10-Q 1 criteo10qq12016.htm 10-Q 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended March 31, 2016

or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _________ to _________
Commission file number: 001-36153
 
Criteo S.A.
(Exact name of registrant as specified in its charter)
 
France 
 
Not Applicable 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
32, rue Blanche, Paris-France
 
75009
(Address of principal executive offices)
 
(Zip Code)

+33 1 40 40 22 90
(Registrant’s telephone number, including area code)

 
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 day 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  x    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
x
Accelerated Filer
¨
Non-accelerated Filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨    No x
          As of April 30, 2016, the registrant had 63,063,279 ordinary shares, nominal value €0.025 per share, outstanding.

 



TABLE OF CONTENTS



General
Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q (“Form 10-Q”) to the “Company,” “Criteo,” “we,” “us,” “our” or similar words or phrases are to Criteo S.A. and its subsidiaries, taken together. In this Form 10-Q, references to “$” and “US$” are to United States dollars. Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.
Trademarks
“Criteo,” the Criteo logo and other trademarks or service marks of Criteo S.A. appearing in this Form 10-Q are the property of Criteo S.A. Trade names, trademarks and service marks of other companies appearing in this Form 10-Q are the property of their respective holders.

Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than present and historical facts and conditions contained in this Form 10-Q, including statements regarding our future results of operations and financial positions, business strategy, plans and our objectives for future operations, are forward-looking statements. When used in this Form 10-Q, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
our ability to meet the challenges of a growing and international company in a rapidly developing and changing industry, including our ability to forecast accurately;
our ability to maintain an adequate rate of revenue growth and sustain profitability;
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 adapt to regulatory, legislative or self-regulatory developments regarding internet privacy matters;
our ability to protect users’ information and adequately address privacy concerns;
our ability to 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 and to effectively scale our technology platform in new industry verticals;
our ability to manage our international operations and expansion and the integration of our acquisitions;
our ability to maintain, protect and enhance our brand and intellectual property;
failures in our systems or infrastructure; and
our ability to attract and retain qualified employees and key personnel.



You should refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
     This Form 10-Q may contain market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-Q is generally reliable, such information is inherently imprecise.




PART I
Item 1. Financial Statements.
CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 
 
 
 
 
 
 
Notes
 
December 31, 2015
 
March 31, 2016
 
 
 
(in thousands)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
    Cash and cash equivalents
3
 
$
353,537

 
$
386,110

    Trade receivables, net of allowances
4
 
261,581

 
262,524

    Current tax assets
11
 
2,714

 
2,977

    Other current assets
5
 
45,582

 
57,706

    Total current assets
 
 
663,414

 
709,317

Property, plant and equipment, net
 
 
82,482

 
85,845

Intangible assets, net
6
 
16,470

 
17,024

Goodwill
6
 
41,973

 
42,736

Non-current financial assets
3
 
17,184

 
16,880

Deferred tax assets
11
 
20,196

 
21,911

Total non current assets
 
 
178,305

 
184,396

Total assets
 
 
$
841,719

 
$
893,713

 
 
 
 
 
 
Liabilities and shareholders' equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
    Trade payables
 
 
$
246,382

 
$
241,119

    Contingencies
13
 
668

 
688

    Current tax liabilities
11
 
15,365

 
13,288

    Financial liabilities - current portion
8
 
7,156

 
6,202

    Other current liabilities
7
 
88,269

 
95,081

    Total current liabilities
 
 
357,840

 
356,378

Deferred tax liabilities
11
 
139

 
410

Retirement benefit obligation
 
 
1,445

 
1,900

Financial liabilities - non current portion
8
 
3,272

 
3,201

Total non-current liabilities
 
 
4,856

 
5,511

Total liabilities
 
 
362,696

 
361,889

Commitments and contingencies
 
 


 


Shareholders' equity:
 
 
 
 
 
Common shares, €0.025 par value, 62,470,881 and 62,896,180 shares authorized, issued and outstanding at December 31, 2015 and March 31, 2016, respectively.
 
 
2,052

 
2,063

Additional paid-in capital
 
 
425,220

 
438,945

Accumulated other comprehensive (loss)
 
 
(69,023
)
 
(48,904
)
Retained earnings
 
 
116,076

 
133,206

Equity - attributable to shareholders of Criteo S.A.
 
 
474,325

 
525,310

Non-controlling interests
 
 
4,698

 
6,514

Total equity
 
 
479,023

 
531,824

Total equity and liabilities
 
 
$
841,719

 
$
893,713

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

2


CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three Months Ended
 
Notes
 
March 31, 2015
 
March 31, 2016
 
 
 
(in thousands, except share and per share data)
 
 
 
 
 
 
Revenue
 
 
$
294,172

 
$
401,253

 
 
 
 
 
 
Cost of revenue
 
 
 
 
 
Traffic acquisition costs
 
 
(175,888
)
 
(238,755
)
Other cost of revenue
 
 
(12,969
)
 
(18,338
)
 
 
 
 
 
 
Gross profit
 
 
105,315

 
144,160

 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
Research and development expenses
 
 
(17,846
)
 
(27,162
)
Sales and operations expenses
 
 
(53,083
)
 
(64,473
)
General and administrative expenses
 
 
(17,546
)
 
(24,737
)
Total operating expenses
 
 
(88,475
)
 
(116,372
)
Income from operations
 
 
16,840

 
27,788

Financial income (expense)
10
 
3,920

 
(1,317
)
Income before taxes
 
 
20,760

 
26,471

Provision for income taxes
11
 
(7,143
)
 
(7,944
)
Net income
 
 
$
13,617

 
$
18,527

 
 
 
 
 
 
Net income available to shareholders of Criteo S.A.
 
 
$
12,982

 
$
17,131

Net income available to non-controlling interests
 
 
$
635

 
$
1,396

 
 
 
 
 
 
Net income allocated to shareholders of Criteo S.A. per share:
 
 
 
 
 
Basic
12
 
$
0.21

 
$
0.27

Diluted
12
 
$
0.20

 
$
0.26

 
 
 
 
 
 
Weighted average shares outstanding used in computing
 
 
 
 
 
per share amounts:
 
 
 
 
 
Basic
12
 
61,174,168

 
62,610,013

Diluted
12
 
64,741,942

 
64,841,134

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.


