report the revenue earned and related costs incurred by the Retail Media Platform solution on a net basis.
i
Accounting
Pronouncements Adopted in 2021
Effective January 1, 2021, we have adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes. The adoption of this new standard did not have a material impact on our consolidated financial statements.
9
Effective January 1, 2021, we have adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 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. The adoption of this new standard did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements
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.
10
Note 2. iSignificant
Events and Transactions of the Period
Restructuring
On February 1, 2021, the Company announced a plan to restructure its workforce across functions and regions to better align with the Company's evolution. We expect the plan will be completed by the end of 2021. The Company recorded $i5.2
million of restructuring charges for severance related to this plan in the period ended March 31, 2021. For the three months ended March 31, 2021, $i4.0 million was included in Sales and Operations expenses, $i1.1 million
was included in General and Administrative expenses and $i0.1 million was included in Research and Development expenses.
i
The
following table presents the breakdown of restructuring liability as of March 31, 2021, presented as part of employees related payables on the balance sheet:
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:
For
our financial assets, other than trade receivables, net of allowances, the fair value approximates the carrying amount, given the nature of the financial assets and the maturity of the expected cash flows.
The
fair value of financial liabilities approximates the carrying amount, given the nature of the financial liabilities and the maturity of the expected cash flows.
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.
Included in financial liabilities - current portion
$
i394
$
i925
/
The
fair value of derivative financial instruments approximates the notional amount, given the nature of the derivative financial instruments and the maturity of the expected cash flows.
12
Cash and Cash Equivalents
i
The
following table presents for each reporting period, the breakdown of 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
The following table presents for each reporting period, the breakdown of the fair value of marketable securities:
Changes
in allowance for credit accounts are summarized below:
2021
2020
(in thousands)
Balance at January 1
$
(i39,899)
$
(i16,068)
Allowance
for credit losses through retained earnings (*)
—
(i3,498)
Allowance for credit losses
(i2,759)
(i6,997)
Reversal
of provision
i3,306
i2,989
Currency
translation adjustment
i658
i490
Balance
at March 31
$
(i38,694)
$
(i23,084)
(*)
On 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.
/
We
write off accounts receivable balances once the receivables are no longer deemed collectible. During the three month period ended March 31, 2021, and March 31, 2020, the Company recovered $i0.5 million, and $i0.6 million,
respectively, previously written off, and accounted for as a reversal of provision.
As
of March 31, 2021, 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
$
i—
$
i7,893
Additional
right of use assets
$
i—
$
i7,893
/
These
operating leases will commence during the year ending December 31, 2021.
17
Note 8. iEmployee Benefits
Defined
Benefit Plans
According to the French law and the Syntec Collective Agreement, French employees are entitled to compensation paid on retirement.
i
The following table summarizes the changes in the projected benefit obligation:
Projected benefit
obligation
(in thousands)
Projected benefit obligation present value at January 1, 2020
The total expense represents contributions payable to these plans by us at specified rates.
In some countries, the Group’s employees are eligible for pension payments and similar financial benefits. The Group provides these benefits via defined contribution plans. Under defined contribution plans, the Group has no obligation other than to pay the agreed contributions, with the corresponding
expense charged to income for the year. The main contributions concern France, the United States, for 401k plans, and the United Kingdom.
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 three months ended March 31, 2021, there was one grant of RSUs under the Employee Share Option Plan 13 as defined in Note 19 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020.
On February 25, 2021, i96,450
RSUs were granted to Criteo employees subject to continued employment and i235,850 RSUs and i235,848
PSUs were granted to members of the management 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 19 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.
i
Change
in number of outstanding BSPCE / OSA / RSU / BSA
The
$i0.7 million and the $i0.3 million financial expenses for the three months ended March 31,
2021 and March 31, 2020, respectively, were driven by the up-front fees amortization, the non-utilization costs and the financial expense relating to our available Revolving Credit Facility (RCF) financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. At March 31, 2021, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
23
Note
12. iIncome 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.
i
The
condensed consolidated statements of income line item “Provision for income taxes” can be broken down as follows:
For
the three months ended March 31, 2021 and March 31, 2020, we used an annual estimated tax rate of ii30/%
to calculate the provision for income taxes. The effective tax rate was ii30/%
for the three months ended March 31, 2021 and 2020, respectively.
