Criteo S.A. 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Form 10-K. Overview We are a global technology company 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 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. Our focus is on ecommerce. Our clients include some of the largest and most sophisticated ecommerce companies in the world, along with world-class consumer brands. We partner with them to capture user activity on their websites and mobile applications ("apps"), which we define as digital properties, and optimize the performance of their ads based on that activity and other data. Demonstrating the depth and scale of our data, we collected data on over $950 billion in online sales transactions 1 on our clients' digital properties in the year ended December 31, 2020. Based on this data and other assets, we delivered 1.6 trillion targeted ads in the year ended December 31, 2020. As of December 31, 2020, we served more than 21,000 clients and, in each of the last three years, our average client retention rate, as measured on a quarterly basis, was approximately 90%. We serve a wide range of clients and our revenue is not concentrated within any single client or group of clients. In 2020, 2019 and 2018, our largest client represented 3.5%, 2.8%, 2.0% of our revenue, respectively, and in 2020, 2019 and 2018, our largest 10 clients represented 13.7%, 11.4% and 11.7% of our revenue in the aggregate, respectively. There is no group of customers under common control or customers that are affiliates of each other constituting an aggregate amount equal to 10% or more of our consolidated revenues, the loss of which would have a material adverse effect on the Company. We operate in 104 countries through a network of 29 offices located in Europe, Middle East, Africa (EMEA), the Americas and Asia-Pacific. As a result of our significant international operations, our revenue from outside of France, our home country, accounted for 93.6% of our revenue for year ended December 31, 2020. The Company's foreign currency risk exposure to the British pound, the Japanese yen, the Brazilian real and the U.S. dollar against the euro (the euro still remains the Company's functional currency) is described in Item 7 note B. Liquidity and Capital Resources to our Management's Discussion and Analysis included elsewhere in this Form 10-K. ___________________________________________________ 1 Excluding Criteo Retail Media 56 Our financial results include: • Revenue of $2,072.6 million, $2,261.5 million and $2,300.3 million for the years ended December 31, 2020, 2019 and 2018, respectively; • Revenue ex-TAC, which is a non-U.S. GAAP financial measure, of $825.0 million, $946.6 million and $966.0 million for the years ended December 31, 2020, 2019 and 2018, respectively; • Net Income of $74.7 million, $96.0 million and $95.9 million for the years ended December 31, 2020, 2019 and 2018, respectively; and • Adjusted EBITDA, which is a non-U.S. GAAP financial measure, of $251.0 million, $299.0 million and $321.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Please see footnotes 3, 4 and 5 to the Other Financial and Operating Data table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue to Revenue ex-TAC, Net Income to Adjusted EBITDA and Net Income to Adjusted Net Income respectively, in each case the most directly comparable financial measures calculated and presented in accordance with accounting principles generally accepted in the United States or "U.S. GAAP". We are focused on maximizing Revenue ex-TAC. We believe this focus builds sustainable long-term value for our business and fortifies a number of our competitive strengths, including a highly liquid marketplace for digital advertising inventory. As part of this focus, we seek to maximize our percentage of overall marketing spend in the digital advertising market over the long-term. In addition, this focus enriches liquidity for both advertisers and publishers resulting in more effective advertising for clients, better monetization for publishers and more relevant advertisements for consumers. We believe our results of operations reflect this focus. Acquisitions On October 29, 2018, we acquired Manage, a Silicon Valley-based company with an attractive app install advertising solution. On August 3, 2018, we acquired Storetail, a Paris-based pioneering retail media technology platform enabling retailers to monetize native placements on their ecommerce sites. 57 A. Operating Results. Basis of Presentation The key elements of our results of operations include: Revenue We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies. Historically, the Criteo model has focused solely on converting our clients' website visitors into customers, enabling us to charge our clients only when users engage with an ad we deliver, usually by clicking on it. More recently, we have expanded our solutions to address a broader range of marketing goals for our clients. We offer two families of solutions to our commerce and brand clients: • Criteo Marketing Solutions allow commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments. • Criteo Retail Media solutions allow retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals. We also have multiple pricing models which now include cost plus margin models in addition to cost-per-click, cost-per-install and cost-per-impression pricing models. We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. For campaigns priced on a cost-per-click, cost-per-install basis and cost plus margin basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognize revenue when a user clicks on an advertisement or installs an application. For campaigns priced on a cost-per-impression basis, we bill our clients based on the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed. For campaigns with a fixed pricing component, where fixed amounts are billed to the customer at various intervals, we recognize revenue on a ratable basis, based on our completion of our performance obligation to the customer. We mainly act as principal in our arrangements because (i) we control the advertising inventory before it is transferred to our clients; (ii) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and (iii) we have full discretion in establishing prices. Therefore, based on these factors, we report revenue earned and the related costs incurred on a gross basis. Cost of Revenue Our cost of revenue primarily includes traffic acquisition costs and other cost of revenue. Traffic Acquisition Costs. Traffic acquisition costs consist primarily of purchases of impressions from publishers on a CPM basis. We purchase impressions directly from publishers or third-party intermediaries, such as advertisement exchanges. We recognize cost of revenue on a publisher by publisher basis as incurred. Costs owed to publishers but not yet paid are recorded in our Consolidated Statements of Financial Position as trade payables. For some solutions within Criteo Retail Media, we pay for the inventory of our retailer partners on a revenue sharing basis, effectively paying the retailers a portion of the click-based revenue generated by user clicks on the sponsored products advertisements displaying the products of our consumer brand clients. For a discussion of the trends we expect to see in traffic acquisition costs, see the section entitled " - Highlights and Trends - Revenue ex-TAC" in Item 7.D - Trend Information below. 58 Other Cost of Revenue. Other cost of revenue includes expenses related to third-party hosting fees, depreciation of data center equipment, the cost of data purchased from third parties and digital taxes. The Company does not build or operate its own data centers and none of its Research and Development employments are dedicated to revenue generating activities. As a result, we do not include the costs of such personnel in other cost of revenue. Operating Expenses Operating expenses consist of research and development, sales and operations, and general and administrative expenses. Salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs are the most significant components of each of these expense categories. The number of employees decreased from 2,764 employees at January 1, 2018 to 2,594 employees at December 31, 2020. We include equity awards compensation expense in connection with grants of share options, warrants, and restricted share units ("RSUs") in the applicable operating expense category based on the respective equity award recipient’s function (Research and development, Sales and operations, General and administrative). Research and Development Expense . Research and development expense consists primarily of personnel-related costs for our employees working in the engine, platform, site reliability engineering, scalability, infrastructure, engineering program management, product, analytics and other teams, including salaries, bonuses, equity awards compensation and other personnel related costs. Our research and development function was supplemented in January 2013 to include a dedicated product organization following the appointment of a Chief Product Officer. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third-party development resources, allocated overhead and depreciation and amortization costs. These expenses are partially offset by the French research tax credit that is conditional upon the level of our expenditures in research and development. Our research and development efforts are focused on enhancing the performance of our solutions and improving the efficiency of the services we deliver to our clients and publisher partners. All development costs, principally headcount-related costs, are expensed until management determines that technological feasibility is reached and the preliminary project phase is completed. The Company capitalizes costs associated with software developed when the preliminary project stage is completed, management implicitly or explicitly authorizes and commits to funding the project and it is probable that the project will be completed and perform as intended . Capitalized costs mainly relates to internally developed internal-use software and IT licenses. The number of employees in research and development functions decreased from 701 at January 1, 2018 to 624 at December 31, 2020. On October 7, 2019, in connection with the new organization structure, we announced a plan to restructure its R&D activities with the closing of our R&D operations in Palo Alto, and our headcount was slightly reduced in connection with the completion of this restructuring. Additionally, research and development expenses slightly decreased as a percentage of our revenue. We believe our continued investment in research and development to be critical to maintaining and improving our technology within the Criteo Commerce Media Platform, our quality of service and our competitive position. Sales and Operations Expense . Sales and operations expense consists primarily of personnel-related costs for our employees working in our sales, account strategy, sales operations, publisher business development, analytics, marketing, technical solutions, creative services and other teams, including salaries, bonuses, equity awards compensation, and other personnel-related costs. Additional expenses in this category include travel and entertainment, marketing and promotional events, marketing activities, provisions for doubtful accounts, subcontracting, consulting and professional fees paid to third parties, allocated overhead and depreciation and amortization costs. The number of employees in sales and operations functions declined from 1,595 at January 1, 2018 to 1,520 at December 31, 2020. In order to expand our business, we expect to make targeted investments in our resources in some areas of our sales and operations. Yet, we expect sales and operations expenses to remain fairly flat as a percentage of revenue over time as we increase the productivity of our sales and operations teams. General and Administrative Expense . General and administrative expense consists primarily of personnel costs, including salaries, bonuses, equity awards compensation, pension benefits and other personnel-related costs for our administrative, legal, information technology, human resources, facilities and finance teams. Additional expenses included in this category include travel-related expenses, subcontracting and professional fees, audit fees, tax services and legal fees, as well as insurance and other corporate expenses, along with allocated overhead and depreciation and amortization costs. The number of employees in general and administrative functions decreased from 468 at January 1, 2018 to 450 at December 31, 2020. We expect our general and administrative expense to decrease as a percentage of revenue over time as we increase the productivity of our general and administrative teams. 