20-F 1 d893756d20f.htm FORM 20-F Form 20-F
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 20-F

 

 

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-36153

 

 

Criteo S.A.

(Exact name of Registrant as specified in its charter

and translation of Registrant’s name into English)

 

 

France

(Jurisdiction of incorporation or organization)

32, rue Blanche, 75009 Paris—France

(Address of principal executive offices)

Jean-Baptiste Rudelle

Chairman and Chief Executive Officer

Criteo S.A.

32 rue Blanche

75009 Paris, France

Tel: +33 1 40 40 22 90 Fax: +33 1 40 40 22 030

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each representing one   The Nasdaq Stock Market LLC
ordinary share, nominal value €0.025 per share  
Ordinary shares, nominal value €0.025 per share*   The Nasdaq Stock Market LLC*

 

* Not for trading, but only in connection with the registration of the American Depositary Shares.

Securities registered or to be registered pursuant to Section 12(g) of the Act. None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

Ordinary shares, nominal value €0.025 per share: 60,902,695 as of December 31, 2014

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  ¨

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an Annual Report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          PAGE  

INTRODUCTION

  

PART I

     

Item 1.

   Identity of Directors, Senior Management and Advisers      4   

Item 2.

   Offer Statistics and Expected Timetable      4   

Item 3.

   Key Information      4   
   A.        Selected Financial Data      4   
   B.        Capitalization and Indebtedness      8   
   C.        Reasons for the Offer and Use of Proceeds      8   
   D.        Risk Factors      8   

Item 4.

   Information on the Company      41   
   A.        History and Development of the Company      41   
   B.        Business Overview      41   
   C.        Organizational Structure      59   
   D.        Property, Plants and Equipment      59   

Item 4A.

   Unresolved Staff Comments      59   

Item 5.

   Operating and Financial Review and Prospects      60   
   A.        Operating Results      61   
   B.        Liquidity and Capital Resources      83   
   C.        Research and Development, Patents and Licenses      88   
   D.        Trend Information      88   
   E.        Off-Balance Sheet Arrangements      91   
   F.        Tabular Disclosure of Contractual Obligations      91   
   G.        Safe Harbor      92   

Item 6.

   Directors, Senior Management and Employees      93   
   A.        Directors and Senior Management      93   
   B.        Compensation      95   
   C.        Board Practices      105   
   D.        Employees      109   
   E.        Share Ownership      109   

Item 7.

   Major Shareholders and Related Party Transactions      110   
   A.        Major Shareholders      110   
   B.        Record Holders      112   
   C.        Related Party Transactions      112   
   D.        Interests of Experts and Counsel      115   

Item 8.

   Financial Information      115   
   A.        Consolidated Statements and Other Financial Information      115   
   B.        Significant Changes      115   

Item 9.

   The Offer and Listing      116   
   A.        Offer and Listing Details      116   
   B.        Plan of Distribution      116   
   C.        Markets      116   
   D.        Selling Shareholders      116   
   E.        Dilution      116   
   F.        Expenses of the Issue      116   

 

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TABLE OF CONTENTS

CONTINUED

 

          PAGE  

Item 10.

   Additional Information      116   
   A.        Share Capital      116   
   B.        Memorandum and Articles of Association      117   
   C.        Material Contracts      117   
   D.        Exchange Controls      117   
   E.        Taxation      117   
   F.        Dividends and Paying Agents      124   
   G.        Statement by Experts      124   
   H.        Documents on Display      125   
   I.        Subsidiary Information      125   

Item 11.

   Quantitative and Qualitative Disclosures About Market Risk      125   

Item 12.

   Description of Securities Other than Equity Securities      126   
   A.        Debt Securities      126   
   B.        Warrants and Rights      126   
   C.        Other Securities      126   
   D.        American Depositary Shares      126   

PART II

     

Item 13.

   Defaults, Dividend Arrearages and Delinquencies      129   

Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds      129   

Item 15.

   Controls and Procedures      129   

Item 16A.

   Audit Committee Financial Expert      131   

Item 16B.

   Code of Ethics      131   

Item 16C.

   Principal Accountant Fees and Services      131   

Item 16D.

   Exemptions from the Listing Standards for Audit Committees      132   

Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers      132   

Item 16F.

   Change in Registrant’s Certifying Accountant      132   

Item 16G.

   Corporate Governance      132   

Item 16H.

   Mine Safety Disclosure      132   

PART III

     

Item 17.

   Financial Statements      133   

Item 18.

   Financial Statements      133   

Item 19.

   Exhibits      133   

 

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INTRODUCTION

Unless otherwise indicated, “Criteo,” “the Company,” “our Company,” “we,” “us” and “our” refer to Criteo S.A. and its consolidated subsidiaries.

“Criteo,” the Criteo logo and other trademarks or service marks of Criteo S.A. appearing in this Annual Report on Form 20-F are the property of Criteo S.A. Trade names, trademarks and service marks of other companies appearing in this Annual Report on Form 20-F are the property of their respective holders.

Our audited consolidated financial statements have been prepared in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. Our consolidated financial statements are presented in euros. All references in this Annual Report on Form 20-F to “$,” “US$,” “U.S.$,” “U.S. dollars,” “dollars” and “USD” mean U.S. dollars and all references to “€” and “euros,” mean euros, unless otherwise noted. Throughout this Annual Report on Form 20-F, references to ADSs mean ADSs or ordinary shares represented by ADSs, as the case may be.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than present and historical facts and conditions contained in this Annual Report on Form 20-F, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward-looking statements. When used in this Annual Report on Form 20-F, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. Forward- looking statements include, but are not limited to, statements about:

 

    our ability to meet the challenges of a growing company in a rapidly developing and changing industry, including our ability to forecast accurately;

 

    our ability to maintain an adequate rate of revenue growth and sustain profitability;

 

    the ability of the Criteo Engine to accurately predict engagement by a user;

 

    our ability to continue to collect and utilize data about user behavior and interaction with advertisers;

 

    our ability to protect users’ information and adequately address privacy concerns;

 

    our ability to acquire an adequate supply of advertising inventory from publishers on terms that are favorable to us;

 

    our ability to predict and adapt to changes in widely adopted industry platforms and other new technologies;

 

    the effects of increased competition in our market;

 

    our ability to enter new marketing channels, to effectively scale our technology platform in new industry verticals and to manage our international operations and expansion and the integration of our acquisitions;

 

    regulatory, legislative or self-regulatory developments regarding internet privacy matters;

 

    our ability to maintain, protect and enhance our brand and intellectual property;

 

    failures in our systems or infrastructure;

 

    our ability to attract and retain qualified employees and key personnel; and

 

    our ability to integrate the operations of acquired businesses.

You should refer to the section of this Annual Report on Form 20-F titled “Item 3.D—Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Annual Report on Form 20-F will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

You should read this Annual Report on Form 20-F and the documents that we reference in this Annual Report on Form 20-F and have filed as exhibits to this Annual Report on Form 20-F completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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This Annual Report on Form 20-F contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Annual Report on Form 20-F is generally reliable, such information is inherently imprecise.

 

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PART I

 

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

Not applicable.

 

Item 3. Key Information

 

A. Selected Financial Data

Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB. We derived the selected consolidated statements of income data for the years ended December 31, 2012, 2013 and 2014 and selected consolidated statements of financial position data as of December 31, 2013 and 2014 from our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F. The selected consolidated statements of income data for the years ended December 31, 2010 and 2011 and the selected consolidated financial position data as of December 31, 2010, 2011 and 2012 have been derived from our audited consolidated financial statements and notes thereto which are not included in this Annual Report on Form 20-F. This data should be read together with, and is qualified in its entirety by reference to, “Item 5. Operating and Financial Review and Prospects” as well as our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 20-F. Our historical results are not necessarily indicative of the results to be expected in the future.

Consolidated Statement of Income Data:

 

    Year Ended December 31,  
    2010     2011     2012     2013     2014  
    Euro     Euro     Euro     Euro     Euro     US$(6)  
    (in thousands, except share and per share data)  

Revenue

  65,626      143,562      271,855      443,960      745,081      $ 901,623   

Cost of revenue:(1)

           

Traffic acquisition costs

    (35,796     (79,062     (157,707     (264,952     (441,427     (534,171

Other cost of revenue

    (2,517     (5,690     (12,662     (21,956     (36,150     (43,745
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

27,313    58,812    101,486    157,052    267,504    $ 323,707   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

Research and development(1)

  (2,433   (8,786   (14,285   (32,175   (45,293   (54,809

Sales and operations(1)

  (11,723   (30,830   (58,047   (82,816   (133,393   (161,419

General and administrative(1)

  (5,741   (9,309   (20,208   (31,387   (48,788   (59,038
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  (19,897   (48,925   (92,540   (146,378   (227,474   (275,266
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  7,416      9,887      8,946      10,674      40,030      48,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial income (expense)

  (34   628      (1,559   (6,868   8,587      10,391   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

  7,382      10,515      7,387      3,806      48,617      58,831   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for income taxes

  (2,668   (4,391   (6,556   (2,413   (13,523   (16,037
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

4,714    6,124    831    1,393    35,364    $ 42,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to shareholders of Criteo S.A.(2)

4,714    6,124    981    1,065    34,354    $ 41,572   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income allocated to shareholders per share:

Basic

0.334    0.140    0.022    0.022    0.583    $ 0.705   

Diluted

0.329    0.129    0.020    0.019    0.543    $ 0.664   

Weighted average shares outstanding used in computing per share amounts:

Basic

  14,127,273      43,793,904      45,143,188      48,692,148      58,928,563      58,928,563   

Diluted

  14,349,075      47,521,964      48,586,666      55,174,764      63,317,281      63,317,281   

 

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Other Financial and Operating Data:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     Euro      Euro      Euro      Euro      Euro      US$(6)  
     (€ and $ in thousands)  

Number of Clients

     832         1,638         3,297         5,072         7,190         7,190   

Revenue ex-TAC(3)

   29,830       64,502       114,148       179,008       303,654       $ 367,452   

Adjusted Net Income(4)

   5,581       7,519       4,387       10,909       53,421       $ 64,645   

Adjusted EBITDA(5)

   9,009       13,884       17,380       31,313       79,427       $ 96,115   

Consolidated Statement of Financial Position Data:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     Euro      Euro      Euro      Euro      Euro      US$(6)  
     (€ and $ in thousands)  

Cash and cash equivalents

   15,552       16,382       43,262       234,343       289,784       $ 350,668   

Total assets

   39,093       63,974       137,130       391,110       565,459       $ 684,262   

Trade receivables net of allowances

   15,055       33,423       60,685       87,643       158,633       $ 191,962   

Total financial liabilities

   775       877       6,253       11,316       12,174       $ 14,732   

Total liabilities

   21,012       38,168       76,689       126,036       222,520       $ 269,271   

Total equity

   18,081       25,806       60,441       265,074       342,938       $ 414,989   

 

  (1)  Cost of revenue and operating expenses include share-based compensation expense, service costs (pension), depreciation and amortization expense, and acquisition-related deferred price consideration as follows:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     Euro      Euro      Euro      Euro      Euro  
     (in thousands)  

Share-Based Compensation Expense:

              

Research and development

   (29    (180    (429    (2,049    (2,776

Sales and operations

   (495    (899    (1,800    (2,801    (9,267

General and administrative

   (343    (316    (1,327    (2,026    (2,735
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

(867 (1,395 (3,556 (6,876 (14,778
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Service Costs (Pension):

Research and development

—      —      —      (109 (126

Sales and operations

—      —      —      (105 (141

General and administrative

(43 (75 (110 (67 (104
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total service costs (pension)(a)

  (43 (75 (110 (281 (371
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and Amortization Expense:

Cost of revenue

(609 (2,010 (3,648 (7,846 (16,176

Research and development(b)

(8 (51 (166 (915 (3,731

Sales and operations

(59 (227 (847 (1,792 (2,762

General and administrative

(7 (239 (107 (566 (863
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

(683 (2,527 (4,768 (11,119 (23,533
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquisition-related deferred price consideration:

Research and development

—      —      —      (2,363 (716

Sales and operations

—      —      —      —      —     

General and administrative

—      —      —      —      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total acquisition-related deferred price consideration:

—      —      —      (2,363 (716
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a) Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income. Prior periods have not been modified as the effect of the change in accounting policy is immaterial.
  (b)  Includes acquisition-related amortization of intangible assets of €350,000 and €2,942,000 as of December 31, 2013 and 2014 respectively

 

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  (2)  For the years ended December 31, 2012, 2013 and 2014, this includes €(150,000), €328,000 and €1,010,000 respectively, of net income (loss) attributable to non-controlling interests in our Japanese subsidiary held by Yahoo! Japan Corporation.
  (3)  We define Revenue ex-TAC (Traffic Acquisition Costs) as our revenue excluding traffic acquisition costs, or TAC, generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance with IFRS. We have included Revenue ex-TAC in this Annual Report on Form 20-F because it is a key measure used by our management and board of directors. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. 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; and (b) other companies may report Revenue ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC alongside our other IFRS-based financial performance measures, such as revenue and our other IFRS financial results. The following table presents a reconciliation of Revenue ex-TAC to revenue, the most directly comparable IFRS measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     Euro      Euro      Euro      Euro      Euro  
     (in thousands)  

Revenue

   65,626       143,562       271,855       443,960       745,081   

Adjustment:

              

Traffic acquisition costs

   (35,796    (79,060    (157,707    (264,952    (441,427
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Revenue ex-TAC

29,830    64,502    114,148    179,008    303,654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (4)  We define Adjusted Net Income as our net income adjusted to eliminate the impact of share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related deferred price consideration and the tax impact of the foregoing adjustments. Adjusted Net Income is not a measure calculated in accordance with IFRS. We have included Adjusted Net Income in this Annual Report on Form 20-F because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of share-based compensation expense, amortization of acquisition-related intangible assets, acquisition-related deferred price consideration and the tax impact of the foregoing adjustments in calculating Adjusted Net Income can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Net Income provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: Adjusted Net Income does not reflect the potentially dilutive impact of equity-based compensation or the impact of certain acquisition related costs and other companies, including companies in our industry, may calculate Adjusted Net Income or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted Net Income alongside our other IFRS-based financial performance measures, such as net profit and our other IFRS financial results. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparable IFRS measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     Euro      Euro      Euro      Euro      Euro  
     (in thousands)  

Net income

   4,714       6,124       831       1,393       35,364   

Adjustment:

              

Share-based compensation expense

   867       1,395       3,556       6,876       14,778   

Amortization of acquisition-related intangible assets

   —         —         —         350       2,942   

Acquisition-related deferred price consideration

   —         —         —         2,263       716   

Tax impact of the above adjustments

   —         —         —         (73    (379
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income

5,581    7,519    4,387    10,909    53,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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  (5)  We define Adjusted EBITDA as our consolidated earnings before interest, taxes, depreciation and amortization, adjusted to eliminate the impact of share-based compensation expense, service costs (pension) and acquisition-related deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with IFRS. We have included Adjusted EBITDA in this Annual Report on Form 20-F because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of share-based compensation expense service costs (pension) and acquisition-related deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under IFRS. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other IFRS-based financial performance measures, such as net profit and our other IFRS financial results. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable IFRS measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  
     (in thousands)  

Net income

   4,714       6,124       831       1,393       35,364   

Adjustments:

              

Financial expense (income)

   34       (628    1,559       6,868       (8,587

Provision for income taxes

   2,668       4,391       6,556       2,413       13,253   

Share-based compensation expense

   867       1,395       3,556       6,876       14,778   

Service costs (pension)(a)

   43       75       110       281       371   

Depreciation and amortization expense

   683       2,527       4,768       11,119       23,532   

Acquisition-related deferred price consideration

   —         —         —         2,363       716   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total net adjustments

4,295    7,760    16,549    29,920    44,063   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

9,009    13,884    17,380    31,313    79,427   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (a)  Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income. Prior periods have not been modified as the effect of the change in accounting policy is immaterial.

 

  (6)  Translated solely for convenience into U.S. dollars at the noon buying rate of €1.00 = U.S. $1.2101 at December 31, 2014.

 

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Exchange Rate Information

In this annual report, for convenience only, we have translated certain euro amounts reflected in our financial statements as of and for the year ended December 31, 2014 into U.S. dollars at the rate of €1.00 = $1.2101, the noon buying rate for the euro in New York City on December 31, 2014. You should not assume that, on that or on any other date, one could have converted these amounts of euros into U.S. dollars at that or any other exchange rate.

The following table sets forth, for each period indicated, the low and high exchange rates for euros expressed in U.S. dollars, the exchange rate at the end of such period and the average of such exchange rates on the last day of each month during such period, based on the noon buying rate in the City of New York for the euro. As used in this document, the term “noon buying rate” refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as certified by the Federal Reserve Bank of New York for customs purposes.

 

     Year Ended December 31,  
     2010      2011      2012      2013      2014  

High

     1.4536         1.4875         1.3463         1.3816         1.2504   

Low

     1.1959         1.2926         1.2062         1.2774         1.2101   

Rate at end of period

     1.3269         1.2973         1.3187         1.3779         1.2101   

Average rate per period

     1.3216         1.4002         1.2909         1.3303         1.2329   

The following table sets forth, for each of the last six months, the low and high exchange rates for euros expressed in U.S. dollars and the exchange rate at the end of the month based on the noon buying rate as described above.

 

     September
2014
     October
2014
     November
2014
     December
2014
     January
2015
     February
2015
 

High

     1.3136         1.2812         1.2554         1.2504         1.2015         1.1462   

Low

     1.2628         1.2517         1.2394         1.2101         1.1279         1.1197   

Rate at end of period

     1.2628         1.2530         1.2438         1.2101         1.1290         1.1197   

On December 31, 2014, the noon buying rate of the Federal Reserve Bank of New York for the euro was €1.00 = $1.2101. Unless otherwise indicated, currency translations in this Annual Report on Form 20-F reflect the December 31, 2014 exchange rate.

On March 19, 2015, the noon buying rate of the Federal Reserve Bank of New York for the euro was €1.00 = $1.0621.

Information presented on a constant currency basis in this Annual Report on Form 20-F is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends.

 

B. Capitalization and Indebtedness

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds

Not applicable.

 

D. Risk Factors

Our business faces significant risks. You should carefully consider all of the information set forth in this Annual Report on Form 20-F and in our other filings with the United States Securities and Exchange Commission (“SEC”), including the following risk factors which we face and which are faced by our industry.

 

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Our business, financial condition or results of operations could be materially adversely affected by any of these risks. This report also contains forward-looking statements that involve risks and uncertainties. Our results could materially differ from those anticipated in these forward-looking statements, as a result of certain factors including the risks described below and elsewhere in this report and our other SEC filings. See “Special Note Regarding Forward-Looking Statements” above.

Risks Related to Our Business and Industry

We are a rapidly growing company, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

We are a rapidly growing company. Our ability to forecast our future operating results is subject to a number of uncertainties, including our ability to plan for and model future growth. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in rapidly evolving industries, including challenges in forecasting accuracy, determining appropriate investments, market acceptance of our existing and future solutions, managing client implementations and developing new solutions. If our assumptions regarding these uncertainties, which we use to plan our business, are incorrect or change in reaction to changes in our markets, or if we do not address these risks successfully, our operating and financial results could differ materially from our expectations, our business could suffer.

We have experienced rapid growth in recent periods, and our recent growth rates may not be indicative of our future growth.

Our revenue has increased substantially since our inception, but we may not be able to sustain revenue growth consistent with our recent history, or at all. You should not consider our revenue growth in recent periods as indicative of our future performance. In future periods, our revenue could decline or grow more slowly than we expect. We believe growth of our revenue depends on a number of factors, including our ability to:

 

    attract new clients, and retain and expand our relationships with existing clients;

 

    maintain the breadth of our publisher network and attract new publishers, including publishers of web content, mobile applications, video and social games, in order to grow the volume and breadth of advertising inventory and opt-in e-mail addresses available to us;

 

    adapt our solution to meet evolving needs of businesses, including to address market trends such as the migration of consumers from web to mobile devices;

 

    maintain and increase our access to data necessary for the performance of the Criteo Engine;

 

    maintain the proper functioning of the Criteo Engine as we continue to collect increasing amounts of data from our growing base of clients;

 

    continuously improve on the algorithms underlying the Criteo Engine;

 

    continue to adapt to a changing regulatory landscape governing privacy matters;

 

    deliver our solution through a broader spectrum of marketing channels;

 

    introduce our solution to new geographic markets;

 

    increase awareness of our brand on a global basis; and

 

    attract and retain employees.

We cannot assure you that we will be able to successfully accomplish any of these objectives.

In addition, we also may incur significant losses in the future for a number of reasons, including other risks described in this Annual Report on Form 20-F, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors. While we have been profitable in each of the last three full years, we had losses in certain quarterly periods. If we fail to achieve sufficient revenue growth to offset increased costs, we may be unable to sustain our recent growth in revenue or return to profitability in the future.

 

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The failure by the Criteo Engine to accurately predict engagement by a user could result in significant costs to us, in lost revenue and in diminished internet display advertising inventory.

The effective delivery of our solution depends on the ability of the Criteo Engine to accurately predict the likelihood that a consumer will engage with any given internet display advertisement in order for our clients to achieve desirable returns on their marketing spend. We primarily charge our clients based on a cost per click, or CPC, pricing model, and our clients only pay us when a user engages with (i.e., clicks on) the advertisement. However, we purchase advertising inventory from publishers on a cost per thousand impressions, or CPM, basis.

Our agreements with clients are open-ended and often do not include a spending minimum. Similarly, our contracts with publishers generally also do not include long-term obligations requiring them to make their inventory available to us. Therefore, we need to continuously deliver satisfactory results for our advertiser clients and publishers in order to maintain and increase revenue, which in turn depends in part on the optimal functioning of the Criteo Engine.

In addition, as we have increased the number of advertiser clients and publishers that use our solution on a global basis, we have experienced significant growth in the amount of data processed by the Criteo Engine and the amount of advertising impressions we deliver. As the amount of data and variables processed by the Criteo Engine increase, the calculations that the algorithms must compute become increasingly complex and the likelihood of any defects or errors increases.

As a result, if we were to experience significant errors or defects in the Criteo Engine, our solution could be impaired, which could have various negative consequences, including:

 

    a loss of advertiser clients and publishers;

 

    lower click-through rates;

 

    lower profitability per impression;

 

    faulty inventory purchase decisions for which we may need to bear the cost;

 

    lower return on marketing spend for our clients;

 

    lower price for advertising inventory which we may be able to offer to publishers; and

 

    delivery of advertisements that are less relevant or irrelevant to users.

Furthermore, our success depends in part on our ability to continuously innovate and improve on the algorithms underlying the Criteo Engine in order to deliver positive results for our advertiser clients and publishers. The failure to do so could result in delivering poor performance for our advertiser clients and a reduced ability to secure advertising inventory from publishers.

If failures in the Criteo Engine or our inability to innovate and improve on the algorithms underlying the Criteo Engine results in our advertiser clients and publishers ceasing to use our solution, we cannot assure you that we will be able to replace, in a timely or effective manner, departing clients with new clients that generate comparable revenue or departing publishers with new publishers that offer similar internet display advertising inventory and/or offer similar opt-in e-mail addresses. As a result, the failure by the Criteo Engine to accurately predict engagement by a user and continue to do so over time could result in significant costs to us, in lost revenue and in diminished internet display advertising inventory.

Our ability to generate revenue depends on our collection of significant amounts of data from various sources.

Our ability to optimize the delivery of internet display advertisements for our clients depends on our ability to successfully leverage data, including data that we collect from our clients as well as data provided by our publisher partners and from third parties as well as our own operating history. Using cookies and similar tracking technologies, we collect information about the interaction of users with our advertisers’ and publishers’ websites

 

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and mobile applications (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our clients’ websites or advertisements). Our ability to successfully leverage such data is dependent upon our continued ability to access and utilize such data. Our ability to access and use such data could be restricted by a number of factors, including consumer choice, restrictions imposed by advertisers and publishers, changes in technology, and new developments in laws, regulations, and industry standards.

If consumer resistance to the collection and sharing of the data used to deliver targeted advertising, increased visibility of consent or “do not track” mechanisms as a result of industry regulatory and/or legal developments, and/or the development and deployment of new technologies result in a material impact on our ability to collect data, this will materially impair the results of our operations.

Changes to web browsers and a number of other factors could impair our ability to collect the significant amounts of data we use to optimize display advertisements for our clients.

We collect information about the interaction of users with our advertisers’ and publishers’ websites and mobile applications (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our clients’ websites, mobile applications or advertisements) using cookies and similar tracking technologies. Our ability to access and use such data could be restricted by a number of factors, including consumer choice, restrictions imposed by advertisers and publishers, changes in technology, and new developments in laws, regulations and industry standards. Further, certain web browsers, such as Safari, currently block or are planning to block some or all third-party cookies by default.

We have adapted our solution to enable us to continue to access data and deliver internet display advertising by using first party cookies, rather than third party cookies. Our solution requires no additional technical integration with our advertiser clients and is fully transparent to users, who receive notice and the ability to elect to deactivate Criteo services before any cookie is dropped. However there can be no assurance regulators will not challenge the transparency of the solution or web browser developers will not technically block the solution. If the roll-out of our solution is not successful, we could be prevented from serving advertisements to users that utilize web browsers that block third party cookies. If we are blocked from serving advertisements to a significant portion of internet users, our business could suffer and our results of operations could be harmed.

In addition, our ability to collect and use data may be restricted or prevented by a number of other factors, including:

 

    the failure of our network or software systems, or the network or software systems of our clients;

 

    variability in user traffic on advertiser websites or mobile applications;

 

    decisions by some of our advertiser clients or publishers to restrict our ability to collect data from them, third parties and users or to refuse to implement mechanisms we request to ensure compliance with our legal obligations;

 

    changes in browser or device functionality and settings, and other new technologies, which make it easier for users to prevent the placement of cookies or other tracking technology and impact our publishers’ or our advertisers’ ability to collect and use data;

 

    decisions by consumers to opt-out of tracking or to use technology, such as browser settings, that limits our ability to collect data about users and reduces our ability to deliver relevant advertisements;

 

    our inability to grow our advertiser and publisher base in new industry verticals and geographic markets in order to obtain the critical mass of data necessary for the Criteo Engine to perform optimally in such new industry vertical or geographic markets;

 

    interruptions, failures or defects in our data collection, mining, analysis and storage systems;

 

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    changes in regulation impacting the collection and use of data; and

 

    changes in international laws, rules, regulations, and industry standards or increased enforcement of international laws, rules, regulations, and industry standards (e.g. laws in the United States., European Union, and the Asia Pacific region).

Any of the above described limitations on our ability to successfully collect, utilize and leverage data could also materially impair the optimal performance of the Criteo Engine and severely limit our ability to target users for our advertisements, which would harm our business and adversely impact our future results of operations.

Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.

Self-regulation and privacy regulation

The regulatory environment for the collection and use of consumer data by advertising networks, advertisers, and publishers is very unsettled in Europe, the United States and internationally.

The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can place cookies or other tracking technologies. A number of existing bills are pending in the U.S. Congress that contain provisions that would regulate how companies can use cookies and other tracking technologies to collect and utilize user information.

On September 27, 2013, the governor of California signed into law AB 370, an amendment to the California Online Privacy Protection Act of 2003, or CalOPPA. This amendment requires that we disclose in our privacy policy how we respond to web browser “do not track” signals. Our updated privacy policy discloses that we do not respond to web browser do not track signals but that we do respond to opt-out requests made through our proprietary opt-out button or through industry opt-out platforms (namely Network Advertising Initiative and Digital Advertising Alliance).