Current tax assets and liabilities
The total amount of current tax assets consists mainly of prepayments of income taxes and credits of Criteo S.A, Criteo Corp., and Criteo GmbH and Criteo K.K.
24
Note 13. iEarnings
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.
Net income attributable to shareholders of Criteo S.A.
$
i22,406
$
i15,459
Weighted
average number of shares outstanding
i60,741,674
i61,691,001
Basic
earnings per share
$
i0.37
$
i0.25
/
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 March 31, 2020 and March 31, 2021. Consequently, all potential dilutive effects from shares are considered.
i
For
each period presented, a contract to issue a certain number of shares (i.e. share option, non-employee warrant, 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).
Net income attributable to shareholders of Criteo S.A.
$
i22,406
$
i15,459
Weighted
average number of shares outstanding of Criteo S.A.
i60,741,674
i61,691,001
Dilutive
effect of :
Restricted share awards ("RSUs")
i2,972,382
i264,309
Share
options and BSPCE
i296,071
i153,786
Share
warrants
i67,282
i16,486
Weighted
average number of shares outstanding used to determine diluted earnings per share
i64,077,409
i62,125,582
Diluted
earnings per share
$
i0.35
$
i0.25
/
i
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:
Weighted
average number of anti-dilutive securities excluded from diluted earnings per share
i332,300
i2,241,223
/
25
Note
14. iCommitments and contingencies
Commitments
Revolving Credit Facilities "RCF", Credit Line Facilities and Bank Overdrafts
We are party to an RCF with a syndicate of banks which allows us to draw up to €i350.0
million ($i410.4 million).
We are also party to short-term credit lines and overdraft facilities with HSBC plc, BNP Paribas and LCL with an authorization to draw up to a maximum of €i21.5
million ($i25.2 million) in the aggregate under the short-term credit lines and overdraft facilities. As of March 31, 2021, 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
i
Changes
in provisions during the presented periods are summarized below:
*Due to changes in management's best estimates of the future outflow
/
The amount of the provisions represents management’s best estimate of the future outflow.
26
Note 15. iBreakdown
of Revenue and Non-Current Assets by Geographical Areas
The Company operates in the following ithree 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 periodsi. Revenue by geographical area is based on the location of advertisers’ campaigns.
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.
There were no significant related-party transactions during the period nor any change in the nature of the transactions as described in Note 24 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 except as follows:
•Sarah Glickman - Chief Financial Officer and Principal Accounting Officer
•Ryan Damon - General Counsel and Corporate Secretary
28
Note 17. iSubsequent
Events
The Company evaluated all subsequent events that occurred after March 31, 2021 through the date of issuance of the unaudited condensed consolidated financial statements and determined there are no significant events that require adjustments or disclosure.
29
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, 2020, filed with the Securities and Exchange Commission, or "SEC", on February 26, 2021.
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, 2020.
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 2021.
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. 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.
30
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.
31
Condensed
Consolidated Statements of Income Data (Unaudited):
Net income available to shareholders of Criteo S.A.
$
22,406
$
15,459
Net
income available to non-controlling interests
1,044
969
Net income allocated to shareholders per share:
Basic
$
0.37
$
0.25
Diluted
$
0.35
$
0.25
Weighted average shares outstanding used in computing per share amounts:
Basic
60,741,674
61,691,001
Diluted
64,077,409
62,125,582
(1)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:
32
Detailed
Information on Selected Items (unaudited):
Total Restructuring related and transformation costs (1)
$
11,636
$
2,209
(a)
Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income.
(b) Includes acquisition-related amortization of intangible assets of $0.7 million and $4.7 million for the three months ended March 31, 2021 and 2020, respectively.
