0001576427-19-000079.txt : 20190802 0001576427-19-000079.hdr.sgml : 20190802 20190802160449 ACCESSION NUMBER: 0001576427-19-000079 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 95 CONFORMED PERIOD OF REPORT: 20190630 FILED AS OF DATE: 20190802 DATE AS OF CHANGE: 20190802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Criteo S.A. CENTRAL INDEX KEY: 0001576427 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 000000000 STATE OF INCORPORATION: I0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36153 FILM NUMBER: 19995995 BUSINESS ADDRESS: STREET 1: 32 RUE BLANCHE CITY: PARIS STATE: I0 ZIP: 75009 BUSINESS PHONE: 33140402290 MAIL ADDRESS: STREET 1: 32 RUE BLANCHE CITY: PARIS STATE: I0 ZIP: 75009 10-Q 1 criteo10qq22019.htm 10-Q Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2019
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)

Securities registered pursuant to Section 12(b) of the Act
Title of each class
 
Trading Symbol(s)
Name of each exchange on which registered
 
American Depositary Shares, each representing one Ordinary Share,
nominal value €0.025 per share
 
CRTO
Nasdaq Global Select Market
 
​Ordinary Shares, nominal value €0.025 per share​
*
 
Nasdaq Global Select Market
*
* Not for trading, but only in connection with the registration of the American Depositary Shares.
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller reporting company
Emerging growth company
 
 
If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes        No x
          As of July 31, 2019, the registrant had 65,171,310 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 appearing in this Form 10-Q are the property of Criteo. Trade names, trademarks and service marks of other companies appearing in this Form 10-Q are the property of their respective holders.

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




You should refer to Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, and to Part II, Item 1A "Risk Factors" of this Form 10-Q, for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this Form 10-Q will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary 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, 2018

 
June 30, 2019

 
 
(in thousands)
Assets
 
 
 
 
Current assets:
 
 
 
 
    Cash and cash equivalents
3
$
364,426

 
$
422,053

    Trade receivables, net of allowances of $25.9 million and $19.5 million at December 31, 2018 and June 30, 2019, respectively
4
473,901

 
374,949

    Income taxes
 
19,370

 
18,185

    Other taxes
 
53,338

 
56,090

    Other current assets
5
22,816

 
18,751

    Total current assets
 
933,851

 
890,028

Property, plant and equipment, net
 
184,013

 
192,651

Intangible assets, net
6
112,036

 
103,113

Goodwill
6
312,881

 
317,093

Right of use assets - operating lease
8

 
183,725

Non-current financial assets
 
20,460

 
21,613

Deferred tax assets
 
33,894

 
41,346

    Total non-current assets
 
663,284

 
859,541

Total assets
 
$
1,597,135

 
$
1,749,569

Liabilities and shareholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
    Trade payables
 
$
425,376

 
$
332,735

    Contingencies
14
2,640

 
4,156

    Income taxes
 
7,725

 
7,065

    Financial liabilities - current portion
3
1,018

 
2,030

    Operating lease liabilities - current portion
8

 
47,964

    Other taxes
 
55,592

 
56,929

    Employee - related payables
 
65,878

 
68,702

    Other current liabilities
7
47,115

 
33,986

    Total current liabilities
 
605,344

 
553,567

Deferred tax liabilities
 
10,770

 
8,489

Retirement benefit obligation
 
5,537

 
8,002

Financial liabilities - non current portion
3
2,490

 
2,051

Operating lease liabilities - non current portion
8

 
148,170

Other non-current liabilities
 
5,103

 
4,327

    Total non-current liabilities
 
23,900

 
171,039

Total liabilities
 
629,244

 
724,606

Commitments and contingencies
 


 


Shareholders' equity:
 
 
 
 
Common shares, €0.025 par value, 67,708,203 and 66,161,523 shares authorized, issued and outstanding at December 31, 2018 and June 30, 2019, respectively.
2,201

 
2,157

Treasury stock, 3,459,119 and 1,118,969 shares at cost as of December 31, 2018 and June 30, 2019, respectively.
 
(79,159
)
 
(26,564
)
Additional paid-in capital
 
663,281

 
652,572

Accumulated other comprehensive (loss)
 
(30,522
)
 
(33,293
)
Retained earnings
 
387,869

 
401,209

Equity-attributable to shareholders of Criteo S.A.
 
943,670

 
996,081

Non-controlling interests
 
24,221

 
28,882

Total equity
 
967,891

 
1,024,963

Total equity and liabilities
 
$
1,597,135

 
$
1,749,569

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
 
Six Months Ended
 
Notes
 
June 30, 2018

 
June 30, 2019

 
June 30, 2018

 
June 30, 2019

 
 
(in thousands, except share per data)
 
 
 
 
 
 
 
 
 
 
Revenue
9
 
$
537,185

 
$
528,147

 
$
1,101,349

 
$
1,086,270

 
 
 
 
 
 
 
 
 
 
Cost of revenue:
 
 
 
 
 
 
 
 
 
Traffic acquisition costs
 
 
(306,963
)
 
(304,229
)
 
(630,709
)
 
(626,658
)
Other cost of revenue
 
 
(29,957
)
 
(29,059
)
 
(60,016
)
 
(55,104
)
 
 
 
 
 
 
 
 
 