Directive 2009/136/EC of the European Parliament and of the Council of November 25, 2009 amended Directive 2002/581-EC of the European Parliament and of the Council, or the E-Privacy Directive, to introduce a requirement for countries in the European Economic Area to enact specific legislation requiring companies like ours together with advertisers and publishers to present users with an information notice and obtain their consent prior to placing cookies or other tracking technologies. The amendment to the E-Privacy Directive and country- specific laws, which follow or have already followed the E-Privacy Directive may reduce the amount of data we can collect or process. As a result of these regulatory changes in Europe and related public attention, some leading browser providers have developed or are further developing browsers which reject third-party cookies as the default setting or at least make it easier for consumers to reject cookies or other similar tracking technologies. The changes in Europe following the amendment to the E-Privacy Directive have also resulted in a significant increase in publicity surrounding use of data for targeted advertising, which has heightened consumer awareness and influenced consumer sentiment.

The amended E-Privacy Directive which requires advertisers or companies like ours to obtain informed consent from users for the placement of cookies or other tracking technologies and the delivery of targeted advertisements, was intended to be implemented in all thirty countries in the European Economic Area. The requirement to obtain users’ consent has been implemented differently across the European Economic Union member states. Some countries, like the UK, permit companies to imply consent from the user’s proceeding onto the website and continuing his/her navigation after s/he has been clearly informed about how cookies are used without disabling them. Other countries currently require through law and/or guidance that the user’s explicit consent must be obtained prior to the placement of cookies for targeted advertising purposes.

 

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The position regarding explicit versus implied consent is still not fully settled within the European Economic Area, or the EU. On October 2, 2013, the Article 29 Data Protection Working Party, a group with an advisory status composed inter alia of representatives of the EU data protection authorities and of the European Commission, issued a new guidance on the obtaining of consent for cookies under the E-Privacy Directive and recommended that consent be expressed by the user’s positive action or other active behavior, such as clicking on a link, image or other content, based on clear information that cookies will be set due to this action.

If the trend in the EU toward an implied consent mechanism as an acceptable solution does not continue, and requirements for explicit consent mechanisms are maintained, decisions by users not to provide explicit consent could materially affect our business. In addition to explicit versus implied consent uncertainties, changes to the timing of when users receive disclosure about placement of our cookies for purposes of targeting advertising (i.e., providing pop-up or other clear notice prior to placement of the cookie) could materially affect our business.

In some countries where legislation and/or regulators’ guidance had previously taken a strict explicit consent position, regulators and some legislators recently have shown more flexibility and willingness to accept an implied consent approach.

Further, in guidance issued in April 2012, the Commission Nationale de l’Informatique et des Libertés, or CNIL, the French data protection regulator, interpreted French law to require the data controller of any processing that sets cookies, or a third-party designated by the data controller, to inform the user of the purpose of the cookie (e.g., targeted advertising) and to ask if the user accepts the storage of the cookie on his/her computer prior to any processing of user data for targeted advertising purposes, among other requirements. On December 5, 2013, the CNIL clarified its former guidance. As a result of this decision, on the entry page of the website or mobile application, users must be shown a notice indicating that by proceeding onto the website and continuing his/ her navigation the user will be deemed to consent to the setting of cookies and other tracking technologies. This notice, which cannot disappear until the user has not continued his/her navigation, must indicate the purpose of the services proposed to be provided through the cookies and give access to options to object to such cookies. Consent remains valid for a maximum period of 13 months, after which consent from the users must again be sought. This is an implied consent regime through information and control. If the consent is obtained prior to the cookie being placed on a device, we would lose all first events on advertiser websites and lose all first impressions on publisher websites. Liability for non-compliance with this recommendation is shared between advertisers, publishers and networks, including us. We need the assistance of the advertisers and publishers with whom we work to ensure our mutual compliance with these rules, including to provide appropriate information and obtain the user’s consent, including explicit consent where required. If advertisers, publishers or networks on whom we rely, fail to obtain appropriate consent, we could potentially be liable under these guidelines and could suffer damages, fines and penalties and reputational harm. In 2012, CNIL commenced an inquiry into our compliance with French Data Privacy laws. While the investigation was closed in July 2014 with no compliance actions for Criteo to take, there can be no assurance that there will not be further inquiries with respect to our compliance with privacy laws from CNIL or regulatory bodies in other jurisdictions.

A new regulation is being considered by European legislative bodies to replace the 1995 European Union Data Protection Directive, which may include more stringent operational requirements for business processing data and may introduce significant penalties for non-compliance. The final provisions may impose requirements that materially impact our business.

Similarly, considering our global presence, we may also be subject to local data protection laws in Canada, the Asia-Pacific region, South America and other regions. There is no harmonized legal approach in many of these regions and little regulatory guidance. Consequently, we could be at risk of non-compliance with applicable local privacy protection laws.

In addition to compliance with government regulations, we voluntarily participate in several trade associations and industry self-regulatory groups that promulgate best practices or codes of conduct relating to

 

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targeted advertising. For example, the Internet Advertising Bureau EU & US, the Network Advertising Initiative and the Digital Advertising Alliance, have developed and implemented guidance for companies to provide notice and choice to users regarding targeted advertising. There is ongoing debate about whether the current guidance and approaches by such associations and industry groups comply with EU law. For example, on December 28, 2011, the Article 29 Working Group published an opinion stating that the self-regulatory code was not adequate to comply with Article 5.3 of the amended E-Privacy Directive addressing placement and reading of cookies for targeted advertising. We could be adversely affected by changes to these guidelines and codes in ways that are inconsistent with our practices or the practices of our publishers and advertisers or in conflict with the laws and regulations of the EU, the United States or other international regulatory authorities.

These existing and proposed laws, regulations and industry standards can be costly to comply with and can delay or impede the development of new products, result in negative publicity and reputational harm, increase our operating costs, require significant management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices.

Privacy risks relating to our clients’ actions or inactions

On behalf of certain of our clients using some of our services, we collect and store information derived from the activities of website visitors, mobile application visitors and their devices. This enables us to provide such clients with reports on information from and about the visitors to their websites or mobile applications in the manner specifically directed by each such individual client and to conduct targeted advertising. Federal, state and foreign governments and agencies have adopted or are considering adopting laws regarding the passive collection, use, sharing and storage of data collected from or about users or their devices. Any perception of our practices or products as an invasion of privacy, whether or not such practices or products are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability.

Our compliance with privacy laws and regulations and our reputation among the public body of website visitors or mobile application visitors depend in part on our clients’ adherence to privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We contractually require our clients to notify visitors to their websites or mobile applications about our services (i.e., that we place cookies and other tracking technologies and collect and share certain non-identifying data for purposes of targeting advertisements), and further require that they link to pages where visitors can opt-out of the collection or targeting. We rely on representations made to us by clients that they will comply with all applicable laws including all relevant privacy and data protection regulations. We make reasonable efforts to enforce contractual notice requirements but do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations, nor do we contractually require them to seek explicit consent to the placement of cookies and other tracking technologies which may be required in certain countries. If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own products, services and data collection, use and sharing practices in our own disclosures to consumers, or if explicit consent was required, then we, and our clients, may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.

If we fail to access a consistent supply of internet display advertising inventory and expand our access to such inventory, our business and results of operations could be harmed.

All of our revenue is derived from placing internet display advertisements on publisher websites that we do not own. As a result, we do not own or control the advertising inventory upon which our business depends. We currently access advertising inventory through various channels, including through direct relationships with publishers, advertising exchange platforms (such as DoubleClick Ad Exchange, Yahoo!’s Right Media, Facebook’s Exchange and Microsoft‘s Ad Exchange) and other platforms that aggregate the supply of

 

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advertising inventory, such as Appnexus Inc., Admeld Inc., The Rubicon Project, Inc. and PubMatic, Inc. For example, Google Inc.’s and Appnexus Inc.’s advertising inventory represented 32% of our traffic acquisition costs in 2012, 28% of our traffic acquisition costs in 2013 and 29% of our traffic acquisition costs in 2014. Since our contracts with publishers with whom we have direct relationships generally do not include long-term obligations requiring them to make their inventory available to us, our ability to continue to purchase inventory from these publishers depends in part on our ability to consistently pay sufficiently competitive CPMs for their internet display advertising inventory as well as our ability to offer advertisements from high quality companies. Similarly, as more companies compete for advertising impressions on advertising exchange platforms and other platforms that aggregate supply of advertising inventory, advertising inventory may become more expensive, which may adversely affect our ability to acquire advertising inventory and to deliver internet display advertisements on a profitable basis. Any interference with our ability to maintain access to such inventory could materially reduce the amount of advertising inventory that our solution relies on in order to deliver advertisements for our clients. In addition, since we rely on a limited number of companies for access to significant portions of advertising inventory that our business depends on, the loss of access to advertising inventory from one of those companies would negatively impact our ability to deliver internet display advertisements for our advertiser clients. Any of these consequences could therefore adversely affect our results of operations and financial condition.

In addition, we rely on a limited number of companies that operate advertising exchange platforms and other platforms that aggregate supply of advertising inventory for access to a significant amount of the advertising inventory that our business depends on. Many widely used aggregators of advertising inventory are owned by companies that may compete with us for clients. Competitive pressure may incentivize these companies to limit our access to advertising inventory available through their platforms. If this were to occur, our ability to place advertisements would be significantly impaired and our results of operations would be adversely affected.

In order to grow our publisher base, we will need to expand the breadth and quality of businesses that utilize our solution. In addition, in order to grow our advertiser base, we must expand our access to new sources of internet display advertising inventory and new sources of inventory of opt-in e-mail addresses and maintain a consistent supply of this inventory. While we have historically relied both on accessing advertising inventory through direct relationships with publishers and through advertising exchange platforms and other platforms that aggregate supply of advertising inventory and opt-in e-mail addresses, we may increasingly rely on direct relationships with publishers in order to maintain the necessary access to, and establish a greater amount of preferred access to, advertising inventory and opt-in e-mail addresses. In order to enter into or maintain such direct relationships, we may need to agree to terms that are unfavorable to us, including, for example, contractual minimums for advertising inventory and/or long-term commitments. In addition, as we attempt to improve our solution to enable businesses to place advertisements with publishers other than on the web, including mobile applications, e-mail, video and social games, we will need to develop and improve our access to publishers in those environments. Our ability to attract new publishers on the web, mobile applications, e-mail, video and social games will depend on various factors, some of which are beyond our control. Therefore, we cannot assure you that we will successfully grow our direct relationships with new publishers or maintain and expand our access to advertising inventory through other channels and, as a result, our business and results of operations could be harmed. In addition, even if we do grow our direct relationships, we cannot assure you that those direct relationships with publishers will be on favorable terms to us.

We have incurred net losses in certain quarterly periods as we invested in our business, and we expect our operating expenses to increase significantly in the foreseeable future. Accordingly, we may have difficulty sustaining profitability.

We have incurred losses in the three month periods ended June 30, 2012, December 31, 2012 and June 30, 2013 and we may incur losses in the future. While we were profitable in each of 2012, 2013 and 2014, we do not know if we will be able to maintain profitability on a continued basis. Although our revenue has increased substantially in recent periods, we may not be able to maintain this rate of revenue growth. We anticipate that our

 

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operating expenses will continue to increase as we scale our business, invest in significantly expanding our headcount and expand our operations. In particular, we plan to continue to focus on maximizing our revenue after traffic acquisition costs on an absolute basis, or the revenue we derive after deducting the costs we incur to purchase advertising inventory, which we call revenue ex-TAC, as we believe this focus fortifies a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance. As part of this focus, we are continuing to invest in building relationships with direct publishers, both on their web and mobile application properties, increasing access to leading advertising exchanges, both on their web and mobile application properties, increasing access to opt-in e-mail address databases and enhancing the liquidity of our advertising inventory supply, which includes purchasing advertising inventory that may result in lower margin on an individual impression basis and may be less effective in generating clicks and driving sales for our clients. We also expect our general and administrative expenses to increase in absolute dollars both to support our growing operations and due to the increased costs of operating as a public company. Our ability to sustain profitability is based on numerous factors, many of which are beyond our control. We may not be able to generate sufficient revenue to sustain profitability.

Our focus on maximizing our revenue after traffic acquisition costs may result in a further decrease in our gross margin.

We are focused on maximizing our revenue after traffic acquisition costs on an absolute basis, or the revenue we derive after deducting the costs we incur to purchase advertising inventory, which we call revenue ex-TAC, as we believe this focus fortifies a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance. As part of this focus, we are continuing to invest in building relationships with direct publishers, both on their web and mobile application properties, increasing access to leading advertising exchanges both on their web and mobile application properties, increasing access to opt-in e-mail address databases and enhancing the liquidity of our advertising inventory supply, which includes purchasing advertising inventory that may have lower margin on an individual impression basis and may be less effective in generating clicks and driving sales for our clients. In addition, we are experiencing, and expect to continue to experience, increased competition for advertising inventory purchased on a programmatic basis. Our focus on maximizing the growth of revenue ex-TAC on an absolute basis may have an adverse impact on our gross margin and we cannot be certain that this strategy will be successful or result in increased liquidity or long-term value for our shareholders.

Large and established internet and technology companies may be able to significantly impair our ability to operate.

Large and established internet and technology companies such as Adobe Systems Incorporated, Amazon.com, Inc., AOL, Inc., Apple Inc., eBay Inc., Facebook, Inc., Google Inc., Microsoft Corp. and Yahoo! Inc. may have the power to significantly change the very nature of the internet display advertising marketplace, and these changes could materially disadvantage us. For example, Amazon, Apple, Facebook, Google and Microsoft have substantial resources and have a significant share of widely adopted industry platforms such as web browsers, mobile operating systems and advertising exchanges and networks. Therefore, these companies could leverage their position to make changes to their web browsers, mobile operating systems, platforms, exchanges, networks or other products or services that could be significantly harmful to our business and results of operations. For example, Apple introduced its Identifier for Advertising, or IDFA, in Fall 2012, which helps us serve personalized advertisements to users in mobile applications that run on the Apple operating system. If Apple were to restrict use of the IDFA, it would impair our ability to identify users and associate particular browsing behaviors to that user. Alternative technologies such as digital fingerprinting exist that could allow us to serve personalized advertisements to users in mobile applications. However, such technologies may be less reliable or become unavailable to us in the future. If we are restricted from using IDFA and we do not have adequate technologies to substitute, we will not be able to serve personalized advertisements on mobile applications running on the Apple operating system.

 

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The market in which we participate is intensely competitive and fragmented, and we may not be able to compete successfully with our current or future competitors.

The market for internet display advertising solutions is highly competitive and rapidly changing. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our profitability.

We compete primarily in the market for internet display advertising. This market is rapidly evolving, highly competitive, complex and fragmented. We face significant competition in this market which we expect will intensify in the future. We currently compete for advertising with Alliance Data Systems Corp., Amazon, Inc., Apple Inc., eBay Inc., Facebook, Google Inc., and Yahoo! Inc. as well as smaller, privately-held companies. We believe the principal competitive factors in our industry include:

 

    ability to deliver return on marketing spend at scale;

 

    global reach;

 

    client trust;

 

    breadth and depth of publisher relationships;

 

    comprehensiveness of products and solutions;

 

    client service; and

 

    ease of use.

In addition to competing with various companies for marketing spend, we also compete with some of them for internet display advertising inventory and some of these companies also operate their own advertising networks or exchanges from which we buy advertising inventory. Further, some of these companies that we compete with either for marketing spend and/ or advertising inventory may also be our clients or affiliated with our clients. Competitive pressure may incentivize such companies to cease to be our clients or cease to provide us with access to their advertising inventory. If this were to occur, our ability to place advertisements would be significantly impaired and our results of operations would be adversely affected.

New technologies and methods of buying advertising present a dynamic competitive challenge, as market participants offer multiple new products and services, such as analytics, programmatic buying and exchanges, aimed at capturing marketing spend. In addition to existing competitors and intermediaries, we may also face competition from new companies entering the market, which may include large established companies, such as Alliance Data Systems Corp. (which recently acquired Conversant, Inc.), Adobe Systems Incorporated (which acquired both Omniture, Inc. and Efficient Frontier, Inc.), AOL Inc. (which acquired Platform-A, Inc. (advertising.com)), eBay Inc. (which acquired both Fetchback, Inc. and GSI Commerce Inc.), and Tesco plc (whose subsidiary dunnhumby acquired Sociomantic Labs), all of which currently offer, or may in the future offer, solutions that result in additional competition for marketing spend or advertising inventory.

We may also face competition from companies we do not yet know about. If existing or new companies develop, market or resell competitive high-value marketing products or services, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our results of operations could be harmed.

Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we have, be able to devote greater resources to the development, promotion, sale and support of their products and services, have more extensive advertiser client bases and broader publisher relationships than we have, and may have longer operating histories and greater name recognition than we have. As a result, these competitors may be better able to respond quickly to new technologies, develop deeper advertiser client relationships or offer services at lower prices. Any of these developments would make it more difficult for us to sell our solution and could result in increased pricing pressure, reduced gross margins, increased sales and marketing expense and/or the loss of market share.

 

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If we fail to innovate, adapt and respond effectively to rapidly changing technology, our solution may become less competitive or obsolete.

Our future success will depend on our ability to continuously enhance and improve our solution to meet advertiser client needs, add functionality to our advertiser and publisher platforms and address technological advancements. If we are unable to enhance our solution to meet market demand in a timely manner, we may not be able to maintain our existing clients or attract new clients. For example, as e-commerce and consumption of content continues to migrate from the web to mobile and tablet devices and advertisements more frequently include video or incorporate animation, sound and/or interactivity, which we refer to as rich media content, businesses are increasingly demanding that internet display marketing solutions extend to all three screens and support video and rich media content. In addition, as consumers spend more time watching video and playing social network games online, including within mobile applications, as opposed to browsing static webpages, businesses may increasingly shift their advertising budgets to video and game publishers and to mobile applications or, if consumers fail to engage with advertisements displayed on smaller screens, reduce their internet display marketing budgets. In order to maintain and continue to grow our revenue, we may need to continue to adapt and improve our solution to offer video and rich media content advertisements and to enable advertisers to place advertisements with publishers other than through web browsers on the desktop, smart phones and tablets, and including on mobile applications created for these devices, and develop ways to encourage engagement in these environments.

In 2014, we launched our complete solution for personalized mobile advertising across all leading browsers and application platforms. This mobile solution involves delivery of display advertising to the web browsers of mobile devices, which we refer to as in-browser, as well as within mobile applications, which we refer to as in-app. To date, most of our revenue derived from delivery of display advertising on mobile devices is from in-browser advertisements. We may not be successful in generating substantial revenue from our mobile in-app solution or sustain revenue from our in-browser solution. In addition, while we have enhanced our in-browser solution to serve advertisements on iOS devices, we may not be successful in continuing scaling and expanding our iOS solution globally or at all. If we are unable to successfully develop or acquire new solutions to continuously meet advertiser needs or are unable to adapt our organization to market these new solutions, our solution may become less competitive or obsolete.

We may not be able to integrate and roll out recently acquired technologies and products in one or more of our geographic markets, which may adversely affect our ability to achieve our growth and business objectives.

In February 2015, we acquired DataPop, Inc., or DataPop, a Los Angeles-based company specializing in connecting the products in a retailer’s catalog to actual user shopping intent. We are in the very early stages of integrating DataPop into our company. There can be no assurance that this integration will be successful or that we will be able to leverage the DataPop technology to enter into a new marketing channel in the future.

In February 2014, we acquired Tedemis S.A., or Tedemis, a provider of real-time personalized marketing solutions. Tedemis product was only offered in France at the time of acquisition. In 2014, we worked on the integration of the e-mail technology onto our core platform and started to build our e-mail publisher base and to deploy our e-mail solution to our existing client base in the United States, the United Kingdom, Spain, Germany and France. In each new country, we will need to build an inventory of e-mail addresses as part of any product roll-out. There can be no assurance that we will be successful in acquiring the necessary email addresses or that, if we do acquire them, our internet display advertising clients will be willing to use e-mail marketing for their products. We are still completing the integration and are in the early stages of the roll-out of our e-mail marketing product and there can be no assurance that we will be successful in integrating and rolling out this new product globally or at all.

In addition, in July 2013 we acquired Ad-X, a complementary mobile analytics and attribution technology company that allows businesses to track and optimize mobile display advertising campaigns delivered to smartphones and tablets through mobile advertising networks and other marketing solutions, but we may not be

 

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successful in utilizing this technology to grow our business. If we are unable to successfully integrate and roll out the solutions we acquire to our advertiser clients in some or all of our markets, our solution may become less competitive which may adversely affect our ability to achieve our growth and business objectives.

Future acquisitions, strategic investments, partnerships or alliances could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute shareholder value and adversely affect our results of operations and financial condition.

Over the past two years, we have acquired DataPop, AdQuantic SAS, or AdQuantic, Tedemis and Ad-X and may seek to acquire additional businesses, products or technologies. However, we have limited experience in acquiring and integrating businesses, products and technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms and/or financing of the acquisition, and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or architecture, regulatory compliance practices, revenue recognition or other accounting practices, or employee or client issues.

Any acquisition or investment may require us to use significant amounts of cash, issue potentially dilutive equity securities or incur debt. In addition, acquisitions, including our recent acquisitions of DataPop, Adquantic, Tedemis and Ad-X, involve numerous risks, any of which could harm our business, including:

 

    difficulties in integrating the operations, technologies, services and personnel of acquired businesses, especially if those businesses operate outside of our core competency;

 

    the need to integrate operations across different geographies, cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries;

 

    cultural challenges associated with integrating employees from the acquired company into our organization;

 

    ineffectiveness or incompatibility of acquired technologies or services;

 

    potential loss of key employees of acquired businesses;

 

    inability to maintain the key business relationships and the reputations of acquired businesses;

 

    failure to successfully further develop the acquired technology in order to recoup our investment;

 

    reputation and perception risks associated with the acquired product or technology by the general public;

 

    diversion of management’s attention from other business concerns;

 

    litigation for activities of the acquired company, including claims from terminated employees, clients, former shareholders or other third parties;

 

    costs necessary to establish and maintain effective internal controls for acquired businesses; and

 

    increased fixed costs.

If we are unable to successfully integrate our recent acquisitions or any future business, product or technology we acquire, our business and results of operations may suffer.

As we expand the market for our solution, we may become more dependent on advertising agencies as intermediaries and this may adversely affect our ability to attract and retain business.

As we market our solution, we may increasingly need to depend on advertising agencies to work with us in assisting businesses in planning and purchasing for broader advertising objectives. However, we have limited experience in working with advertising agencies as intermediaries, as we have traditionally had direct relationships with our advertiser clients. Historically, direct relationships with our clients accounted for 78%, 70% and 69% of our revenue for 2012, 2013 and 2014, respectively. If we have an unsuccessful engagement with

 

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an advertising agency on a particular advertising campaign, we risk losing the ability to do work not only for the advertiser for whom the campaign was run, but also for other brands represented by that agency. Further, if our business evolves so that we are increasingly working through advertising agency intermediaries, we would have less of a direct relationship with our clients than if our clients dealt with us directly. This may drive our clients to attribute the value we provide to the advertising agency rather than to us, further limiting our ability to develop long-term relationships directly with our clients. Our clients may move from one advertising agency to another, and, accordingly, even if we have a positive relationship with an advertising agency, we may lose the underlying business when an advertiser switches to a new agency. The presence of advertising agencies as intermediaries between us and our clients thus creates a challenge to building our own brand awareness and affinity with our clients who are the ultimate sources of our revenue. Further, we may become more dependent on advertising agencies as intermediaries and this may adversely affect our ability to attract and retain business.

Our future success will depend in part on our ability to expand into new marketing channels.

We started delivering our solution in internet display in web browsers. Since then, we have progressively entered and expanded into additional marketing channels: internet display on social platforms, internet display on mobile applications and e-mail marketing. We define a marketing channel as a specific advertisement medium to engage with a user or a consumer for which we currently purchase inventory through a specific source. In the future, we may decide to broaden the spectrum of our marketing channels further, if we believe that doing so would significantly increase the value we can offer to clients. We believe a broader platform delivering our digital performance marketing solution through complementary marketing channels can enhance our value proposition for existing and prospective clients.

However, to date, we have limited experience in entering into additional marketing channels beyond internet display in web browsers, internet display on social platforms, internet display on mobile applications and e-mail marketing, and any future attempts to enter new marketing channels may not be successful. In particular, our success in expanding into additional marketing channels will depend on various factors, including our ability to:

 

  identify additional marketing channels where our solution could perform;

 

  adapt our solution to additional marketing channels and effectively market it for such additional marketing channels to our existing and prospective clients;

 

  integrate newly developed or acquired marketing channels into our pay-for-performance model, with a clear and measurable performance attribution mechanism, and in a manner that is consistent with our privacy standards;

 

  accumulate sufficient data sets relevant for those marketing channels to ensure that the Criteo Engine has a sufficient quantity and quality of information to deliver relevant personalized advertisement through those additional marketing channels;

 

  identify and establish acceptable business arrangements with publishers to access inventories in sufficient quality and quantity for these new marketing channels; and

 

  hire and retain key personnel with relevant technology and product expertise to lead the integration of additional marketing channels onto our platform.

If we are unable to successfully adapt our solution to additional marketing channels and effectively market such solutions to our existing and prospective clients, or if were unable to maintain our pay-for-performance model in these additional marketing channels, we may not be able to achieve our growth or business objectives.

Our future success will depend in part on our ability to expand into new industry verticals.

As we market our solution to a wider group of potential clients outside of our three key industry verticals of retail, travel and classifieds, including businesses in the automotive, telecommunications, consumer goods and finance industries, we will need to adapt our solution and effectively market our solution to businesses in those

 

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industry verticals. We have limited experience in selling to businesses outside of the retail, travel and classified industries. Our success in expanding our solution to businesses in new industry verticals will depend on various factors, including our ability to:

 

    design products and solutions that are attractive to businesses in such industries;

 

    hire personnel with relevant industry vertical experience to lead sales and product teams; and

 

    accumulate sufficient data sets relevant for those industry verticals to ensure that the Criteo Engine has sufficient quantity and quality of information to deliver efficient and effective internet display advertising within the relevant industry.

If we are unable to successfully adapt our solution to appeal to businesses in industries other than retail, travel and classifieds, and then effectively market such solutions to businesses in such industries, we may not be able to achieve our growth or business objectives. Further, as we expand our client base and solution into new industry verticals, we may be unable to maintain our current client retention rates.

If we are unable to protect our proprietary information or other intellectual property, our business could be adversely affected.

We rely largely on trade secret law to protect our proprietary information and technology. We generally seek to protect our proprietary information by confidentiality, non-disclosure and assignment of invention agreements with our employees, contractors and parties with which we do business. However, we may not be successful in executing these agreements with every party who has access to our confidential information or contributes to the development of our intellectual property. Those agreements that we do execute may be breached, and we may not have adequate remedies for any such breach. Breaches of the security of our website, databases or other resources could expose us to a risk of loss of proprietary information. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology or information. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors and in these situations we may have no or limited rights to stop their use of our information. To the extent that our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights to such intellectual property. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and may have an adverse effect on our business.

Although we also rely on copyright laws to protect the works of authorship, including software, created by us, we do not register the copyrights in any of our copyrightable works. U.S. copyrights must be registered before the copyright owner may bring an infringement suit in the United States. Furthermore, if a U.S. copyright is not registered within three months of publication of the underlying work, the copyright owner is precluded from seeking statutory damages or attorney’s fees in any U.S. enforcement action, and is limited to seeking actual damages and lost profits. Accordingly, if one of our unregistered U.S. copyrights is infringed by a third-party, we will need to register the copyright before we can file an infringement suit in the United States, and our remedies in any such infringement suit may be limited.