(c) Includes acquisition-related amortization of intangible assets of $2.2 million and $2.2 million for the three months ended March 31, 2021 and 2020, respectively.
(1)For the three months
ended March 31, 2021, and March 31, 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:
(Gain) from forfeitures of share-based compensation awards
(666)
—
Facilities
and impairment related costs
6,616
987
Payroll related costs
5,152
1,222
Consulting costs related to transformation
534
—
Total
restructuring related and transformation costs
11,636
2,209
33
For the three months ended March 31, 2021 and March 31, 2020, respectively, the cash outflows related to restructuring related and transformation costs were $6.1 million, and $4.5 million respectively, and were
mainly comprised of payroll costs and broker and termination penalties related to facilities and other consulting fees.
Consolidated Statements of Financial Position Data (unaudited):
(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:
(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:
Amortization of acquisition-related intangible assets
2,935
6,848
Restructuring
related and transformation costs
11,636
2,209
Tax impact of the above adjustments
(2,751)
(1,960)
Adjusted Net Income
$
43,152
$
32,028
36
(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:
(1)
Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2020 average exchange rates for the relevant period to 2021 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.
(2) Criteo operates as one operating segment. From January 1,2021 we have disaggregated revenues between Marketing Solutions and Retail Media. A strategic building block of Criteo’s Commerce Media Platform, the Retail Media Platform, introduced in June 2020, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements
running on this platform, Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. Over time, we expect most clients using Criteo’s legacy Retail Media solutions to transition to this platform. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Revenue ex-TAC margin will increase. Revenue ex-TAC will not be impacted by this transition.
Revenue for the three months ended March 31, 2021 increased 7% or 4% on a constant currency basis, (as defined in footnote 1 directly above) to $541.1 million, compared to the three months ended March 31, 2020.
The COVID-19 pandemic impacted our business during
most of the quarter, with an estimated net negative impact on revenue of approximately $46 million for the three months ended March 31, 2021, or approximately 9 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us.
In the quarter, 81% of the year-over-year increase in revenue was driven by the higher contribution from our existing clients while 19% came from new client additions. We added 266 net new clients year-over-year across regions, while revenue from existing clients increased by 8% at constant currency over the period.
The year-over-year increase in revenue on a constant currency basis was 88% attributable to volume-based drivers of our business (increasing number of impressions delivered and clicks delivered
on the advertising banners displayed), and 12% attributable to price-based drivers (increasing average price charged to advertisers).
Marketing Solutions revenue increased 3% (or decreased (0.5)% on a constant currency basis) to $483.2 million for the three months ended March 31, 2021, as increased spend from Retail clients, in particular in our retargeting solution, was partially offset by the negative impact from continued lower spend from Travel clients.
Retail Media revenue increased 72% (or 69% on a constant currency basis) to $57.9 million for the three months ended March 31, 2021, driven by strong performance with large retailers across the U.S. and EMEA, supported by continued solid trends in ecommerce shopping sustained through the COVID-19
pandemic.
Our revenue in the Americas region increased 6% (or 8% on a constant currency basis), including 6% in the U.S., to $203.9 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, driven by positive Retail trends, in particular with large customers across our retargeting and new solutions, continued strong performance of Retail Media, in particular with CPG brands and existing retailers, partially offset by continued negative impact from COVID-19 on Travel and Classifieds clients.
Our revenue in EMEA increased 12% (or 4% on a constant currency basis) to $212.1 million for the three months ended March 31, 2021 compared to the three months ended
March 31, 2020, driven by positive Retail trends, in particular with large customers across our retargeting and new solutions, continued strong performance of Retail Media, partially offset by continued negative impact from COVID-19 on Travel and Classifieds clients.
Our revenue in the Asia-Pacific region increased 3% (or (1)% decrease on a constant currency basis) to $125.1 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, as the continued negative impact from the COVID-19 pandemic on Travel and Classifieds more than offset the recovery of Retail accounts in the region.