3


CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
(in thousands)
 
 
 
 
Net income
$
13,617

 
$
18,527

Foreign currency translation differences, net of taxes
(43,126
)
 
20,689

Foreign currency translation differences
(43,126
)
 
20,689

Income tax effect

 

Actuarial losses on employee benefits, net of taxes
(146
)
 
(200
)
Actuarial losses on employee benefits
(176
)
 
(238
)
Income tax effect
30

 
38

Financial instruments, net of taxes

 

Fair value change on financial instruments

 

Income tax effect

 

Comprehensive (loss) income
$
(29,655
)
 
$
39,016

Attributable to shareholders of Criteo S.A
$
(30,282
)
 
$
37,245

Attributable to non-controlling interests
$
627

 
$
1,771

The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

4


CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
(in thousands)
Net income
$
13,617

 
$
18,527

Non-cash and non-operating items
21,882

 
29,506

Amortization and provisions
8,262

 
13,180

Shared-based compensation expense
6,318

 
8,370

Net gain on disposal of non-current assets
3

 

Interest accrued
2

 
2

Non-cash financial expenses
153

 
10

Change in deferred taxes
31

 
(1,138
)
Income tax for the period
7,113

 
9,082

Change in working capital requirement
8,905

 
(17,140
)
(Increase) decrease in trade receivables
(9,421
)
 
4,758

Increase (decrease) in trade payables
23,937

 
(13,906
)
(Increase) in other current assets
(10,639
)
 
(10,368
)
Increase in other current liabilities
5,028

 
2,376

Income taxes paid
(3,397
)
 
(11,986
)
Cash from operating activities
41,007

 
18,907

Acquisition of intangibles assets, property, plant and equipment
(11,528
)
 
(13,615
)
Change in accounts payable related to intangible assets, property, plant and equipment
(1,334
)
 
1,507

Payments for acquired business, net of cash
(17,209
)
 

Change in other financial non-current assets
(3,751
)
 
781

Cash used for investing activities
(33,822
)
 
(11,327
)
Issuance of long term borrowings
827

 
764

Repayment of borrowings
(3,277
)
 
(1,503
)
Proceeds from capital increase
2,771

 
5,476

Change in other financial liabilities
(1,000
)
 

Cash (used for) from financing activities
(679
)
 
4,737

Change in net cash and cash equivalents
6,506

 
12,317

Net cash and cash equivalents - beginning of period
351,827

 
353,537

Effect of exchange rate changes on cash and cash equivalents
(41,957
)
 
20,256

Net cash and cash equivalents - end of period
$
316,376

 
$
386,110


The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

5


CRITEO S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Criteo S.A. is a global technology company specialized in digital performance marketing. We strive to deliver post-click sales to our advertiser clients at scale and according to the client's targeted return on investment. In these notes, Criteo S.A. is referred to as the Parent company and together with its subsidiaries, collectively, as "Criteo", the" Company", the "Group", or "we". The Company uses its proprietary predictive software algorithms coupled with its deep insights into expressed consumer intent and purchasing habits to price and deliver highly relevant and personalized performance advertisements to consumers in real time.

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements included herein have been prepared by Criteo S.A. pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

Conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. Our actual results may differ from these estimates. U.S. GAAP requires us to make estimates and judgments in several areas, including, but not limited to (1) the recognition of revenue; (2) the evaluation of our trade receivables and the recognition of a valuation allowance; (3) the recognition and measurement of goodwill and intangible assets and particularly costs capitalized in relation to our customized internal-use software; (4) the measurement of share-based compensation and (5) the tax provision determination and particularly the estimate of our annual effective tax rate.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 that have had a material impact on our unaudited condensed consolidated financial statements and related notes.

Recently Issued Accounting Standards
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount, as if the accounting had been completed at the acquisition date. The Company does not expect the provision of ASU 2015-16 to have a material impact on its consolidated financial statements.  This update will be effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017.  Early adoption is permitted for financial statements that have not yet been made available for issuance.

6



In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires that all financial assets and liabilities not accounted for under the equity method be measured at fair value, with the changes in fair value recognized in net income. The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update supersede the requirement to disclose the methods and significant assumptions used in calculating the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The Company can early adopt the provision requiring it to recognize in other comprehensive income the fair value change from instrument-specific credit risk measured using the fair value option for financial instruments. Except for this early application guidance, early adoption is not permitted. The Company is still evaluating the effects that the provision of ASU 2016-01 will have on its consolidated financial statements. This update will be effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.  Early adoption as of fiscal years beginning after December 15, 2017, including interim periods within those fiscal year, is permitted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. Early adoption is permitted. The updated guidance requires a modified retrospective adoption. The Company is still evaluating the effects that the provision of ASU 2016-02 will have on its consolidated financial statements. This update will be effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020.  Early application is permitted. 
In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net).  ASU 2016-08 amends the principal-versus-agent implementation guidance and illustrations in the FASB's new revenue standard Revenue from Contracts with Customers (ASC Topic 606).  The Company is currently evaluating the impact of ASU 2016-08 on its consolidated financial statements.  This update will be effective for fiscal years beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Earlier application is permitted only as of fiscal years beginning after December 15, 2016, including interim periods within that fiscal year, or fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning one year after the fiscal year in which an entity first applies the guidance in Update 2014-09.
In March 2016 the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting.  ASU 2016-09 was issued as part of FASB’s initiative to reduce complexity in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.  This update will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period.

In April 2016 the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing.  ASU 2016-10 clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue standard Revenue from Contracts with Customers (ASC Topic 606).  The Company is currently evaluating the impact of ASU 2016-10 on its consolidated financial statements.  The effective date of ASU 2016-10 is the same as for requirements of ASC Topic 606.


Note 2. Significant Events and Transactions of the Period

The Company evaluated events and transactions of the period and determined that there are no significant events that require specific disclosure in such condensed consolidated financial statements.