We hold two patents issued by the U.S. Patent and Trademark Office and one patent issued by the French Patent Office, and have filed six non-provisional U.S. patent applications, three European applications and one Japanese application. We have also registered numerous domain names and are also pursuing the registration of trademarks and service marks in the United States and in certain locations outside the United States. Effective trademark, domain name and patent protection are expensive to develop and maintain, both in terms of initial and ongoing registration requirements and the costs of defending our rights. Any of our patents, trademarks or other intellectual property rights may not provide sufficient protection for our business as currently conducted or may be challenged by others or invalidated through administrative process or litigation. In addition, in the event that our trademarks are successfully challenged, we could be forced to rebrand our solution, which could result in loss of brand recognition, and could require us to devote resources to advertising and marketing our new brand.

 

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Further, we cannot assure you that competitors will not infringe our trademarks, or that we will have adequate resources to enforce our trademarks. While we have three patents, our existing patents and any patents issued in the future may not provide us with competitive advantages, may be successfully challenged, invalidated or circumvented by third parties, may give rise to ownership claims or to claims for the payment of additional remuneration of fair price by the persons having participated in the creation of the inventions and may not be of sufficient scope or strength to provide us with any meaningful protection. Further, as we continue to expand our business geographically, it may become desirable for us to protect our intellectual property in an increasing number of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may, over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive and time consuming. Once we file a patent application in one country, we have a limited period of time to file it in all other countries in which we want to have patent protection over a certain invention. If we fail to file in those countries we will be precluded from having patent protection for that invention in those other countries. Without patent protection, others will be free to practice that invention in those other countries. Even if we obtain patent protection, we cannot assure you that competitors will not infringe our patents, or that we will have adequate resources to enforce our patents.

Additionally, in the United States, the central provisions of the Leahy-Smith America Invents Act, or AIA, became effective recently. Among other things, this law switched U.S. patent rights from the former “first-to-invent” system to a “first inventor-to-file” system. This may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions. This may favor larger competitors that have the resources to file more patent applications.

Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.

To protect or enforce our intellectual property rights, we may initiate litigation against third parties. Litigation may be necessary to protect our intellectual property, or determine the enforceability, scope and validity of the proprietary rights of others. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Additionally, we may provoke third parties to assert claims against us. These claims could invalidate or narrow the scope of our own intellectual property. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property. The occurrence of any of these events may adversely affect our business, financial condition and results of operations.

Our business may suffer if it is alleged or determined that our technology or another aspect of our business infringes the intellectual property rights of others.

The online and mobile advertising industries are characterized by the existence of large numbers of patents, copyrights, trademarks, trade secrets and other intellectual property and proprietary rights. Companies in these industries are often required to defend against litigation claims that are based on allegations of infringement or other violations of intellectual property rights. Our technologies may not be able to withstand any third-party claims or rights against their use.

Our success depends, in part, upon non-infringement of intellectual property rights owned by others and being able to resolve claims of intellectual property infringement or misappropriation without major financial expenditures or adverse consequences. From time to time, we may be the subject of claims that our solution and underlying technology infringe or violate the intellectual property rights of others, particularly as we expand the complexity and scope of our business. Furthermore, as a result of disclosure of information in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties.

 

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Regardless of whether claims that we are infringing patents or other intellectual property rights have any merit, these claims are time-consuming and costly to evaluate and defend and the outcome of any litigation is inherently uncertain. Some of our competitors have substantially greater resources than we do and are able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. Claims that we are infringing patents or other intellectual property rights could:

 

    subject us to significant liabilities for monetary damages, which may be tripled in certain instances;

 

    prohibit us from developing, commercializing or continuing to provide some or all of our solution unless we obtain licenses from, and pay royalties to, the holders of the patents or other intellectual property rights, which may not be available on commercially favorable terms, or at all;

 

    subject us to indemnification obligations or obligations to refund fees to, and adversely affect our relationships with, our current or future clients, advertising agencies, media networks and exchanges or publishers;

 

    cause delays or stoppages in providing our solution;

 

    cause clients, potential clients, advertising agencies, media networks and exchanges or publishers to avoid working with us;

 

    divert the attention and resources of management and technical personnel;

 

    harm our reputation; and

 

    require technology or branding changes to our solution that would cause us to incur substantial cost and that we may be unable to execute effectively or at all.

In addition, we may be exposed to claims that the content contained in advertising campaigns violates the intellectual property or other rights of third parties. Such claims could be made directly against us or against the advertising agencies, media networks and exchanges and publishers from whom we purchase advertising inventory. Generally, under our agreements with advertising agencies, media networks and exchanges and publishers, we are required to indemnify the advertising agencies, media networks and exchanges and publishers against any such claim with respect to an advertisement we served. We generally require our clients to indemnify us for any damages from any such claims. There can be no assurance, however, that our clients will have the ability to satisfy their indemnification obligations to us, and pursuing any claims for indemnification may be costly or unsuccessful. As a result, we may be required to satisfy our indemnification obligations to advertising agencies, media networks and exchanges and publishers or claims against us with our assets. This result could harm our reputation, business, financial condition and results of operations.

Our business involves the use, transmission and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational harm and monetary damages.

Our business involves the storage and transmission of confidential consumer information, including certain purchaser data, and security breaches could expose us to a risk of loss or unauthorized disclosure of this information, litigation and possible liability, as well as damage our relationships with our clients. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to our data or the data of our clients or publishers, our reputation could be damaged, our business may suffer and we could incur significant liability.

Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and clients. Any significant violations of data privacy or other security breaches could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a high profile security breach occurs with respect to another provider of

 

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performance display advertising solutions, our clients and potential clients may lose trust in the security of providers of performance display advertising solutions generally, which could adversely impact our ability to retain existing clients or attract new ones.

Additionally, third parties may attempt to fraudulently induce employees or consumers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our data, our advertiser clients’ or publishers’ data, which could result in significant legal and financial exposure and a loss of confidence in the security of our solution and ultimately harm our future business prospects. A party who is able to compromise the security of our facilities could misappropriate our proprietary information or the proprietary information of our advertiser clients and/or our publishers, or cause interruptions or malfunctions in our operations or those of our advertiser clients and/or publishers. We may be required to expend significant capital and financial resources to protect against such threats or to alleviate problems caused by breaches in security. Finally, in addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. Our errors and omissions insurance may be inadequate or may not be available in the future on acceptable terms, or at all. In addition, our policy may not cover any claim against us for loss of data or other indirect or consequential damages and defending a suit, regardless of its merit, could be costly and divert management’s attention.

Our business depends on our ability to maintain the quality of content of our advertiser clients and publishers.

We must be able to ensure that our clients’ advertisements are not placed in publisher content that is unlawful or inappropriate. With respect to the purchase of opt-in e-mail addresses, we must ensure that the databases we partner with are reputable, keep updated e-mail address lists, honor users’ election to opt-out and obtain required and specific consent from users to receive third-party promotional e-mails. If we fail to ensure that our clients’ advertisements are not placed in unlawful or inappropriate content or we fail to source opt-in e-mail addresses from reputable partners that comply with consent requirements, our reputation and business may suffer. In particular, we could be treated as a spammer and blocked by internet service providers or regulators. In addition, if we place advertisements in content that is not permitted under the terms of the applicable agreements with a client, we may be unable to charge the client for clicks generated on those sites, the client may terminate their campaign or the client may require us to indemnify them for any resulting third party claims. Further, our publishers rely upon us not to place advertisements on their websites that are unlawful or inappropriate. If we are unable to ensure that the quality of our advertiser and publisher content does not decline as the number of advertiser clients and publishers we work with continues to grow, our reputation and business may suffer and we may not be able to retain or secure additional clients or publisher relationships.

Our sales efforts with both potential advertiser clients and publishers require significant time and expense and our success will depend on effectively expanding our sales and marketing operations and activities to grow our base of advertiser clients and publishers.

Attempting to increase our base of advertiser clients and publishers and achieving broader market acceptance of our solution is a key component of our growth strategy. Attracting advertiser clients and publishers, however, requires substantial time and expense, and we may not be successful in establishing these new relationships or in maintaining or advancing our existing relationships. For example, it may be difficult to identify, engage and market to potential clients that are unfamiliar with our solution, especially as they relate to their general advertising campaigns, or currently delegate advertising decisions to advertising agencies. Furthermore, many of our existing and potential clients require input from multiple internal constituencies. As a result, we must identify those involved in the purchasing decision and devote a sufficient amount of time to presenting our solution to those individuals, including providing demonstrations and comparisons against other available solutions, which can be a costly and time-consuming process.

Our ability to grow our advertiser and publisher base will depend to a significant extent on our ability to expand our sales and marketing and publisher support operations and activities. We expect to be increasingly dependent on our direct sales force and publisher support teams to attract new advertiser clients and publishers

 

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and we intend to continue to expand these teams internationally. In addition, as we target new industry verticals, we will need to attract sophisticated sales and publisher support personnel that are familiar with the relevant industry and geographic market. We believe that there is significant competition for direct sales personnel with the sales skills and technical knowledge that we require. Therefore, our ability to achieve significant growth in revenue in the future will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of sales and publisher support personnel with relevant industry knowledge. New hires require significant training before they achieve full productivity. Newly hired advertiser sales and publisher development personnel may not become productive as quickly as we would like, or at all, thus representing increased operating costs and lost opportunities which in turn would adversely affect our business, financial condition and results of operations.

Therefore, if we are not successful in recruiting and training our advertiser sales and publisher development personnel and streamlining our sales and business development processes with advertiser clients and publishers to cost-effectively grow our advertiser and publisher base, our ability to grow our business and our results of operation could be adversely affected.

If our implementation cycles are long, we may allocate resources to an advertiser without any guarantee of near-term revenue generation.

Implementing our solution with clients generally requires clients to integrate software code on their website to enable us to gather and import data regarding consumer behavior on their website into our systems and inform the algorithms underlying the Criteo Engine. This implementation process can be complex and time-consuming for an advertiser and can result in delays in the deployment and use of our solution after an advertiser has signed up to utilize it. Depending upon the time and resources that an advertiser is willing to devote to the integration of our solution with their website and the nature and complexity of an advertiser’s network and systems, the actual testing and implementation of our solution may occur some period of time after an advertiser has signed up to use our solution. As a result, the possibly lengthy implementation cycle may result in difficulty in predicting our future results of operations.

Failures in our systems and infrastructure supporting our solution could significantly disrupt our operations and cause us to lose clients.

In addition to the optimal performance of the Criteo Engine, our business relies on the continued and uninterrupted performance of our software and hardware infrastructures. We currently place over two billion advertisements per day and each of those advertisements can be placed in under 150 milliseconds. Sustained or repeated system failures of our software and hardware infrastructures, which interrupt our ability to deliver advertisements quickly and accurately, our ability to serve and track advertisements and our ability to process consumers’ responses to those advertisements, could significantly reduce the attractiveness of our solution to advertiser clients and publishers, reduce our revenue and impair our reputation.

In addition, while we seek to maintain excess capacity to facilitate the rapid provision of new client deployments and the expansion of existing client deployments, we may need to increase data center hosting capacity, bandwidth, storage, power or other elements of our system architecture and our infrastructure as our client base continues to grow, and our existing systems may not be able to scale up in a manner satisfactory to our existing or prospective clients. Our failure to continuously upgrade or increase the reliability and redundancy of our infrastructure to meet the demands of a growing base of global advertiser clients and publishers could adversely affect the functioning and performance of our solution and could in turn affect our results of operations.

Finally, our systems are vulnerable to damage from a variety of sources, some of which are outside of our control, including telecommunications failures, power outages, malicious human acts and natural disasters. Any steps we take to increase the reliability and redundancy of our systems supporting our solution may be expensive and may not be successful in preventing system failures.

 

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If we fail to manage our growth effectively, we may be unable to execute our business plan or maintain high levels of advertiser and publisher satisfaction.

We have experienced, and may continue to experience, rapid growth and organizational change, which have created, and may continue to create, challenges to the quality of our service to our advertiser clients and publishers, and which have placed, and may continue to place, significant demands on our management and our operational and financial resources.

For example, the number of clients from which we collect revenue has increased from under 350 located in eight countries as of January 1, 2010 to over 7,000, located in over 69 countries, as of December 31, 2014. 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 our clients and timing and amount of revenue contribution from new clients. 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. Part of the challenge that we expect to face in the course of our continued expansion is to maintain a high level of service and advertiser and publisher satisfaction. To the extent our advertiser and publisher base grows, we will need to expand our account management and other personnel, in order to continue to provide personalized account management and services. We will therefore require significant expenses and capital expenditures and the allocation of valuable management resources to maintain the quality of our client service that has been central to our growth so far, especially as we continue to seek to attract larger advertiser clients and publishers. If we fail to manage our anticipated growth in a manner that preserves our attention to our clients, our brand and reputation may suffer which would in turn impair our ability to attract and retain advertiser clients and publishers.

We expect to continue to expand our international operations into other countries in the future. As such, our organizational structure is becoming more complex as we expand our managerial, operational, research and development, marketing and sales, administrative, financial and other functions in order to support our expanding business. Furthermore, our rapid international expansion and the expanding geographical diversity of our workforce has placed, and is expected to continue to place, a significant strain on the corporate culture of rapid innovation and teamwork that has been central to our growth so far. If we are unable to successfully manage growth in employee headcount and function and our geographical expansion, our results of operations could suffer.

If we fail to enhance our brand cost-effectively, our ability to expand our client base will be impaired and our financial condition may suffer.

We believe that developing and maintaining awareness of the Criteo brand in a cost-effective manner is critical to achieving widespread acceptance of our existing solution and future solutions, such as mobile solutions and solutions directed toward capturing broader advertising budgets, and is an important element in attracting new advertiser clients and publishers. Furthermore, we believe that the importance of brand recognition will increase as competition in our market increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and on our ability to deliver valuable solutions for our advertiser clients and publishers. In the past, our efforts to build our brand have involved significant expenses. Brand promotion activities may not yield increased revenue, and even if they do, any increased revenue may not offset the expenses we incurred in building our brand. If we fail to successfully promote and maintain our brand, or incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may fail to attract enough new advertiser clients or publishers or retain our existing advertiser clients or publishers and our business could suffer.

We experience quarterly fluctuations in our results of operations due to a number of factors which make our future results difficult to predict and could cause our operating results to fall below expectations or our guidance.

Our quarterly results of operations fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our results of operations on a period-to-period basis may not be meaningful. You

 

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should not rely on our past results as indicative of our future performance. If our revenue or results of operations fall below the expectations of investors or securities analysts, or below any guidance we may provide to the market, the price of the ADSs could decline substantially.

We plan to continue to substantially increase our investment in research and development, product development and sales and marketing, as we seek to continue to expand into new marketing channels (e.g. mobile applications and mobile), geographically and to new industry verticals to capitalize on what we see as a growing global opportunity for our solution. We also expect that our general and administrative expense will increase both to support our growing operations and due to the increased costs of operating as a public company. For the foregoing reasons or other reasons we may not anticipate, historical patterns should not be considered indicative of our future quarterly results of operations.

Other factors that may affect our quarterly results of operations include the following:

 

    the nature of our clients’ products or services;

 

    demand for our solution and the size, scope and timing of advertising campaigns;

 

    the lack of long-term agreements with our advertiser clients and publishers;

 

    advertiser and publisher renewal rates;

 

    market acceptance of our solution and future products and services in current industry verticals and in new industry verticals;

 

    market acceptance of our solution and future products and services in new geographic markets;

 

    the timing of large expenditures related to expansion into new geographic markets and/or new industry verticals;

 

    the timing of adding support for new devices, platforms and operating systems;

 

    the amount of inventory purchased through direct relationships with publishers versus internet advertising exchanges or networks;

 

    our clients’ budgeting cycles;

 

    our ability to timely collect amounts owed to us by our clients;

 

    changes in the competitive dynamics of our industry, including consolidation among competitors;

 

    the response of consumers to our clients’ advertisements and to online marketing in general;

 

    our ability to control costs, including our operating expenses;

 

    network outages, errors in our solution or security breaches and any associated expense and collateral effects;

 

    foreign currency exchange rate fluctuations, as some of our foreign sales and costs are denominated in their local currencies;

 

    failure to successfully manage any acquisitions; and

 

    general economic and political conditions in our domestic and international markets.

As a result, we have a limited ability to forecast the amount of future revenue and expense, and our results of operations may from time to time fall below our estimates or the expectations of public market analysts and investors.

 

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Seasonal fluctuations in advertising activity could adversely affect our cash flows.

Our cash flows from operations could vary from quarter to quarter due to the seasonal nature of our clients’ spending. For example, in particular in the online retail industry, many businesses devote the largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday spending by consumers. Conversely, our e-commerce retail and travel clients typically conduct fewer advertising campaigns in the second quarter than they do in other quarters. To date, these seasonal effects have been masked by our rapid revenue growth. However, if and to the extent that seasonal fluctuations become more pronounced, our operating cash flows could fluctuate materially from period to period as a result.

In periods of economic uncertainty, businesses may delay or reduce their spending on advertising, which could materially harm our business.

General worldwide economic conditions have experienced significant instability in recent years, especially in the European Union where we generated 63.5%, 53.5% and 49.2% of our revenue for 2012, 2013 and 2014, respectively. These conditions make it difficult for our clients and us to accurately forecast and plan future business activities, and could cause our clients to reduce or delay their advertising spend with us. Historically, economic downturns have resulted in overall reductions in advertising spending. We cannot predict the timing, strength or duration of any economic slowdown or recovery. In downturns our revenue can be adversely affected as businesses may curtail spending on advertising in general and on a solution such as ours. Any macroeconomic deterioration in the future, especially further deterioration in the European Union, could impair our revenue and results of operations. In addition, even if the overall economy improves, we cannot assure you that the market for internet display advertising solutions and the market for performance internet display advertising will experience growth or that we will experience growth. Furthermore, we generally sell through insertion orders with our clients. These insertion orders generally do not include long-term obligations and are cancelable upon short notice and without penalty. Any reduction in advertising spending could limit our ability to grow our business and negatively affect our results of operations.

We derive a significant portion of our revenue from e-commerce businesses, especially in the retail, travel and classified industries, and downturn in these industries or any changes in regulations affecting these industries could harm our business.

A significant portion of our revenue is derived from e-commerce businesses in the retail, travel and classifieds industries. For example, in 2012, 2013 and 2014, 66.0%, 62.4% and 66.3%, respectively, of our revenue was derived from advertisements placed for retail e-commerce businesses. While we expect to grow our advertiser base in additional industries, such as automotive, telecommunications, consumer goods and finance, any downturn in any of our core industries, or other industries we may target in the future, may cause our clients to reduce their spending with us, delay or cancel their advertising campaigns with us.

Furthermore, our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws by federal, state and foreign governmental or regulatory agencies which would impose taxes on goods and services provided over the internet. To the extent such taxes discourage the use of the internet as a means of commercial marketing or reduce the amount of products and services offered through e-commerce websites, online advertising spending may decline and the use or attractiveness of our solution by our clients or potential clients may be adversely affected.

Interruptions or delays in services provided by third-party providers that we rely upon could impair the performance of our solution and harm our business.

We currently lease space from third-party data center hosting facilities for our servers located in California, New York, France, Japan, Hong Kong and The Netherlands. All of our data gathering and analytics are conducted on, and the advertisements we deliver are processed through, our servers located in these facilities. We also rely on bandwidth providers and internet service providers to deliver advertisements. Any damage to, or

 

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failure of, the systems or facilities of our third-party providers could adversely impact our ability to deliver our solution to clients. If, for any reason, our arrangement with one or more data centers is terminated, we could experience additional expense in arranging for new facilities and support.

The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close any data center or the facilities of any other third-party provider without adequate notice, or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our solution. While we have disaster recovery arrangements in place, our testing in actual disasters or similar events is limited. If any such event were to occur, our business, results of operations and financial condition could be adversely affected.

Our international operations and expansion expose us to several risks.

During 2012, 2013 and 2014, revenue generated outside of France was 81.9%, 86.5% and 88.3% of our revenue, respectively, based on the location of where the respective advertising campaign was delivered. Our primary research and development operations are located in France and the United States. In addition, we currently have international offices outside of France and the United States, which focus primarily on selling and implementing our solution in those regions. In the future, we may expand to other international locations. Our current international operations and future initiatives involve a variety of risks, including:

 

    localization of our solution, including translation into foreign languages and adaptation for local practices;

 

    unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;

 

    different labor regulations, especially in the European Union, where labor laws are generally more advantageous to employees as compared to the United States, including deemed hourly wage and overtime regulations in these locations;

 

    exposure to many onerous and potentially inconsistent data protections laws;

 

    more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;

 

    changes in a specific country’s or region’s political or economic conditions;

 

    challenges inherent to efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

    risks resulting from changes in currency exchange rates and the implementation of exchange controls, including restrictions promulgated by the Office of Foreign Assets Control of the U.S. Department of the Treasury, and other similar trade protection regulations and measures in the United States or in other jurisdictions;

 

    reduced ability to timely collect amounts owed to us by our clients in countries where our recourse may be more limited;

 

    limitations on our ability to reinvest earnings from operations derived from one country to fund the capital needs of our operations in other countries;

 

    limited or unfavorable intellectual property protection;

 

    exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions; and

 

    restrictions on repatriation of earnings.

 

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We have limited experience in marketing, selling and supporting our solution outside of France, Germany, the United Kingdom, the United States and Japan. Our limited experience in operating our business internationally increases the risk that any potential future expansion efforts that we may undertake will not be successful. If we invest substantial time and resources to expand our international operations and are unable to do so successfully and in a timely manner, our business and results of operations will suffer.

Additionally, operating in international markets also requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing operations in other countries will produce desired levels of revenue or profitability.

We are a multinational organization faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions as a result of new taxes and new laws, including sales taxes, which may negatively affect our business.

As a multinational organization, operating in multiple jurisdictions such as France, the United States, the United Kingdom, Germany and Japan, we may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on our liquidity and results of operations.

In addition, as internet commerce and globalization continue to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to digital advertising. The cost to comply with such laws or regulations could be significant, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our business.

Finally, the authorities in these jurisdictions could review our tax returns and impose additional taxes, interest and penalties, and the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, any of which could have a material impact on us and the results of our operations.

We are exposed to foreign currency exchange rate fluctuations.

We incur portions of our expenses and derive revenues in currencies other than the euro. As a result, 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. Therefore, for example, an increase in the value of the euro against the U.S. dollar could be expected to have a negative impact on our revenue and earnings growth as U.S. dollar revenue and earnings, if any, would be translated into euros at a reduced value. Before December 2013, we did not engage in hedging transactions to protect Criteo’s sales, expenses and other balance sheet items from the impact of uncertainty in future exchange rates between particular foreign currencies and the euro. While we are now engaging in hedging transactions to minimize the impact of uncertainty in future exchange rates on intra-company transactions and financing, we may not hedge all of our foreign currency exchange rate risk. In addition, hedging transactions carry their own risks, including the possibility of a default by the counterparty to the hedge transaction. There can be no assurance that we will be successful in managing our foreign currency exchange rate risk. We cannot predict the impact of foreign currency fluctuations, and foreign currency fluctuations in the future may adversely affect our financial condition, results of operations and cash flows.

 

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Our revenue would decline if we fail to gather sufficient data in a particular geographical market and effectively coordinate the demand for and supply of advertising inventory.

The performance of the Criteo Engine in a particular geographical market depends on having sufficient advertiser clients and publishers in that market utilizing our solution and our ability to coordinate the demand for and supply of advertising inventory in that market. Since we cannot consistently predict the demand for advertising inventory by our clients and the advertising inventory being made available to us, including on a priority basis, the demand for and supply of advertising inventory in that market may not be sufficient or sufficiently coordinated for the Criteo Engine to function optimally. As such, as we target new geographic markets, we will need to adequately coordinate the timing for local advertiser clients and publishers to use our solution. A failure to effectively manage demand for and the supply of advertising inventory processed through the Criteo Engine could impair its ability to accurately predict user engagement in that market, which could result in:

 

    a reduction in the amount of inventory our publishers make available to us in the future;

 

    a loss of existing advertiser clients or publishers;

 

    an adverse effect on our ability to attract new publishers willing to give us preferred access;

 

    harm to our reputation;

 

    increased cost; and

 

    lost revenue.

If we do not retain our senior management team and key employees, or attract additional sales and technology talent, we may not be able to sustain our growth or achieve our business objectives.

Our future success is substantially dependent on the continued service of our senior management team. Our management team is currently spread across multiple physical locations and geographies, which can strain the organization and make coordinated management more challenging. Our future success also depends on our ability to continue to attract, retain and motivate highly skilled employees, particularly employees with technical skills that enable us to deliver effective advertising solutions, and sales and advertiser and publisher support representatives with experience in digital advertising. Competition for these employees in our industry is intense. As a result, we may be unable to attract or retain these management, technical, sales and advertiser and publisher support personnel who are critical to our success, resulting in harm to our key advertiser and publisher relationships, loss of key information, expertise or proprietary knowledge and unanticipated recruitment and training costs. The loss of the services of our senior management or other key employees could make it more difficult to successfully operate our business and pursue our business goals.

Our inability to use software licensed from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt our business.

Our technology platform incorporates software licensed from third parties, including some software, known as open source software, which we use without charge. Although we monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide our solution to our clients. In the future, we could be required to seek licenses from third parties in order to continue offering our solution, which licenses may not be available on terms that are acceptable to us, or at all. Alternatively, we may need to re-engineer our solution or discontinue use of portions of the functionality provided by our solution. In addition, the terms of open source software licenses may require us to provide software that we develop using such software to others on unfavorable license terms such as by precluding us from charging license fees or by requiring us to disclose our source code. Our inability to use third-party software could result in disruptions to our business, or delays in the development of future offerings or enhancements of our existing platform, which could impair our business.

 

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Our failure to maintain certain tax benefits applicable to French technology companies may adversely affect our results of operations.

As a French technology company, we have benefited from certain tax advantages, including, for example, the French research tax credit (crédit d’impôt recherche), or CIR. The CIR is a French tax credit aimed at stimulating research and development. The CIR can be offset against French corporate income tax due and the portion in excess (if any) may be refunded at the end of a three fiscal-year period. The CIR is calculated based on our claimed amount of eligible research and development expenditures in France and represented €2.4 million, €1.9 million and €3.8 million for 2012, 2013 and 2014, respectively. The French tax authority with the assistance of the Research and Technology Ministry may audit each research and development program in respect of which a CIR benefit has been claimed and assess whether such program qualifies in their view for the CIR benefit. If the French tax authority determines that our research and development programs do not meet the requirements for the CIR benefit, we could be liable for additional corporate tax, and penalties and interest related thereto, which could have a significant impact on our results of operations and future cash flows.

For example, in 2011, we underwent a tax inspection by the French tax authorities covering fiscal years 2008 and 2009, which resulted in a reassessment of €0.5 million for the two years. Further, we had another inspection related to fiscal years 2010 and 2011 with the French tax authorities, which resulted in a non-significant reassessment of less than €50,000 for the two years. The French tax authorities may challenge our eligibility for, or our calculation of, certain tax reductions and/or deductions in respect of our research and development activities and, should the French tax authorities be successful, we may be liable for additional corporate income tax, and penalties and interest related thereto, which could have a significant impact on our results of operations and future cash flows. Furthermore, if the French Parliament decides to eliminate, or reduce the scope or the rate of, the CIR benefit, either of which it could decide to do at any time, our results of operations could be adversely affected.

Transfer pricing rules may adversely affect our corporate income tax expense.