Additionally, our $541.1 million of revenue for the three months ended March
31, 2021 was positively impacted by $16.7 million of currency fluctuations, particularly as a result of the depreciation of the Turkish Lira, Russian Ruble, the Brazilian real, partially offset by the appreciation of the Euro and the Japanese Yen, compared to the U.S. dollar.
(1) Criteo operates as one operating segment. From January 1,2021
we have disaggregated revenues between Marketing Solutions and Retail Media. A strategic building block of Criteo’s Commerce Media Platform, the Retail Media Platform, introduced in June 2020, is a self-service solution providing transparency, measurement and control to brands and retailers. In all arrangements running on this platform, Criteo recognizes revenue on a net basis, whereas revenue from arrangements running on legacy Retail Media solutions are accounted for on a gross basis. Over time, we expect most clients using Criteo’s legacy Retail Media solutions to transition to this platform. As new clients onboard and existing clients transition to the Retail Media Platform, Revenue may decline but Revenue ex-TAC margin will increase. Revenue ex-TAC will not be impacted by this transition.
Cost of revenue for the three months ended March
31, 2021 increased $31.2 million, or 9%, compared to the three months ended March 31, 2020. This increase was primarily the result of an increase of $30.3 million, or 10% (or 7% on a constant currency basis) in traffic acquisition costs, and an increase of $0.9 million, or 3% (or 2% on a constant currency basis) in other cost of revenue.
The increase in traffic acquisition costs on a constant currency basis related primarily to the 13% increase in the number of impressions we purchased, reflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns. This increase was partially offset by the (3)% decrease (and (3)% decrease on a constant currency basis) in the average CPM for inventory purchased. This was partly driven by the effectiveness of our Criteo Direct
Bidder and direct publisher integrations, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process.
Traffic acquisition costs in Marketing Solutions increased by 7%, driven by a 12% increase in the number of impressions we purchased, partially offset by a 5% decrease in the average CPM for inventory purchased.
Traffic acquisition costs in Retail Media increased by 51%, driven by a 53% increase in the number of impressions we purchased, partially offset by a 1% decrease in the average CPM for inventory purchased. As we recognize revenue on a net basis in all arrangements running on the Retail Media platform, we expect our Traffic acquisition costs for Retail Media to decrease over time as our clients are transitioned to the Criteo Retail Media Platform.
40
The
increase in other cost of revenue includes a $1.3 million increase in allocated depreciation and amortization expense following the acquisitions of servers and other equipment used in our data centers offset by a $0.4 million decrease 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.
41
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.
(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.
42
Constant Currency Reconciliation
Information in this Form 10-Q with respect to results presented on a constant currency basis was calculated by applying the 2020 average exchange rates for the relevant period to 2021 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:
Research and development expenses for the three months ended March 31, 2021, decreased $(5.8) million or (16)%, compared to the three months ended March 31, 2020. This decrease mainly relates to a decrease in headcount-related costs, and a decrease in depreciation and amortization following the full depreciation of Manage technology in 2020.
Sales and operations expenses for the three months ended March 31, 2021, decreased $(5.6) million or (7)%, compared to the three months ended March 31, 2020. This decrease is mainly driven by lower bad debt expense, a reduction in headcount-related costs and a lower share-based compensation expense, partially offset by an increase in facilities costs due to early termination of a lease agreement as part of the right-sizing of our real estate footprint.
General and administrative expenses for the three months ended March 31, 2021 increased $7.5 million or 29%, compared to the three months ended March 31, 2020. This increase is mainly related to an increase in third-party services as part of our on-going transformation program, a favorable one-time accounting impact in Q1 2020 which lowered the comparable basis, as well as the negative impact of our growing stock price on social charges related to people costs.
Financial expense for the three months ended March 31, 2021, respectively, increased by $(0.4) million, compared to the three months ended March 31, 2020. The $0.7 million financial expense for the three months ended March 31, 2021 was driven by the up-front fees amortization, the non-utilization costs and the financial expense relating to our available Revolving Credit Facility (RCF) financing and the recognition of
a negative impact of foreign exchange reevaluations net of related hedging. At March 31, 2021, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
For the three ended months March 31, 2021 and March 31, 2020, respectively, we used an annual estimated
tax rate of 30% to calculate the provision for income taxes. The effective tax rate was 30% for both the three months ended March 31, 2021 and March 31, 2020.