59 Financial Income (Expense) Financial income (expense) primarily consists of: • exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros (the Company's functional currency). We are exposed to changes in exchange rates primarily in the United States, the United Kingdom, Japan, Korea and Brazil. The U.S. dollar, the British pound, the Korean won, the Japanese yen and the Brazilian real are our most significant foreign currency exchange risks. At December 31, 2020, our exposure to foreign currency risk was centralized at parent company level and hedged. These exchange differences in euro are then translated into U.S. dollars (the Company's reporting currency) according to the average euro/U.S. dollar exchange rate. • interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt loan agreements and revolving credit facilities ("RCFs"). We monitor foreign currency exposure and look to mitigate exposures through normal business operations and hedging strategies. Provision for Income Taxes We are subject to potential income taxes in France, the United States and numerous other jurisdictions. We recognize tax liabilities based on estimates of whether additional taxes will be due. These tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities, notwithstanding our belief that our tax return positions are supportable. Our effective tax rates differ from the statutory rate applicable to us primarily due to valuation allowance on deferred tax assets, differences between domestic and foreign jurisdiction tax rates, Research Tax Credit offsets, which are non-taxable items, potential tax audit provision settlements, share-based compensation expenses that are non-deductible in some jurisdictions under certain circumstances, and transfer pricing adjustments. We license access to our technology to our subsidiaries and charge a royalty fee to these subsidiaries for such access. In France, we benefit from a reduced tax rate of 10% on a large portion of this technology royalty income. On September 27, 2017, we received a draft notice of proposed adjustment (NOPA) from the Internal Revenue Service ("IRS") audit of Criteo Corp. for the year ended December 31, 2014, confirmed by the definitive notice dated February 8, 2018. We disagreed with the IRS's position and contested it. On August 24, 2020, the IRS and the Company agreed to a settlement and closed the income tax audit for the year ended December 31, 2014. The settlement provides for a disallowance of Criteo Corp's. Net Operating Losses (NOLs) amounting to $9.2 million. No uncertain tax positions were identified as of December 31, 2020. Critical Accounting Policies and Significant Judgments and Estimates Our consolidated financial statements are prepared in accordance with U.S. GAAP. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. An accounting policy is deemed to be critical if it requires an accounting estimate to be made on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe estimates associated with (1) revenue recognition criteria (2) allowances for credit losses, (3) research tax credits (4) income taxes, including i) recognition of deferred tax assets arising from the subsidiaries projected taxable profit for future years, ii) evaluation of uncertain tax positions associated with our transfer pricing policy and iii) recognition of income tax position in respect with tax reforms recently enacted in countries we operate, (5) assumptions used in valuing acquired assets and assumed liabilities in business combinations, (6) assumptions used in the valuation of goodwill, intangible assets and right of use assets - operating lease, and (7) assumptions used in the valuation model to determine the fair value of share-based compensation plan. The 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. Therefore, we consider these to be our critical accounting policies and estimates. See Note 1. Principles and Accounting Methods to our audited consolidated financial statements beginning on page F-1 for a description of our other significant accounting policies. 60 Revenue Recognition We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. For campaigns priced on a cost-per-click, cost-per-install basis and cost plus margin basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognize revenue when a user clicks on an advertisement or installs an application. For campaigns priced on a cost-per-impression basis, we bill our clients based on the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed. For campaigns with a fixed pricing component, where fixed amounts are billed to the customer at various intervals, we recognize revenue on a ratable basis, based on our completion of our performance obligation to the customer. We mainly act as principal in our arrangements because (i) we control the advertising inventory before it is transferred to our clients; (ii) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and (iii) we have full discretion in establishing prices. Therefore, based on these factors, we report revenue earned and the related costs incurred on a gross basis.. Trade Receivables, Net of Allowances for Doubtful Accounts We carry our accounts receivable at net realizable value. On a periodic basis, our management evaluates our accounts receivable and determines whether to provide an allowance or if any accounts should be written down and charged to expense as a bad debt. The evaluation is based on a past history of collections, current credit conditions, the length of time the trade receivable is past due and a past history of write downs. A trade receivable is considered past due if we have not received payments based on agreed-upon terms. A higher default rate than estimated or a deterioration in our major clients’ creditworthiness could have an adverse impact on our future results. Given the global economic turmoil brought about by COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. Allowances for doubtful accounts on trade receivables are recorded in “Sales and Operations” in our consolidated statements of income. We generally do not require any security or collateral to support our trade receivables. The amount of allowance for doubtful accounts charged to our consolidated statements of income for the years ended December 31, 2020, 2019 and 2018 was $30.8 million, $11.1 million and $17.1 million, respectively and represented 6.5%, 2.3% and 3.7% of our trade receivables, net of allowances, as of December 31, 2020, 2019, and 2018, respectively. The amount charged to allowance for credit losses for the twelve months ended December 31, 2020 increased compared to the same period in the prior year due to the application of the expected credit loss model beginning on January 1, 2020 as well as an increase to the provision due to the expected impact of COVID-19 on the Company's future cash collections caused by the downturn in the economy which has led to financial difficulties for some of our customers, particularly those operating in the retail sector. Deferred Tax Assets Deferred taxes are recorded on all temporary differences between the financial reporting and tax bases of assets and liabilities, and on tax losses, using the liability method. Differences are defined as temporary when they are expected to reverse within a foreseeable future. We may only recognize deferred tax assets if, based on the projected taxable incomes within the next three years, we determine that it is probable that future taxable profit will be available against which the unused tax losses and tax credits can be utilized. As a result, the measurement of deferred income tax assets is reduced, if necessary, by a valuation allowance for any tax benefits which are not expected to be realized. If future taxable profits are considerably different from those forecasted that support recording deferred tax assets, we will have to revise downwards or upwards the amount of the deferred tax assets, which could have a significant impact on our financial results. This determination requires many estimates and judgments by our management for which the ultimate tax determination may be uncertain. 61 Uncertain Tax Positions We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. These uncertain tax positions include our estimates for transfer pricing that have been developed based upon analyses of appropriate arms-length prices. Similarly, our estimates related to uncertain tax positions concerning research tax credits are based on an assessment of whether our available documentation corroborating the nature of our activities supporting the tax credits will be sufficient. Although we believe that we have adequately reserved for our uncertain tax positions (including net interest and penalties), we can provide no assurance that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves in accordance with the income tax accounting guidance when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different from the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made, and could have a material impact on our financial condition and operating results. Goodwill Goodwill is not amortized and is tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has determined that it operates as a single reporting unit and has selected December 31 as the date to perform its annual impairment test. In the impairment assessment of its goodwill, the Company performs an impairment test, which involves assumptions regarding estimated future cash flows to be derived from the Company The estimated future cash flows are used to derive the fair value of the reporting unit, which is then compared to its net book value, including goodwill . If these estimates or their related assumptions change in the future, the Company may be required to record impairment for these assets. If the net book value exceeds its fair value, then the Company would be required to recognize an impairment loss. The impairment loss to be recognized would be calculated by comparing the fair value of the Company to its net book value, including goodwill. An impairment loss would be recognized in the Consolidated Statement of Income when the carrying amount of goodwill exceeds its implied fair value. There has been no impairment of goodwill during the years ended December 31, 2020, 2019 and 2018, as the Company's reporting unit's fair value was substantially in excess of the carrying value based on the annual goodwill impairment test. Intangible assets Acquired intangible assets are accounted for at acquisition cost, less accumulated amortization. Acquired intangible assets are composed of software, technology and customer relationships amortized on a straight-line basis over their estimated useful lives comprised between one and three years for the software, and three and nine years, for the technology and customer relationships. Intangible assets are reviewed for impairment whenever events or changes in circumstances such as, but not limited to, significant declines in revenue, earnings or cash flows or material adverse changes in the business climate indicate that the carrying amount of an asset may be impaired. Software development costs also include costs to develop software to be used solely to meet internal needs and cloud based applications used to deliver our services. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed and the software will be used to perform the function intended. Amortization of these costs begins when assets are placed in service and is calculated on a straight-line basis over the assets’ useful lives estimated at three to five years. Cloud computing arrangements (“CCAs”), such as software as a service and other hosting arrangements, are evaluated for capitalized implementation costs in a similar manner as capitalized software development costs. If a CCA includes a software license, the software license element of the arrangement is accounted for in a manner consistent with the acquisition of other software licenses. If a CCA does not include a software license, the service element of the arrangement is accounted for as a service contract. The Company capitalized certain implementation costs for its CCAs that are service contracts, which are included in other current assets. The Company amortizes capitalized implementation costs in a CCA over the life of the service contract. 62 Equity Awards Compensation We account for share-based compensation in accordance with ASC 718 - Compensation - Stock Compensation . Under the fair value recognition provisions of this guidance, share-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, over the requisite service period, which is generally the vesting period of the respective award. Determining the fair value of share-based awards at the grant date requires judgment. The determination of the grant date fair value of RSUs is based on the share price on the grant date. We use the Black-Scholes option-pricing model to determine the fair value of share options. The determination of the grant date fair value of options using an option-pricing model is affected by our estimated ordinary share fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our ordinary shares, the exercise price of the option, the expected term of the options, our expected share price volatility, risk-free interest rates, and expected dividends, which are estimated as follows: • Fair value of our ordinary shares. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on the Nasdaq on the date of grant for purposes of determining the fair value of ordinary shares. • Exercise price of the option. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on the Nasdaq on the date of grant for purposes of determining the exercise price with a floor value of 95% of the average of the closing sales price per ADS for the 20 trading days preceding the grant. • Expected term. The expected term represents the period that our share-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the ordinary share option awards granted, we have based our expected term on the simplified method, which represents the average period from vesting to the expiration of the award. • Expected volatility. Prior to our initial public offering, as we did not have a trading history for our ordinary shares, the expected share price volatility for our ordinary shares was estimated by taking the average historic price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the ordinary share option grants. From the initial public offering, the expected share price volatility takes into account the Criteo closing share price from the initial public offering date to the grant date and closing share price of industry peers for the remaining expected term of the ordinary share option grant. • Risk-free rate . The risk-free interest rate is based on the yields of France Treasury securities with maturities similar to the expected term of the options for each option group. • Dividend yield. We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero. If any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously. The following table presents the range of assumptions used to estimate the fair value of options granted during the periods presented: Year Ended December 31, 2020 2019 2018 Volatility 39.2% - 39.9% 39.2% - 41.2% 40.7% - 41.5% Risk-free interest rate 0.00% - 0.25% 0.00% - 0.10% 0.60% - 0.90% Expected life (in years) 6 years 6 years 6 years Dividend yield —% —% — % Recent Accounting Pronouncements For a discussion of recent accounting pronouncements applicable to us, see Note 1 to our audited consolidated financial statements beginning on page F-1. 63 Results of Operations for the Years Ended December 31, 2020, 2019 and 2018 Revenue Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis. Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands) Revenue as reported $ 2,072,617 $ 2,261,516 $ 2,300,314 (8) % (2) % Conversion impact U.S. dollar/other currencies $ 3,239 $ 51,373 (19,118) Revenue at constant currency (*) 2,075,856 2,312,889 2,281,196 (8) % 1 % Americas Revenue as reported $ 894,854 $ 952,154 $ 954,073 (6) % (0.2) % Conversion impact U.S. dollar/other currencies 12,770 4,584 7,693 Revenue at constant currency (*) $ 907,624 $ 956,738 $ 961,766 (5) % 0.3 % EMEA Revenue as reported $ 749,672 $ 806,197 $ 839,825 (7) % (4) % Conversion impact U.S. dollar/other currencies (4,528) 44,478 (21,553) Revenue at constant currency (*) $ 745,144 $ 850,675 $ 818,272 (8) % 1 % Asia-Pacific Revenue as reported $ 428,091 $ 503,165 $ 506,416 (15) % (1) % Conversion impact U.S. dollar/other currencies (5,003) 2,311 (5,258) Revenue at constant currency (*) $ 423,088 $ 505,476 $ 501,158 (16) % (0.2) % (*) Revenue at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the average exchange rates for the prior year to the following year figures. 2020 Compared to 2019 Revenue in 2020 decreased $(188.9) million, or (8)% (or (8)% on a constant currency basis) to $2,072.6 million compared to 2019. The COVID-19 pandemic impacted our business during most of the year, with an estimated net negative impact on revenue of approximately $262 million for the twelve months ended December 31, 2020, or approximately 12 points of year-over-year growth, as some clients decided to temporarily pause or reduce their campaigns with us. The COVID-19 headwind impacted our large customers in our Marketing Solutions business, in particular in the Travel, Classifieds verticals and some large brick-and-mortar Retail clients. However, we believe that client spending from Retail clients in the midmarket and in our Retail Media solutions was supported by stronger ecommerce shopping trends emerging from the COVID-19 pandemic. The year-over-year decrease in revenue was driven by the lower contribution from our existing clients and some churning clients, both of which we largely attribute to the COVID-19 outbreak, offsetting the positive contribution from new clients. We added 1,213 net new clients year-over-year across regions. Our revenue in the Americas region decreased $(57.3) million, or (6)% (or (5)% on a constant currency basis) to $894.9 million for 2020 compared to 2019. This decline was driven by an estimated revenue impact from COVID-19 of approximately $90 million, in particular with large customers in the broader Classifieds vertical and some large brick-and-mortar Retail clients in the U.S. 64 Our revenue in the EMEA region decreased $(56.5) million, or (7)% (or (8)% on a constant currency basis) to $749.7 million for 2020 compared to 2019. This decrease at constant currency includes an estimated $96 million revenue impact from the COVID-19 pandemic, in part due to the fact that the EMEA region had the highest exposure to the Travel vertical prior to the pandemic, which was most impacted by COVID-19. Our revenue in the Asia-Pacific region decreased $(75.1) million, or (15)% (or (16)% on a constant currency basis) to $428.1 million for 2020 compared to 2019. The decrease at constant currency included an estimated $76 million revenue impact from the COVID-19 pandemic, mostly in the Travel and Classifieds verticals, and was also driven by a weak economic climate in Japan, our largest market in the region. Additionally, $2,073 million of revenue for 2020 was negatively impacted by $ $3.2 million of currency fluctuations, particularly as a result of the depreciation of the Turkish Lira, Russian Ruble, the Brazilian real, partially offset by the appreciation of the Japanese Yen and the Euro, compared to the U.S. dollar. The year-over-year decrease in revenue on a constant currency basis is entirely attributable to the decrease in the average price charged to advertisers, partly driven by the evolution of our revenue mix over the period, and partially offset by the increased number of impressions delivered by us and the increased number of clicks delivered on the advertising banners displayed by us. 2019 Compared to 2018 Revenue for 2019 decreased $(38.8) million, or (2)% (or increased 1% on a constant currency basis) to $2,261.5 million, compared to 2018. The year-over-year increase in revenue at constant currency was entirely driven by new clients, offsetting the decrease in our business with existing clients. We added 828 net new clients across regions and client sizes over the period, a lower volume than the prior year. This was primarily driven by focused execution and productivity improvements in the midmarket category leading to higher additions of higher-value midmarket clients. Contribution from existing clients was impacted by lower retargeting spend from large clients, as well as by a general softness in the web environment, where users tend to progressively spend less time than in apps, where our solutions do not yet contribute significantly to our revenue growth, despite continued adoption of our new products. Our revenue in the Americas region decreased (0.2)% (or increased 0.3% on a constant currency basis) to $952.2 million for 2019 compared to 2018. Growth was driven by the acceleration of our midmarket business driven by larger midmarket clients, as well as continued traction in our Criteo Retail Media business in the U.S., partly offset by lower retargeting spend by large clients. Our revenue in the EMEA region decreased (4)% (or increased 1% on a constant currency basis) to $806.2 million for 2019 compared to 2018. This increase at constant currency was largely driven by accelerated growth in our midmarket business and by the positive traction of our new solutions, including Retail Media, partly offset by softer business with large customers. Our revenue in the Asia-Pacific region decreased (1)% (or (0.2)% on a constant currency basis) to $503.2 million for 2019 compared to 2018. This slight decrease at constant currency was driven by a slow-down in our large customer business in Japan, South-East Asia and Australia, despite strong growth across client categories in Korea and our growing midmarket business across the region. Additionally, our $2,261.5 million of revenue for 2019 was negatively impacted by $(51.4) million of currency fluctuations, particularly as a result of the depreciation of the Japanese yen, the British pound, the Korean won, the Brazilian real and the Euro, compared to the U.S. dollar. The year-over-year growth in revenue on a constant currency basis was entirely attributable to an increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us, offsetting the decrease in the average cost-per-click charged to advertisers. 