Many of the jurisdictions in which we conduct business have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles. Contemporaneous documentation must exist to support this pricing. The tax authorities in these jurisdictions could challenge whether our related party transfer pricing policies are at arm’s length and, as a consequence, the tax treatment of corresponding expenses and income. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these tax authorities were successful in challenging our transfer pricing policies, we may be liable for additional corporate income tax, and penalties and interest related thereto, which may have a significant impact on our results of operations and future cash flows.

Risks Related to Ownership of Our Shares and the ADSs and the Trading of the ADSs

The market price for the ADSs may be volatile or may decline regardless of our operating performance.

The trading price of the ADSs has fluctuated, and is likely to continue to fluctuate, substantially. The trading price of the ADSs depends on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. Since the ADSs were sold at our initial public offering in November 2013 at a price of $31.00 per share, the price per ADS has ranged as low as $25.16 and as high as $60.95 through March 19, 2015. The market price of the ADSs may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

    actual or anticipated fluctuations in our revenue and other results of operations;

 

    the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

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    failure of securities analysts to initiate or maintain coverage of us and our securities, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

    announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

    changes in operating performance and stock market valuations of online marketing or other technology companies, or those in our industry in particular;

 

    lawsuits threatened or filed against us; and

 

    other events or factors, including those resulting from war, incidents of terrorism or responses to these events.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, shareholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and adversely affect our business.

Share ownership remains concentrated in the hands of our principal shareholders and management, who continue to be able to exercise a direct or indirect influence on us.

As of January 31, 2015, our executive officers, directors, current five percent or greater shareholders and affiliated entities together beneficially owned approximately 40% of our ordinary shares outstanding. As a result, these shareholders, acting together, may have influence over matters that require approval by our shareholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other shareholders may view as beneficial.

If securities or industry analysts cease publishing research or publish inaccurate or unfavorable research about our business, the price of the ADSs and trading volume could decline.

The trading market for the ADSs depends in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades the ADSs or publishes incorrect or unfavorable research about our business, the price of the ADSs would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, or downgrades the ADSs, demand for the ADSs could decrease, which could cause the price of the ADSs or trading volume to decline.

We do not currently intend to pay dividends on our securities and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of the ADSs. In addition, French law may limit the amount of dividends we are able to distribute.

We have never declared or paid any cash dividends on our ordinary shares and do not currently intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your ADSs for the foreseeable future and the success of an investment in ADSs will depend upon any future appreciation in their value. Consequently, investors may need to sell all or part of their holdings of ADSs after price appreciation, which may never occur, as the only way to realize any future gains on their investment. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which our shareholders have purchased the ADSs. Investors seeking cash dividends should not purchase the ADSs.

 

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Further, under French law, the determination of whether we have been sufficiently profitable to pay dividends is made on the basis of our statutory financial statements prepared and presented in accordance with accounting principles generally accepted in France, or French GAAP. In addition, payment of dividends may subject us to additional taxes under French law. Therefore, we may be more restricted in our ability to declare dividends than companies not based in France. In addition, exchange rate fluctuations may affect the amount of euros that we are able to distribute, and the amount in U.S. dollars that our shareholders receive upon the payment of cash dividends or other distributions we declare and pay in euros, if any. These factors could harm the value of the ADSs, and, in turn, the U.S. dollar proceeds that holders receive from the sale of the ADSs.

We may need additional capital in the future to meet our financial obligations and to pursue our business objectives. Additional capital may not be available on favorable terms, or at all, which could compromise our ability to meet our financial obligations and grow our business.

While we anticipate that our existing cash and cash equivalents and short-term investments will be sufficient to fund our operations for at least the next 12 months, we may need to raise additional capital to fund operations in the future or to finance acquisitions. If adequate funds are not available on acceptable terms, we may be unable to fund the expansion of our marketing and sales and research and development efforts, increase working capital, take advantage of acquisition or other opportunities, or adequately respond to competitive pressures which could seriously harm our business and results of operations. If we incur debt, the debt holders would have rights senior to shareholders to make claims on our assets, and the terms of any debt could restrict our operations, including our ability to pay dividends on our ordinary shares. In addition, pursuant to the terms of our credit facilities, our ability to use such facilities for capital expenditures and information technology-related expenses may be restricted. If adequate additional funds are not available, we may be required to delay, reduce the scope of, or eliminate material parts of our business strategy, including potential additional acquisitions or development of new technologies.

Furthermore, if we issue additional equity securities, shareholders will experience dilution, and the new equity securities could have rights senior to those of our ordinary shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. As a result, our shareholders bear the risk of our future securities offerings reducing the market price of the ADSs and diluting their interest.

Future sales of shares of the ADSs by existing shareholders could depress the market price of the ADSs.

If our existing shareholders sell, or indicate an intent to sell, substantial amounts of the ADSs in the public market the trading price of the ADSs could decline significantly. In addition, the sale of these securities could impair our ability to raise capital through the sale of additional securities.

As of January 31, 2015, we had 61,009,571 outstanding ordinary shares, which are all eligible for sale in the public market, subject to applicable securities restrictions. As of January 31, 2015, approximately 10% of our outstanding ordinary shares are held by directors and executive officers and continue to be subject to resale limitations under Rule 144 under the Securities Act.

In addition, as of January 31, 2015, option and warrants to purchase an aggregate of 2,586,488 ordinary shares issued under our equity incentive plans were exercisable, subject to compliance with Rule 144 under the Securities Act in the case of our affiliates.

Sales of ADSs by existing shareholders in the public market, the availability of these shares for sale, our issuance of securities or the perception that any of these events might occur could materially and adversely affect the market price of the ADSs.

 

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Our by-laws and French corporate law contain provisions that may delay or discourage a takeover attempt.

Provisions contained in our by-laws and the corporate laws of France, the country in which we are incorporated, could make it more difficult for a third-party to acquire us, even if doing so might be beneficial to our shareholders. In addition, provisions of our by-laws impose various procedural and other requirements, which could make it more difficult for shareholders to effect certain corporate actions. These provisions include the following:

 

    our ordinary shares are in registered form only and we must be notified of any transfer of our shares in order for such transfer to be validly registered;

 

    under French law, a non-resident of France may have to file an administrative notice with French authorities in connection with a direct or indirect investment in us, as defined by administrative rulings;

 

    the provisions of French law allowing the owner of 95% of the share capital or voting rights of a public company to force out the minority shareholders following a tender offer made to all shareholders are only applicable to companies listed on a stock exchange of the European Union and will therefore not be applicable to us;

 

    a merger (i.e., in a French law context, a stock-for-stock exchange following which our company would be dissolved into the acquiring entity and our shareholders would become shareholders of the acquiring entity) of our company into a company incorporated in the European Union would require the approval of our board of directors as well as a two-thirds majority of the votes held by the shareholders present, represented by proxy or voting by mail at the relevant meeting;

 

    a merger of our company into a company incorporated outside of the European Union would require 100% of our shareholders to approve it;

 

    under French law, a cash merger is treated as a share purchase and would require the consent of each participating shareholder;

 

    our shareholders have granted and may grant in the future our board of directors broad authorizations to increase our share capital or to issue additional ordinary shares or other securities (for example, warrants) to our shareholders, the public or qualified investors, including as a possible defense following the launching of a tender offer for our shares;

 

    our shareholders have preferential subscription rights on a pro rata basis on the issuance by us of any additional securities for cash or a set-off of cash debts, which rights may only be waived by the extraordinary general meeting (by a two-thirds majority vote) of our shareholders or on an individual basis by each shareholder;

 

    our board of directors has the right to appoint directors to fill a vacancy created by the resignation or death of a director, subject to the approval by the shareholders of such appointment at the next shareholders’ meeting, which prevents shareholders from having the sole right to fill vacancies on our board of directors;

 

    our board of directors can only be convened by our chairman or our managing director, if any, or, when no board meeting has been held for more than two consecutive months, by directors representing at least one third of the total number of directors;

 

    our board of directors meetings can only be regularly held if at least half of the directors attend either physically or by way of videoconference or teleconference enabling the directors’ identification and ensuring their effective participation in the board’s decisions;

 

    approval of at least a majority of the votes held by shareholders present, represented by a proxy, or voting by mail at the relevant ordinary shareholders’ general meeting is required to remove directors with or without cause;

 

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    advance notice is required for nominations to the board of directors or for proposing matters to be acted upon at a shareholders’ meeting, except that a vote to remove and replace a director can be proposed at any shareholders’ meeting without notice; and

 

    pursuant to French law, the sections of the by-laws relating to the number of directors and election and removal of a director from office may only be modified by a resolution adopted by 66 2/3% of the votes of our shareholders present, represented by a proxy or voting by mail at the meeting.

You may not be able to exercise your right to vote the ordinary shares underlying your ADSs.

Holders of ADSs may exercise voting rights with respect to the ordinary shares represented by the ADSs only in accordance with the provisions of the deposit agreement. The deposit agreement provides that, upon receipt of notice of any meeting of holders of our ordinary shares, the depositary will fix a record date for the determination of ADS holders who shall be entitled to give instructions for the exercise of voting rights. Upon timely receipt of notice from us, if we so request, the depositary shall distribute to the holders as of the record date (1) the notice of the meeting or solicitation of consent or proxy sent by us and (2) a statement as to the manner in which instructions may be given by the holders.

You may instruct the depositary of your ADSs to vote the ordinary shares underlying your ADSs. Otherwise, you will not be able to exercise your right to vote, unless you withdraw the ordinary shares underlying the ADSs you hold. However, you may not know about the meeting far enough in advance to withdraw those ordinary shares. If we ask for your instructions, the depositary, upon timely notice from us, will notify you of the upcoming vote and arrange to deliver our voting materials to you. We cannot guarantee you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your ordinary shares or to withdraw your ordinary shares so that you can vote them yourself. If the depositary does not receive timely voting instructions from you, it may give a proxy to a person designated by us to vote the ordinary shares underlying your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote, and there may be nothing you can do if the ordinary shares underlying your ADSs are not voted as you requested.

Your right as a holder of ADSs to participate in any future preferential subscription rights or to elect to receive dividends in shares may be limited, which may cause dilution to your holdings.

According to French Law, if we issue additional securities for cash, current shareholders will have preferential subscription rights for these securities on a pro rata basis unless they waive those rights at an extraordinary meeting of our shareholders (by a two-thirds majority vote) or individually by each shareholder. However, the ADS holders in the United States will not be entitled to exercise or sell such rights unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available.

In addition, the deposit agreement provides that the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. Further, if we offer holders of our ordinary shares the option to receive dividends in either cash or shares, under the deposit agreement the depositary may require satisfactory assurances from us that extending the offer to holders of ADSs does not require registration of any securities under the Securities Act before making the option available to holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings or to elect to receive dividends in shares and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case you will receive no value for these rights.

 

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You may be subject to limitations on the transfer of your ADSs and the withdrawal of the underlying ordinary shares.

Your ADSs, which may be evidenced by ADRs, are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems expedient in connection with the performance of its duties. The depositary may refuse to deliver, transfer or register transfers of your ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary think it is advisable to do so because of any requirement of law, government or governmental body, or under any provision of the deposit agreement, or for any other reason subject to your right to cancel your ADSs and withdraw the underlying ordinary shares. Temporary delays in the cancellation of your ADSs and withdrawal of the underlying ordinary shares may arise because the depositary has closed its transfer books or we have closed our transfer books, the transfer of ordinary shares is blocked to permit voting at a shareholders’ meeting or we are paying a dividend on our ordinary shares. In addition, you may not be able to cancel your ADSs and withdraw the underlying ordinary shares when you owe money for fees, taxes and similar charges and when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of ordinary shares or other deposited securities.

If we fail to establish or maintain an effective system of internal controls, we may be unable to accurately report our financial results or prevent fraud, and investor confidence and the market price of the ADSs may, therefore, be adversely impacted.

As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. In addition, we are required to submit a report by management to the audit committee and external auditors on the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act and our independent registered public accounting firm is required to attest to the effectiveness of our internal controls over financial reporting. If we identify material weaknesses in our internal controls over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal controls over financial reporting are effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal controls over financial reporting investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the ADSs may be adversely impacted, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC, or other regulatory authorities, which could require additional financial and management resources.

The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

We are subject to the reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the listing requirements of the Nasdaq Stock Market and other applicable securities rules and regulations. Compliance with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly if we cease to be a foreign private issuer at some point in the future. The Exchange Act requires that, as a public company, we file annual, quarterly and current reports with respect to our business, financial condition and result of operations. However, while we expect to continue to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, as a foreign private issuer, we are not required to file quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective disclosure controls and procedures and internal control over financial reporting. In order to establish and maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of

 

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operations. Although we already hired additional employees to comply with these requirements in connection with our initial public offering, we may need to hire more employees in the future or engage outside consultants, which will increase our cost and expense.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expense and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

As a public company that is subject to these rules and regulations, we may find that it is more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this Annual Report on Form 20-F and in other filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business and results of operations.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the SEC than a U.S. company; our ordinary shares are not listed, and we do not intend to list our shares, on any market in France, our home country. This may limit the information available to holders of the ordinary shares.

We are a “foreign private issuer,” as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to public companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act, including the U.S. proxy rules under Section 14 of the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we expect to submit quarterly interim consolidated financial data to the SEC under cover of the SEC’s Form 6-K, we will not be required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. public companies and will not be required to file quarterly reports on Form 10-Q or current reports on Form 8-K under the Exchange Act. Furthermore, our ordinary shares are not listed and we do not currently intend to list our ordinary shares on any market in France, our home country. As a result, we are not subject to the reporting and other requirements of listed companies in France. For instance, we are not required to publish quarterly or semi-annual financial statements. Accordingly, there will be less publicly available information concerning our company than there would be if we were a U.S. public company.

 

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As a foreign private issuer, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from Nasdaq corporate governance listing standards. These practices may afford less protection to shareholders than they would enjoy if we complied fully with corporate governance listing standards.

As a foreign private issuer listed on Nasdaq, we are subject to its corporate governance listing standards. However, rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in France, which is our home country, may differ significantly from corporate governance listing standards. For example, neither the corporate laws of France nor our by-laws require a majority of our directors to be independent and we could include non-independent directors as members of our compensation committee and nomination and corporate governance committee, and our independent directors would not necessarily hold regularly scheduled meetings at which only independent directors are present. Currently, we intend to continue to comply with the corporate governance listing standards of Nasdaq to the extent possible under French law. However, if we choose to change such practice to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would have under corporate governance listing standards applicable to U.S. domestic issuers.

We may lose our foreign private issuer status in the future, which could result in significant additional cost and expense.

While we currently qualify as a foreign private issuer, the determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter and, accordingly, the next determination will be made with respect to us on June 30, 2015.

In the future, we would lose our foreign private issuer status if we to fail to meet the requirements necessary to maintain our foreign private issuer status as of the relevant determination date. For example, if more than 50% of our securities are held by U.S. residents and more than 50% of our executive officers or members of our board of directors are residents or citizens of the United States, we could lose our foreign private issuer status. As of January 31, 2015, based on the information available to us, approximately 67% of our outstanding ordinary shares were held in the United States.

The regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer may be significantly more than costs we incur as a foreign private issuer. If we are not a foreign private issuer, we will be required to file periodic reports and registration statements on U.S. domestic issuer forms with the SEC, which are more detailed and extensive in certain respects than the forms available to a foreign private issuer. We would be required under current SEC rules to prepare our financial statements in accordance with U.S. GAAP, rather than IFRS, which will involve significant time and cost. This migration from IFRS to U.S. GAAP would require us to present our financial information in U.S. dollars instead of euros as well, which would involve a significant change in the way our financial information is prepared and presented. Additionally, this migration from IFRS to U.S. GAAP may involve revisions to our accounting for and presentation of historical transactions which may adversely affect our reported financial results or the way we conduct our business. In addition, we may lose our ability to rely upon exemptions from certain corporate governance requirements on U.S. stock exchanges that are available to foreign private issuers such as the ones described above and exemptions from procedural requirements related to the solicitation of proxies.

U.S. investors may have difficulty enforcing civil liabilities against our company and directors and senior management.

Two of our directors and certain members of senior management, and those of certain of our subsidiaries, are non-residents of the United States, and all or a substantial portion of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible to serve process on such persons or us in the United States or to enforce judgments obtained in U.S. courts against them or us based on civil liability provisions of the securities laws of the United States. Additionally, it may be difficult to assert U.S. securities

 

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law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides. In particular, there is some doubt as to whether French courts would recognize and enforce certain civil liabilities under U.S. securities laws in original actions or judgments of U.S. courts based upon these civil liability provisions. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in France. An award for monetary damages under the U.S. securities laws would be considered punitive if it does not seek to compensate the claimant for loss or damage suffered but is intended to punish the defendant. The enforceability of any judgment in France will depend on the particular facts of the case as well as the laws and treaties in effect at the time. The United States and France do not currently have a treaty providing for recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters.

The rights of shareholders in companies subject to French corporate law differ in material respects from the rights of shareholders of corporations incorporated in the United States.

We are a French company with limited liability. Our corporate affairs are governed by our by-laws and by the laws governing companies incorporated in France. The rights of shareholders and the responsibilities of members of our board of directors are in many ways different from the rights and obligations of shareholders in companies governed by the laws of U.S. jurisdictions. For example, in the performance of its duties, our board of directors is required by French law to consider the interests of our company, its shareholders, its employees and other stakeholders, rather than solely our shareholders and/or creditors. It is possible that some of these parties will have interests that are different from, or in addition to, your interests as a shareholder. See the sections of this Annual Report on Form 20-F titled “Item 10. B—Memorandum and Articles of Association” and “Item 16.G—Corporate Governance.”

 

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Item 4. Information on the Company

 

A. History and Development of the Company.

Criteo S.A. was incorporated as a société par actions simplifiée, or S.A.S., under the laws of the French Republic on November 3, 2005, for a period of 99 years and subsequently converted to a société anonyome, or S.A. We are registered at the Paris Commerce and Companies Register under the number 484 786 249. Our principal executive offices are located at 32 Rue Blanche, 75009 Paris, France, and our telephone number is + 33 1 40 40 22 90. Our agent for service of process in the United States is National Registered Agents, Inc. We also maintain a web site at www.criteo.com. The reference to our website is an inactive textual reference only and the information contained in, or that can be accessed through, our web site is not a part of this Annual Report on Form 20-F.

We began selling our solution in France in 2007 and expanded our business into other countries in Western Europe. In 2009, we expanded our business into North America. As part of our geographic expansion goals, we initially entered the Asia-Pacific region in late 2010. As a result of our significant international operations, our revenue from outside of our home country France, accounted for 88.3% of our revenue for the year ended December 31, 2014.

In August 2012, we entered into a strategic relationship with Yahoo! Japan, a leading provider of advertising inventory in Japan, which provides us with privileged access to their performance-based display inventory. In connection with this strategic relationship, Yahoo! Japan invested in our subsidiary, Criteo K.K. After that investment, we retain 66% ownership and Yahoo! Japan holds 34% ownership. The term of this strategic relationship is two years and renews automatically for one-year terms if neither party provides advance written notice of termination within a specified period of time. The strategic relationship may be terminated by either party for material breach and other customary events. Yahoo! Japan also has the right to require us to buy back its interest, and we have the right to require them to sell their interest, in Criteo K.K. under specified circumstances, such as a termination of the commercial relationship.

As part of our strategy to build upon our market and technology leadership, in July 2013, we acquired all of the shares of Ad-X Limited, or Ad-X, a mobile analytics and attribution technology company. In February 2014, we acquired all of the equity of Tedemis S.A., or Tedemis, a leading provider of real-time personalized e-mail marketing solutions to help advertisers turn web visitors into customers. In April 2014, we completed the acquisition of AdQuantic SAS, or AdQuantic, a bidding technology company headquartered in Paris. Through the acquisition of AdQuantic, we added a team of seven experts in bidding technology, reinforcing our focus on research & development. In February 2015, we acquired DataPop, Inc., or DataPop, a Los Angeles-based company specializing in connecting the products in a retailer’s catalog to actual user shopping intent.

Our actual capital expenditures for the years ended December 31, 2012, 2013 and 2014 amounted to €13.6 million, €22.0 million and €35.4 million respectively. These investments in property and equipment primarily consisted of the acquisition of servers and other data center equipment. We expect our capital expenditures to increase in absolute terms in the near term as we continue to grow our operations. We anticipate our capital expenditure in 2015 to be financed from the cash flows from operating activities and proceeds of our initial public offering. We will continue investing in data centers and servers equipment in the Asia-Pacific region to support the launch of our activities in China and Singapore, but we will also pursue our investment in the United States and the EMEA region to sustain our growth in these regions.

 

B. Business Overview.

Overview

We are a global technology company specializing in digital performance marketing. We leverage large volumes of granular data to efficiently and effectively engage and convert customers on behalf of our advertiser

 

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clients. We use our proprietary predictive software algorithms coupled with deep insights into expressed consumer intent and purchasing habits to price and deliver highly relevant and personalized digital performance advertisements on all devices in real time.

We partner with our clients to track activity on their digital properties, which we define as websites and/or mobile applications, and optimize our advertisement placement decisions based on that activity and other data. Demonstrating the depth and scale of our data, we observed over $430 billion in sales transactions on our clients’ digital properties in the year ended December 31, 2014, whether or not a consumer saw or clicked on a Criteo advertisement. Based on this data and our other data assets, we delivered targeted advertisements that generated approximately 3.3 billion clicks over the same period. Based on these clicks, our clients generated over $16.5 billion in post-click sales in 2014. A post-click sale is defined as a purchase made by a user from one of our client’s digital properties during the 30 day period following a click by that user on an advertisement we delivered for that client. We believe post-click sales is a key performance indicator that our clients use to measure the effectiveness of our solution in driving sales and the return on their marketing spend with us. As of December 31, 2014, we had over 7,000 clients and in each of the last three years our client retention rate was over 90%.

Our solution is comprised of the Criteo Engine, our data assets, access to inventory, and our advertiser and publisher platforms. The Criteo Engine has been developed over the past nine years and consists of multiple machine learning algorithms—in particular, prediction and recommendation algorithms—and the proprietary global hardware and software infrastructure that enables our solution to operate in real time and at significant scale. The accuracy of the prediction and recommendation algorithms improves with every advertisement we deliver, as they incorporate new data, while continuing to learn from previous data.

We deliver our solution through different marketing channels, which we define as specific advertisement mediums to engage with a user or a consumer, and for which we purchase inventory through a specific source. Today, our marketing channels include: display advertising banners delivered on web browsers, display advertising banners delivered on social platforms, display advertising banners delivered in mobile applications and marketing e-mail messages delivered to opt-in e-mail addresses. We deliver display advertising banners in various formats, including standard banner formats, as set by the International Advertising Bureau or IAB, as well as native banner formats, which are specific to an individual publisher, either a traditional digital publisher or a social media platform.

Our solution includes the integration of our advertiser clients’ website or mobile application, a unified dashboard to manage campaigns, the tracking of users, the real-time buying of impressions on publisher partners’ websites or mobile applications, the real-time creation of customized advertisements for each specific client and its prospective end customer, the serving and delivery of the advertisements and the provision of analytics to clients. As a result, we reduce unnecessary complexity and cost associated with manual processes and multiple vendors for our clients, delivering efficiencies even as clients’ campaigns grow in size and complexity. Our solution is available as a unique offering and cannot be broken down into separate products or services that our clients could purchase on an individual basis from us.

Every day we are presented with billions of opportunities to connect individuals that are browsing the internet or using mobile applications, whom we refer to as consumers or users, with relevant marketing messages from our clients. For each of these opportunities, our algorithms will have analyzed massive volumes of data to observe and predict user intent and deliver specific messaging and products that are likely to engage that particular user and result in a sale for our client. To deliver an advertisement with the right product to the right user, the Criteo Engine dynamically creates a customized advertisement for that user and ultimately determines the right price to pay for the internet impression where an advertisement can be served, which we refer to as an advertising impression. The Criteo Engine then buys the advertising impression and seamlessly delivers the advertisement. This entire process can be executed in under 150 milliseconds and resulted in the delivery of over 23,500 advertisements per second on average in 2014, which represents the scale and capacity of our solution.

 

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Access to high quality data assets fuels the accuracy of our algorithms. These data assets include our clients’ sensitive and proprietary data, such as transaction activity on their websites; publisher-specific data, such as the performance of advertisements we previously delivered on a particular publisher’s website; as well as internally developed data that includes vast and proprietary knowledge we have extracted from having delivered and measured responses to over 1,700 billion advertising impressions. We obtain large volumes of expressed consumer purchase intent, browsing behavior and transaction data through integration with substantially all of our clients, which enables us to track users’ interactions with our clients’ websites at an individual product level. This deep access to highly granular information from our clients demonstrates the trust that our clients place in us. For example, for most of our clients, we typically have real-time access to the products or services a customer has viewed, researched or bought from them and we continuously receive updated information on approximately 700 million individual products or services, including pricing, images and descriptions. Our proprietary knowledge in extracting value from this data is the result of over nine years of extensive algorithmic-driven analysis, the ongoing refinement of this analysis and delivery of targeted advertisements. The combination of these data sets gives us powerful and actionable insights into consumer purchasing habits that we use to create the most relevant advertisements to drive user engagement and ultimately sales for our clients.

We benefit from broad access to inventory through our direct relationships with over 9,000 publisher partners, as well as a leading presence on real-time-bidding display advertising exchanges. We define inventory as the combination of display advertising impressions as well as opt-in e-mail addresses. Many of our direct publisher partners have granted us preferred access to portions of their inventory as a result of our ability to effectively monetize that inventory. This preferred access means we are able to select and buy inventory on an impression by impression basis in real time that a publisher might otherwise only sell subject to minimum volume commitments. In addition, this preferred access means that we are able to buy inventory in some instances before a publisher makes that inventory available to others.

Across both our direct publisher relationships and inventory purchasing done on advertising exchanges, we leverage the Criteo Engine’s ability to quickly and accurately value available advertising inventory as it becomes available to us, and utilize that information to bid for inventory on a programmatic, automated basis. Our ability to efficiently access and value inventory has enabled us to build a highly liquid marketplace for internet display advertising inventory, as well as opt-in e-mail inventory, which in turn allows us to quickly find potential customers for our clients, before a potential customer’s purchase intent has diminished and to deliver effective advertisements to these users at the right price. We encourage publishers to provide us with access to their inventory by offering a technology platform through which they can tap into marketing budgets and manage their inventory.

We also offer our clients an integrated technology platform called the Criteo Performance Optimization Platform, or CPOP, that enables comprehensive digital performance marketing campaign management, including a unified and easy-to-use dashboard and a suite of software and services that gives clients visibility on key campaign metrics. As a result, we reduce unnecessary complexity and cost associated with manual processes and multiple vendors, delivering efficiencies even as campaigns grow in size and complexity.

The accuracy and efficiency of the Criteo Engine enables us to charge our clients only when users engage with an advertisement we deliver, usually by clicking on it. In contrast, traditional display solutions typically charge clients when an advertisement is displayed, whether or not the advertisement is seen or clicked on by a user. We believe our pay-for-performance pricing model provides a clear link between the cost of a marketing campaign and its effectiveness in driving sales and is valued as such by our clients. Our revenue retention rate was 155%, 135% and 147% for the years ended December 31, 2012, 2013 and 2014, respectively. We define our revenue retention rate with respect to a given twelve-month period as (i) revenue recognized during such period from clients that contributed to revenue recognized in the prior twelve-month period divided by (ii) total revenue recognized in such prior twelve-month period.