7


Note 3. Financial Instruments
Financial Assets
The following schedules disclose our financial assets categories for the presented periods:
 
December 31, 2015
 
Carrying Value
 
Loans and receivables
 
Assets designated at FVTPL (1)
 
Fair value
 
(in thousands)
Cash and cash equivalents
$
353,537

 
$

 
$
353,537

 
$
353,537

Trade receivables, net of allowances
261,581

 
261,581

 

 
261,581

Other current assets
45,582

 
45,582

 

 
45,582

Non-current financial assets
17,184

 
17,184

 

 
17,184

Total
$
677,884

 
$
324,347

 
$
353,537

 
$
677,884

(1)
Fair value through profit or loss.
 
March 31, 2016
 
Carrying Value
 
Loans and receivables
 
Assets designated at FVTPL (1)
 
Fair value
 
(in thousands)
Cash and cash equivalents
$
386,110

 
$

 
$
386,110

 
$
386,110

Trade receivables, net of allowances
262,524

 
262,524

 

 
262,524

Other current assets
57,706

 
56,915

 
791

 
57,706

Non-current financial assets
16,880

 
16,880

 

 
16,880

Total
$
723,220

 
$
336,319

 
$
386,901

 
$
723,220

(1)
Fair value through profit or loss.
Financial Liabilities
 
December 31, 2015
 
Carrying Value
 
Amortized Cost
 
Liabilities designated at FVTPL (1)
 
Fair value
 
(in thousands)
Trade payables
$
246,382

 
$
246,382

 
$

 
$
246,382

Other current liabilities
88,269

 
88,269

 

 
88,269

Financial liabilities
10,428

 
9,876

 
552

 
10,428

Total
$
345,079

 
$
344,527

 
$
552

 
$
345,079

(1)
Fair value through profit or loss.

8


 
March 31, 2016
 
Carrying Value
 
Amortized Cost
 
Liabilities designated at FVTPL (1)
 
Fair value
 
(in thousands)
Trade payables
$
241,119

 
$
241,119

 
$

 
$
241,119

Other current liabilities
95,081

 
95,081

 

 
95,081

Financial liabilities
9,403

 
9,403

 

 
9,403

Total
$
345,603

 
$
345,603

 
$

 
$
345,603

(1)    Fair value through profit or loss.
Fair Value Measurements     
We measure the fair value of our cash equivalents, which include money market funds and interest bearing deposits, as level 1 and level 2 measurements because they are valued using quoted market prices and observable market data, respectively.
Financial assets or liabilities include derivative financial instruments used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
The following tables provide information for the assets and liabilities carried at fair value as of December 31, 2015 and March 31, 2016:
 
 
 
Fair Value Measurements Using
 
December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Money market funds
$
54,188

 
$
54,188

 
$

 
$

Interest-bearing bank deposits
114,127

 

 
114,127

 

Cash
185,222

 
185,222

 

 

Total assets measured at fair value
$
353,537

 
$
239,410

 
$
114,127

 
$

 
 
 
 
 
 
 
 
Derivative instruments
$
552

 
$

 
$
552

 
$

Total liabilities measured at fair value
$
552

 
$

 
$
552

 
$


 
 
 
Fair Value Measurements Using
 
March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
(in thousands)
Money market funds
$
79,273

 
$
79,273

 
$

 
$

Interest-bearing bank deposits
107,618

 

 
107,618

 

Cash
199,219

 
199,219

 

 

Derivative instruments
791

 

 
791

 

Total assets measured at fair value
$
386,901

 
$
278,492

 
$
108,409

 
$



9


Note 4. Trade Receivables
The following table shows the breakdown in trade receivables net book value for the presented periods:
 
 
 
 
 
December 31, 2015
 
March 31, 2016
 
(in thousands)
Trade accounts receivables
$
267,845

 
$
269,475

(Less) Allowance for doubtful accounts
(6,264
)
 
(6,951
)
Net book value at end of period
$
261,581

 
$
262,524

Changes in allowance for doubtful accounts are summarized below:
 
2015
 
2016
 
(in thousands)
Balance at January 1
$
(3,930
)
 
$
(6,264
)
Allowance for doubtful accounts
(783
)
 
(906
)
Reversal of provision
157

 
366

Change in consolidation scope
(135
)
 

Currency translation adjustment
375

 
(147
)
Balance at March 31
$
(4,316
)
 
$
(6,951
)
Note 5. Other Current Assets
The following table shows the breakdown in other current assets net book value for the presented periods:
 
December 31, 2015
 
March 31, 2016
 
(in thousands)
Prepayments to suppliers
$
2,774

 
$
4,879

Employee-related receivables
94

 
24

Tax receivables
29,552

 
35,332

Other debtors
3,687

 
1,795

Prepaid expenses
9,475

 
14,885

Derivative instruments

 
791

Gross book value at end of period
45,582

 
57,706

(Less) Allowance for doubtful accounts

 

Net book value at end of period
$
45,582

 
$
57,706

Tax receivables primarily consist of VAT receivables and research tax credit receivables. Prepaid expenses mainly consist of office rental advance payments.

10


Note 6. Intangible assets and Goodwill
There have been no significant changes in intangible assets or goodwill since December 31, 2015. In addition, no triggering events have occurred which would indicate impairment in the balance of either intangible assets or goodwill.
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
 
Software

 
Technology and customer relationships

 
Total

Remainder of 2016
$
(2,439
)
 
$
(2,632
)
 
$
(5,071
)
2017
(3,105
)
 
(2,336
)
 
(5,441
)
2018
(2,463
)
 
(2,024
)
 
(4,487
)
2019
(1,196
)
 
(244
)
 
(1,440
)
2020
(585
)
 

 
(585
)
Thereafter

 

 

Total
$
(9,788
)
 
$
(7,236
)
 
$
(17,024
)

Note 7. Other Current Liabilities
Other current liabilities are presented in the following table:
 
December 31, 2015
 
March 31,
2016
 
(in thousands)
Clients' prepayments
$
6,244

 
$
8,051

Employee-related payables
42,275

 
41,807

Taxes payable
30,463

 
33,861

Accounts payable relating to capital expenditures
8,037

 
10,024

Other creditors
1,091

 
736

Deferred revenue
159

 
602

Total
$
88,269

 
$
95,081


11


Note 8. Financial Liabilities
The changes in current and non-current financial liabilities during the period ended March 31, 2016 are illustrated in the following schedules:
 