65 Cost of Revenue Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percentages) Traffic acquisition costs $ (1,247,571) $ (1,314,947) $ (1,334,334) (5)% (1)% Other cost of revenue (137,028) (117,533) (131,744) 17% (11)% Total cost of revenue $ (1,384,599) $ (1,432,480) $ (1,466,078) (3)% (2)% % of revenue (67) % (63) % (64) % Gross profit % 33 % 37 % 36 % 2020 Compared to 2019 Cost of revenue for 2020 decreased $(47.9) million, or (3)%, compared to 2019. This decrease was primarily the result of a $(67.4) million, or (5)% decrease in traffic acquisition costs (or (5)% on a constant currency basis), partially offset by a $19.5 million, or 17% (or 18% on a constant currency basis), increase in other cost of revenue. The decrease in traffic acquisition costs on a constant currency basis related primarily to the (13)% decrease (and (13)% decrease on a constant currency basis) in the average CPM for inventory purchased. This was partly driven by lower global demand for advertising inventory, despite the increase in online traffic globally caused by the lockdown imposed in COVID-19 affected areas, making the unit price of inventory relatively cheaper than in the pre-pandemic period. This was also driven by the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process. This decrease was not entirely offset by the 10% increase in the number of impressions we purchased, reflecting higher volumes of inventory available and our expanding relationships with existing and new publisher partners, in particular through direct connections, to support client demand for advertising campaigns. The increase in other cost of revenue includes $(11.1) million in the allocated depreciation and amortization expense,$(4.2) million in hosting costs, $(2.6) million in data acquisition and $(1.6) million increase in other cost of sales. 2019 Compared to 2018 Cost of revenue for 2019 decreased $(33.6) million, or (2)%, compared to 2018. This decrease was primarily the result of a $(19.4) million, or (1)% decrease in traffic acquisition costs (or an increase of 1% on a constant currency basis), and a $(14.2) million, or (11)% (or (9)% on a constant currency basis), decrease in other cost of revenue. The increase in traffic acquisition costs on a constant currency basis related primarily to an increase of 9.2% in the total number of impressions we purchased, partly offset by a (10)% decrease (or (8)% decrease on a constant currency basis) in the average CPM for inventory purchased. The increase in the volume of purchased impressions reflects our expanding relationships with existing and new publisher partners to support the growth in our client demand for advertising campaigns. The year-over-year decrease in average CPM was driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers and remove intermediary fees in the process, as well as of the growing share of in-app inventory in our business, which inventory cost tends to be slightly lower than that in the web browser environment. The decrease in other cost of revenue includes a $(22.5) million decrease in the allocated depreciation and amortization expense following the changes in our estimation of the useful life of the servers and other equipment used in our data centers from 3 to 5 years, partially offset by a $5.9 million increase in other cost of sales and a $2.4 million increase in hosting costs. 66 Revenue excluding Traffic Acquisition Costs We consider Revenue ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing 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 AI Engine’s performance, allowing it to deliver more relevant advertisements at scale. As part of this focus, we continue to invest in building preferred relationships with direct publishers and pursue access to leading advertising exchanges. The following table sets forth our revenue, traffic acquisition costs and Revenue ex-TAC by region, including the Americas (North and South America), Europe, Middle East and Africa, or EMEA, and Asia-Pacific: Year Ended December 31, Region 2020 2019 2018 (in thousands) Revenue Americas $ 894,854 $ 952,154 $ 954,073 EMEA 749,672 806,197 839,825 Asia-Pacific 428,091 503,165 506,416 Total $ 2,072,617 $ 2,261,516 $ 2,300,314 Traffic acquisition costs Americas $ (569,436) $ (579,175) $ (579,597) EMEA (433,206) (453,530) (471,654) Asia-Pacific (244,929) (282,242) (283,083) Total $ (1,247,571) $ (1,314,947) $ (1,334,334) Revenue ex-TAC (1) Americas $ 325,418 $ 372,979 $ 374,476 EMEA 316,466 352,667 368,171 Asia-Pacific 183,162 220,923 223,333 Total $ 825,046 $ 946,569 $ 965,980 (1) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue ex-TAC by Region are not measures calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC and Revenue ex-TAC by Region in this Form 10-K 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 ex-TAC by Region provide 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 ex-TAC by Region has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Revenue ex-TAC and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report 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 ex-TAC by Region alongside our other U.S. GAAP financial results, including revenue. The above table provides a reconciliation of Revenue ex-TAC by region to revenue by region. Please also refer to footnote 3 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for a reconciliation of Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. 67 Constant Currency Reconciliation Information in this Form 10-K with respect to results presented on a constant currency basis was calculated by applying prior period average exchange rates to current period results. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant currency basis: Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands) Revenue as reported $ 2,072,617 $ 2,261,516 $ 2,300,314 (8)% (2)% Conversion impact U.S. dollar/other currencies 3,239 51,373 (19,118) Revenue at constant currency $ 2,075,856 $ 2,312,889 $ 2,281,196 (8)% 1% Traffic acquisition costs as reported $ (1,247,571) $ (1,314,947) $ (1,334,334) (5)% (1)% Conversion impact U.S. dollar/other currencies (1,605) (28,831) 10,433 Traffic acquisition cost at constant currency $ (1,249,176) $ (1,343,778) $ (1,323,901) (5)% 1% Revenue ex-TAC as reported $ 825,046 $ 946,569 $ 965,980 (13)% (2)% Conversion impact U.S. dollar/other currencies 1,634 22,542 (8,686) Revenue ex-TAC at constant currency $ 826,680 $ 969,111 $ 957,294 (13)% 0.3% Other cost of revenue as reported $ (137,028) $ (117,533) $ (131,744) 17% (11)% Conversion impact U.S. dollar/other currencies (1,167) (1,856) (114) Other cost of revenue at constant currency $ (138,195) $ (119,389) $ (131,858) 18% (9)% 68 Research and Development Expenses Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent of revenue) Research and development expenses $ (132,513) $ (172,591) $ (179,263) (23)% (4)% % of revenue (6) % (8) % (8) % 2020 Compared to 2019 Research and development expenses for 2020 decreased $(40.1) million, or (23)%, compared to 2019. This decrease mainly related to a decrease in headcount-related costs following the cessation of our R&D operations in Palo Alto in 2019 and lower amortization expense due to the Manage assets revised useful life in 2019. 2019 Compared to 2018 Research and development expenses for 2019 decreased $(6.7) million, or (4)%, compared to 2018. This decrease mainly related to an increase in the French Research Tax Credit and a decrease of headcount-related costs due to a lower share-based compensation expense, partially offset by an increased amortization expense for Manage technology due to a revised useful life (see Note 8). On October 7, 2019, in connection with the new organization structure, the Company announced a plan to restructure its R&D activities with the cessation of its R&D operations in Palo Alto. The Company incurred net restructuring costs of $0.7 million (see Note 2). Sales and Operations Expenses Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent of revenue) Sales and operations expenses $ (330,285) $ (375,477) $ (372,707) (12)% 1% % of revenue (16) % (17) % (16) % 2020 Compared to 2019 Sales and operations expenses for 2020 decreased $(45.2) million, or (12)%, compared to 2019. This decrease mainly related to a reduction in headcount-related costs, a lower share-based compensation expense, the absence of Manage customer relationships amortization (as asset was fully impaired in 2019), discretionary spend measures on marketing and events, partially offset by an increase in the provision for credit losses. 2019 Compared to 2018 Sales and operations expenses for 2019 increased $2.8 million, or 1%, compared to 2018. This increase mainly related to impairment of facilities following our offices right sizing policy implementation (see Note 2), the $4.8 million impairment loss recognized on Manage customers relationships (see Note 8) and a $5.0 million increase following an exceptional charge related to an invoicing dispute partially offset by a positive change in provisions for doubtful receivables. 69 General and Administrative Expenses Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent of revenue) General and administrative expenses $ (116,395) $ (139,754) $ (135,159) (17)% 3% % of revenue (6) % (6) % (6) % 2020 Compared to 2019 General and administrative expenses for 2020 decreased $(23.4) million, or (17)%, compared to 2019. This decrease was mostly driven by a decrease in headcount-related costs, a lower share-based compensation expense and a decrease in rent and facilities costs, following the right-sizing of our real estate footprint, partially offset by transformation fees. 2019 Compared to 2018 General and administrative expenses for 2019 increased $4.6 million, or 3%, compared to 2018. This increase was mostly driven by an increase in consulting fees for process optimization projects and the proceeds from the disposal of the HookLogic travel business in March 31, 2018. Financial Expense Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent of revenue) Financial expense $ (1,939) $ (5,749) $ (5,084) (66)% 13% % of revenue (0.1) % (0.3) % (0.2) % 2020 Compared to 2019 Financial expense for 2020 decreased by $(3.8) million, or (66)% compared to 2019. The $1.9 million financial expense for the period ended December 31, 2020 was mainly driven by the financial expense relating to the €140 million drawing from May 2020 to November 2020 as part of our available Revolving Credit Facility (RCF) financing, the up-front fees amortization, and the non-utilization costs, partially offset by income from invested cash & cash equivalents. At December 31, 2020, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies. 2019 Compared to 2018 Financial expense for 2019 increased by $0.7 million, or 13% compared to 2018. The $5.7 million financial expense for the period ended December 31, 2019 was mainly driven by the non-utilization costs and up-front fees amortization incurred as part of our available RCF financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. At December 31, 2019, 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. 