As clients have embraced our solution, we have achieved significant growth since our inception and established a global footprint, including a significant presence in Europe, the United States, and Asia, where we

 

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have a strategic relationship with Yahoo! Japan, which gives us privileged access to its advertising inventory for delivering personalized display advertisements. As of December 31, 2014, we had more than 7,000 clients that used our solution in order to acquire, engage, convert and retain their customers. These include some of the largest and most sophisticated e-commerce companies in the world, including 3 Suisses, BonPrix, CDiscount, CROCS, Expedia, Ford, Gmarket, Gumtree.com, Hankyu Kotsusha, Hokende, Hotels.com, IKEA, ING, L’Oréal Paris, La Redoute, Lenovo, Lotte, Macy’s, MakeMyTrip, NetShoes, Nissen, Orange, Qatar Airways, Rakuten, Recruit, Samsung, Sarenza, Sephora, Staples, Tiger Direct, Travelocity, Voyages SNCF and Zalando.

Our financial results include:

 

    revenue increased from €271.9 million for 2012 to €444.0 million for 2013 and €745.1 million for 2014;

 

    revenue excluding traffic acquisition costs, which we refer to as revenue ex-TAC, which is a non-IFRS financial measure, increased from €114.1 million in 2012 to €179.0 million in 2013 and €303.7 million in 2014;

 

    net income was €0.8 million in 2012, €1.4 million in 2013 and €35.4 million in 2014; and

 

    Adjusted EBITDA, which is a non-IFRS financial measure, increased from €17.4 million in 2012 to €31.3 million in 2013 and €79.4 million in 2014.

Please see footnotes 3 and 5 to the Other Financial and Operating Data table in “Item 3.A—Selected Financial Data” of this Annual Report on Form 20-F for a reconciliation of revenue ex-TAC to revenue and Adjusted EBITDA to net income, the most directly comparable financial measures calculated and presented in accordance with IFRS.

Acquisitions

In February 2015, we acquired DataPop , a Los Angeles-based company specializing in connecting the products in a retailer’s catalog to actual user shopping intent.

In April 2014, we completed the acquisition of AdQuantic, a bidding technology company headquartered in Paris. Through the acquisition of AdQuantic, we added a team of seven experts in bidding technology, reinforcing our focus on research and development.

In February 2014, we acquired Tedemis, a leading provider of real- time personalized e-mail marketing solutions that help advertisers turn web visitors into customers. The addition of Tedemis enabled us to extend our digital performance marketing solution to a new marketing channel. Please refer to Note 1 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F for further details.

Industry Background

The ability to market to and acquire customers is a critical driver of success for businesses, especially for businesses operating in the e-commerce sector, often representing a very significant portion of their cost base. Business to consumer retail e-commerce was approximately a $1.3 trillion industry globally in 2014, growing at 19.5% per year from 2013 to 2017, according to eMarketer. Penetration of smartphones and tablets has also driven rapid growth of mobile commerce, which represented $61 billion globally in 2012, and is expected to grow at a 53.3% compound annual growth rate, or CAGR, between 2012 and 2017 according to Goldman Sachs. The internet and mobile devices are becoming increasingly important mediums for businesses to generate customer engagement and leads that ultimately result in sales, both online and offline. However, these mediums are also complex and fragmented, making it difficult and costly to engage and convert customers. Illustrating the difficulty of converting customers, 88% of online shoppers surveyed in 2013 by comScore indicated they had from time to time placed items in a shopping cart and left a site without making a purchase. It is therefore important for businesses to develop and execute marketing campaigns across all screens (desktop, laptops,

 

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smartphones and tablets) efficiently and effectively harnessing consumer intent, big data, technology, measurability, and the ability to target, at scale. According to ZenithOptimedia, marketers spent $122.1 billion on internet advertising in 2014, with this spend expected to grow at a CAGR of 15.5% through 2017.

There are two primary channels for customer engagement and conversion online – search and display. Search marketing, which mainly consists in placing text-based advertisements alongside user query results, represented 43.1% of internet advertising spend in 2014 and is expected to grow at a 12.6% CAGR from 2013 to 2017, according to ZenithOptimedia. Historically, search has been effective at capturing consumer intent and quickly delivering highly targeted advertisements based on query keywords, showing clearly measurable results through simple, pay-for-results pricing, and creating an automated and efficient marketplace for advertising inventory. These factors have made search an ideal “performance” medium enabling businesses to efficiently engage with potential customers and convert them into buyers. The consolidated nature of the search advertising marketplace has played a key role in enabling these benefits. In most geographies globally, there exists a single leading search advertising provider, who has advantages in creating a single, efficient marketplace for advertising inventory, and in aggregating data on user intent that can improve performance of advertising campaigns.

Internet display advertising involves placing images, video or advertisements that incorporate animation, sound and/or interactivity, which we refer to as rich media content, alongside website and mobile application content. According to ZenithOptimedia, display advertising accounted for 46.3% of the total internet advertising market in 2014, with a global market totaling approximately $56.5 billion in 2014. It is projected to grow at a 18.0% CAGR from 2014 to 2017. The display market is highly fragmented as compared to search and is growing at a rate faster than search, due in part to the rapid rise of social and mobile internet usage, as well as the continued proliferation of content across the internet, including on social media platforms. Through internet display advertising, businesses can deliver impactful advertisements integrating imagery, sound, motion and interactivity with the user. These attributes have led display advertising to be well suited to broad marketing objectives, including generating awareness and favorability for brands as opposed to the intent-driven performance objectives of search. Currently, internet display advertising faces a number of important challenges as an efficient and effective intent-driven medium for customer engagement and conversion, including:

Difficult to Deliver Targeted, Relevant Ads. Businesses strive for targeted, relevant advertisements to minimize wasted spend and maximize their chances of generating engagement, and ultimately a sale. Relevant advertisements are ones that target a specific audience with a message that matches that audience’s purchase intent or interest and that are delivered at the right moment. Achieving relevance, however, is particularly difficult because users are scattered across a multitude of online destinations and devices, and consumer purchase intent and interest can be hard to determine or change rapidly. Against this backdrop, traditional internet display advertising solutions have incorporated very limited audience targeting capabilities, and even more limited personalization. In addition, these solutions have generally not been effective in utilizing consumer intent as a signal for the delivery of advertisements. As a result, targeting and messaging have mainly been done at the contextual level, enabling the placement of generic advertisements alongside certain types of content (e.g., non- personalized automotive advertisements on sites related to cars), without incorporating purchase intent or interests. These traditional campaigns often lack relevance, and result in poor engagement.

Difficult to Deliver Performance at Scale. While internet display advertising solutions may be able to meet or exceed engagement and conversion objectives for small budgets and limited pilots, many such solutions are unable to sustain that performance for larger campaigns or longer trials. This limited ability to scale performance is due in part to the highly fragmented nature of the internet display landscape, proliferation of data, and lack of robust technology. Therefore, the challenges described above are amplified for larger and more complex campaigns.

Inefficient Campaign Execution. Deployment of internet display advertising campaigns can be inefficient and costly. Traditional solutions are often a combination of many point solutions, requiring businesses to connect and manage multiple intermediaries and complex elements of the advertising campaign execution process,

 

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including media planning, data analysis, targeting, creative assembly, media buying, optimization, advertisement serving and reporting. In addition, meaningful portions of campaign planning, execution and management remain a highly manual exercise.

Pricing Disconnected from Performance. Internet display advertising inventory has historically been sold on a cost per impression, or CPM, basis, meaning that a business is charged each time an advertisement is displayed, whether or not a user interacted with, viewed, or made a purchase based on, the advertisement. This makes it difficult for businesses to determine the true cost of an advertising campaign and evaluate the relationship of that cost to the effectiveness of the campaign in driving engagement and sales. There are a few different pricing models generally available in the internet advertising market, including the traditional CPM priced model, as well as cost per click, or CPC, priced model, where an advertiser is charged when a user clicks on the advertisement, cost per action, or CPA, priced model, where an advertiser is charged when a user takes a specific action which may be completing a form or making a purchase, and hybrid pricing models, which reflect a combination of one or more of these models. While the search segment of the internet advertising market is generally priced on a CPC model, we believe the internet display advertisement segment of the internet advertising market is generally priced on a CPM basis.

We believe internet display advertising is now at a critical inflection point where the potential for it to be both a brand building medium and a more effective engagement and conversion medium is finally being realized. This market transformation is being driven by powerful technology trends including:

Big Data. According to IDC, from 2005 to 2020, the digital universe is estimated to grow by a factor of 300, from 130 exabytes to 40,000 exabytes, or 40 trillion gigabytes. From now until 2020, the digital universe is expected to double every two years. The large and diverse data sets that make up this digital information are often referred to as big data and are generally categorized into business application data, human-generated content and machine data. New computational approaches and the falling costs of computing power now enable technology companies to process and draw insights from this data using machine learning approaches. These insights can be used to optimize display advertising campaigns in ways that were not previously possible.

Programmatic Buying. Technologies for more automated and efficient buying and selling of display advertising are gaining traction with both advertisers and publishers. Programmatic buying from real-time, automated buying platforms and bidding exchanges, as well as through direct relationships with publishers, provide advertisers with dynamic, targeted and efficient ways to access the right inventory, and help publishers to maximize the value of their advertising inventory. These technologies have been gaining significant traction and growth is accelerating. Worldwide spending in programmatic display advertising is expected to grow from $16.6 billion in 2014 to $32.6 billion in 2017 according to MAGNA GLOBAL, representing a CAGR of 28.4%.

Benefits of Our Solution

We believe our solution is transforming the way that our clients use digital performance marketing to drive sales, by making digital performance marketing, and in particular internet display advertising, a more efficient and effective medium for engaging and converting their potential customers. Key benefits of our solution include:

Highly Relevant, Targeted Ads. We are able to deliver highly relevant, targeted and personalized advertisement through the right marketing channel on all devices, which includes desktops, laptops, smartphones and tablets. Based on observed or predicted user intent, we use the Criteo Engine to create a targeted and personalized internet display advertisement that addresses a user’s expressed intent while that intent likely remains strong. We also use the Criteo Engine to predict a user’s other likely interests and deliver a targeted and personalized internet display advertisement that matches those potential interests. This relevance is facilitated by data and access to inventory. We have direct relationships with our advertiser clients and publishers, through which we have extensive and valuable data assets. In addition, we have access to the leading real-time bidding, or

 

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RTB, exchanges and advertisement networks, as well as direct relationships with over 9,000 publishers, many of whom have granted us preferred access to portions of their inventory. This breadth and preferred access enable us to quickly find the right users on behalf of our clients before a user’s interest or purchase intent has changed, and to deliver our personalized advertisements. By dynamically matching what we believe to be a user’s intent or interest with a personalized advertisement, we are able to deliver more relevant and engaging advertisements to users, which are therefore more likely to lead to sales.

Compelling Performance at Scale. As a result of the Criteo Engine and our broad access to inventory through our direct relationships with over 9,000 publisher partners and integration with the leading advertising exchanges and networks, we are able to deliver compelling and consistent performance for our clients even as the size and complexity of their marketing campaigns grow. Therefore, we believe that we have an industry-leading capability to deliver digital performance marketing within a given client’s campaign parameters and in doing so can more effectively help our clients reach their customers and drive sales.

Performance Driven Business Model. We get paid only when a user engages with our advertisements, usually by clicking on them. This model is well proven in search marketing, and our clients value pay-for- performance pricing for providing a clear link between the cost of marketing campaign and its effectiveness in driving sales. In addition, as our algorithms, data, and technologies become ever more sophisticated over time, we increasingly are optimizing our solution not just to maximize clicks at a target cost per click, but to maximize post-click purchases at a target cost of sales. This has led most of our clients to set their budgets with us whereby their total spend with us is effectively constrained only by our ability to find enough relevant opportunities for them that achieve their specific return objectives. For example, during the fourth quarter of 2014, over 75% of our revenue ex-TAC was derived from clients whose budgets were either uncapped or so large that the budget constraint did not restrict purchases of advertisements by us.

Complementary Performance-Based Marketing Channels. We deliver our solution through complementary marketing channels: display advertising banners delivered on web browsers, display advertising banners delivered on social platforms, display advertising banners delivered in mobile applications and marketing e-mail messages delivered to opt-in e-mail addresses. Our marketer clients have the choice to maximize the reach and engagement of their customers through a combination of our marketing channels, while always using a single, integrated solution, optimizing their marketing spend and only paying for performance.

Commitment to Privacy. We are committed to and are proactive about consumer privacy. In 2009, we became one of the first companies to broadly include a link in the advertisements we deliver, which gives access to clear, detailed, and user-friendly information about personalized advertisements and the data practices associated with the advertisements they receive. In addition, we provide consumers with an easy-to-use and easy-to-access mechanism to opt-out of receiving targeted advertisements we deliver or being tracked by us either for all campaigns or for a specific client. We believe that this consumer-centric approach to privacy empowers consumers to make better-informed decisions about our use of their data. We also actively encourage our advertiser clients and publishers to provide information to consumers about our collection and use of data relating to advertisements we deliver and track.

Highly Efficient Campaigns at Scale. Our solution provides clients with a unified dashboard to drive the efficiency of their performance marketing. Our platform automates most of the processes associated with executing a performance marketing campaign, such as creative assembly, real-time buying of inventory and campaign optimization, and billing. Using our platform, our clients are able to drive sales based on their specific cost of sales or return on investment objectives in large volumes with real-time control over the prices they pay. As a result, we reduce unnecessary complexity and cost associated with manual processes and multiple providers involved in performance marketing campaign management. Further, we are able to continue to deliver these efficiencies even as marketing campaigns scale and become more complex.

 

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Our Competitive Strengths

We believe we have established a strong leadership position in the global digital performance advertising market, built upon a number of differentiating strengths that enable our clients to engage customers and drive sales in a cost-effective way, regardless of campaign budget or complexity. We believe that the following competitive strengths will enable us to capture increasingly greater digital performance marketing budgets.

Powerful and Scalable Technology. Our solution is the result of over nine years of focused research and development and investment. It is supported by a flexible and scalable infrastructure, built in-house with six data centers on three continents. Our team of 477 product and engineering professionals is dedicated to developing and enhancing our platform. This platform operates at significant scale and is powered by machine learning algorithms whose accuracy and performance improve with each new piece of information about a user and the billions of advertising impressions we analyze daily.

Deep Data-Driven Understanding of Consumer Intent and Behavior. For our machine-learning algorithms to function optimally, breadth, quality and granularity of data are critical. We have access to two types of differentiating high quality data: (1) valuable consumer purchase behavior data, including products that a consumer has recently looked at or purchased; and (2) our own operating data and insights, which we have accumulated through our experience in delivering over 1.7 trillion internet display advertisements. Substantially all our clients grant us access to detailed consumer purchase behavior data through integration with their websites and/or mobile applications. We only use the purchase intent data from each of our clients for the benefit of that specific client’s marketing campaigns and do not sell or otherwise share this data with other clients or third parties. The power of our solution compels our clients to share this valuable data with us, which they would otherwise not typically share. Our own operating data includes insights from user responses to each individual advertisement that we serve, which we use to continually improve our performance. The scale and breadth of our data is constantly growing as users interact with our clients and as we deliver more advertising impressions. For example, in 2014, we analyzed over 5.7 trillion ad impressions and delivered over 740 billion advertisements.

Deep Liquidity of Demand and Supply. Over the course of multiple years, we have built an extensive network of relationships with our advertiser clients and publishers, creating a highly liquid marketplace for internet display advertising inventory, as well as for opt-in e-mail inventory. We channel demand for advertising inventory from over 7,000 clients on our advertiser platform, representing a broad range of businesses. On the supply side, we have direct relationships with over 9,000 publisher partners and are also integrated with the leading advertising exchanges and networks. A dedicated team of 130 professionals is focused on building and maintaining our direct relationships with publishers, many of whom have granted us preferred access to portions of their internet display advertising inventory. This deep and liquid marketplace has enabled us to increase our reach and access to a quality supply of advertising inventory, driving our ability to quickly match an advertisement to a user before purchase intent has diminished, wherever that user may be online.

High-Quality Client Base. As of December 31, 2014, we had more than 7,000 clients that used our solution in order to acquire, engage, convert and retain their customers. These include some of the largest and most sophisticated e-commerce companies in the world, including 3 Suisses, BonPrix, CDiscount, CROCS, Expedia, Ford, Gmarket, Gumtree.com, Hankyu Kotsusha, Hokende, Hotels.com, IKEA, ING, L’Oréal Paris, La Redoute, Lenovo, Lotte, Macy’s, MakeMyTrip, NetShoes, Nissen, Orange, Qatar Airways, Rakuten, Recruit, Samsung, Sarenza, Sephora, Staples, Tiger Direct, Travelocity, Voyages SNCF and Zalando.

Extensive Global Presence. We operate globally in 69 countries. In 2014, 44.4% of our revenue was derived from clients who conducted marketing campaigns with us in more than one national market. We have achieved this global presence by successfully replicating and scaling our business model in multiple different geographic markets. We efficiently conduct campaigns across multiple geographies by leveraging our global network of relationships. Large businesses are increasingly seeking comprehensive marketing solutions that are effective across geographic markets and we believe we are well positioned to serve them in nearly every market in which they seek to drive sales.

 

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Data-Driven Virtuous Circle. Our solution provides significant benefits to advertisers, publishers and users, which we believe creates a virtuous circle that drives network effects. As we attract more marketing budgets and publisher inventory and deliver more advertisements, our data assets grow, enabling us to deliver even more precisely targeted and personalized advertisements and generate more sales for our clients. As our ability to generate sales improves, we believe more businesses will use our solution and increase their marketing spend with us. This, in turn, will enable us to increase advertising revenue for our publishers, further building our publisher network and enhancing our access to their advertising inventory. We expect this virtuous circle will continue to fuel our growth.

Our Growth Opportunities

Our goal is to offer our clients their preferred solution globally for digital performance marketing as we drive more sales for them through customer engagement and conversion. The core elements of our growth strategy include:

Continuing to Innovate and Invest in Technology and Data. We intend to continue to make substantial investments in research and development to further increase the efficiency and effectiveness of our solution. In addition to improving our algorithms and underlying technology platform, we also intend to continue to develop ways of extracting greater value from the data we collect for the benefit of our clients. We believe these investments will enhance our value proposition for both existing and prospective clients and publisher partners.

Broadening Selectively our Spectrum of Marketing Channels. We started delivering our solution in internet display in web browsers on the desktop. Since then, we have progressively expanded into internet display on social platforms, internet display on mobile applications and e-mail marketing. We intend to continue to expand selectively into additional marketing channels in order to help our clients optimize their performance marketing spend and generate more sales across a broader range of marketing channels, while always using a single solution and benefitting from our performance-based business model. We believe a broader platform delivering our digital performance marketing solution through complementary marketing channels will enhance our value proposition for existing and prospective clients.

Reach and Convert our Clients’ Customers Across Different Screens and Devices. Today, our solution is delivered on internet browsers, both on the desktop and mobile devices, as well as on applications within mobile devices. In the month of December 2014, 80% of our clients used our solution on multiple screens, including the desktop and mobile devices. We believe the growth in mobile commerce is a significant opportunity to continue to expand our solution on multiple screens, including mobile devices. In addition, at the end of 2014, we launched our cross-device matching solution, allowing us to match consumers’ shopping behavior in real-time and to deliver relevant user-centric marketing messages across different devices. With the dramatic increase in smartphone and tablet usage in an increasingly fragmented digital landscape, we believe it is more and more critical for marketers to engage and convert their customers as they complete their journey across multiple digital devices. We intend to leverage our significant reach with users worldwide to empower marketers to engage and convert their customers wherever they are through our cross-device matching solution, which, we believe, will enhance our value proposition for existing and prospective clients.

Expanding Our Presence in Core Markets and Penetrating New Markets. At the end of 2014, we operated globally in 69 countries. We believe significant opportunities remain for us to grow our business in geographic markets where we already operate, such as Europe, the United States and Japan. Additionally, we plan to leverage and grow our existing sales teams as we enter and expand operations in new geographic markets, such as the Asia-Pacific region, Eastern Europe, the Middle East and Latin America. We have a strong track record of entering new markets successfully and rapidly achieving commercial traction.

Continuing to Grow our Client Base. As of December 31, 2014, we had over 7,000 clients using our solution. We intend to continue growing our client base, both in the large client and the midmarket segments.

 

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During 2014, we invested significantly to capture the midmarket opportunity and intend to continue investing in this promising market segment. For a definition of the midmarket segment, please refer to the section entitled “Our Clients” in the “Business Overview”.

Our Solution

Our technology solution delivers digital performance marketing. We enable our clients to generate sales by efficiently and effectively engaging and converting customers. Our solution is comprised of the Criteo Engine, data assets, our advertiser and publisher platforms and access to inventory.

How It Works

When we sign a new client, we require the client to place software code on their digital property to enable us to gather and import data regarding consumer behavior on that digital property, such as which products or services each visitor to the digital property has viewed. Using our prediction algorithms and the data collected, we build models to help us predict the potential likelihood a user will engage with the advertisements we display, typically by clicking, and will convert and buy the products or services contained in the advertisement. Using our recommendation algorithms, we also build models to identify other products or services of our clients that our algorithms indicate the user could be interested in.

Each day, we are presented with billions of opportunities to deliver an advertisement to users when advertising impressions become available to us. For each impression that becomes available to us, we have real-time software and hardware systems that apply our models to recommend specific products or services most likely to result in a purchase by the user and to predict the likelihood of that user engaging with an advertisement and purchasing the products or services contained in such advertisement. This calculation is done for each of our clients whose digital property the user has previously visited, taking into account specific products or services viewed. Based on the recommendations and predicted likelihood of engagement and conversion into a purchase, the Criteo Engine is designed to determine the most appropriate advertisement to show to the user, dynamically creates a custom advertisement and determines what price to pay for the advertising impression. If we are able to acquire the advertising impression for less than this price, we display the advertisement. This entire process can be executed in under 150 milliseconds and resulted in the delivery of over 23,500 advertisements per second on average in 2014, which represents the scale and capacity of our solution. However, the rate of the process and the number of advertisements delivered can vary on a second-by-second and day-to-day basis based on a number of potential factors, such as client demand, time of day and season. The results of the campaign, such as whether the user clicked on the advertisement or made a purchase, are fed back into the Criteo Engine each time we display an advertisement in order to improve the accuracy of its predictions and recommendations.

Criteo Engine

The Criteo Engine leverages the vast and high-quality data assets developed through our extensive relationships with thousands of clients, brands and publishers, as well as our significant operational history to deliver the right advertisement to the right user at the right time.

The core of our solution involves solving highly complex problems in a dynamic environment. This involves:

 

    determining a user’s engagement with display advertisements, which is a relatively rare event that requires a large sample size of relevant data to accurately predict;

 

    obtaining a large sample size of relevant data, which is difficult, in particular where the most relevant data points are also the most sparse—for example, very recent data on specific product interest; and

 

    building powerful, scalable and flexible systems that operate both accurately and quickly, between the time a user navigates to a page and an advertisement is delivered.

 

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LOGO

We solve this complex problem on a very large scale through:

 

    analyzing 230 terabytes of data daily (representing 2 petabytes of raw uncompressed data);

 

    serving over 2.0 billion impressions per day;

 

    running hundreds of A/B tests and ad-hoc data mining requests each year;

 

    refreshing the data pushed to the Criteo Engine on an hourly basis; and

 

    refreshing the prediction models used by the Criteo Engine on a daily basis.

The Criteo Engine consists of:

 

    Prediction algorithms. These algorithms predict the probability and nature of a user’s engagement with a given advertisement, for example in the form of clicks, conversions, basket-value, or even specific product categories purchased. This predicted engagement incorporates data from our advertiser clients, publishers and third-party sources, including user intent, who the client is, the products offered by the client, as well as data on the creative content of the advertisement, context in which the advertisement is viewed, demographic, behavioral and other data. We also incorporate an increasing number of variables resulting in millions of parameters used in these algorithms. Together with our recommendation algorithms, the prediction algorithms allow us to determine the most appropriate price to pay for an advertising impression based on predicted engagement and what a client is willing to pay for that engagement.

 

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    Recommendation algorithms. These algorithms dynamically create and tailor advertisements to specific user interest by modifying the advertisement’s creative content and presentation (including, for example, style of the advertisement, colors displayed, text used and formatting) and determining the specific products and services to include in the advertisement. These products and services may be ones that a user has already been exposed to, or that the algorithms predict the user could be interested in.

 

    Software systems and processes. Our algorithms are supported by robust software infrastructure that allows them and our solution to operate seamlessly at scale. The architecture and processing capabilities of this technology have been designed to match the massive computational demands and complexity of the algorithms. This technology enables data synchronization, storage and analysis across a large-scale distributed computing infrastructure in multiple geographies, as well as fast data collection and retrieval using multi-layered caching infrastructure.

 

    Bidding engine. Our bidding engine executes campaigns based on certain objectives set by the clients (for example, cost per click limits and number of sales). After a bid is placed and won, the Criteo Engine assembles and delivers individualized advertisements and provides campaign reporting, all in real time.

 

    Dynamic creative optimization. Based on the results of our algorithms, the Criteo Engine automatically assembles customized advertising content on an impression-by-impression basis in real time.

 

    Experimentation platform. This offline platform is used to improve the prediction abilities of our models, by measuring the correlation of specific parameters with user engagement, usually clicks. A dedicated team is constantly testing new types and sources of data to determine whether they help to diminish the gap between predicted engagement and actual observed engagement over the course of live campaigns.

Data Assets

The accuracy of our algorithms improves with both the increasing quantity and quality of data we obtain from our clients and publishers, as well as insights gained through our extensive operational history. Using cookies and similar tracking technologies, we collect information about the interaction of users with our advertisers’ and publishers’ digital properties (including, for example, information about the placement of advertisements and users’ shopping or other interactions with our clients’ digital properties or advertisements). The information we collect does not enable us to identify the particular user. We have access to large volumes of granular data from our clients, which carry consumer intent and are directly relevant to those clients’ campaigns. Our clients grant us access to this valuable data through direct integration with us, which requires our clients to place Criteo software code throughout their digital properties. This integration gives us privileged insight into users’ behavioral history at the product level for each client, representing a very high-quality data asset. We use the shopping intent data from each specific client only for the benefit of that specific client’s marketing campaigns.

In addition to client data, we seek to use as much information as possible about the context or intent of a given user to further refine our prediction accuracy. We collect this data directly from our clients or publishers.

Advertiser and Publisher Platforms

We offer our clients an integrated technology platform that enables comprehensive visibility and includes a unified and easy-to-use dashboard and a suite of software and services that automates key campaign processes. As a result, we reduce unnecessary complexity and cost associated with manual processes and multiple vendors, delivering efficiencies even as campaigns grow in size and complexity.

 

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Our integrated solution includes a comprehensive suite of services and software tools, including:

 

    CPOP, our unified dashboard to manage campaigns. This dashboard automates a number of campaign execution and management tasks. Key attributes of the dashboard include:

 

    easy-to-use interface;

 

    24/7 availability;

 

    granular control, with the ability to specify product categories, and bid at the category level; and

 

    transparent and detailed report of key campaign metrics, such as CPCs, impressions served, eCPM (or effective cost per thousand impressions), post-click sales, which represent sales of all products or services from our client’s digital properties from users that made a purchase during the 30 day period following a click by that user on an advertisement we delivered for that client, and post-view sales which represent sales of all products or services from our client’s digital properties from users that made a purchase during the 30 day period following us delivering an advertisement to that user.

 

    Business intelligence. We provide consultative services to our larger clients through a team of advisors that aid them in setting goals for, extracting insights from, and evaluating trends and performance of their marketing campaigns across our different marketing channels.