As of January 1, 2016
 
New borrowings
 
Repayments
 
Change in scope
 
Other (1)
 
Currency translation adjustment
 
As of March 31, 2016
 
(in thousands)
Borrowings
$
5,973

 
$
807

 
$
(1,518
)
 
$

 
$
213

 
$
91

 
$
5,566

Financial liabilities relating to finance leases
23

 

 
(23
)
 

 

 

 

Other financial liabilities
608

 

 

 

 

 
28

 
636

Derivative instruments
552

 

 

 

 
(560
)
 
8

 

Current portion
7,156


807


(1,541
)



(347
)

127


6,202

Borrowings
3,272

 

 

 

 
(213
)
 
142

 
3,201

Financial liabilities relating to finance leases

 

 

 

 

 

 

Other financial liabilities

 

 

 

 

 

 

Non current portion
3,272

 

 

 

 
(213
)
 
142

 
3,201

Borrowings
9,245

 
807

 
(1,518
)
 

 

 
233

 
8,767

Financial liabilities relating to finance leases
23

 

 
(23
)
 

 

 

 

Other financial liabilities
608

 

 

 

 

 
28

 
636

Derivative instruments
552

 

 

 

 
(560
)
 
8

 

Total
$
10,428

 
$
807

 
$
(1,541
)
 
$

 
$
(560
)
 
$
269

 
$
9,403

 (1) Includes reclassification from non-current to current portion based on maturity of the financial liabilities.
Borrowings are financial liabilities with amortized costs and are measured using level 2 fair value measurements.
We are party to loan agreements with Le Credit Lyonnais, or LCL, Bpifrance Financement (French Public Investment Bank), HSBC as well as with a bank syndicate composed of Natixis (coordinator and documentation agent), LCL (facility agent), HSBC France, Société Générale Corporate & Investment Banking and BNP Paribas (each acting individually as bookrunners and mandated lead arrangers).
There have been no changes in the terms of our loan agreement and other financial liabilities, including maturity and allocation by currency, from what was disclosed in Note 14 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.



12


Note 9. Share-Based Compensation
The Board of Directors has been authorized by the general meeting of the shareholders to grant employee warrants (Bons de Souscription de Parts de Créateur d’Entreprise or "BSPCEs"), share options (Options de Souscription d'Actions or "OSAs"), restricted share units ("RSUs") and non-employee warrants (Bons de Souscription d'Actions or "BSAs").
During the quarter ended March 31, 2016, there were two grants of RSUs under the Employee Share Option Plan 8, as defined in Note 19 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2015:
On January 29, 2016, 33,010 RSUs were granted to senior management subject to achievement of internal performance objectives and continued employment. Based on the assumptions known as of March 31, 2016, we determined share-based compensation expense by applying a probability ratio on performance objectives completion.
On February 25, 2016, 181,885 RSUs were granted to Criteo employees subject to continued employment.
There have been no changes in the vesting and method of valuation of the BSPCE, OSA, RSU, or BSA from what was disclosed in Note 19 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 29, 2016.

Change in Number of BSPCE / OSA / RSU / BSA
 
OSA/BSPCE
 
RSU
 
BSA
 
Total

Balance at January 1, 2016
6,547,854

 
1,095,585

 
154,910

 
7,798,349

Granted

 
214,895

 

 
214,895

Exercised
(401,299
)
 

 

 
(401,299
)
Forfeited
(129,097
)
 
(13,779
)
 

 
(142,876
)
Expired

 

 

 

Balance at March 31, 2016
6,017,458

 
1,296,701

 
154,910

 
7,469,069


Breakdown of the Closing Balance
 
OSA/BSPCE
 
RSU
 
BSA
Number outstanding
6,017,458

 
1,296,701

 
154,910

Weighted-average exercise price
21.40

 
NA

 
15.72

Number exercisable
2,760,417

 
NA

 
123,558

Weighted-average exercise price
13.90

 
NA

 
10.10

Weighted-average remaining contractual life of options outstanding
7.75

 
NA

 
7.1


13


Share-based compensation expense
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
(in thousands)
 
R&D

 
S&O

 
G&A

 
Total

 
R&D

 
S&O

 
G&A

 
Total

RSUs
$

 
$

 
$

 
$

 
$
(1,256
)
 
$
(1,668
)
 
$
(1,101
)
 
$
(4,025
)
Share options / BSPCE
(1,478
)
 
(3,454
)
 
(1,365
)
 
(6,297
)
 
(1,146
)
 
(1,722
)
 
(1,388
)
 
(4,256
)
BSA

 

 
(20
)
 
(20
)
 

 

 
(89
)
 
(89
)
Total
$
(1,478
)
 
$
(3,454
)
 
$
(1,385
)
 
$
(6,317
)
 
$
(2,402
)
 
$
(3,390
)

$
(2,578
)
 
$
(8,370
)

Note 10. Financial Income and Expenses
The Condensed Consolidated Statements of Income line item “Financial income (expense)” can be broken down as follows:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
Financial income from cash equivalents
$
552

 
$
388

Interest on debt
(169
)
 
(476
)
Foreign exchange gain (loss)
3,690

 
(1,216
)
Other financial expense
(153
)
 
(13
)
Total financial income (expense)
$
3,920

 
$
(1,317
)
The $1.2 million foreign exchange loss for the period ended March 31, 2016 mainly results from the revaluation of the intra-group positions between Criteo S.A. and its Brazilian subsidiary. At the end of March 2016, the main positions bearing a risk of foreign currency are centralized at the Parent company level and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.

The $3.7 million foreign exchange gain for the period ended March 31, 2015 was a result of the translation of the remaining funds of our initial public offering proceeds into euros at the foreign exchange closing rate (the euro remains the Group functional currency), then translated into the U.S. dollar (the Group presentation currency) according to the average euro / U.S. dollar exchange rate, partially offset by the cost of premiums on related hedging instruments.