70 Provision for Income Taxes Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent information) Provision for income taxes $ (32,197) $ (39,496) $ (46,144) (18)% (14)% % of revenue (2) % (2) % (2) % Effective tax rate 30.1 % 29.2 % 32.5 % 2020 Compared to 2019 The provision for income taxes for 2020 decreased by $(7.3) million, or 18%, compared to 2019. The annual effective tax rate for 2020 was 30.1%, compared to an annual effective tax rate of 29.2% for 2019. The annual effective tax rates differs from the statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain foreign subsidiaries, non-recognition of deferred tax assets related to tax losses and temporary differences, recognition of previously unrecognized tax losses and equity awards compensation expense. In 2020, our income before taxes decreased by $28.6 million to $106.9 million, compared to 2019, generating a $34.2 million theoretical income tax expense at a nominal standard French tax rate of 32.02%. This theoretical tax expense is impacted primarily by the following items contributing to a $32.2 million effective tax expense and a 30.1% effective tax rate: $11.6 million of net effect of share-based compensation, $6.0 million of deferred tax assets on which we recognized a valuation allowance, $13.4 million resulting from the BEAT waiver election, $3.5 million related to the French business tax, Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, offset by a $13.4 million tax deduction resulting from technology royalty income we received from our subsidiaries, $5.3 million Research and Development tax credit, the recognition or reversal of valuation allowance on deferred tax assets of $2.5 million and $9.0 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions). Please see Note 21 to our audited consolidated financial statements for more detailed information on the provision for income taxes. Amounts recognized in our Consolidated Financial Statements are calculated at the level of each subsidiary within our Consolidated Financial Statements. As at December 31, 2020, 2019 and 2018, the valuation allowance against net deferred income taxes amounted to $37.3 million, $25.3 million and $43.2 million, which related mainly to Criteo Corp. ($13.3 million, $12.8 million and $18.6 million, respectively), Criteo do Brasil ($2.8 million, $3.2 million and $3.6 million, respectively), Criteo Ltd ($7.4 million, $7.5 million and $7.2 million, respectively), Criteo China ($3.3 million, $3.3 million and $3.5 million, respectively), Criteo Singapore ($3.3 million, $3.6 million and $2.9 million ), Criteo Pty ($2.8 million, $2.6 million and $2.5 million) and Criteo France ($1.0 million, $(7.7) million and $3.9 million, respectively). 2019 Compared to 2018 The provision for income taxes for 2019 decreased by $(6.6) million, or 14%, compared to 2018. The annual effective tax rate for 2019 was 29.2%, compared to an annual effective tax rate of 32.5% for 2018. The annual effective tax rates differ from statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions, tax loss carryforwards in certain of our foreign subsidiaries, non-recognition of deferred tax assets related to tax losses and temporary differences, recognition of previously unrecognized tax losses and equity awards compensation expense. In 2019, our income before taxes decreased by $(6.6) million to $135.5 million, compared to 2018, generating a $46.6 million theoretical income tax expense at a nominal standard French tax rate of 34.43%. This theoretical tax expense is impacted primarily by the following items contributing to a $39.5 million effective tax expense and a 29.2% effective tax rate: $13.4 million of net effect of share-based compensation, $2.7 million of deferred tax assets on which we recognized a valuation allowance, $16.0 million resulting from the BEAT waiver election issued by the United States Treasury and IRS in December 2019, $7.7 million of permanent differences (mainly based on employee costs, depreciation expenses and intercompany transactions), $3.6 million related to the French business tax Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, offset by a $15.9 million tax deduction resulting from technology royalty income we received from our subsidiaries, $10.9 million Research and Development tax credit and the recognition or reversal of valuation allowance on deferred tax assets for $20.6 million (mainly for Criteo Corp). Please see Note 21 to our audited consolidated financial statements for more detailed information on the provision for income taxes. 71 Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As at December 31, 2019, the valuation allowance against deferred tax assets amounted to $25.3 million. It mainly related to Criteo Corp. ($12.8 million), Criteo Ltd ($7.5 million), Criteo China ($3.3 million), Criteo Brazil ($3.2 million), and Criteo France ($7.7 million). Net Income Year Ended December 31, % change 2020 2019 2018 2020 vs 2019 2019 vs 2018 (in thousands, except percent of revenue) Net income $ 74,689 $ 95,969 $ 95,879 (22)% 0.1% % of revenue 4 % 4 % 4 % 2020 Compared to 2019 Net income for 2020 decreased $(21.3) million, or (22)% compared to 2019. This decrease was the result of the factors discussed above, in particular a $(32.4) million decrease in income from operations, a $3.8 million decrease in financial expense and a $7.3 million decrease in the provision for income taxes compared to 2019. 2019 Compared to 2018 Net income for 2019 increased $0.1 million, or 0.1% compared to 2018. This increase was the result of the factors discussed above, in particular a $(5.9) million decrease in income from operations, a $(0.7) million increase in financial expense offset by a $6.7 million decrease in provision for income taxes compared to 2018. 72 Unaudited Quarterly Results of Operations The following tables set forth our unaudited consolidated statement of income data for the last eight quarters, as well as the percentage of revenue for each line item shown. We derived this information from our unaudited interim consolidated financial information, which, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the information for the quarters presented. The quarterly results of operations have been prepared by, and are the responsibility of, our management and have not been audited or reviewed by our independent registered public accounting firm. You should read this information together with our audited consolidated financial statements and related notes beginning on page F-1. Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (in thousands) Consolidated Statements of Income Data: Revenue $ 661,282 $ 470,345 $ 437,614 $ 503,376 $ 652,640 $ 522,606 $ 528,147 $ 558,123 Cost of revenue (1) Traffic acquisition costs (408,108) (284,401) (257,698) (297,364) (386,388) (301,901) (304,229) (322,429) Other cost of revenue (34,700) (34,608) (33,914) (33,806) (31,328) (31,101) (29,059) (26,045) Gross profit 218,474 151,336 146,002 172,206 234,924 189,604 194,859 209,649 Operating expenses (1) Research and development expenses (32,797) (30,954) (31,247) (37,515) (40,585) (41,414) (44,015) (46,577) Sales and operations expenses (85,871) (83,659) (75,781) (84,974) (98,080) (85,985) (95,503) (95,909) General and administrative expenses (32,623) (28,672) (29,185) (25,915) (37,382) (32,835) (35,767) (33,770) Total operating expenses (151,291) (143,285) (136,213) (148,404) (176,047) (160,234) (175,285) (176,256) Income from operations 67,183 8,051 9,789 23,802 58,877 29,370 19,574 33,393 Financial income (expense) (111) (491) (1,003) (334) (1,521) (900) (1,354) (1,974) Income before taxes 67,072 7,560 8,786 23,468 57,356 28,470 18,220 31,419 Provision for income taxes (20,254) (2,267) (2,636) (7,040) (15,882) (7,913) (5,683) (10,018) Net income $ 46,818 $ 5,293 $ 6,150 $ 16,428 $ 41,474 $ 20,557 $ 12,537 $ 21,401 Net income available to shareholders of Criteo S.A. 45,277 5,227 5,716 15,459 42,024 18,778 10,823 19,120 Other Financial Data: Revenue ex-TAC (2) $ 253,174 $ 185,944 $ 179,916 $ 206,012 $ 266,252 $ 220,705 $ 223,918 $ 235,694 Adjusted EBITDA (3) $ 103,423 $ 49,471 $ 38,911 $ 59,190 $ 109,499 $ 64,219 $ 56,399 $ 68,855 (1) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense and acquisition-related costs and deferred price consideration as follows: 73 Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (in thousands) Equity awards compensation expense Research and development expenses 2,482 3,333 2,068 2,370 3,578 3,230 4,203 4,025 Sales and operations expenses 3,662 3,190 1,572 3,618 3,009 4,398 5,693 6,201 General and administrative expenses 2,816 280 3,519 2,515 2,502 4,142 4,495 3,656 Total equity awards compensation expense (a) 8,960 6,803 7,159 8,503 9,089 11,770 14,391 13,882 Pension service costs Research and development expenses 290 286 269 269 188 188 191 193 Sales and operations expenses 103 101 95 95 69 71 71 72 General and administrative expenses 190 185 175 174 126 129 129 129 Total pension service costs 583 572 539 538 383 388 391 394 Depreciation and amortization expense Cost of revenue 15,354 14,712 13,098 12,771 12,691 12,193 10,847 9,135 Research and development expenses (b) 1,712 1,721 1,658 5,650 5,248 4,249 3,534 3,477 Sales and operations expenses (b) 4,033 4,176 4,221 4,340 10,763 4,178 5,109 4,864 General and administrative expenses 1,041 1,143 1,231 1,377 1,787 1,768 1,825 1,820 Total depreciation and amortization expense 22,140 21,752 20,208 24,138 30,489 22,388 21,315 19,296 Acquisition-related costs General and administrative expenses 174 112 — — — — — — Total acquisition-related costs 174 112 — — — — — — Restructuring related and transformation costs Cost of revenue — — — — — — — — Research and development expenses 747 1,985 513 995 1,704 172 124 — Sales and operations expenses 2,605 5,357 415 1,021 6,614 131 175 1,890 General and administrative expenses 1,031 4,839 288 193 2,343 — 429 — Total restructuring related and transformation costs (c) $ 4,383 $ 12,181 $ 1,216 $ 2,209 $ 10,661 $ 303 $ 728 $ 1,890 (a) Excludes $(2.7) million, $(4.8) million and $(0.5) million disclosed as restructuring costs as of December 31, 2020, 2019 and 2018 , respectively. (b) For the Three Months Ended December 31, 2019 the Company recognized accelerated amortization for Manage technology due to a revised useful life ($4.0 million in Research and development) and an impairment loss for Manage customers relationships ($6.9 million in Sales and operations). (c) For the Three Months Ended December 31, 2020 and 2019 the Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy and office right sizing policy detailed below: 74 Three Months Ended December 31, 2020 2019 (Gain) from forfeitures of share-based compensation awards (2,655) (4,849) Depreciation and amortization expense — (67) Facilities and impairment related costs 4,158 9,432 Payroll related costs 1,422 6,145 Consulting costs related to transformation 1,458 — Total restructuring related and transformation costs $ 4,383 $ 10,661 (2) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance with U.S. GAAP. Please see footnote 3 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for more information. Below is a reconciliation of Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (in thousands) Reconciliation of Revenue ex-TAC to Revenue: Revenue $ 661,282 $ 470,345 $ 437,614 $ 503,376 $ 652,640 $ 522,606 $ 528,147 $ 558,123 Adjustment: Traffic acquisition costs (408,108) (284,401) (257,698) (297,364) (386,388) (301,901) (304,229) (322,429) Revenue ex-TAC $ 253,174 $ 185,944 $ 179,916 $ 206,012 $ 266,252 $ 220,705 $ 223,918 $ 235,694 (3) 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. Please see footnote 5 to the "Other Financial and Operating Data" table in “Item 6. Selected Financial Data” in this Form 10-K for more information. Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP. 75 Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (in thousands) Reconciliation of Adjusted EBITDA to Net Income: Net Income $ 46,818 $ 5,293 $ 6,150 $ 16,428 $ 41,474 $ 20,557 $ 12,537 $ 21,401 Adjustments: Financial (income) expense 111 491 1,003 334 1,521 900 1,354 1,974 Provision for income taxes 20,254 2,267 2,636 7,040 15,882 7,913 5,683 10,018 Equity awards compensation expense (a) 8,960 6,803 7,159 8,503 9,089 11,770 14,391 13,882 Pension service costs 583 572 539 538 383 388 391 394 Depreciation and amortization expense (b) 22,140 21,752 20,208 24,138 30,489 22,388 21,315 19,296 Acquisition-related costs 174 112 — — — — — — Restructuring costs (c) 4,383 12,181 1,216 2,209 10,661 303 728 1,890 Total net adjustments 56,605 44,178 32,761 42,762 68,025 43,662 43,862 47,454 Adjusted EBITDA $ 103,423 $ 49,471 $ 38,911 $ 59,190 $ 109,499 $ 64,219 $ 56,399 $ 68,855 (a) Excludes $(2.7) million, $(4 .8) million and $(0.5) million disclosed as restructuring costs as of December 31, 2020, 2019 and 2018, respectively. (b) For the Three Months Ended December 31, 2019, respectively the Company recognized accelerated amortization for Manage technology due to a revised useful life ($2.2 million in Research and development) and an impairment loss for Manage customers relationships ($4.6 million in Sales and operations). (c) For the Three Months Ended December 31, 2020 and 2019, respectively the Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy and office right sizing policy as detailed below: Three Months Ended December 31, 2020 2019 (Gain) from forfeitures of share-based compensation awards (2,655) (4,849) Depreciation and amortization expense — (67) Facilities and impairment related costs 4,158 9,432 Payroll related costs 1,422 6,145 Consulting costs related to transformation 1,458 — Total restructuring related and transformation costs $ 4,383 $ 10,661 76 Three Months Ended December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 (as a percentage of revenue) Statements of Operations Data: Revenue 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue Traffic acquisition costs (61.7) (60.5) (58.9) (59.1) (59.2) (57.8) (57.6) (57.8) Other cost of revenue (5.2) (7.4) (7.7) (6.7) (4.8) (6.0) (5.5) (4.7) Gross profit 33.0 32.2 33.4 34.2 36.0 36.3 36.9 37.6 Operating expenses: Research and development expenses (5.0) (6.6) (7.1) (7.5) (6.2) (7.9) (8.3) (8.3) Sales and operations expenses (13.0) (17.8) (17.3) (16.9) (15.0) (16.5) (18.1) (17.2) General and administrative expenses (4.9) (6.1) (6.7) (5.1) (5.7) (6.3) (6.8) (6.1) Total operating expenses (22.9) (30.5) (31.1) (29.5) (27.0) (30.7) (33.2) (31.6) Income from operations 10.2 1.7 2.2 4.7 9.0 5.6 3.7 6.0 Financial income (expense) — (0.1) (0.2) (0.1) (0.2) (0.2) (0.3) (0.4) Income before taxes 10.1 1.6 2.0 4.7 8.8 5.4 3.4 5.6 Provision for income taxes (3.1) (0.5) (0.6) (1.4) (2.4) (1.5) (1.1) (1.8) Net income 7.1 % 1.1 % 1.4 % 3.3 % 6.4 % 3.9 % 2.4 % 3.8 % Net income available to shareholders of Criteo S.A. 6.8 % 1.1 % 1.3 % 3.1 % 6.4 % 3.6 % 2.0 % 3.4 % Other Financial Data: Revenue ex-TAC 38.3 % 39.5 % 41.1 % 40.9 % 40.8 % 42.2 % 42.4 % 42.2 % Adjusted EBITDA 15.6 % 10.5 % 8.9 % 11.8 % 16.8 % 12.3 % 10.7 % 12.3 % 77 B. Liquidity and Capital Resources. Market Risk We are mainly exposed to changes of foreign currency exchange rate fluctuations. The functional currency of the Company is the euro, while our reporting currency is the U.S. dollar. Because we incur some of our expenses and derive revenues in currencies other than the euro, we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates. Foreign exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro. The statements of financial position of consolidated entities having a functional currency different from the U.S. dollar are translated into U.S. dollars at the closing exchange rate (spot exchange rate at the statement of financial position date) and the statement of income, statement of comprehensive income and statement of cash flow of such consolidated entities are translated at the average period to date exchange rate. The resulting translation adjustments are included in equity under the caption “Accumulated Other Comprehensive Income” in the Consolidated Statement of Changes in Equity. The $1.9 million financial expense for the period ended December 31, 2020 was mainly driven by the financial expense relating to the €140 million drawdown from May 2020 to November 2020 as part of our available Revolving Credit Facility (RCF) financing, the up-front fees amortization, and the non-utilization costs, partially offset by income from invested cash & cash equivalents. The $5.7 million financial expense for the period ended December 31, 2019 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available RCF financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. The $5.1 million financial expense for the period ended December 31, 2018 was mainly driven by the non-utilization costs and upfront fees amortization incurred as part of our available RCF financing. The intra-group position between Criteo S.A. and its U.S. subsidiary in the context of the funding of the HookLogic acquisition is qualified as a net investment in a foreign operation from February 2018 and no longer requires hedging, resulting in reduced costs compared to the same period ended December 31, 2017. Since 2013, the Company has had a foreign currency risk management policy in place. At December 31, 2020, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies. 78 Foreign Currency Risk A 10% increase or decrease of the British pound, the euro, the Japanese yen or the Brazilian real against the U.S. dollar would have impacted the Consolidated Statements of Income including non-controlling interests as follows: Year Ended December 31, 2020 2019 2018 (in thousands) GBP/USD +10% -10% +10% -10% +10% -10% Net income impact $ 116 $ (116) $ (386) $ 386 $ (785) $ 785 Year Ended December 31, 2020 2019 2018 (in thousands) BRL/USD +10% -10% +10% -10% +10% -10% Net income impact $ (41) $ 41 $ (71) $ 71 $ (645) $ 645 Year Ended December 31, 2020 2019 2018 (in thousands) JPY/USD +10% -10% +10% -10% +10% -10% Net income impact $ 614 $ (614) $ 1,019 $ (1,019) $ 1,404 $ (1,404) Year Ended December 31, 2020 2019 2018 (in thousands) EUR/USD +10% -10% +10% -10% +10% -10% Net income impact $ 9,360 $ (9,360) $ 10,755 $ (10,755) $ 11,552 $ (11,552) Counterparty Risk As of December 31, 2020, we show a positive net cash position. Since 2012, we utilize a cash pooling arrangement, reinforcing cash management centralization. Investment and financing decisions are carried out by our internal central treasury function. We only deal with counterparties with high credit ratings. In addition, under our Investment and Risk Management Policy, our central treasury function ensures a balanced distribution between counterparties of the investments, no matter the rating of such counterparty. 79 Liquidity Risk We are mainly exposed to changes of foreign currency exchange rate fluctuations. Working Capital The following table summarizes our cash flows from operations, trade receivables, net of allowances and working capital for the periods indicated: Year Ended December 31, 2020 2019 Cash flows provided by operating activities $185,356 $222,832 Trade receivables, net of allowances $474,055 $481,732 Working capital (current assets less current liabilities) $464,219 $390,122 In addition, the cash flows were also positively impacted by a $42.7 million change in foreign exchange rates on our cash position over the period. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts and money market funds that are currently providing only a minimal return. Sources of Liquidity Our principal sources of liquidity are our cash and cash equivalents and cash generated from operations. We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying cash dividends on our equity securities in the foreseeable future. Since our inception, we raised a total of $51.1 million aggregate net proceeds from the sale of preferred shares through four private placements. In November 2013, we received aggregate net proceeds before expenses of $269.0 million from our initial public offering. In March 2014, we received aggregate net proceeds before expenses of $22.6 million from our secondary equity offering. We also benefited to a much lesser extent from the proceeds of the exercise of share options and warrants and expect to continue to do so in the future, as such securities are exercised by holders. In 2018, we completed an $80 million share repurchase program. We completed two ADS repurchase programs in 2020: our July 2019 program of up to $80 million, which was completed in February 2020, and our April 2020 program of up to $30 million, which was completed in July 2020. Other than these repurchase programs, we intend to retain all available funds and any future earnings to fund our growth. We are party to a loan agreement and several RCFs with third-party financial institutions. Our loan and RCF agreements as of December 31, 2020 are presented in the table below: 80 Nominal/ Authorized amounts (RCF Only) Amount drawn as of December 31, 2020 (RCF only) Amount Outstanding as of December 31, 2020 Nature (in thousands) Interest rate Settlement date BPI Loan - February 2014 NA NA $ 368.1 Fixed: 2.09% May 2021 Other BPI Loans NA NA $ 912.0 0% 2023 and after Other Loans NA NA $ 224.8 0% 2024 Bank Syndicate RCF - September 2015 (1) € 350,000 € — € — Floating rate: EURIBOR / LIBOR + margin depending on leverage ratio March 2022 (1) Subsequent to the settlement date of March 2022, the authorized amount of €350 million is reduced to €294 million through to a new settlement date of March 2023 For additional information regarding our loan and RCF agreements, please refer to Note 12 - Financial Liabilities and Note 23 - Commitments. All of these loans and RCFs are unsecured and contain customary events of default but do not contain any affirmative, financial or negative covenants, with the exception of the September 2015 RCF which contains covenants, including compliance with a total net debt to Adjusted EBITDA ratio and restrictions on the incurrence of additional indebtedness. At December 31, 2020, we were in compliance with the required leverage ratio. We are also party to short-term credit lines and overdraft facilities with HSBC Holdings plc, LCL and BNP Paribas. We are authorized to draw up to a maximum of €21.5 million ($26.4 million) in the aggregate under the short-term credit lines and overdraft facilities. As of December 31, 2020, we had not drawn on either of these facilities. Any loans or overdrafts under these short-term facilities bear interest based on the one month EURIBOR rate or three month EURIBOR rate. As these facilities are exclusively short-term credit and overdraft facilities, our banks have the ability to terminate such facilities on short notice. Our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return. Our cash and cash equivalents at December 31, 2020 were held for working capital and general corporate purposes, which could include acquisitions, and amounted to $488.0 million as of December 31, 2020. The $69.2 million increase in cash and cash equivalents compared with December 31, 2019 primarily resulted from an increase of $185.4 million in cash from operating activities partially offset by a decrease of $(101.1) million in cash used for investing activities and a decrease of $(57.7) million in cash used for financing activities. In addition, the increase in cash includes a $42.7 million positive impact due to changes in foreign exchange rates on our cash position over the period. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return. Furthermore, Criteo had financial liquidity of approximately $960 million, including its cash position, marketable securities and its Revolving Credit Facility as of December 31, 2020. Overall, we believe that our current financial liquidity, combined with our expected cash-flow generation in 2020, enables financial flexibility. Operating and Capital Expenditure Requirements In 2020, 2019 and 2018, our actual capital expenditures were $65.5 million, $97.9 million and $125.5 million respectively, primarily related to the acquisition of data center and server equipment, and internal IT systems. We expect our capital expenditures to remain at, or slightly below, 3% of revenue for 2021, as we plan to continue to build and maintain additional data center equipment capacity in all regions and increase our investments supporting our new work from home policy as part of our office right sizing program. 81 As part of our strategy to build upon our market and technology leadership, in 2016 we acquired all of the outstanding shares of HookLogic for a final purchase price of $249.0 million financed by (i) a $75.0 million amount drawn on the General RCF and (ii) a $175.1 million amount financed by the available cash resources and in 2018 we acquired all of the outstanding shares of Storetail and Manage for $43.7 million and $60.0 million respectively, financed by available cash resources. We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in personnel and capital equipment, and the timing and extent of our introduction of new products and product enhancements. If our cash and cash equivalents balances and cash flows from operating activities are insufficient to satisfy our liquidity requirements, we may need to raise additional funds through equity, equity-linked or debt financings to support our operations, and such financings may not be available to us on acceptable terms, or at all. We may also need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies, assets or products. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing will be dilutive to our shareholders. Historical Cash Flows The following table sets forth our cash flows for 2020, 2019 and 2018 : Year Ended December 31, 2020 2019 2018 (in thousands) Cash flows provided by operating activities $ 185,356 $ 222,832 $ 260,726 Cash used in investing activities (101,093) (103,888) (226,717) Cash used for financing activities $ (57,747) $ (59,111) $ (62,676) Our cash and cash equivalents at December 31, 2020 were held for working capital and general corporate purposes, which could include acquisitions. The increase in cash and cash equivalents compared with December 31, 2019, primarily resulted from an increase of $185.4 million in cash flows from operating activities partially offset by a decrease of $(101.1) million in cash flows used for investing activities and a decrease of $(57.7) million in cash flows used for financing activities. Operating Activities Cash provided by operating activities is primarily impacted by the increase in the number of clients using our solution and by the amount of cash we invest in personnel to support the anticipated growth of our business. Cash provided by operating activities has typically been generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating expense items such as depreciation, amortization, equity awards compensation, deferred tax assets and income taxes. In 2020, net cash flows provided by operating activities were $185.4 million and consisted of net income of $74.7 million, $154.6 million in adjustments for non-cash and non-operating items and $(44.0) million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of $106.6 million, equity awards compensation expense of $28.8 million, changes in deferred tax assets of $3.7 million , $2.7 million generated on disposal of non-current assets, $1.9 million from other non-operating items, and by $10.9 million of accrued income taxes net of income tax paid. 82 The $(44.0) million decrease in cash resulting from changes in working capital primarily consisted of a $(33.3) million decrease in accounts payable, a $(5.8) million decrease due to changes in operating lease liabilities and right of use assets, a $(7.2) million increase in other current assets (including prepaid expenses and VAT receivables) and a $(4.0) million increase in accounts receivable partially offset by a $6.3 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables. In 2019, net cash flows provided by operating activities were $222.8 million and consisted of net income of $96.0 million, $126.3 million in adjustments for non-cash and non-operating items and $0.6 million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of $97.1 million, equity awards compensation expense of $41.0 million, $15.4 million of changes in deferred tax assets and $0.8 million of changes in other items, partially offset by $28.0 million of accrued income taxes net of income tax paid. The $0.6 million increase in cash resulting from changes in working capital primarily consisted of a $11.4 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, a $7.6 million decrease in other current assets (including prepaid expenses and VAT receivables) and a $0.9 million decrease in accounts receivable partially offset by a $14.1 million decrease in accounts payable and a $5.2 million decrease due to changes in operating lease liabilities and right of use assets. In 2018, net cash flows provided by operating activities were $260.7 million and consisted of net income of $95.9 million, $154.4 million in adjustments for non-cash and non-operating items and by $10.4 million of cash flows from working capital. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of $111.8 million, equity awards compensation expense of $66.6 million, partially offset by $12.7 million of accrued income taxes net of income tax paid, $8.2 million of changes in deferred tax assets and other items for $3.1 million including $2.3 million reclassification of the cash impact of the settlement of hedging derivatives to financing activities. The $10.4 million increase in cash resulting from changes in working capital primarily consisted of $1.4 million decrease in accounts receivable, a $4.0 million decrease in other current assets (including prepaid expenses and VAT receivables) and a $9.0 million increase in accounts payable partially offset by a $4.0 million decrease in accrued expenses such as payroll and payroll related expenses and VAT payables. Investing Activities Our investing activities to date have consisted primarily of purchases of servers and other data-center equipment and business acquisitions. In 2020, net cash flows used in investing activities were $101.1 million and consisted of $65.5 million for purchases of servers and other data-center equipment, $1.2 million for business acquisitions and $34.4 million change in other non-current financial assets resulting from investments in Marketable Securities (see Note 2 and 3). In 2019, net cash flows used in investing activities were $103.9 million and consisted of $97.9 million for purchas es of servers and other data-center equipment, $4.6 million for business acquisitions and $1.2 million in other financial liabilities. In 2018, net cash flows used in investing activities were $226.7 million and consisted of $125.5 million for purchases of property and equipment, and by $101.2 million related to the Storetail and Manage acquisitions and disposal of a business. Financing Activities In 2020, net cash used in financing activities was $57.7 million mainly resulting from the $10.9 million impact of the €140 million drawing from May 2020 to November 2020 as part of our available Revolving Credit Facility (RCF) and the $43.7 million impact from our share repurchase program. In 2019, net cash used in financing activities was $59.1 million resulting from $58.6 million relating to the share repurchase program, $1.2 million of changes in other financial liabilities and $1.0 million for the repayment of borrowings, partially offset by $1.7 million related to proceeds from capital increase. In 2018, net cash used in financing activities was $62.7 million resulting from $1.5 million from proceeds of share option exercises and $16.8 million of changes in other financial liabilities relating to the cash impact of the settlement of hedging derivatives, offset by $80.0 million relating to the share repurchase program and by $1.0 million for the repayment of borrowings. 83 C. Research and Development, Patents and Licenses, etc. We invest substantial resources in research and development to enhance our solution and technology infrastructure, develop new features, conduct quality assurance testing and improve our core technology. Our engineering group is primarily located in research and development center s in Paris, Grenoble, France and Ann Arbor, Michigan. We expect to continue to expand the capabilities of our technology in the future and to invest significantly in continued research and development efforts. We had 624 employees primarily engaged in research and development at December 31, 2020. Research and development e xpense totaled $132.5 million, $172.6 million and $179.3 million for 2020, 2019 and 2018, respectively. 