 

    Publisher Marketplace. We also offer small- and medium-sized publishers direct access to advertisers by providing a comprehensive inventory management platform which we call our Publisher Marketplace, or PuMP, which allows us to access the inventory of these publishers, without directly managing that inventory. Through this platform, our small- and medium-sized publisher partners have access to:

 

    an easy-to-use interface;

 

    24/7 availability;

 

    control to specify minimum prices for each publisher’s inventory; and

 

    reporting that allows each publisher to monitor the amount of money they have made selling their inventory to us.

Access to Inventory

Through our relationships with the leading RTB internet display exchanges, and more than 9,000 publisher partners, including through PuMP, we provide extensive access to advertising inventory. In some cases, we have negotiated direct and privileged access with publishers, giving us the opportunity to purchase on an impression by impression basis and in real time: (1) inventory that a publisher might otherwise only sell subject to minimum volume commitments; and/or (2) particular advertising impressions before such impressions are made available to other potential buyers. For example, in Japan, we have entered into a strategic relationship with Yahoo! Japan, giving us privileged access to its advertising inventory for delivering personalized display advertisements. This marks the first time that Yahoo! Japan, one of Japan’s largest publishers, has allowed a third-party technology to monetize their inventory.

Across both our direct publisher relationships and inventory purchasing done on advertising exchanges, we leverage the Criteo Engine’s ability to quickly and accurately value available advertising inventory, and utilize that information to bid for inventory on a programmatic, automated basis. Our ability to efficiently access and value inventory results in deep liquidity, allowing us to deliver effective advertisements at the right price for our clients, even as the size and complexity of campaigns increases.

We purchase inventory from our direct publishers generally through insertion orders consistent with industry standard terms and conditions for the purchase of internet advertising inventory. Pursuant to such

 

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arrangements, we purchase impressions on a CPM-basis for users that Criteo recognizes on the publishers’ network. Such arrangements are cancellable upon short notice and without penalty.

Through the direct relationships we have with publishers, we take steps to determine that the publisher’s inventory meets our content requirements and the content requirements of our clients to ensure that their display advertisements are not shown in inappropriate content categories, such as adult or political content. With respect to our inventory purchased through RTB exchanges, we utilize third-party software to verify that the inventory where the advertisement placement is shown conforms to our advertising guidelines and the content expectations of our advertisers.

In addition to display advertising inventory, we also source opt-in e-mail addresses from third party marketing e-mail databases, usually from publishers with whom we have a direct relationship. Such e-mail addresses are collected by publishers on an opt-in basis for usage for commercial purposes. The recipients of such e-mail messages have provided their positive consent to a given publisher to have their e-mail address included in a publisher’s database used for commercial purposes, usually on topics, products or services that are relevant to the recipients of these e-mail addresses.

Infrastructure

Our ability to deliver our solution depends on our highly sophisticated global technology software and hardware infrastructure. Our global infrastructure includes over 11,000 servers and a 1,085-node Hadoop cluster providing a storage capacity exceeding 38 petabytes. Our global infrastructure is divided into three independent geographical zones in the Americas, in Europe, Middle East and Africa (or EMEA) and in Asia. In each of the zones, our services are delivered through data centers that support these zones. We generally rely on more than one data center in any given zone that are strategically placed within large zones to be close to our advertiser clients, publishers and users. This has the benefit of minimizing the impact of network latency within a particular zone, especially for time-constrained services such as RTB. In addition, we replicate data across multiple data centers to maximize availability and performance. We also generally seek to distribute workload across multiple locations in order to avoid overloads in our systems and increase reliability through redundancy.

Within each data center, computing power is provided by horizontal build-outs of commodity servers arranged in multiple, highly redundant pools. Some of these pools are dedicated to handling incoming traffic and delivering advertisements, including web servers, caches, and real-time database applications. Other pools are devoted to the data analytics involved in creating these advertisements. In particular, we use clusters using software specifically designed for processing large data sets, Hadoop, to run the offline data analysis which results are then fed back to refresh and improve our prediction and recommendation algorithms.

We use multiple layered security controls to protect the Criteo Engine and data assets, including hardware and software based access controls for our source code and production systems, segregated networks for different components of our production systems and centralized production systems management.

Our Clients

Our client base consists primarily of companies in the online retail, classifieds and travel segments. These companies range from large, diversified e-commerce companies to many smaller regional companies. As of December 31, 2014, we had more than 7,000 advertiser clients, representing clients who had a marketing campaign that was live on any given day over a 12 trailing-month period. In 2014, 69% of our advertiser client relationships were held directly with the advertiser. For a breakdown of our revenue by geographic region, please see note 5 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

 

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Our clients include some of the largest and most sophisticated e-commerce companies in the world, including:

3 Suisses

BonPrix

CDiscount

CROCS

Expedia

Ford

Gmarket

Gumtree.com

Hankyu Kotsusha

Hokende

Hotels.com

IKEA

ING

L’Oréal Paris

La Redoute

Lenovo

Lotte

Macy’s

MakeMyTrip

NetShoes

Nissen

Orange

Qatar Airways

Rakuten

Recruit

Samsung

Sarenza

Sephora

Staples

Tiger Direct

Travelocity

Voyages SNCF

Zalando

The foregoing list is not intended to represent a comprehensive list of our client base. Our largest clients could change from period to period. We believe our business is not substantially dependent on any particular client. In 2012, 2013 and 2014, our largest client represented 5.2%, 5.1% and 2.9% of our revenue, respectively, and in 2014 our largest ten clients represented 14.6% of our revenue in the aggregate.

We define a client to be a unique party from whom we have received an insertion order and delivered an advertisement during the previous 12 months. We count specific brands or divisions within the same business as distinct clients so long as those entities have separately signed insertion orders with us. 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 marketing campaign is conducted as the “client” for purposes of this calculation. In the event a client has its marketing spend with us managed by multiple agencies, that client is counted as a single client.

Our client base is composed of two client segments: the large client segment and the midmarket segment. We define large clients typically as the top-100 or the top-200 advertisers per vertical in a given geographic

 

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market, depending on the depth of that market, based on the value of their advertising spend. We define a midmarket client as any client outside of the top-100 or top-200 advertisers per vertical in a given geographic market, depending on the depth of that market, based on the value of their advertising spend and with a minimum of 40,000 unique monthly visitors to their digital property as measured by comScore.

We generally charge our clients on a CPC-basis, that is, only when a user clicks on an advertisement. We typically sell digital performance marketing to clients through insertion orders that are cancellable upon short notice and without penalty. For any given marketing campaign, the client has the ability to adjust its CPC above a determined floor price in real time during the campaign life by product category and user intent segment in the event the client wants to increase its spending on the given marketing campaign due to the success of the campaign.

Competition

We compete primarily in the market for digital performance marketing. Our market is rapidly evolving, highly competitive, complex and fragmented. We face significant competition in this market, which we expect to intensify in the future, partially as a result of potential new entrants on our market, including but not limited to large well-established internet publishers. We currently compete with large, well-established companies, such as Amazon.com, Inc., eBay Inc., Google Inc., Alliance Data Systems, Corp. and Yahoo! Inc. as well as smaller, privately held companies. We believe the principal competitive factors in our industry include:

 

    ability to deliver return on marketing spend at scale;

 

    global reach;

 

    client trust;

 

    breadth and depth of publisher relationships;

 

    comprehensiveness of products and solutions;

 

    client service; and

 

    ease of use.

We believe that we are well positioned with respect to all of these factors and expect to continue to grow and capture an increasing share of digital performance marketing budgets globally.

Sales and Publisher Development

Client Sales and Support

We sell our solution directly to clients and their advertising agencies through a global sales team which is organized by geography, size of account and industry vertical. A number of our sales professionals are devoted to clients in specific industries, helping to ensure that our teams possess relevant industry knowledge and expertise. Supporting our sales team is our account strategist team, which helps maintain and grow the accounts of our existing clients. As of December 31, 2014, our sales and account strategists teams included 360 employees. We expect to continue to expand our sales and account strategist teams as we expand into new industry verticals and geographical markets.

Publisher Development

As of December 31, 2014, we had a team of approximately 130 dedicated professionals focused on establishing new relationships with publishers and managing our existing publisher relationships. Our premium publisher team focuses its efforts on establishing direct relationships with the largest publishers to obtain preferred access to high-quality advertising inventory. In addition, we have developed our own publisher

 

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marketplace, which we refer to as PuMP, in order to efficiently access and manage advertising inventory from small-to-medium-sized publishers. We have a team of dedicated professionals in local markets in which we operate to expand the number of publishers that utilize PuMP. Finally, our global RTB team focuses on our developing and enhancing relationships with leading advertising exchanges.

Research and Development

We invest substantial resources in research and development to enhance our solution and technology infrastructure, develop new features, conduct and quality assurance testing and improve our core technology. Our engineering group is primarily located in research and development centers in Paris, France and Palo Alto, California. We expect to continue to expand capabilities of our technology in the future and to invest significantly in continued research and development efforts. We had 250 employees primarily engaged in research and development at December 31, 2014. Research and development expense totaled €14.3 million, €32.2 million and €45.3 million for 2012, 2013 and 2014, respectively.

Intellectual Property

Our intellectual property rights are a key component of our success. We rely on a combination of patent, trademark, copyright and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish, maintain and protect our proprietary rights. We generally require employees, consultants, clients, publishers, suppliers and partners to execute confidentiality agreements with us that restrict the disclosure of our intellectual property. We also generally require our employees and consultants to execute invention assignment agreements with us that protect our intellectual property rights.

Intellectual property laws, together with our efforts to protect our proprietary rights, provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. The laws of certain countries do not protect proprietary rights to the same extent as the laws of France and the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology. Further, agreements with our employees and consultants may be breached, and we may not have adequate remedies to redress any breach. Further, to the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know- how and inventions. Finally, our trade secrets may otherwise become known or be independently discovered by competitors and unauthorized parties may attempt to copy aspects of our solution or obtain and use information that we regard as proprietary.

As of December 31, 2014, we held one issued French patent, which expires in 2026, and two issued U.S. patents, one of which expires in 2028 and the other in 2031. In addition, we have filed six non-provisional U.S. patent applications, three European applications and one Japanese application. We also own and use registered and unregistered trademarks on or in connection with our products and services in numerous jurisdictions. In addition, we have also registered numerous internet domain names.

Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. In particular, leading companies in the technology industry have extensive patent portfolios. From time to time, third parties, including certain of these leading companies, have asserted and may assert patent, copyright, trademark and other intellectual property rights against us, our advertiser clients or our publishers. Litigation and associated expenses may be necessary to enforce our proprietary rights.

Privacy, Data Protection and Content Control

Privacy and Data Protection

Privacy and data protection laws play a significant role in our business. In the United States, at both the state and federal level, there are laws that govern activities such as the collection and use of data by companies like us.

 

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Online advertising activities in the United States have primarily been subject to regulation by the Federal Trade Commission, or the FTC, which has regularly relied upon Section 5 of the Federal Trade Commission Act, or Section 5, to enforce against unfair and deceptive trade practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations of consumer privacy interests. In addition, our solution reaches users throughout the world, including in Europe, Australia, Canada, South America and Asia. As a result, some of our activities may also be subject to the laws of foreign jurisdictions. In particular, European data protection laws can be more restrictive regarding the collection and use of data than those in U.S. jurisdictions. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.

Additionally, U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict industry participants’ ability to collect, augment, analyze, use and share anonymous data, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tools to track people online. The European Union, or EU, and some EU member states have already implemented legislation and regulations requiring websites to obtain specific types of notice and consent from individuals before using cookies or other technologies to track individuals and their online behavior and deliver targeted advertisements. It remains a possibility that additional legislation and regulations may be passed or otherwise issued in the future.

We also participate in industry self-regulatory programs, mainly initiated by Internet Advertising Bureau EU & US, Network Advertising Initiative and Digital Advertising Alliance, and under which, in addition to other compliance obligations, we provide consumers with notice about our use of cookies and our collection and use of data in connection with the delivery of targeted advertising and allow them to opt-out from the use of data we collect for the delivery of targeted advertising. In an effort to harmonize the industry’s approach to internet-based advertising, these programs also facilitate a user’s ability to disable services of integrated providers but also educate users on the potential benefits of online advertising, including access to free content and display of more relevant advertisements to users. The rules and policies of the self-regulatory programs that we participate in are updated from time to time and may impose additional restrictions upon us in the future.

In 2009, we became one of the first companies to broadly include a link in the advertisements we deliver, which gives access to clear, detailed and user-friendly information describing why a user is seeing an advertisement, as well as prominently describing our service and data management practices. In addition, we provide users with an easy-to-use and easy-to-access mechanism to opt-out of receiving advertisements we deliver or being tracked by us either for all campaigns or for a specific client or time period. We believe that this user-centric approach in addressing privacy matters empowers users to make informed decisions on the use of their data. We also actively encourage our clients to provide greater transparency and information about the collection and use of data.

Content Control

To protect against unlawful content (advertiser and publisher), we include restrictions on content in our terms and conditions. We also manually review the websites of new publisher partners and use third party software to screen impressions we acquire through advertising exchanges.

Government Regulation

We are subject to numerous domestic and foreign laws and regulations covering a wide variety of subject matters. New laws and regulations (or new interpretations of existing laws and regulations) may also impact our business. The costs of compliance with these laws and regulations are high and are likely to increase in the future and any failure on our part to comply with these laws may subject us to significant liabilities and other penalties.

 

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Facilities

Our headquarters are located in Paris, France, in an approximately 14,000-square-meters facility, under a lease agreement expiring on June 15, 2023 and our principal executive office in the United States is located in New York City, New York in a 16,814 square-foot facility, under a lease agreement expiring on December 30, 2016. We have regional offices in London, Munich, Stockholm, Amsterdam, Milan, Madrid, Barcelona, Moscow, Grenoble, Sao Paolo, Palo Alto, San Francisco, Miami, New York, Boston, Chicago, Tokyo, Seoul, Sydney, Beijing and Singapore.

Legal Proceedings

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, results of operations, financial condition or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

 

C. Organizational Structure.

The following diagram illustrates our corporate structure:

 

LOGO

 

D. Property, Plants and Equipment.

For a discussion of property, plants and equipment, see “Item 4.B—Business Overview—Facilities.”

 

Item 4A. Unresolved Staff Comments

Not applicable.

 

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Item 5. Operating and Financial Review and Prospects

Overview

We are a global technology company specializing in digital performance advertising. We leverage large volumes of granular data to efficiently and effectively engage and convert customers on behalf of our advertiser clients. We use our proprietary predictive software algorithms coupled with deep insights into expressed consumer intent and purchasing habits to price and deliver highly relevant and personalized digital performance advertisements on all devices in real time.

We partner with our clients to track activity on their websites and optimize our advertising placement decisions based on that activity and other data. Demonstrating the depth and scale of our data, we observed over $430 billion in sales transactions on our clients’ websites in the year ended December 31, 2014 whether or not a consumer saw or clicked on a Criteo advertisement. Based on this data and our other data assets, we delivered targeted advertisements that generated approximately 3.3 billion clicks over the same period. Based on these clicks, our clients generated over $16.5 billion in post-click sales. A post-click sale is defined as a purchase made by a user from one of our client’s websites during the 30 day period following a click by that user on an advertisement we delivered for that client. We believe post-click sales is a key performance indicator that our clients use to measure the effectiveness of our solution in driving sales and the return on their advertising spend with us. As of December 31, 2014, we had over 7,000 clients and in each of the last three years our client retention rate was approximately 90%.

We operate in 69 countries through a network of 21 international offices located in Europe, the Americas and the Asia- Pacific region. We were organized in 2005 and began selling our solution in France in 2007 and expanded our business into other countries in Western Europe. In 2009, we expanded our business into North America. As part of our geographic expansion goals, we initially entered the Asia-Pacific region in late 2010. Additionally, in August 2012, we entered into a strategic relationship with Yahoo! Japan, a leading provider of advertising inventory in Japan, which provides us with privileged access to their performance-based display inventory. As a result of our significant international operations, our revenue from outside of our home country France, accounted for 88.3% of our revenue for year ended December 31, 2014.

Our financial results include:

 

    revenue increased from €271.9 million for 2012 to €444.0 million for 2013 and €745.1 million for 2014;

 

    revenue excluding traffic acquisition costs, which we refer to as revenue ex-TAC, which is a non-IFRS financial measure, increased from €114.1 million for 2012 to €179.0 million for 2013 and €303.7 million for 2014;

 

    net income was €0.8 million for 2012, €1.4 million for 2013 and €35.4 million for 2014; and

 

    Adjusted EBITDA, which is a non-IFRS financial measure, increased from €17.4 million for 2012 to €31.3 million for 2013 and €79.4 million for 2014.

Please see footnotes 3 and 5 to the Other Financial and Operating Data table in “Item 3.A—Selected Financial Data” of this Annual Report on Form 20-F for a reconciliation of revenue ex-TAC to revenue and Adjusted EBITDA to net income, the most directly comparable financial measures calculated and presented in accordance with IFRS.

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 display advertising. As part of this focus, we seek to maximize our percentage of overall marketing spend in the internet display advertising market over the long-term. In addition, this focus enriches liquidity for both advertisers and publishers resulting in more effective advertising for the advertiser, better monetization for the publisher and more relevant advertisements for the user. We believe our results of operations are reflective of this focus.

 

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Acquisitions

In February 2015, Criteo acquired DataPop, a Los Angeles-based company specializing in the optimization of shopping campaigns on the main search engines. With the addition of DataPop, we will continue to broaden our channels enabling marketers to convert customers across a wider spectrum of marketing channels and deliver multi-channel performance marketing across all devices and screens. Please refer to Note 28 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F for further details.

In April 2014, we completed the acquisition of AdQuantic, a bidding technology company headquartered in Paris. Through the acquisition of AdQuantic, we added a team of seven experts in bidding technology, reinforcing our focus on research and development.

In February 2014, we acquired Tedemis, a leading provider of real-time personalized e-mail marketing solutions that help advertisers turn web visitors into customers. With the addition of Tedemis, we extended our digital performance marketing solution to a new marketing channel.

As part of our strategy to build upon our market and technology leadership, in July 2013, we acquired Ad-X, a mobile analytics and attribution technology company. Ad-X provides a solution for businesses to track and optimize mobile display advertising campaigns delivered to smartphones and tablets through mobile advertising networks and other marketing solutions. The acquisition of Ad-X enabled us to leverage Ad-X’s complementary technology, personnel and client relationships to accelerate our mobile strategy.

How Criteo Generates Revenue

We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies, which we collectively refer to as our clients, and primarily generate revenue when a user clicks on a banner advertisement. We price our advertising campaigns on a CPC model based on the number of clicks by users per month on each advertising campaign. Essentially all of our revenue in each of 2012, 2013 and 2014 was derived from advertising campaigns sold on a CPC basis. We serve a wide range of clients and our revenue is not concentrated within any single client or group of clients. In 2012, 2013 and 2014, our largest client represented 5.2%, 5.1% and 2.9% of our revenue, respectively, and in 2014, our largest 10 clients represented 14.6% of our revenue in the aggregate.

Publishers are a source of inventory for us, and we account for the cost of such inventory, which is purchased on a CPM basis, in our cost of revenue. While accessing publishers’ supply of inventory in sufficient quantity and quality is a critical requirement for us to successfully conduct our business, we do not generate any revenue directly from our relationships with publishers.

 

A. Operating Results.

Basis of Presentation

The key elements of our results of operations include:

Revenue

We sell internet display advertisements featuring product-level recommendations either directly to clients or to advertising agencies, which we collectively refer to as our clients, and generate revenue when a user clicks on a banner advertisement of one of our advertiser clients. Publishers are a source of inventory for us, and we account for the cost of such inventory, which is purchased on a cost per thousand impressions basis, in our cost of revenue. While accessing publishers’ supply of inventory in sufficient quantity and quality is a critical requirement for us to successfully conduct our business, we do not generate any revenue directly from its relationship with publishers. We serve a wide range of clients across multiple industry verticals and company

 

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sizes, and our revenue is not concentrated within any single client or group of clients. In 2012, 2013 and 2014, our largest client represented 5.2%, 5.1% and 2.9% of our revenue, respectively, and in 2014 our largest 10 clients represented 14.6% of our revenue in the aggregate.

We price our advertising campaigns on a CPC model based on the number of clicks generated by users on each advertising campaign. The actual number of clicks generated by users is highly dependent on our ability to maximize click through rate, or CTR, by displaying customized individual banners to individual users and purchasing in real time the most relevant impression for that particular individual user. For any given advertising campaign, the client has the ability to adjust its CPC above a determined floor price in real time during the campaign life by product category and by user intent segment. This enables clients to adjust the estimated marketing spend attributable to the particular campaign. Essentially all of our revenue in each of 2012, 2013 and 2014 was derived from advertising campaigns sold on a CPC basis. Our remaining revenue also includes advertising revenue generated on a CPM basis or on a cost per acquisition, or CPA, basis as well as fees for packaged sales of advertising on our clients’ websites.

We sell performance-based campaigns to clients generally through insertion orders that are cancellable upon short notice and without penalty. We generally bill our clients on a monthly basis for each campaign run during the prior month. The monthly fee is based on the campaign’s various real-time CPCs for that month multiplied by the number of clicks generated by users for that month for such CPCs.

As we further expand our geographic footprint, develop new clients and grow our business with existing clients, and expand our business into new marketing channels and new industry verticals, we expect our revenue to continue to increase.

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 advertising 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 accounts payable and accrued expenses.

We purchase inventory from our direct publishers generally through insertion orders consistent with industry standard terms and conditions for the purchase of internet advertising inventory. Pursuant to such arrangements, we purchase impressions on a CPM-basis for users that Criteo recognizes on the publishers’ network. Such arrangements are cancellable upon short notice and without penalty. Under our current agreements with our publishers, we only commit to purchase a defined volume of impressions from any given publisher to the extent that a pre-determined CTR is reached. If the publisher fails to reach the targeted volume of impressions, we can either terminate the agreement or reduce our commitment to buy impressions accordingly. We intend to expand our direct relationships with publishers to secure our access to qualified inventory. We may require our publishers to deliver higher volumes of impressions, with our commitment to buy being linked to a specified CTR reached. We may also require our publishers to first call us for the advertising serving, thereby granting us privileged access to qualified internet display advertising inventory, and we may sign more exclusive deals with publishers.

In recent years, real-time automated buying platforms and bidding exchanges have gained significant traction in the internet display advertising market, resulting in a significant increase in the supply of inventory. As part of this expansion, we have integrated our solution with the leading advertising exchanges and developed our own comprehensive inventory management platform, which we refer to as PuMP. We believe the

 

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combination of our extensive direct publisher relationships and access to leading advertising exchanges enhances the breadth and depth of our accessible advertising inventory resulting in deep liquidity for us. We believe that this contributes to increasing the strength our solution with our clients.

For a discussion of the trends we expect to experience in traffic acquisition costs, see the section titled “—Highlights and Trends—Revenue ex-TAC” in Item 5.D—Trend Information” below.

Other Cost of Revenue. Other cost of revenue includes expenses related to third-party hosting fees, depreciation of data center equipment and data purchased from third parties that we leverage in our solution. We intend to continue to invest additional resources in the capacity of our hosting services infrastructure, and as we enter new markets, we may make additional investments in the acquisition of relevant third-party data.

Operating Expenses

Operating expenses consist of research and development, sales and operations, and general and administrative expenses. Salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs are the most significant components of each of these expense categories. We grew from 197 employees at January 1, 2011 to 1,300 employees at December 31, 2014, and we expect to continue to hire a significant number of new employees in order to support our anticipated revenue growth. We include share-based compensation expense in connection with the grant of share options in the applicable operating expense category based on the respective equity award recipient’s function.

Research and Development Expense. Research and development expense consists primarily of personnel-related costs for our employees working in the engine, platform and infrastructure teams, including salaries, bonuses, share-based compensation and other personnel related costs. Our research and development function was supplemented in January 2013 to include a dedicated product organization following the appointment of our Chief Product Officer. Also included are non-personnel costs such as subcontracting, consulting and professional fees to third-party development resources, allocated overhead and depreciation and amortization costs. These expenses are partially offset by the French research tax credit that is conditional upon the level of our investments in research and development. For additional discussion of the French research tax credit, see the discussion below titled “—Provision for Income Taxes.”

Our research and development efforts are focused on enhancing the performance of our solution and improving the efficiency of the services we deliver to our clients. All development costs, principally headcount-related costs, are expensed as management determines that technological feasibility is reached shortly before the release of products or features developed and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products or features are not material and accordingly, are expensed as incurred.

The number of employees in research and development functions grew from 44 at January 1, 2011 to 250 at December 31, 2014. We expect research and development expenses to continue to increase in absolute euros but remain fairly constant as a percentage of our revenue. We believe our continued focus on research and development to be critical to maintaining and improving our technology solution, 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 sales, marketing, account strategy, business intelligence, technical solutions and creative teams, including salaries, bonuses, share-based 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 fees and allocated overhead.

The number of employees in sales and operations functions grew from 126 at January 1, 2011 to 833 at December 31, 2014. In order to continue to grow our business, geographic footprint and brand awareness, we

 

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expect to continue investing our resources in sales and operations, in particular by increasing the number of sales and account strategy teams. As a result, we expect sales and operations expenses to increase in absolute euros as we invest to acquire new clients and retain existing clients and grow revenue from existing clients and hire additional sales personnel, but will decrease as a percentage of revenue over time as we scale and increase the productivity of our sales and operations teams.

General and Administrative Expense. General and administrative expense consists primarily of personnel costs, including salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs for our administrative, legal, information technology, human resources, and finance employees. Additional expenses included in this category are non-personnel costs, such as 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.

The number of employees in general and administrative functions grew from 27 at January 1, 2011 to 217 at December 31, 2014. We expect our general and administrative expense to increase as we continue to support our growth. We also anticipate that we will incur additional costs for personnel and professional services-related to operating as a public company. Such costs include increases in our finance and legal personnel, additional external legal and audit fees, increased cost for directors’ and officers’ liability insurance and expenses and costs associated with compliance with the Sarbanes-Oxley Act of 2002 and other regulations governing public companies.

Financial Income (Expense)

Financial income (expense) primarily consists of:

 

    exchange differences arising on the balance of proceeds of our initial public offering completed in October 2013 and received in U.S. dollars that have been hedged through put and collar instruments since 2013. The translation of the U.S. dollars into euros according to the closing foreign exchange rate generates an exchange difference partially offset by the cost of the related hedging instruments.

 

    exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros. We are exposed to changes in exchange rates primarily in the United States, the United Kingdom, Japan and Brazil. The U.S. dollar, the British Pound, the Japanese Yen and the Brazilian Real are our most significant foreign currency exchange risks. At end of December 2014, the main positions bearing a risk of foreign currency were centralized at parent company level and hedged.

 

    interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt obligations.

We will monitor foreign currency exposure and will 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 unrecognized deferred tax assets, differences between domestic and foreign jurisdiction tax rates, RTC (Research Tax Credit) offsets, which are non-taxable items, potential tax audit provision settlements, non-deductible share-based compensation

 

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expenses, and transfer pricing adjustments. We license access to our technology to our subsidiaries and charge a royalty to these subsidiaries for such access. We benefit from a reduced tax rate on this technology royalty income.

In 2011, we underwent a tax inspection by the French tax authorities covering fiscal years 2008 and 2009. At the end of 2011, we received a tax assessment notice for which a provision has been recognized for €0.5 million. Pursuant to another tax inspection in 2013, no significant reassessment was received. The provision has been maintained as of December 31, 2014.