14


Note 11. Income Taxes
Breakdown of Income Taxes
The Condensed Consolidated Statements of Income line item “Provision for income taxes” can be broken down as follows:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
Current income tax
$
(7,112
)
 
$
(9,082
)
France
(4,586
)
 
(3,121
)
International
(2,526
)
 
(5,961
)
Net change in deferred taxes
(31
)
 
1,138

France
(31
)
 
1,216

International

 
(78
)
Provision for income taxes
$
(7,143
)
 
$
(7,944
)
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate (“AETR”). To calculate our estimated AETR, we estimate our income before taxes and the related tax expense or benefit for the full fiscal year (total of expected current and deferred tax provisions), excluding the effect of significant unusual or infrequently occurring items or comprehensive income items not recognized in the statement of of income. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated annual tax rate changes, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors including our ability to accurately predict our income (loss) before provision for income taxes in multiple jurisdictions and the changes in foreign exchange rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside of France.
Current tax assets and liabilities
The total amount of current tax assets consists mainly of prepayments of income taxes by Criteo do Brasil LTDA and withholding taxes accountable to future income taxes of Criteo Corp. The current tax liabilities refers mainly to the net corporate tax payable of Criteo S.A. and Criteo KK.

15


Note 12. Earnings Per Share
Basic Earnings Per Share
We calculate basic earnings per share by dividing the net income for the period attributable to shareholders of the Parent by the weighted average number of shares outstanding.
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
 
 
 
 
(in thousands, except share and per share data)
 
 
 
 
Net income attributable to shareholders of Criteo S.A.
$
12,982

 
$
17,131

Weighted average number of shares outstanding
61,174,168

 
62,610,013

Basic earnings per share
$
0.21

 
$
0.27

Diluted Earnings Per Share
We calculate diluted earnings per share by dividing the net income attributable to shareholders of the Parent by the weighted average number of shares outstanding plus any potentially dilutive shares not yet issued from share-based compensation plans (see note 9). There were no other potentially dilutive instruments outstanding as of March 31, 2015 and 2016. Consequently all potential dilutive effects from shares are considered.
For each period presented, a contract to issue a certain number of shares (i.e. share option, share warrant, restricted share award or BSPCE contracts) is assessed as potentially dilutive, if it is “in the money” (i.e., the exercise or settlement price is lower than the average market price).
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
 
 
 
 
(in thousands, except share and per share data)
 
 
 
 
Net income attributable to shareholders of Criteo S.A.
$
12,982

 
$
17,131

Weighted average number of shares outstanding of Criteo S.A.
61,174,168

 
62,610,013

Dilutive effect of :
 
 
 
Restricted share awards

 

Share options and BSPCE
3,421,375

 
2,144,884

Share warrants
146,399

 
86,237

Weighted average number of shares outstanding used to determine diluted earnings per share
64,741,942

 
64,841,134

Diluted earnings per share
$
0.20

 
$
0.26

The weighted average number of securities that were anti-dilutive for diluted EPS for the periods presented but which could potentially dilute EPS in the future are as follows:
 
Three Months Ended
 
March 31, 2015
 
March 31, 2016
 
 
 
 
        Restricted share awards

 
1,038,691

        Share options and BSPCE
754,644

 

        Share warrants

 

Weighted average number of anti-dilutive securities excluded from diluted earnings per share
754,644

 
1,038,691


16


Note 13. Commitments and contingencies
Commitments
Leases
We are party to various operating lease agreements mainly related to our offices as well as hosting services. Certain of these arrangements have free rent periods or escalating rent payment provisions, and we recognize rent expense under such arrangements on a straight-line basis.
Operating lease expenses totaled $4.9 million and $7.4 million for the three month period ended March 31, 2015 and 2016, respectively. Hosting costs totaled $6.5 million and $9.3 million for the three month period ended March 31, 2015 and 2016, respectively.

Revolving Credit Facilities, Credit Line Facilities and Bank Overdrafts     
As mentioned in Note 8, we are party to various credit facilities, short term credit lines, and overdraft facilities. There have been no significant changes in the terms, conditions, or the amounts drawn on these facilities since December 31, 2015.
All of these credit facilities are unsecured and contain customary events of default but do not contain any affirmative, financial or negative covenants, with the exception of the €250.0 million ($284.6 million) revolving credit facility which contains covenants, including compliance with a total net debt to adjusted EBITDA ratio and restrictions on incurring additional indebtedness. At March 31, 2016, we were in compliance with the required leverage ratio.

Contingencies
Changes in provisions during the presented periods are summarized below:
 
Provision for employee related litigation

Provision for tax related litigation

Other provisions

Total
 
(in thousands)
Balance at January 1, 2016
$
236

$
44

$
388

$
668

Charges
275



275

Provision used




Provision released not used


(272
)
(272
)
Change in consolidation scope




Currency translation adjustments
21

2

(6
)
17

Other




Balance at March 31, 2016
$
532

$
46

$
110

$
688

 - of which current
532

46

110

688

 - of which non-current




The amount of the provisions represent management’s best estimate of the future outflow. Provisions are mainly in relation to employee related litigations and other provisions which consist of estimated restoration costs following the end of leases in 2015. The remaining provisions are for tax contingencies.


17


Note 14. Breakdown of Revenue and Non-Current Assets by Geographical Areas
The Company operates in the following three geographical markets:
Americas: North and South America,
EMEA: Europe, Middle-East and Africa, and
Asia-Pacific.
 The following tables disclose our consolidated revenue for each geographical area for each of the reported periods. Revenue by geographical area is based on the location of advertisers’ campaigns.  
 
Americas
 
EMEA
 
Asia-Pacific
 
Total
 
(in thousands)
 
 
 
 
 
 
 
 
March 31, 2015
$
100,624

 
$
132,208

 
$
61,340

 
$
294,172

March 31, 2016
$
147,174

 
$
159,405

 
$
94,674

 
$
401,253

Revenue generated in France amounted to $30.5 million and $32.5 million for the three months ended March 31, 2015 and 2016, respectively.
Revenue generated in other significant countries where we operate is presented in the following table:
 
Three Months Ended
 
2015
 
2016
 
(in thousands)
Americas
 
 
 
United States
$
80,661

 
$
126,913

EMEA
 
 
 
Germany
$
28,446

 
$
33,696

United Kingdom
$
25,943

 
$
28,509

Asia-Pacific
 
 
 
Japan
$
44,508

 
$
65,973

As of March 31, 2015 and 2016, our largest client represented 2.1% and 2.0%, respectively, of our consolidated revenue.
Other Information
For each reported period, non-current assets (corresponding to the net book value of tangible and intangible assets) are presented in the table below. The geographical information results from the locations of legal entities.
 