84 D. Trend Information. Key Metrics We review three key metrics to help us monitor the performance of our business and to identify trends affecting our business. These key metrics include number of clients, Revenue ex-TAC, and Adjusted EBITDA. We believe these metrics are useful to understanding the underlying trends in our business. The following table summarizes our key metrics for 2020, 2019 and 2018. Year Ended December 31, 2020 2019 2018 (in thousands, except number of clients) 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 Number of Clients We define a client to be a unique party from whom we have received a signed contract or an insertion order and for whom we have delivered an advertisement or monetized an advertising inventory during the previous 12 months. We believe this criteria best identifies clients who actively use our set of solutions. We count specific brands or divisions within the same business as distinct clients so long as those entities have separately signed insertion orders with us. In the case of some solutions within Criteo Retail Media, we count the parent company of the brands as an individual client, even if several distinct brands pertaining to the same parent company have signed separate contracts or insertion orders with us. On the other hand, we count a client who runs campaigns in multiple geographies as a single client, even though multiple insertion orders may be involved. When the insertion order is with an advertising agency, we generally consider the client on whose behalf the advertising campaign is conducted as the “client” for purposes of this calculation. In the event a client has its advertising spend with us managed by multiple agencies, that client is counted as a single client. We believe that our ability to increase the number of clients is an important indicator of our ability to grow revenue over time. While our client count has increased over time, this metric can also fluctuate from quarter to quarter due to the seasonal trends in advertising spend of clients and the timing and amount of revenue contribution from new clients. In addition, over time we have added an increasing number of midmarket clients that generate a lower revenue per client than large clients on average, and may continue to add a significant number of midmarket clients in the future. Therefore, there is not necessarily a direct correlation between a change in clients in a particular period and an increase or decrease in our revenue over that same period. Revenue ex-TAC We consider Revenue ex-TAC as a key measure of our business activity. Our traffic acquisition costs primarily consist of purchases of impressions from publishers on a CPM basis. Our management views our Revenue ex-TAC as a key measure to evaluate, plan and make decisions on our business activities and sales performance. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our 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. Revenue ex-TAC is not a measure calculated in accordance with U.S. GAAP. Please see footnote 3 to the "Other Financial and Operating Data" table in "Item 6. Selected Financial Data" in this Form 10-K for a discussion of the limitations of Revenue ex-TAC and a reconciliation of Revenue ex-TAC to revenue, the most comparable U.S. GAAP measure, for 2016, 2017, 2018, 2019 and 2020. 85 Adjusted EBITDA Adjusted EBITDA represents our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is a key measure used by management to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, restructuring related and transformation costs, acquisition-related costs and deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Please see footnote 5 to the "Other Financial and Operating Data" table in "Item 6. Selected Financial Data" in this Form 10-K for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable U.S. GAAP measure, for 2016, 2017, 2018, 2019 and 2020. Highlights and Trends Revenue We believe the expansion of our business with existing clients as well as the addition of new clients have both been significant drivers of our historical growth. We believe significant opportunities exist for us to continue to expand our business going forward. Specifically, as part of our Commerce Media Platform strategy, we believe that we can further strengthen our core business, continue to expand our product portfolio, explore strategic game changers for our business and drive further technology innovation and operational excellence to further expand our business over time. However, due to external challenges and other factors, we may not be able to maintain our historical growth rates in the future. Revenue ex-TAC We are focused on maximizing our Revenue ex-TAC on an absolute basis. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to digital advertising inventory, breadth and depth of data and continuous improvement of the Criteo AI Engine’s performance, allowing us to deliver more relevant advertisements at scale. As part of this focus we are continuing to invest in building preferred relationships with direct publishers, including with ecommerce retailers, and increasing access to leading advertising exchanges, which includes purchasing advertising inventory that may have lower margins on an individual impression basis, but generates incremental Revenue ex-TAC. We believe this strategy maximizes the growth of our Revenue ex-TAC on an absolute basis and strengthens our market position. As a result, we expect our traffic acquisition costs to continue to increase on an absolute basis as we continue to grow our revenue. However, our traffic acquisition costs might also increase as a percentage of revenue as we continue to invest in building liquidity and long-term value for clients and publishers over optimizing near-term gross margins, and as our product mix continues to evolve towards a growing share of new solutions, some of which might involve a higher level of traffic acquisition costs as a percentage of revenue relative to our historical trends. 86 Adjusted EBITDA Our Adjusted EBITDA for 2020 was $ 251.0 million, a (16)% decrease over 2019. Our decrease in Adjusted EBITDA for 2020 compared to 2019 was primarily the result of the (13)% decrease in Revenue ex-TAC over the period, partly offset by the decrease in our Non-GAAP operating expenses. In the short-term, we expect to continue to have a disciplined management of our expense base cross the company and to drive efficiency through more automation and operational excellence across the organization, in order to self-fund investments in the strategic growth areas of our business, such as Retail Media, our first-party media network, Contextual advertising, video, Connected TV and Commerce Insights. For 2021, we anticipate an approximately flat Adjusted EBITDA margin as a percentage of Revenue ex-TAC compared to 2020. Over time, we expect to continue to invest in the growth areas of our business and to maintain a healthy profitability as our revenue returns to sustainable growth and as we benefit from operating leverage and continued discipline in our expense management. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Please see footnote 5 to the "Other Financial and Operating Data" table in "Item 6. Selected Financial Data" in this Form 10-K for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most comparable U.S. GAAP measure. Number of Clients Since our inception, we have significantly grown the number of clients with which we do business. Our base of clients increased to more than 21,000 at December 31, 2020, a 4% increase over December 31, 2019. This growth in our number of clients has been driven by a number of factors, including our global footprint and our commercial expansion in existing markets, our continued development of large clients in the Retail vertical, especially in ecommerce, our expansion of midmarket clients and our penetration into the consumer brand vertical through some of our Criteo Retail Media offerings. We believe that our ability to increase our number of clients is a leading indicator of our ability to grow revenue over time. We expect to continue to focus our attention and investment on further growing our client base across all regions, client categories and verticals, with continued strong focus on ecommerce. While we intend to grow our client base across all categories, we expect midmarket customers to continue to increase their contribution in the mix of our total revenue. Client Retention We believe our ability to retain and grow revenue from our existing clients is a useful indicator of the stability of our revenue base and the long-term value of our client relationships. Our offering, the Criteo Commerce Media Platform, is powered by AI technology and aims to cover the entire marketing funnel (Awareness, Audience Targeting, Conversion). Our technology is optimized to drive impactful business outcomes from marketing and monetization for retailers and brands. We measure our client satisfaction through our ability to retain them and the revenue they generate quarter after quarter. We define client retention rate as the percentage of live clients during the previous quarter that continued to be live clients during the current quarter. This metric is calculated on a quarterly basis, and for annual periods, we use an average of the quarterly metrics. We define a live client as a client whose advertising campaign has or had been generating Revenue ex-TAC for us on any day over the relevant measurement period. In each of 2020, 2019 and 2018, our client retention rate was approximately 90%. We define our revenue retention rate with respect to a given 12-month period as (1) revenue recognized during such period from clients that contributed to revenue recognized in the prior 12-month period divided by (2) total revenue recognized in such prior 12-month period. Our revenue retention rate wa s 92%, 94% 1 and 101% 1 for the years ended December 31, 2020, 2019 and 2018, respectively. Seasonality Our client base consists primarily of businesses in the digital Retail, Travel and Classifieds industries, which we define as commerce clients. In the digital Retail industry and the consumer brand verticals in particular, many businesses devote the largest portion of their advertising spend to the fourth quarter of the calendar year, to coincide with increased holiday spending by consumers. With respect to Criteo Retail Media, the concentration of advertising spend in the fourth quarter of the calendar year is particularly pronounced. Our Retail clients typically conduct fewer advertising campaigns in the first and second quarters than they do in other quarters, while our Travel clients typically increase their travel campaigns in the first and third quarters and conduct fewer advertising campaigns in the second quarter. As a result, our revenue tends to be seasonal in nature, but the impact of this seasonality has, to date, been partly offset by our significant growth and geographic expansion. If the seasonal fluctuations become more pronounced, our operating cash flows could fluctuate materially from period to period. ___________________________________________________ 1 Excluding Criteo Retail Media. 87 E. 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. F. Tabular Disclosure of Contractual Obligations. The following table discloses aggregate information about material contractual obligations and periods in which payments were due as of December 31, 2020. Future events could cause actual payments to differ from these estimates. Less than 1 year 1 to 5 years More than 5 years Total (in thousands of U.S. Dollars) Long-term debt $ 1,583 $ 341 $ — $ 1,924 Operating Leases 53,565 82,351 — 135,916 Other financial liabilities 398 45 — 443 Financial derivatives 925 — — 925 Other purchase obligations 4,780 1,894 — 6,674 Total $ 61,251 $ 84,631 $ — $ 145,882 The commitment amounts in the table above are associated with contracts that are enforceable and legally binding and that specify all significant terms, including interest on long-term debt, fixed or minimum services to be used, fixed, minimum or variable price provisions, the approximate timing of the actions under the contracts and operating leases for offices and data centers. The table does not include obligations under agreements that we can cancel without a significant penalty. Long-term debt includes interest of $0.1 million. Pension contributions and cash outflows have not been included in the above table as they have been deemed immaterial. G. Safe Harbor. This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and as defined in the Private Securities Litigation Reform Act of 1995. See "Special Note Regarding Forward-Looking Statements."