Critical Accounting Policies and Significant Judgments and Estimates

Our consolidated financial statements are prepared in accordance with IFRS. The preparation of our consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of revenue, assets, liabilities, costs and expenses. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates. Our most critical accounting policies are summarized below. See note 3 to our audited consolidated financial statements beginning on page F-1 for a description of our other significant accounting policies.

Revenue Recognition

We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies, which we collectively refer to as our clients, and generate revenue when a user clicks on the banner advertisement. We price our advertising campaigns on a CPC model based on the number of clicks generated by users on each advertising campaign.

Revenue is recognized when the related services are delivered based on the specific terms of the contract, which are primarily based on specified CPCs and related campaign budgets. We recognize revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the client reflecting the terms and conditions under which the services will be provided; (2) services have been provided or delivery has occurred; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. Collectability is assessed based on a number of factors, including the creditworthiness of a client, the size and nature of a client’s website and transaction history. Amounts billed or collected in excess of revenue recognized are included as deferred revenue. An example of this deferred revenue would be arrangements where clients request or are required by us to pay in advance of delivery.

We recognize revenue from the delivery of display advertisements in the period in which the display advertisements are delivered. Specifically, we recognize revenue for display advertising delivery through our solution once the consumer clicks on the personalized banner displayed by us on the client’s website for CPC advertising campaigns. For CPC advertising campaigns, sales are valued at the fair value of the amount received. Rebates and discounts granted to clients, along with free or extended advertising campaigns, are recorded as a deduction from revenue. Essentially all of our revenue in each of 2012, 2013 and 2014 was derived from advertising campaigns sold on a CPC basis.

In the normal course of business, we act as an intermediary in executing transactions with third parties. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether we are acting as the principal or an agent in our transactions. In determining whether we act as the principal or an agent, we follow the accounting guidance for principal-agent considerations. The determination of whether we are acting as a principal or an agent in a transaction involves judgment and is based on an evaluation of the terms of each arrangement. While none of the factors individually are considered presumptive or determinative, because we are the primary obligor and are responsible for (1) identifying and contracting with third-party clients, (2) establishing the selling prices of the display advertisements sold, (3) performing all billing and

 

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collection activities, including retaining credit risk, and (4) bearing sole responsibility for fulfillment of the advertising and the inventory risk, we act as the principal in these arrangements and therefore report revenue earned and costs incurred related to these transactions on a gross basis.

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. 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 allowances for doubtful accounts charged to our consolidated statements of income for the years ended December 31, 2012, 2013 and 2014 was €0.8 million, €0.8 million and €1.0 million, respectively.

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. 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 would have a significant impact on our financial results. This determination requires many estimates and judgments by our management for which the ultimate tax determination may be uncertain. Amounts recognized in our consolidated financial statements are calculated at the level of each subsidiary within our consolidated financial statements. As at December 31, 2012, 2013 and 2014, limitation of deferred tax assets amounted to €10.9 million, €13.5 million and €21.5 million. These amounts mainly relate to the limitation of Criteo Corp. accumulated tax losses, (€8.3 million, €10.0 million and €11.4 million, respectively), of Criteo do Brasil temporary differences (€1.8 million at the end of 2013 and €2.1 million at the end of 2014) and of Criteo Ltd temporary differences (€6.1 million at the end 2014, of which €5.1 million concerns the total potential tax deduction relating to stock-options).

For 2012, unrecognized deferred tax assets were mainly related to the tax losses of Criteo Corp. (United States). For 2013, unrecognized deferred tax assets mainly correspond to the 2013 tax losses of Criteo do Brasil (Brazil). For 2014, unrecognized deferred tax assets mainly relate to Criteo Ltd. (United Kingdom), Criteo Singapore Pte. Ltd. (Singapore), Criteo do Brasil (Brazil) and Criteo Advertising (Beijing) Co. Ltd. (China) tax losses.

Goodwill

The acquisition method is used in accounting for business combinations. The consideration transferred to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interests issued by Criteo S.A. or one of its subsidiaries, which includes the fair value of any asset or liability arising from a contingent consideration arrangement.

Identifiable assets acquired and liabilities assumed are recognized in a business combination regardless of whether they have been previously recognized in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition date fair values.

 

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Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the fair value fair of consideration transferred, over the sum of the recognized amount of any non-controlling interest in the acquiree and the acquisition-date fair values of identifiable net assets.

Intangible Assets

Acquired intangible assets are accounted for at acquisition cost less cumulative amortization and any impairment loss. Acquired intangible assets are amortized over their estimated useful lives of one to five years on a straight-line method. 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.

Internal-Use Software

Costs related to customized internal-use software that have reached the development stage are capitalized. Capitalization of such costs begins when the preliminary project stage is complete and stops when the project is substantially complete and is ready for its intended purpose. In making this determination, several analyses for each phase were performed, including analysis of the feasibility, availability of resources, intention to use and future economic benefits. Amortization of these costs begins when capitalization stops and is calculated on a straight-line basis over the assets’ useful lives estimated at three to five years.

Our research and development efforts are focused on enhancing the performance of our solution and improving the efficiency of the services we deliver to our clients. All development costs, principally headcount-related costs, are expensed as management determines that technological feasibility is reached shortly before the release of products or feature development and as a result, the development costs incurred after the establishment of technological feasibility and before the release of those products or features are not material and accordingly are expensed as incurred.

Provisions

We recognize provisions in accordance with International Accounting Standard No. 37, Provisions, Contingent Liabilities and Contingent Assets, if the following three conditions are met: we have a present obligation (legal or constructive) towards a third-party that arises from an event prior to the closing date; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and the obligation amount can be estimated reliably. With respect to litigation and claims that may result in a provision to be recognized, we exercise significant judgment in measuring and recognizing provisions or determining exposure to contingent liabilities that are related to pending litigation or other outstanding claims. These judgment and estimates are subject to change as new information becomes available.

Share-Based Compensation

We account for share-based compensation in accordance with the authoritative guidance on share 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, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the respective award.

 

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Determining the fair value of share-based awards at the grant date requires judgment. 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 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. Prior to the completion of our initial public offering, we estimated the fair value of ordinary shares as discussed in “—Ordinary Share Valuations” below. Following our initial public offering, we established a policy of using the closing sales price per ADS as quoted on Nasdaq on the date of grant for purposes of determining the fair value of ordinary shares 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 used an expected dividend yield of zero.

If any of the assumptions used in the Black-Scholes model changes significantly, share-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:

 

     Year Ended December 31,  
     2012      2013      2014  

Volatility

     50.2% – 52.5%         50.0% – 50.1%         41.5% – 44.5%   

Risk-free interest rate

     2.20% – 3.16%         1.80% – 2.40%         0.43% – 1.90%   

Expected life (in years)

     8 years         8 years         6 years   

Dividend yield

     —  %         —  %         —  %   

Ordinary Share Valuations

Prior to our initial public offering, the fair value of the ordinary shares underlying our share options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per share fair value of our ordinary shares underlying those options on the date of grant. The valuations of our ordinary shares were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held- Company Equity Securities Issued as Compensation. The assumptions we used in the valuation model were based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors with

 

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input from management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our ordinary shares as of the date of each option grant, including the following factors:

 

    Contemporaneous third-party valuations performed at periodic intervals by a valuation firm conducted as of September 12, 2012, December 31, 2012, March 31, 2013 and July 31, 2013;

 

    the prices, rights, preferences and privileges of our preferred shares relative to the ordinary shares;

 

    the purchases of preferred shares by venture capital firms;

 

    our operating and financial performance and forecast;

 

    current business conditions;

 

    significant new client wins;

 

    our stage of development;

 

    the likelihood of achieving a liquidity event for the ordinary shares underlying these share options, such as an initial public offering or sale of our company, given prevailing market conditions;

 

    any adjustment necessary to recognize a lack of marketability for our ordinary shares;

 

    the market performance of comparable publicly-traded technology companies; and

 

    U.S. and global capital market conditions.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements applicable to us, see note 2 to our audited consolidated financial statements beginning on page F-1.

Results of Operations

We operate in one segment, internet display advertising services. The following table sets forth our selected consolidated statements of income data:

 

     Year Ended December 31,  
     2012      2013      2014  
     (in thousands)  

Consolidated Statements of Income data:

  

Revenue

   271,855       443,960       745,081   

Cost of revenue(1)

        

Traffic acquisition costs

     (157,707      (264,952      (441,427

Other cost of revenue

     (12,662      (21,956      (36,150
  

 

 

    

 

 

    

 

 

 

Gross profit

101,486    157,052    267,504   
  

 

 

    

 

 

    

 

 

 

Operating expenses(1)

Research and development

  (14,285   (32,175   (45,293

Sales and operations

  (58,047   (82,816   (133,393

General and administrative

  (20,208   (31,387   (48,788
  

 

 

    

 

 

    

 

 

 

Total operating expenses

  (92,540   (146,378   (227,474
  

 

 

    

 

 

    

 

 

 

Income from operations

  8,946      10,674      40,030   
  

 

 

    

 

 

    

 

 

 

Financial income (expense)

  (1,559   (6,868   8,587   
  

 

 

    

 

 

    

 

 

 

Income before taxes

  7,387      3,806      48,617   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

  (6,556   (2,413   (13,523
  

 

 

    

 

 

    

 

 

 

Net income

831    1,393    35,364   
  

 

 

    

 

 

    

 

 

 

 

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  (1)  Cost of revenue and operating expenses include share-based compensation expense, service costs (pension), depreciation and amortization expense, and acquisition-related deferred price consideration as follows:

 

     Year Ended December 31,  
     2012      2013      2014  
     (in thousands)  

Share-Based Compensation Expense:

        

Research and development

   (429    (2,049    (2,776

Sales and operations

   (1,800    (2,801    (9,267

General and administrative

   (1,327    (2,026    (2,735
  

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

(3,556 (6,876 (14,778
  

 

 

    

 

 

    

 

 

 

Service Costs (Pension):

Research and development

—      (109 (126

Sales and operations

—      (105 (141

General and administrative

(110 (67 (104
  

 

 

    

 

 

    

 

 

 

Total service costs (pension)(a)

(110 (281 (371
  

 

 

    

 

 

    

 

 

 

Depreciation and Amortization Expense:

Cost of revenue

(3,648 (7,846 (16,176

Research and development(b)

(166 (915 (3,731

Sales and operations

(847 (1,792 (2,762

General and administrative

(107 (566 (863
  

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

(4,768 (11,119 (23,533
  

 

 

    

 

 

    

 

 

 

Acquisition-related deferred price consideration:

Research and development

—      (2,363 (716

Sales and operations

—      —      —     

General and administrative

—      —      —     
  

 

 

    

 

 

    

 

 

 

Total acquisition-related deferred price consideration:

—      (2,363 (716
  

 

 

    

 

 

    

 

 

 

 

  (a)  Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income. Prior periods have not been modified as the effect of the change in accounting policy is immaterial.
  (b)  Includes acquisition-related amortization of intangible assets of €350,000 and €2,942,000 as of December 31, 2013 and 2014 respectively.

 

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     Year Ended December 31,  
         2012              2013              2014      
     (as a percentage of revenue)  

Consolidated Statements of Income data:

        

Revenue

     100.0         100.0         100.0   

Cost of revenue(1)

        

Traffic acquisition costs

     (58.0      (59.7      (59.2

Other cost of revenue

     (4.7      (4.9      (4.9
  

 

 

    

 

 

    

 

 

 

Gross profit

  37.3      35.4      35.9   
  

 

 

    

 

 

    

 

 

 

Operating expenses(1)

Research and development

  (5.3   (7.2   (6.1

Sales and operations

  (21.4   (18.7   (17.9

General and administrative

  (7.4   (7.1   (6.5
  

 

 

    

 

 

    

 

 

 

Total operating expenses

  (34.0   (33.0   (30.5
  

 

 

    

 

 

    

 

 

 

Income from operations

  3.3      2.4      5.4   
  

 

 

    

 

 

    

 

 

 

Financial income (expense)

  (0.6   (1.5   (1.2
  

 

 

    

 

 

    

 

 

 

Income before taxes

  2.7      0.9      6.5   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

  (2.4   (0.5   (1.8
  

 

 

    

 

 

    

 

 

 

Net income

  0.3      0.3      4.7   
  

 

 

    

 

 

    

 

 

 

 

  (1) Cost of revenue and operating expenses include share-based compensation expense, service costs (pension), depreciation and amortization expense, and acquisition-related deferred price consideration expressed as a percentage of revenue as follows:

 

     Year Ended December 31,  
         2012              2013              2014      
     (as a percentage of revenue)  

Share-Based Compensation Expense:

        

Research and development

     (0.2      (0.5      (0.4

Sales and operations

     (0.7      (0.6      (1.2

General and administrative

     (0.5      (0.5      (0.4
  

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

  (1.3   (1.5   (2.0
  

 

 

    

 

 

    

 

 

 

Service Costs (Pension):

Research and development

  —        (0.0   (0.0

Sales and operations

  —        (0.0   (0.0

General and administrative

  (0.0   (0.0   (0.0
  

 

 

    

 

 

    

 

 

 

Total service costs (pension)(a)

  (0.0   (0.0   (0.0
  

 

 

    

 

 

    

 

 

 

Depreciation and Amortization Expense:

Cost of revenue

  (1.3   (1.8   (2.2

Research and development

  (0.1   (0.2   (0.5

Sales and operations

  (0.3   (0.4   (0.4

General and administrative

  (0.0   (0.1   (0.1
  

 

 

    

 

 

    

 

 

 

Total depreciation and amortization expense

  (1.8   (2.5   (3.2
  

 

 

    

 

 

    

 

 

 

Acquisition-related deferred price consideration:

Research and development

  —        (0.5   (0.1

Sales and operations

  —        —        —     

General and administrative

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Total acquisition-related deferred price consideration:

  —        (0.5   (0.1
  

 

 

    

 

 

    

 

 

 

 

  (a)  Effective January 1, 2012 actuarial gains and losses are recognized in other comprehensive income. Prior periods have not been modified as the effect of the change in accounting policy is immaterial.

 

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Years Ended December 31, 2012, 2013 and 2014

Revenue

 

     Year Ended December 31,      % change  
     2012      2013      2014      2012 vs 2013     2013 vs 2014  
     (in thousands)               

Revenue

   271,855       443,960       745,081         63.3     67.8

2014 Compared to 2013

Revenue for 2014 increased €301.1 million, or 67.8% (or 70.3% on a constant currency basis), compared to 2013. Revenue from new clients contributed 34.3% to the global year-over-year revenue growth while revenue from existing clients contributed 65.7% to the global year-over-year revenue growth. This increase in revenue was due in part to our technology improvements and our ability to engage seamlessly with end-customers across desktop and mobile screens helped generate more revenue per client, in particular from our existing clients. Our continuous ability to convert a large portion of our clients to uncapped budgets was also a key driver of the increase in revenue per client.

The year-over-year increase was the result of our rapid growth across all geographies. Our revenue in the Americas region increased 86.0% to €228.8 million for 2014 compared to 2013, as our solution continued to gain significant traction among large clients in the United States and as mid-market clients continued to ramp-up. Our revenue in the EMEA region increased 54.1% to €366.4 million for 2014 compared 2013, primarily driven by increased penetration in our Western European core markets, including mid-market clients. Our revenue in the Asia-Pacific region increased 80.3% to €149.9 million for 2014 compared to 2013 which was largely driven by new clients in the region. Revenue from new clients contributed 27.4% to the year-over-year revenue growth. Revenue from existing clients contributed 72.6% to the year-over-year revenue growth. In the Asia-Pacific region, our business with existing clients benefited specifically from our technology improvements and our ability to engage seamlessly with end-customers across desktop and mobile screens.

Additionally, our €745.1 million of revenue for 2014 was negatively impacted by €10.9 million of currency fluctuations, particularly as a result of the strengthening of the euro compared to the Japanese Yen and the Brazilian Real.

100% of this year-over-year growth in revenue was attributable to an increased volume of clicks delivered on the advertising banners displayed by us. Changes in 2014 due to pricing were immaterial.

2013 Compared to 2012

Revenue for 2013 increased €172.1 million, or 63.3% (or 73.6% on a constant currency basis), compared to 2012. This increase was the result of our rapid growth across all geographies. In 2013, revenue from new clients contributed 44.4% of the global year-over-year revenue growth while revenue from existing clients contributed 55.6% of the global year-over-year revenue growth. The expansion of our business with existing clients was mainly driven by the increase in advertising spend per client, which resulted primarily from both the ramp-up in spend per client with whom we had signed an insertion order for the first time in the second half of 2012 and our continuous effort to convince clients to uncap their budgets to fully benefit from our performance driven solution.

Our revenue in the Americas region increased 81.5% to €123.0 million for 2013 compared to 2012, as our solution continued to gain significant traction among large clients in the United States and as small and mid-size clients ramped-up. Our revenue in the EMEA region increased 37.9% to €237.8 million for 2013 compared to 2012, primarily driven by increased penetration in our Western European core markets, including with mid-market clients. Our revenue in the Asia-Pacific region increased 163.4% to €83.2 million for 2013 compared to 2012. In the Asia-Pacific region, revenue from new clients contributed 46.9% to the year-over-year revenue

 

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growth, a greater proportion than our global average, which is explained by the rapid expansion of the client base in this region where we had recently launched operations. Revenue from existing clients contributed 53.1% to the year-over-year revenue growth. In the Asia-Pacific region, our business with existing clients benefited specifically from our increased ability to find relevant opportunities for our existing clients to achieve their performance objectives through broader access to quality inventory in Japan, resulting from the strengthening of the Company’s relationship with Yahoo! Japan.

Additionally, our €444.0 million of revenue for 2013 was negatively impacted by €28.0 million of currency fluctuations, and particularly as a result of the strengthening of the euro compared to the Japanese Yen, the Brazilian Real, the U.S. Dollar and the British Pound.

104% of this year-over-year growth is attributable to an increased volume of clicks delivered on the advertising banners displayed by us. Changes due to pricing were immaterial.

Cost of Revenue

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Traffic acquisition costs (in thousands)

   (157,707   (264,952   (441,427     68.0     66.6

Other cost of revenue (in thousands)

   (12,662   (21,956   (36,150     73.4     64.6

% of revenue

     (62.7 )%      (64.6 )%      (64.1 )%     

Gross profit %

     37.3     35.4     35.9    

2014 Compared to 2013

Cost of revenue for 2014 increased €190.7 million, or 66.4%, compared to 2013. This increase was primarily the result of a €176.5 million, or 66.6% (or 69.3% on a constant currency basis), increase in traffic acquisition costs and a €14.2 million, or 64.6% (or 65.9% on a constant currency basis), increase in other cost of revenue.

The increase in traffic acquisition costs related primarily to the 25.6% increase in the number of our impressions purchased, in particular from publishers with whom we have direct relationships, including our publisher marketplace, or PuMP, and to a lesser extent from the main real-time bidding exchanges. The increase in other cost of revenue includes a €6.5 million increase in hosting costs, a €8.3 million increase in allocated depreciation and amortization expense and a €0.5 million increase in other cost of sales, partially offset by a €1.1 million decrease in data acquisition costs.

We consider revenue ex-TAC as a key measure of its business activity. Our strategy focuses on maximizing the growth of our revenue ex-TAC on an absolute basis over maximizing our near-term gross margin, as we believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance, allowing it to deliver more relevant advertisements at scale. As a part of this focus, we continue to invest in building relationships with direct publishers and pursue access to leading advertising exchanges. Our performance-based business model provides it with significant control over our level of revenue ex-TAC margin, which we seek to optimize in order to maximize revenue ex-TAC growth on an absolute basis in accordance with our strategic focus.

2013 Compared to 2012

Cost of revenue for 2013 increased €116.5 million, or 68.4%, compared to 2012. This increase was primarily the result of a €107.2 million, or 68.0% (or 78.8% on a constant currency basis), increase in traffic acquisition costs and a €9.3 million, or 73.4% (or 82.4% on a constant currency basis), increase in other cost of revenue.

 

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The increase in traffic acquisition costs related primarily to the 169.0% increase in the number of our impressions purchased to support our revenue growth, in particular from real-time time bidding exchanges and to a lesser extent from our publisher marketplace, or PuMP. The increase in other cost of revenue related primarily to a €5.3 million increase in hosting costs, a €4.2 million increase in allocated depreciation and amortization expense and a €0.1 million increase in other cost of sales, partially offset by a €0.3 million decrease in data acquisition costs.

Our gross profit percentage decreased to 35.4% in 2013 compared to 37.3% for 2012. This decrease resulted primarily from a 2.9 percentage point increase in TAC (Traffic Acquisition Costs) as a percentage of revenue across all regions. Our traffic acquisition costs have increased as a percentage of our revenue, particularly in Asia-Pacific, as a consequence of the priority we have given to maximizing scale and liquidity of our solution over a gross profit based focus. We believe this focus builds sustainable long-term value for our business and fortifies a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance, allowing us to deliver more relevant advertisements at scale. Other cost of revenue also increased by 4.3% as a percentage of revenue.

Research and Development Expense

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Research and development (in thousands)

   (14,285   (32,175   (45,293     62.6     40.8

% of revenue

     (5.3 )%      (7.2 )%      (6.1 )%     

2014 Compared to 2013

Research and development expense for 2014 increased €13.1 million, or 40.8%, compared to 2013. This increase was primarily the result of a €9.0 million increase in salaries, bonuses, share-based compensation, and other personnel costs primarily due to increased headcount in this function, a €1.6 million increase in subcontracting and other headcount-related costs, a €1.0 million increase in allocated rent and facilities costs, a €2.8 million increase in amortization of acquisition-related intangible assets, a €0.2 million increase in consulting and professional fees and a €0.4 million increase in other costs, partially offset by a €1.9 million increase of the French Research Tax Credit.

2013 Compared to 2012

Research and development expense for 2013 increased €17.9 million, or 125.2%, compared to 2012. This increase was primarily the result of a €14.8 million increase in salaries, bonuses, share-based compensation, and other personnel costs primarily due to increased headcount in this function, acquisition-related deferred price consideration of €2.3 million, a €1.4 million increase in subcontracting and other headcount-related costs, a €1.0 million increase in allocated rent and facilities costs, a €0.7 million increase in allocated depreciation and amortization expense and a €0.5 million increase in events and other costs, partially offset by a €0.4 million decrease in provisions for tax reassessments expense and a €0.1 million decrease in consulting and professional fees.

Sales and Operations Expense

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Sales and operations (in thousands)

   (58,047   (82,816   (133,393     42.7     61.1

% of revenue

     (21.4 )%      (18.7 )%      (17.9 )%     

 

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2014 Compared to 2013

Sales and operations expense for 2014 increased €50.6 million, or 61.1%, compared to 2013. This increase was primarily a result of a €42.6 million increase in salaries, bonuses, share-based compensation, and other personnel-related costs primarily due to increased headcount in this function, a €0.4 million increase in subcontracting and other headcount-related costs, a €3.9 million increase in events, a €1.0 million increase in allocated depreciation and amortization expense, a €4.9 million increase in allocated rent and facilities costs and a €0.3 million increase in provisions for doubtful receivables, partially offset by a €2.5 million decrease in other expenses mainly related to 2013 taxes in Brazil that were not incurred again in 2014.

2013 Compared to 2012

Sales and operations expense for 2013 increased €24.8 million, or 42.7%, compared to 2012. This increase was primarily a result of a €11.9 million increase in salaries, bonuses, share-based compensation, and other personnel-related costs primarily due to increased headcount in this function, a €2.6 million increase in subcontracting and other headcount-related costs, a €1.3 million increase in events, a €1.0 million increase in consulting and professional fees, a €0.9 million increase in allocated depreciation and amortization expense, a €0.4 million increase in allocated rent and facilities costs and a €6.7 million increase in other expenses. The €6.7 million increase in the other expenses was mainly due to a €6.0 million increase in taxes in Brazil, €3.1 million relating to settlement of large intercompany open balances and €2.9 million as a result of increased business activity in Brazil.

General and Administrative Expense

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

General and administrative (in thousands)

   (20,308   (31,387   (48,788     55.3     55.4

% of revenue

     (7.4 )%      (7.1 )%      (6.5 )%     

2014 Compared to 2013

General and administrative expense for 2014 increased €17.4 million, or 55.4%, compared to 2013. This increase was primarily a result of a €7.8 million increase in salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs primarily due to increased headcount in this function, a €5.0 million increase in subcontracting and other headcount-related costs, a €1.5 million increase in allocated rent and facilities costs, a €0.3 million increase in allocated depreciation and amortization expense and a €2.8 million increase in consulting and professional fees.

2013 Compared to 2012

General and administrative expense for 2013 increased €11.2 million, or 55.3%, compared to 2012. This increase was primarily a result of a €5.2 million increase in salaries, bonuses, share-based compensation, pension benefits and other personnel-related costs primarily due to increased headcount in this function, a €3.0 million increase in subcontracting and other headcount-related costs, a €1.2 million increase in event costs, a €0.9 million increase in allocated rent and facilities costs, a €0.5 million increase in allocated depreciation and amortization expense and a €0.4 million in other expenses.

Financial Income (Expense)

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Financial income (expense) (in thousands)

   (1,559   (6,868   8,587        340.5     (225.0 )% 

% of revenue

     (0.6 )%      (1.5 )%      1.2    

 

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2014 Compared to 2013

Financial income for 2014 increased by €15.5 million, or 225.0% compared to 2013. The significant foreign exchange gain for the period ended December 31, 2014 was a result of the translation of $90 million of our initial public offering proceeds into euros at the foreign exchange closing rate generating a €8.9 million gain, partially offset by the cost of premiums on related hedging instruments (€2.2 million).

2013 Compared to 2012

Financial expense for 2013 increased by €5.3 million, or 340.5%, compared to 2012. The significant foreign exchange loss for the year ended December 31, 2013 is primarily due to a strengthening of the euro compared to the Japanese Yen, the Brazilian Real and the U.S. dollar and arises on the settlement or translation by our foreign subsidiaries whose functional currency is not the euro for their monetary statement of financial position items into their functional currency.

Criteo K.K. (Japan), Criteo Corp. (United States) and Criteo do Brasil’s (Brazil) are the primary contributors especially due to translation of their payable balances into euros.

Provision for Income Taxes

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Provision for income taxes (in thousands)

   (6,556   (2,413   (13,253     (63.2 )%      (449.2 )% 

% of revenue

     (2.4 )%      (0.5 )%      (1.8 )%     

Effective tax rate

     88.8     63.4     27.3    

2014 Compared to 2013

The provision for income taxes for 2014 increased €10.8 million, or 449.2%, compared to 2013. The annual effective tax rate for 2014 was 27.3%, compared to an annual effective tax rate of 63.4% for 2013. Generally, the annual effective tax rates differ from statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions and non-deductible losses in certain of our foreign subsidiaries and share-based compensation expense.

In 2014, our income before taxes increased by €44.8 million to €48.6 million, compared to 2013, generating a €16.7 million theoretical income tax expense at a nominal standard French tax rate of 34.43%. This nominal tax expense is impacted primarily by the following items contributing to a €13.2 million effective tax expense and a 27.3% effective tax rate: €2.7 million of non-recognition of income tax assets related to Criteo Ltd, Criteo Singapore Pte. Ltd, Criteo do Brasil and Criteo Advertising (Beijing) Co. Ltd tax losses, €5.1 million in taxes related to our share-based compensation expense, for which no deferred taxes are recognized, the exclusion of the Cotisation sur la Valeur Ajoutée des Entreprises, or “CVAE”, a French business tax, from income taxes for €1.9 million and other permanent differences for €1.4 million offset by a €7.7 million tax deduction on share options exercised during the period by English and American residents and a €6.8 million tax deduction resulting from technology royalty income we received from our subsidiaries. Please see note 10 to our audited consolidated financial statements for more detailed information on the provision for income taxes.