 
 
 
 
Of which
 
 
 
 
 
Of which
 
 
 
Holding
 
Americas
 
United States
 
Europe
 
Asia-Pacific
 
Japan
 
Total
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
$
48,160

 
$
24,437

 
$
23,332

 
$
8,847

 
$
17,508

 
$
7,807

 
$
98,952

March 31, 2016
$
49,875

 
$
26,435

 
$
25,390

 
$
8,159

 
$
18,400

 
$
7,923

 
$
102,869


18


Note 15. Related Parties
There were no significant related-party transactions during the period nor any evolution in the nature of the transactions as described in Note 24 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.
 
Note 16. Subsequent Events
The Company evaluated subsequent events that occurred after March 31, 2016 through the date of issuance of the unaudited condensed consolidated financial statements and determined that there are no significant events that require adjustments or disclosure.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission, or SEC, on February 29, 2016.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Annual Report filed on Form 10-K for the year ended December 31, 2015.

Recently Issued Pronouncements

See "Recently Issued Accounting Standards" under Note 1, "Summary of Significant Accounting Policies," of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards that have been issued during 2016.

Use of Non-GAAP Financial Measures

This Form 10-Q includes the following financial measures defined as non-GAAP financial measures by the SEC: Revenue ex-TAC, Adjusted EBITDA, and Adjusted Net Income. These measures are not calculated in accordance with U.S. GAAP.

Revenue ex-TAC is our revenue excluding Traffic Acquisition Costs (“TAC”) generated over the applicable measurement period and Revenue ex-TAC by Region reflects our Revenue ex-TAC by our core geographies. Revenue ex-TAC and Revenue ex-TAC by Region are key measures used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our core business and across our core geographies.

Adjusted EBITDA is our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of share-based compensation expense, pension service costs and acquisition-related deferred price consideration. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short‑ and long-term operational plans. In particular, we believe that by eliminating non-cash compensation expense, pension costs and acquisition-related deferred price consideration, 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 the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.

Adjusted Net Income is 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 these adjustments. Adjusted Net Income 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 by eliminating share-based compensation expense, amortization of acquisition-related intangible assets and acquisition-related deferred price consideration and the tax impact of these adjustments, 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 the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.

Please refer to the supplemental financial tables provided for a reconciliation of Revenue ex-TAC to Revenue, Adjusted EBITDA to net income, and Adjusted Net Income to net income, in each case, the most comparable U.S. GAAP measurement. Our use non-GAAP financial measures has limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are:  (1) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; and (2) other companies may report Revenue ex-TAC, Adjusted EBITDA, Adjusted Net Income, or similarly titled measures but calculate them differently or over different regions, which reduces their usefulness as comparative

20


measures. Because of these and other limitations, you should consider these measures alongside our U.S. GAAP financial results, including revenue and net income.

Condensed Consolidated Statements of Income Data (Unaudited):
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands, except share and per share data)
Revenue
$
294,172

 
$
401,253

 
 
 
 
Cost of revenue (1):
 
 
 
Traffic acquisition costs
(175,888
)
 
(238,755
)
Other cost of revenue
(12,969
)
 
(18,338
)
Gross profit
105,315

 
144,160

 

 

Operating expenses

 

Research and development expenses (1)
(17,846
)
 
(27,162
)
Sales and operations expenses (1)
(53,083
)
 
(64,473
)
General and administrative expenses (1)
(17,546
)
 
(24,737
)
Total operating expenses
(88,475
)
 
(116,372
)
Income from operations
16,840

 
27,788

Financial income (expense)
3,920

 
(1,317
)
Income before taxes
20,760

 
26,471

Provision for income taxes
(7,143
)
 
(7,944
)
Net income
$
13,617

 
$
18,527

Net income available to shareholders of Criteo S.A. (2)
12,982

 
17,131

Net income available to shareholders per share:
 
 
 
Basic
$
0.21

 
$
0.27

Diluted
$
0.20

 
$
0.26

Weighted average shares outstanding used in computing per share amounts:
 
 
 
Basic
61,174,168

 
62,610,013

Diluted
64,741,942

 
64,841,134

(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:









21



Detailed Information on Selected Items:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
Share-based compensation expense
 
 
 
Research and development
$
1,478

 
$
2,402

Sales and operations
3,454

 
3,390

General and administrative
1,385

 
2,578

Total share-based compensation expense
$
6,317

 
$
8,370

 
 
 
 
Service costs - pension
 
 
 
Research and development
$
42

 
$
52

Sales and operations
39

 
34

General and administrative
31

 
43

Total service costs - pension
$
112

 
$
129

 
 
 
 
Depreciation and amortization expense
 
 
 
Cost of revenue
$
5,971

 
$
8,220

Research and development (a)
1,144

 
2,007

Sales and operations
992

 
1,771

General and administrative
321

 
518

Total depreciation and amortization Expense
$
8,428

 
$
12,516

 
 
 
 
Acquisition-related deferred price consideration
 
 
 
Research and development
$
109

 
$
40

Sales and operations

 

General and administrative

 

Total acquisition-related deferred price consideration
$
109

 
$
40

(a) Includes acquisition-related amortization of intangible assets of $0.9 million and $1.4 million as of March 31, 2015 and March 31, 2016, respectively.
(2) For the three months ended March 31, 2015 and March 31, 2016, this excludes $0.6 million and $1.4 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK.