Net income for the three months ended March 31, 2021, increased $7.0 million, or 43%, compared to the three months ended March 31, 2020. This increase was the result of the factors discussed above, in particular, a $10.4 million increase in income from operations partially offset by a $(0.4) million increase in financial expense and a $(3.0) million increase in provision for income taxes compared to the three months ended March 31, 2020.
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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. In February
2021, the Board of Directors approved a new, long-term share repurchase program of up $100 million of the Company's outstanding American Depositary Shares, for which the duration is estimated to be until February, 2023. Other than these repurchase programs, we intend to retain all available funds from any future earnings to fund our growth. As discussed in Note 14 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 March 31, 2021 were held for working capital
and general corporate purposes, which could include acquisitions, and amounted to $520.1 million as of March 31, 2021. The $32.0 million increase in cash and cash equivalents compared with December 31, 2020 primarily resulted from $77.4 million in cash from operating activities, partially offset by $(17.0) million in cash used for investing activities and $(3.4) million in cash used for financing activities over the period. The cash used for financing activities is mainly related to $(4.9) million cash used for the share repurchase programs. In addition, the increase in cash includes a $(24.9) million negative 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 €350 million from the Revolving Credit Facility, which, combined with its cash position, marketable securities and treasury shares as of March 31, 2021, provides total liquidity in excess of $1.0 billion. Overall, we believe that our current financial liquidity, combined with our expected cash-flow generation in 2021, enables financial flexibility.
Operating and Capital Expenditure Requirements
For the three months ended March
31, 2021 and 2020, our capital expenditures were $13.8 million and $11.7 million, respectively. During the three months ended March 31, 2021, 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 2021, 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.
47
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 three month period ended March 31, 2021 and 2020:
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 three months ended March 31, 2021, net cash provided by operating activities was $77.4 million and consisted of net income of $23.5 million, $30.0 million in adjustments for certain non-cash and non-operating items and changes in working capital of $23.9 million. Adjustments for certain non-operating items primarily consisted of depreciation and amortization expense of $17.2 million, equity awards compensation expense of $7.2 million, $3.9 million on disposal of non-current assets and $5.0 million changes in deferred tax assets, partially offset by a $3.4 million change in income taxes. The $23.9 million increase in cash from changes in working capital primarily consisted of a $47.2 million decrease in trade receivables, partially offset by a $5.1 million increase in other current assets including prepaid expenses and VAT receivables,
a $3.1 million change in lease liabilities and right of use assets, a $10.6 million decrease in trade payables, and a $4.5 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. For the three months ended March 31, 2021, net cash used for investing activities was $17.0 million and primarily consisted of $13.8 million in capital expenditures, mainly comprised of purchases of servers and other data-center equipment and capitalized costs, and a $3.3 million change in other non-current financial assets.
Financing Activities
For the
three months ended March 31, 2021, net cash used for financing activities was $3.4 million, resulting mainly from a $4.9 million payment for our share repurchase program, $0.4 million change in other financial liabilities and a $0.2 million repayment of borrowings partially offset by $2.1 million of proceeds from capital increase.
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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 three months ended March 31, 2021.
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, 2020.
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:
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.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
Based on their evaluation as of March 31, 2021, 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, 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, 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 first fiscal quarter of 2021:
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)
January 1 to 31, 2021
—
$
—
—
$
—
February
1 to 28, 2021
—
—
—
$
—
March 1 to 31, 2021
149,960
$
32.87
149,960
$
95,069,508
Total
149,960
$
32.87
149,960
—
(1)
On February 5, 2021, Criteo's Board of Directors authorized a share repurchase program of up to $100.0 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 March 2021 and will be concluded in March 2023.
(2) Average price paid per share excludes any broker commissions paid.
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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.