As at December 31, 2014, we had €21.5 million of unrecognized deferred tax assets arising from tax losses, €11.4 million of which was attributable to our U.S. subsidiary, €2.1 million was attributable to the temporary differences of our Brazilian subsidiary and €6.1 million was attributable to the temporary differences of our UK subsidiary (of which €5.1 million concern the total potential tax deduction relating to stock-options). The changes from 2013 to 2014 related primarily to the recognition of deferred tax assets for another portion of Criteo Corp. tax losses in connection with our three-year tax plan (€2.2 million as deferred tax income) and the

 

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recognition of deferred tax liabilities relating to intangibles acquired in connection with the Tedemis acquisition (€2.4 million). We will review the determination not to recognize these deferred tax assets and the probability of utilization of these net operating losses in the future at year end 2015 in light of the positive and negative elements of certain economic factors that may affect our business in the foreseeable future and past events. This analysis will be carried out in each tax jurisdiction where we have significant operations, and our expectations for growth, especially in the United States, may result in the recognition of additional deferred tax assets. Should we determine that recognition of additional deferred tax assets is appropriate, such recognition would likely continue reducing our effective tax rate.

2013 Compared to 2012

The provision for income taxes for 2013 decreased €4.1 million, or 63.2%, compared to 2012. The annual effective tax rate for 2013 was 63.4% compared to an annual effective tax rate of 88.8% for 2012. Generally, the annual effective tax rates differ from statutory rates primarily due to the impact of the domestic tax deduction applicable to technology royalty income we received from our subsidiaries, differences in tax rates in foreign jurisdictions and non-deductible losses at certain of our foreign subsidiaries and share-based compensation expense.

In 2013 our effective tax rate and provision for income taxes decreased compared to 2012 primarily due to the partial recognition of the tax losses of our U.S. subsidiary. Based on the projected taxable profit within the next three years, we determined that it is now probable that future taxable profit will be available against which the tax losses and tax credits can be utilized. Therefore, deferred tax assets were recognized for €2.4 million as of December 31, 2013. Furthermore, the initial tax regime elected in Brazil was changed at the beginning of 2013, and the subsidiary’s results are now taxed on realized profits, rather than on presumptive profits, which resulted in a decrease of €1.8 million in taxes for 2013. Finally, we had a €0.8 million decrease in taxes as a result of the utilization of previously unrecognized tax losses on our UK subsidiary. These decreases were partially offset by a €1.1 million increase in taxes related to our share-based compensation expense, for which no deferred taxes are recognized, and a decrease of €0.9 million for 2013 as compared to 2012 in the tax deduction resulting from technology royalty income we received from our subsidiaries as well as other factors contributing to an aggregate year-over-year €4.1 million decrease in the provision for income taxes. Please see note 10 to our consolidated financial statements for more detailed information on the provision for income taxes.

As of December 31, 2013, we had €13.5 million of unrecognized deferred tax assets arising from tax losses, €10.0 million of which are attributable to our U.S. subsidiary and €1.8 million attributable to our Brazilian subsidiary. We have reviewed the determination not to recognize these deferred tax assets and the probability of utilization of these net operating losses at year end 2014 in light of the positive and negative elements of certain economic factors that may affect our business in the foreseeable future and past events. This analysis was carried out in each tax jurisdiction where we have significant operations, and our expectations for growth, especially in the United States, did not result in the recognition of additional deferred tax assets. If we had determined that recognition of additional deferred tax assets was appropriate, such recognition would likely have continued to reduce our effective tax rate.

Net Income

 

     Year Ended December 31,     % change  
     2012     2013     2014     2012 vs 2013     2013 vs 2014  

Net income (in thousands)

   831,000      1,393      35,364        67.6     2,438.7

% of revenue

     0.3     0.3     4.7    

 

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2014 Compared to 2013

Net income for 2014 increased €34.0 million, or 2,438.7% compared to 2013. This increase was the result of the factors discussed above, in particular, a €29.4 million increase in income from operations as well as a €15.5 million increase in financial income (expense) compared to 2013, partially offset by a €10.8 million increase in provision for income taxes compared to 2013.

2013 Compared to 2012

Net income for 2013 increased €0.6 million, or 67.6%, compared to 2012. This increase was the result of the factors discussed above and particularly a €1.7 million increase in income from operations as well as a €4.1 million decrease in provision for income taxes compared to 2012, partially offset by a €5.3 million increase in financial expense.

Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region

The following table sets forth our revenue, traffic acquisition costs and revenue ex-TAC by geographic region, including the Americas (North and South America), Europe, Middle East and Africa, or EMEA, and Asia-Pacific:

 

          Year Ended December 31,  
    

  Region  

       2012             2013             2014      
          (in thousands)  

Revenue

  

Americas

   67,787      123,004      228,773   
  

EMEA

     172,499        237,800        366,404   
  

Asia-Pacific

     31,569        83,155        149,904   
     

 

 

   

 

 

   

 

 

 

Total

271,855    443,960    745,081   
     

 

 

   

 

 

   

 

 

 

Traffic acquisition costs

Americas

(40,043 (75,306 (138,910

EMEA

  (100,706   (140,416   (211,287

Asia-Pacific

  (16,958   (49,230   (91,230
     

 

 

   

 

 

   

 

 

 

Total

(157,707 (264,952 (441,427
     

 

 

   

 

 

   

 

 

 

Revenue ex-TAC(1)

Americas

27,744    47,698    89,863   

EMEA

  71,793      97,385      155,117   

Asia-Pacific

  14,611      33,925      58,674   
     

 

 

   

 

 

   

 

 

 

Total

114,148    179,008    303,654   
     

 

 

   

 

 

   

 

 

 

 

  (1)  We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region are not measures calculated in accordance with IFRS. We have included Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region in this Annual Report on Form 20-F because they are key measures used by our management and board of directors. In particular, we believe that the elimination of TAC from revenue and review of these measures by region can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under IFRS.

 

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Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report Revenue ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region alongside our other IFRS based financial performance measures, such as revenue and our other IFRS financial results. The above table also provides a reconciliation of revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with IFRS. 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 3.A—Selected Financial Data” of this Annual Report on Form 20-F for a reconciliation of revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with IFRS.

Constant Currency Reconciliation

Information in this Annual Report on Form 20-F with respect to results presented on a constant-currency basis was calculated by translating current period results at prior period average exchange rates. 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  
     2012     2013      2014      2013 vs. 2012     2014 vs. 2013  
     (in thousands)               

Revenue as reported

   271,855      443,960        745,081         63.3     67.8

Conversion impact euro/other currencies

  (7,835   27,985      10,906   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Revenue at constant currency

  264,020      471,945      755,987      78.8      70.3   

Traffic acquisition costs as reported

  157,707      264,952      441,427      68.0      66.6   

Conversion impact euro/other currencies

  (4,653   17,033      7,053   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Traffic acquisition costs at constant currency

  153,054      281,985      448,480      84.2      69.3   

Revenue ex-TAC as reported

  114,148      179,008      303,654      56.8      69.6   

Conversion impact euro/other currencies

  (3,183   10,952      3,853   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Revenue ex-TAC at constant currency

  110,965      189,960      307,507      71.2      71.8   

Other cost of revenue as reported

  12,662      21,956      36,150      73.4      64.6   

Conversion impact euro/other currencies

  (467   1,139      268   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other cost of revenue at constant currency

12,195    23,095    36,418      89.4   65.9

 

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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, include 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  
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
 
    (in thousands)  

Consolidated Statements of Income Data:

               

Revenue

  94,860      99,400      113,811      135,889      152,520      165,317      194,449      232,796   

Cost of revenue(1)

               

Traffic acquisition costs

    (57,553     (59,369     (66,996     (81,034     (89,787     (98,294     (116,853     (136,493

Other cost of revenue

    (5,172     (5,708     (4,742     (6,334     (7,446     (8,303     (9,347     (11,054
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

32,134    34,324    42,073    48,521    55,287    58,720    68,249    85,249   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1)

Research and development

  (6,252   (6,942   (9,008   (9,973   (10,028   (10,829   (12,244   (12,191

Sales and operations

  (17,296   (22,787   (20,427   (22,306   (27,222   (31,787   (34,715   (39,668

General and administrative

  (7,536   (7,659   (6,919   (9,273   (11,815   (11,083   (12,192   (13,698
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  (31,084   (37,388   (36,354   (41,552   (49,065   (53,700   (59,151   (65,557
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  1,051      (3,064   5,719      6,969      6,222      5,020      9,098      19,692   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial income (expense)

  246      (2,791   (1,054   (3,269   805      957      5,560      1,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

  1,297      (5,855   4,665      3,700      7,027      5,977      14,658      20,956   

(Provision for) benefit from income taxes

  (590   236      (1,627   (432   (3,205   (3,549   (3,185   (3,313
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

707    (5,619 3,038    3,268    3,822    2,427    11,473    17,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

Revenue ex-TAC(2)

37,307    40,031    46,815    54,855    62,733    67,023    77,596    96,303   

Adjusted EBITDA(3)

4,556    685    11,568    14,504    14,505    13,245    19,828    31,854   

Average revenue per employee(4)

$ 597    $ 625    $ 723    $ 780    $ 701    $ 678    $ 686    $ 726   

 

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  (1)  Cost of revenue and operating expenses include share-based compensation expense, service costs (pension), depreciation and amortization expense and acquisition related deferred price consideration as follows:

 

    Three Months Ended  
    March 31,     June 30,     September 30,     December 31,     March 31,     June 30,     September 30,     December 31,  
    2013     2013     2013     2013     2014     2014     2014     2014  
    (in thousands)  

Share-Based Compensation Expense:

               

Research and development

  (281   (278   (909   (581   (606   (487   (984   (700

Sales and operations

    (599     (227     (683     (1,292     (1,870     (2,051     (2,531     (2,814

General and administrative

    (645     (685     (237     (459     (780     171        (800     (1,326
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total share-based compensation expense

(1,525 (1,190 (1,829 (2,332 (3,256 (2,367 (4,315 (4,840
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Service costs (pension):

Research and development

—      (67 (25 (17 (50 (13 (32 (31

Sales and operations

  —        (58   (26   (21   (26   (41   (38   (36

General and administrative

  (91   45      (16   (5   (33   (19   (25   (27
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total service costs (pension)(a)

(91 (45 (67 (43 (109 (73 (95 (94
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense:

Cost of revenue

(1,364 (1,779 (2,007 (2,696 (3,309 (3,614 (4,245 (5,008

Research and development

  (152   (77   (168   (518   (412   (1,252   (1,059   (1,009

Sales and operations

  (252   (501   (516   (523   (599   (609   (701   (854

General and administrative

  (122   (122   (160   (162   (187   (203   (213   (260
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total depreciation and amortization expense

(1,890 (2,479 (2,851 (3,899 (4,507 (5,678 (6,217 (7,131
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisition-related deferred price consideration:

Research and development

—      —      (1,102 (1,261 (411 (108 (101 (97

Sales and operations

  —        —        —        —        —        —        —        —     

General and administrative

  —        —        —        —        —        —        —        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total acquisition-related deferred price consideration

—      —      (1,102 (1,261 (411 (108 (101 (97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a) Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income. Prior periods have not been modified as the effect of the change in accounting policy is immaterial.
  (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 IFRS. Please see footnote 3 to the Other Financial and Operating Data table in “Item 3.A—Selected Financial Data” of this Annual Report on Form 20-F 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 IFRS.

 

    Three Months Ended  
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
 
    (in thousands)  

Reconciliation of Revenue ex-TAC to Revenue:

               

Revenue

  94,860      99,400      113,811      135,889      152,520      165,316      194,449      232,796   

Adjustment:

               

Traffic acquisition costs

    (57,553     (59,369     (66,996     (81,034     (89,787     (98,294     (116,853     (136,493
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue ex-TAC

37,307    40,031    46,815    54,855    62,733    67,022   77,596    96,303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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  (3)  We define Adjusted EBITDA as our consolidated earnings before interest, taxes, depreciation and amortization, adjusted to eliminate the impact of share-based compensation expense, service costs (pension) and acquisition-related deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with IFRS. Please see footnote 5 to the Other Financial and Operating Data table in “Item 3.A – Selected Financial Data” of this Annual Report on Form 20-F for more information. Below is a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with IFRS.

 

    Three Months Ended  
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
 
    (in thousands)  

Reconciliation of Adjusted EBITDA to Net Income:

               

Net income (loss)

  706      (5,619   3,038      3,268      3,822      2,427      11,473      17,643   

Adjustments:

               

Financial Income (expense)

    246        (2,791     (1,054     (3,269     805        957        5,560        1,264   

(Provision for) benefit from income taxes

    (590     236        (1,627     (432     (3,205     (3,549     (3,185     (3,313

Share-based compensation expense

    (1,525     (1,190     (1,829     (2,332     (3,256     (2,367     (4,315     (4,840

Service costs (pension)

    (91     (80     (67     (43     (109     (73     (95     (94

Depreciation and amortization expense

    (1,890     (2,479     (2,851     (3,899     (4,507     (5,678     (6,217     (7,131

Acquisition–related deferred price consideration

    —          —          (1,102     (1,261     (411     (108     (101     (97
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net adjustments

    (3,850     (6,304     (8,530     (11,236     (10,683     (10,818     (8,351     (14,211
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  4,556      685      11,568      14,504      14,505      13,245      19,828      31,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (4)  Represents revenue on a trailing 12 month basis measured from the applicable period divided by our average number of employees per quarter (which is calculated based on the total number of employees at the end of the prior quarter and the current quarter divided by two). Translated solely for convenience into U.S. dollars at the noon buying rate of €1.00 = US$1.2101 at December 31, 2014.

 

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    Three Months Ended  
    March 31,
2013
    June 30,
2013
    September 30,
2013
    December 31,
2013
    March 31,
2014
    June 30,
2014
    September 30,
2014
    December 31,
2014
 
    (as a percentage of revenue)  

Statement 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

    (60.7     (59.7     (58.9     (59.6     (58.9     (59.5     (60.1     (58.6

Other cost of revenue

    (5.5     (5.7     (4.2     (4.7     (4.9     (5.0     (4.8     (4.7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  33.9      34.5      37.0      35.7      36.2      35.5      35.1      36.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

Research and development

  (6.6   (7.0   (7.9   (7.3   (6.6   (6.6   (6.3   (5.2

Sales and operations

  (18.2   (22.9   (17.9   (16.4   (17.8   (19.2   (17.9   (17.0

General and administrative

  (7.9   (7.7   (6.1   (6.8   (7.7   (6.7   (6.3   (5.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

  (32.8   (37.6   (31.9   (30.6   (32.2   (32.5   (30.4   (28.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  1.1     (3.1   5.0      5.1      4.1      (3.0   4.7      8.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial income

(expense)

  0.3      (2.8   (0.9   (2.4   0.5      (0.6   2.9      0.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes

  1.4      (5.9   4.1      2.7      4.6      (3.6   7.5      9.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Provision for) benefit from income taxes

  (0.6   0.2      (1.4   (0.3   (2.1   (2.1   (1.6   (1.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  0.7      (5.7   2.7      2.4      2.5      (1.5   5.9      7.6   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

Revenue ex-TAC(1)

  39.3   40.3   41.1   40.4   41.1   39.9   41.1   41.4

Adjusted EBITDA(2)

  4.8   0.7   10.2   10.7   9.5   10.2   10.2   13.7

 

  (1)  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 IFRS. Please see footnote 3 to the Other Financial and Operating Data table in “Item 3.A—Selected Financial Data” and footnote 2 to the first table under “—Quarterly Results of Operations” of this Annual Report on Form 20-F for more information.
  (2)  We define Adjusted EBITDA as our consolidated earnings before interest, taxes, depreciation and amortization, adjusted to eliminate the impact of share-based compensation expense, service costs (pension) and acquisition-related deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with IFRS. Please see footnote 5 to the Other Financial and Operating Data table in “Item 3.A—Selected Financial Data” and footnote 3 to the first table under “—Quarterly Results of Operations” of this Annual Report on Form 20-F for more information.

 

B. Liquidity and Capital Resources.

Working Capital

The following table summarizes our cash, cash equivalents and short-term investments, accounts receivable and working capital for the periods indicated:

 

    As of December 31,  
  2012     2013     2014  
    (in thousands)  

Cash, cash equivalents and short-term investments

  43,262      234,343      289,784   

Trade receivables, net of allowances for doubtful accounts

  60,685      87,643      158,633   

Working capital(1)

  2,884      (10,004   256,104   

 

  (1)  We define working capital as current assets less current liabilities.

 

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Our cash and cash equivalents at December 31, 2014 were held for working capital purposes. The significant increase in cash and cash equivalents is primarily due, with respect to 2013, to the net proceeds from our initial and secondary public offering received in November 2013 and March 2014 and, with respect to 2013 and 2014, the cash generated from operations. 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. To mitigate the risk of exposure to exchange rate fluctuations in respect of the proceeds of our initial public offering which were received in U.S. dollars, we have determined a hedging strategy that is described in note 4 of our audited consolidated financial statements included elsewhere in this Annual Report on Form 20-F.

Sources of Liquidity

Prior to our initial public offering, we funded our operations principally through private placements of our capital shares, cash flows from operations and bank borrowings. 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. Since our inception, we raised a total of €47.0 million, net of costs and expenses, from the sale of preferred shares through four private placements. In November 2013, we received aggregate net proceeds of €197.0 million ($269.0 million) from our initial public offering. In March 2014, we received aggregate net proceeds of €16.4 million ($22.6 million) resulting from our secondary equity offering.

We are party to several loan agreements and revolving credit facilities, or RCF, with third-party financial institutions. Our loans and RCF agreements are presented in the table below:

 

Nature

   Nominal/
Authorized
amounts
(in thousands)
     Amount drawn
(RCF only)
(in thousands)
    

Interest rate

  

Settlement date

Central loan agreements

           

CEPAL Loans

           

August 27, 2012

   2,500         N/A       Fixed: 2.65 %    September 5, 2015

September 28, 2012

   1,100         N/A       Fixed: 2.50 %    November 5, 2015

LCL Loans

           

December 28, 2012

   2,500         N/A       Fixed: 2.40 %    December 28, 2015

June 7, 2013

   8,000         N/A       Fixed: 2.30 %    June 7, 2016

BPI Loan

           

February 20, 2014

   3,000         N/A       Fixed: 2.09 %    May 31, 2021

Central RCF

           

BPI RCF

           

February 20, 2014

   3,000       50       Floating rate: EURIBOR 3M + 0.7%    February 28, 2017

China RCF

           

HSBC RCF

           

October 3, 2014

     RMB 15,000         RMB 10,000       Floating rate + 10%    October 3, 2015

We are party to two loan agreements with Caisse D’Epargne et de Prévoyance d’Auvergne et du Limousin, or CEPAL, providing an aggregate of €3.6 million, consisting of a €2.5 million loan to finance certain capital expenditures and a €1.1 million loan to finance our SAP licenses. The combined outstanding principal and interest for each CEPAL loan are payable in equal monthly installments based upon the applicable date of such loan. Each CEPAL loan matures in 2015. At December 31, 2014, there was €1.0 million outstanding on the CEPAL loans.

 

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We are party to two loan agreements with Le Credit Lyonnais, or LCL, to finance certain capital expenditures. The combined outstanding principal and interest LCL loans are payable in equal monthly installments and mature in December 2015 and June 2016, respectively. At December 31, 2014, there was €4.9 million outstanding on the LCL loans.

In February 2014, we entered into two agreements with Bpifrance Financement (French Public Investment Bank) to support our development. The first agreement is a fixed rate seven-year term loan for €3.0 million. This amount will be amortized quarterly after a two-year grace period. The second agreement is a three-year RCF for a maximum amount of €3.0 million in the first year, and decreasing by €1.0 million in each subsequent year. The interest rate is Euribor 3 months plus a 0.70% margin. A 0.30% commitment fee is due on a quarterly basis depending on the amount used. At December 31, 2014, €50,000 had been drawn.

In October 2014, we entered into a revolving loan facility with HSBC to support the development of our Chinese subsidiary for a total amount of RMB15.0 million (€1.8 million). Interest is determined at a rate equal to the benchmark lending rate effective on the loan drawdown date promulgated by the People’s Bank of China with a 10% mark up and payable when the loan matures. At December 31, 2014, RMB10 million (€1.3 million) have been drawn.

All of these loans are unsecured and contain customary events of default but do not contain any affirmative, financial or negative covenants.

We are also party to short-term credit lines and overdraft facilities with HSBC plc, LCL and Credit Industriel et Commercial, or CIC. We are authorized to draw up to a maximum of €9.4 million in the aggregate under the short-term credit lines and overdraft facilities. As of December 31, 2014, we had not drawn on any of these facilities. Any loans or overdraft 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. All of these short-term facilities are unsecured and contain customary events of default but do not contain any affirmative, financial or negative covenants.

Operating and Capital Expenditure Requirements

In 2013 and 2014, our actual capital expenditures were €22.0 million and €35.4 million, respectively, primarily related to the acquisition of data center and servers equipment. We expect our capital expenditures to grow from less than 5% of revenue for 2014 to approximately 6% of revenue for 2015, as we plan to continue to build hosting capacity in all regions and significantly increase our redundancy capacity to strengthen our infrastructure. We also plan to increase our investments in internal information technology (IT) and in facilities globally, including in two offices in New York and London.

As part of our strategy to build upon our market and technology leadership, in July 2013, we acquired all of the shares of Ad-X for €5.5 million (based on the exchange rate of €1.1591 for a £1.00 as of July 11, 2013) in upfront cash plus €3.7 million (based on the exchange rate of €1.1591 for a £1.00 as of July 11, 2013) payable in cash over a three-year period. €1.1 million (based on the exchange rate of €1.1591 for a £1.00 as of July 11, 2013) of the upfront cash was placed into escrow for a period of 12 months to secure certain indemnification obligations of the selling shareholders. The upfront portion of the cash purchase price was funded using cash on hand. In February 2014, we acquired 100% of the equity of Tedemis for €17.0 million in upfront cash plus €4.0 million payable in cash over a two-year period if certain milestones are met. The upfront portion of the cash purchase price was funded using cash on hand. In April 2014, we acquired 100% of the equity of AdQuantic, a bidding technology company headquartered in Paris. The global amount of the acquisition is € 3.0 million paid in cash at the acquisition.

We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months.

 

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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 2012, 2013 and 2014:

 

     Year Ended December 31,  
   2012     2013     2014  
     (in thousands)  

Cash flows provided by operating activities

   11,812      24,705      87,670   

Cash used in investing activities

   (19,610   (28,133   (55,853

Cash provided by financing activities

   35,903      196,716      23,383   

Operating Activities

Cash provided by operating activities is primarily influenced by the increase in the number of clients using our solution and by the amount of cash we invest in personnel and infrastructure to support the anticipated growth of our business. Cash provided by operating activities has typically been generated from net profit and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for non-cash and non-operating expense items such as depreciation, amortization and share-based compensation, deferred tax assets and income taxes.

In 2014, net cash provided by operating activities was €87.7 million and consisted of a net profit of €35.4 million, €53.9 million in adjustments for non-cash and non-operating items and €3.5 million of cash provided by working capital, partially offset by €5.1 million of income taxes paid during 2014. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of €25.1 million, share-based compensation expense of €14.8 million and €17.3 million of accrued income taxes, partially offset by €4.0 million of changes in deferred tax assets. The €3.5 million increase in cash resulting from changes in working capital primarily consisted of an increase in operating cash flow due to a €53.2 million increase in accounts payable and a €19.4 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, driven primarily by an increase in traffic acquisition costs, and an increase in accrued payroll and payroll related expenses resulting from an increase in the number of our employees. This was partially offset by an increase in accounts receivable of €63.1 million, primarily driven by increased revenue during the year as we continue to expand our operations and an increase in the average days outstanding of our accounts receivable. Prepaid expenses, VAT receivables, and other current assets also increased by €6.0 million, primarily the result of an increase in our revenue and to a lesser extent, an increase in office rental advance payments.

In 2013, net cash provided by operating activities was €24.7 million and consisted of a net profit of €1.4 million, €21.5 million in adjustments for non-cash and non-operating items and €13.0 million of cash provided by working capital, partially offset by €11.2 million of income taxes paid during 2013. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of €12.2 million, share-based compensation expense of €6.9 million and €6.1 million of accrued income taxes, partially offset by €3.7 million of changes in deferred tax assets. The €9.5 million increase in cash resulting from changes in

 

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working capital primarily consisted of an increase in operating cash flow due to a €3.4 million increase in accounts payable and a €11.4 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, driven primarily by an increase in traffic acquisition costs, and an increase in accrued payroll and payroll related expenses resulting from an increase in the number of our employees. This was partially offset by an increase in accounts receivable of €2.4 million, primarily driven by increased revenue during the year as we continue to expand our operations and an increase in the average days outstanding of our accounts receivable. Prepaid expenses, VAT receivables, and other current assets also increased by €3.0 million, primarily the result of an increase in our revenue and an increase in transaction costs to be recognized as a deduction from equity in the context of our initial public offering and to a lesser extent, an increase in office rental advance payments.

In 2012, net cash provided by operating activities was €11.8 million and consisted of a net profit of €0.8 million, €15.9 million in adjustments for non-cash and non-operating items and €3.4 million of cash provided by working capital, partially offset by €8.4 million of income taxes paid during 2012. Adjustments for non-cash and non-operating items primarily consisted of depreciation and amortization expense of €5.8 million, share-based compensation expense of €3.6 million, €0.2 million of changes in deferred tax assets and €6.3 million of accrued income taxes. The €3.4 million increase in cash resulting from changes in working capital primarily consisted of an increase in operating cash flow due to a €30.3 million increase in accounts payable and a €4.8 million increase in accrued expenses such as payroll and payroll related expenses and VAT payables, driven primarily by an increase in traffic acquisition costs, and an increase in accrued payroll and payroll related expenses resulting from an increase in the number of our employees. This was partially offset by an increase in accounts receivable of €29.0 million, primarily driven by increased revenue during the year as we continue to expand our operations and an increase in the average days outstanding of our accounts receivable, an increase in prepaid expenses, VAT receivables, and other current assets of €2.6 million, primarily the result of an increase in our revenue and an increase in advance payments made for rental expenses in our subsidiaries where new offices have been opened.

Investing Activities

Our investing activities have consisted primarily of purchases of property and equipment.

In 2014, net cash used in investing activities was €55.9 million and consisted of €35.4 million for purchases of property and equipment, €18.8 million related to the Tedemis and Adquantic acquisitions and €1.7 million composed of bank deposits or lease deposits related to new premises.

In 2013, net cash used in investing activities was €28.1 million and consisted of €22.0 million for purchases of property and equipment, €5.4 million related to the Ad-X acquisition, a €0.5 million interest-bearing bank deposit that has been pledged in relation with a guaranty provided by the depositary bank with regard to the 2008 and 2009 tax reassessment and €0.2 million security deposit related to our new premises in Japan.

In 2012, net cash used in investing activities was €19.6 million and consisted of €13.6 million for purchases of property and equipment, a €5.6 million interest-bearing bank deposit that has been pledged for the lease for our principal executive offices and €0.4 million for other security deposits for office spaces for certain of our subsidiaries.

Financing Activities

In 2014, net cash provided by financing activities was €23.4 million resulting from €15.3 million in net proceeds from our secondary equity offering in March 2014, €8.6 million from share option exercises, €4.2 million of new loans, and €0.2 million of lease deposits, partially offset by €4.9 million for repayment of indebtedness.

In 2013, net cash provided by financing activities was €196.7 million and consisted primarily of €192.2 million of net proceeds from our initial public offering, €8.0