22


Consolidated Statements of Financial Position Data (Unaudited):
 
December 31,
2015
 
March 31,
2016
 
(in thousands)
(unaudited)
Cash and cash equivalents
$
353,537

 
$
386,110

Total assets
841,719

 
893,713

Trade receivables, net of allowances for doubtful accounts
261,581

 
262,524

Total financial liabilities
10,428

 
9,403

Total liabilities
362,696

 
361,889

Total equity
$
479,023

 
$
531,824

Other Financial and Operating Data (Unaudited):
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands, except number of clients)
(unaudited)
Number of clients
7,832

 
10,962

Revenue ex-TAC (3)
$
118,284

 
$
162,498

Adjusted net income (4)
$
20,833

 
$
28,086

Adjusted EBITDA (5)
$
31,806

 
$
48,843

(3) We define Revenue ex-TAC (Traffic Acquisition Costs) as our revenue excluding traffic acquisition costs, or TAC, generated over the applicable measurement period. Revenue ex-TAC is not a measure calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC in this Form 10-Q because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report Revenue ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC alongside our other U.S. GAAP financial results, including revenue. The following table presents a reconciliation of Revenue ex-TAC to revenue, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
(unaudited)
Revenue
$
294,172

 
$
401,253

Adjustment:
 
 
 
Traffic acquisition costs
(175,888
)
 
(238,755
)
Revenue ex-TAC
$
118,284

 
$
162,498


23


(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 U.S. GAAP. We have included Adjusted Net Income in this Form 10-Q because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of 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 U.S. GAAP. Some of these limitations are: (a) Adjusted Net Income does not reflect the potentially dilutive impact of equity-based compensation or the impact of certain acquisition related costs; and (b) other companies, including companies in our industry, may calculate Adjusted Net Income or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted Net Income alongside our other U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
Net income
$
13,617

 
$
18,527

Adjustments:


 


Share-based compensation expense
6,317

 
8,370

Amortization of acquisition-related intangible assets
920

 
1,377

Acquisition-related deferred price consideration
109

 
40

Tax impact of the above adjustments
(130
)
 
(228
)
Adjusted net income
$
20,833

 
$
28,086

(5) We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income 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 U.S. GAAP. We have included Adjusted EBITDA in this Form 10-Q because it is a key measure used by our management and board of directors to 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 U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other U.S. GAAP financial results, including net income . The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:


24


 
Three Months Ended
 
March 31,
2015
 
March 31,
2016
 
(in thousands)
Net income
$
13,617

 
$
18,527

Adjustment
 
 
 
Financial expense (income)
(3,920
)
 
1,317

Provision for income taxes
7,143

 
7,944

Shared-based compensation expense
6,317

 
8,370

Service costs (pension)
112

 
129

Depreciation and amortization expense
8,428

 
12,516

Acquisition-related deferred price consideration
109

 
40

Total net adjustments
18,189

 
30,316

Adjusted EBITDA
$
31,806

 
$
48,843




25


Results of Operations for the Quarters Ended March 31, 2015 and 2016 (Unaudited)
Revenue
 
Three Months Ended
 
 
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands)
 
 
Revenue as reported
$
294,172

 
$
401,253

 
36.4
%
Conversion impact U.S dollar/other currencies

 
8,349

 
 
Revenue at constant currency (1)
294,172

 
409,602

 
39.2
%
 
 
 
 
 
 
Americas
 
 
 
 
 
Revenue as reported
100,624

 
147,174

 
46.3
%
Conversion impact U.S dollar/other currencies

 
4,395

 
 
Revenue at constant currency (1)
100,624

 
151,569

 
50.6
%
 
 
 
 
 
 
EMEA
 
 
 
 
 
Revenue as reported
132,208

 
159,405

 
20.6
%
Conversion impact U.S dollar/other currencies

 
4,943

 
 
Revenue at constant currency (1)
132,208

 
164,348

 
24.3
%
 
 
 
 
 
 
Asia-Pacific
 
 
 
 
 
Revenue as reported
61,340

 
94,674

 
54.3
%
Conversion impact U.S dollar/other currencies

 
(989
)
 
 
Revenue at constant currency(1)
$
61,340

 
$
93,685

 
52.7
%
(1) Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2015 average exchange rates for the relevant period to 2016 figures. We have included revenue at constant currency in this Form 10-Q because it is a key measure used by our management and board of directors to evaluate operating performance. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends.
Revenue for the three months ended March 31, 2016 increased to $401.3 million, growing 36.4% (or 39.2% on a constant currency basis), compared to the three months ended March 31, 2015. Revenue from new clients contributed 45.0% to the year-over-year revenue growth while revenue from existing clients contributed 55.0% to the year-over-year revenue growth. This increase in revenue was primarily driven by the continued roll-out of technology innovations across all devices, including mobile, the addition of over 760 clients our second largest quarterly increase in new clients, and the continued expansion of our publisher relationships. Technology improvements and broader inventory reach helped generate more revenue per existing client. Our continuing ability to convert and maintain a large portion of our clients to uncapped budgets was also a key driver of the increase in revenue per existing client.
The year-over-year increase was the result of our rapid growth across all geographies. Revenue in the Americas region increased 46.3% (or 50.6% on a constant currency basis) to $147.2 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as existing large clients continued to increase their spend with us. We signed several new large clients in the U.S. and our midmarket segment continued its strong growth across the Americas. Revenue in the EMEA region increased 20.6% (or 24.3% on a constant currency basis) to $159.4 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as we saw strong performance in the Travel sector, signed several large and midmarket clients in the region and continued to grow our revenue from existing clients across client segments and markets. Revenue in the Asia-Pacific region increased 54.3% (or 52.7% on a constant currency basis) to $94.7 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as we continued to win new clients, in particular in Japan and South-east Asia.

26



Additionally, our $401.3 million revenue for the three months ended March 31, 2016 was negatively impacted by $8.3 million as a result of changes in foreign currency against the U.S. dollar compared to the three months ended March 31, 2015.
The year-over-year growth in revenue on a constant currency basis is primarily attributable to an increased volume of clicks delivered on the advertising banners displayed by us (i.e. higher volumes of impressions).
Cost of Revenue
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
Traffic acquisition costs
$
(175,888
)
 
$
(238,755
)
 
35.7%
Other cost of revenue
$
(12,969
)
 
$
(18,338
)
 
41.4%
% of revenue
(64.2
)%
 
(64.1
)%
 
 
Gross profit %
35.8
 %
 
35.9
 %
 
 
Cost of revenue for the three months ended March 31, 2016 increased $68.2 million, or 36.1%, compared to the three months ended March 31, 2015. This increase was primarily the result of a $62.9 million, or 35.7% (or 38.4% on a constant currency basis), increase in traffic acquisition costs and a $5.4 million, or 41.4% (or 43.3% on a constant currency basis), increase in other cost of revenue.
The increase in traffic acquisition costs related primarily to an increase of 21.2% increase in the number of impressions we purchased, driven by both publishers with whom we have direct relationships, including the Criteo Publisher Marketplace, and the main real-time bidding exchanges, both global and local. Over the period, the average cost per thousand impressions (or CPM) increased 12.0%. The year-over-year increase in average CPM was not only driven by price dynamics but was largely a function of the improving quality of the inventory as well as the evolving formats of ad units available to us on an individual basis.
The year-over year growth in traffic acquisition costs was the result of our strong growth across all geographies. Traffic acquisition costs in the Americas region increased 48.5% (or 52.3% on a constant currency basis) to $90.9 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as our purchases of impressions from the main real-time bidding exchanges and the Facebook mobile application increased and we maintained strong direct relationships with large premium publishers. Traffic acquisition costs in the EMEA region increased 16.7% (or 20.4% on a constant currency basis) to $91.2 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as our purchases of impressions, across several markets in the region, from both large publishers we have a direct relationship with and the main real-time bidding exchanges, increased. Traffic acquisition costs in the Asia-Pacific region increased 55.2% (or 53.5% on a constant currency basis) to $56.6 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, as we significantly increased our purchases of impressions from global and local real-time bidding exchanges to enable and support our rapid development across several markets in South-East Asia, as well as maintained strong relationships with large premium publishers in the region, in particular in Japan.
The increase in other cost of revenue includes a $2.8 million increase in hosting costs, a $2.2 million increase in allocated depreciation and amortization expense and a $0.4 million increase in other cost of sales, partially offset by a $0.1 million decrease in data acquisition costs.
We consider Revenue ex-TAC as a key measure of our business activity. Our strategy focuses on maximizing the growth of our Revenue ex-TAC on an absolute basis over maximizing our near-term gross margin. We believe this focus builds sustainable long-term value for our business by fortifying a number of our competitive strengths, including access to advertising inventory, breadth and depth of data and continuous improvement of the Criteo Engine’s performance, allowing it to deliver more relevant advertisements at scale. As a part of this focus, we continue to invest in building relationships with direct publishers and pursuing access to leading advertising exchanges. Our performance-based business model provides us with significant control over our level of Revenue ex-TAC margin, which we seek to optimize in order to maximize Revenue ex-TAC growth on an absolute basis in accordance with our strategic focus.

27



Research and Development Expense
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
Research and development expenses
$
(17,846
)
 
$
(27,162
)
 
52.2%
% of revenue
(6.1
)%
 
(6.8
)%
 
 
Research and development expense for the three months ended March 31, 2016 increased $9.3 million, or 52.2%, compared to the three months ended March 31, 2015. This increase was primarily the result of a growth in headcount to 440 employees resulting in $6.2 million of additional expense, a $0.9 million increase in subcontracting and other headcount-related costs, a $1.1 million increase in allocated rent and facilities costs, a $0.9 million increase in amortization and depreciation of assets, and a $0.6 million increase in consulting and professional fees partially offset by a $0.4 million increase in the French Research Tax Credit.
Sales and Operations Expense
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
Sales and operations expenses
$
(53,083
)
 
$
(64,473
)
 
21.5%
% of revenue
(18.0
)%
 
(16.1
)%
 
 
 
Sales and operations expense for the three months ended March 31, 2016 increased $11.4 million, or 21.5%, compared to the three months ended March 31, 2015. This increase was primarily the result of a growth in headcount to 1,190 employees resulting in $7.1 million of additional expense, a $0.8 million increase in marketing events, a $0.8 million increase in allocated depreciation and amortization expense, a $2.4 million increase in allocated rent and facilities costs, a $0.1 million increase in provisions for doubtful receivables, and a $0.2 million increase in other expenses, mainly in consulting and professional fees.
General and Administrative Expenses
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
General and administrative expenses
$
(17,546
)
 
$
(24,737
)
 
41.0%
% of revenue
(6.0
)%
 
(6.2
)%
 
 
General and administrative expense for the three months ended March 31, 2016 increased $7.2 million, or 41.0%, compared to the three months ended March 31, 2015. This increase was primarily the result of a growth in headcount to 340 employees resulting in $6.4 million of additional expense, a $0.2 million increase in subcontracting and other headcount-related costs, a $0.6 million increase in allocated rent and facilities costs, and a $0.2 million increase in allocated depreciation and amortization expense, partially offset by a $0.2 million decrease in consulting and professional fees.

28


Financial Income (Expense)
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
Financial income (expense)
$
3,920

 
$
(1,317
)
 
(133.6)%
% of revenue
1.3
%
 
(0.3
)%
 
 
Financial income for the three months ended March 31, 2016 decreased by $5.2 million, or (133.6)%, compared to the three months ended March 31, 2015. The $1.3 million financial expense for the three months ended March 31, 2016 was mainly a result of the weakening of the Brazilian Real which resulted in losses on intra-group positions denominated in this currency. The $3.9 million financial income for the three months ended March 31, 2015 included the reevaluation and related hedging of the remaining funds from our initial public offering. At the end of March 2016, the main positions bearing a risk of foreign currency are centralized at the Parent company level and hedged using foreign currency swaps and forward purchases or sales of foreign currencies.
Provision for Income Taxes
 
Three Months Ended
 
% change
 
March 31, 2015
 
March 31, 2016
 
2015 vs 2016
 
(in thousands, except percentages)
 
 
Provision for income taxes
$
(7,143
)
 
$
(7,944
)
 
11.2%
% of revenue
(2.4
)%
 
(2.0
)%
 
 
Effective tax rate
34.41