 
Gross profit
 
 
200,265

 
194,859

 
410,624

 
404,508

 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development expenses
 
 
(47,544
)
 
(44,015
)
 
(92,862
)
 
(90,592
)
Sales and operations expenses
 
 
(92,726
)
 
(95,503
)
 
(188,375
)
 
(191,412
)
General and administrative expenses
 
 
(35,644
)
 
(35,767
)
 
(70,235
)
 
(69,537
)
Total operating expenses
 
 
(175,914
)
 
(175,285
)
 
(351,472
)
 
(351,541
)
Income from operations
 
 
24,351

 
19,574

 
59,152

 
52,967

Financial income (expense)
11
 
(1,006
)
 
(1,354
)
 
(2,331
)
 
(3,328
)
Income before taxes
 
 
23,345

 
18,220

 
56,821

 
49,639

Provision for income taxes
12
 
(8,638
)
 
(5,683
)
 
(21,024
)
 
(15,701
)
Net income
 
 
$
14,707

 
$
12,537

 
$
35,797

 
$
33,938

 
 
 
 
 
 
 
 
 
 
Net income available to shareholders of Criteo S.A.
 
 
$
13,726

 
$
10,823

 
$
33,535

 
$
29,943

Net income available to non-controlling interests
 
 
$
981

 
$
1,714

 
$
2,262

 
$
3,995

 
 
 
 
 
 
 
 
 
 
Net income allocated to shareholders of Criteo S.A. per share:
 
 
 
 
 
 
 
 
 
Basic
13
 
$
0.21

 
$
0.17

 
$
0.51

 
$
0.46

Diluted
13
 
$
0.20

 
$
0.16

 
$
0.50

 
$
0.45

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing per share amounts:
 
 
 
 
 
 
 
 
 
Basic
13
 
66,347,599

 
64,581,476

 
66,254,476

 
64,459,867

Diluted
13
 
67,488,311

 
65,624,505

 
67,479,513

 
65,833,642

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
Six Months Ended
 
 
June 30, 2018

 
June 30, 2019

June 30, 2018

 
June 30, 2019

 
 
(in thousands)
 
 
 
 
 
 
 
 
Net income
 
$
14,707

 
$
12,537

$
35,797

 
$
33,938

Foreign currency translation differences, net of taxes
 
(34,555
)
 
9,598

(8,671
)
 
(894
)
Actuarial (losses) gains on employee benefits, net of taxes
 
413

 
(585
)
413

 
(1,638
)
Other comprehensive income (loss)
 
$
(34,142
)
 
$
9,013

$
(8,258
)
 
$
(2,532
)
Total comprehensive income (loss)
 
$
(19,435
)
 
$
21,550

$
27,539

 
$
31,406

Attributable to shareholders of Criteo S.A.
 
$
(19,706
)
 
$
19,069

$
25,051

 
$
26,842

Attributable to non-controlling interests
 
$
271

 
$
2,481

$
2,488

 
$
4,564

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

4


CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)


 
Share capital
Treasury
Stock
Additional paid-in capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Equity - attributable to shareholders of Criteo S.A.
Non controlling interest
Total equity
 
Common shares
 
Shares
 
 
 
(in thousands, except share amounts )
Balance at December 31, 2017
66,085,097
$2,152
$591,404
$(12,241)
$300,210
$881,525
$16,173
$897,698
Net income
19,809
19,809
1,281
21,090
Other comprehensive income (loss)
24,947
24,947
937
25,884
Issuance of ordinary shares
163,254
1
597
598
598
Change in treasury stocks
Share-Based Compensation
18,284
18,284
112
18,396
Other changes in equity
4
(4)
4
1
5
5
Balance at March 31, 2018
66,248,351
$2,157
$610,281
$12,710
$320,020
$945,168
$18,503
$963,671
Net income
13,726
13,726
981
14,707
Other comprehensive income (loss)
(33,432)
(33,432)
(710)
(34,142)
Issuance of ordinary shares
612,694
3
820
823
823
Change in treasury stocks
Share-Based Compensation
19,676
19,676
142
19,818
Other changes in equity
17
(5)
(21)
(9)
(9)
Balance at June 30, 2018
66,861,045
$2,177
$630,772
$(20,722)
$333,725
$945,952
$18,916
$964,868

5


 
Share capital
Treasury
Stock
Additional paid-in capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Equity - attributable to shareholders of Criteo S.A.
Non controlling interest
Total equity
 
Common shares
 
Shares
 
 
 
(in thousands, except share amounts )
Balance at December 31, 2018
67,708,203
$2,201
(3,459,119)
$(79,159)
$663,281
$(30,522)
$387,869
$943,670
$24,221
$967,891
Net income
19,120
19,120
2,281
21,401
Other comprehensive income (loss)
(11,347)
(11,347)
(198)
(11,545)
Issuance of ordinary shares
28,596
1
372
373
373
Change in treasury stocks
(1,594,288)
(45)
1,786,715
40,080
(36,091)
(3,944)
Share-Based Compensation
13,533
13,533
(11)
13,522
Other changes in equity

(1)
155
154
154
Balance at March 31, 2019
66,142,511
$2,157
(1,672,404)
$(39,079)
$641,094
$(41,869)
$403,200
$965,503
$26,293
$991,796
Net income
10,823
10,823
1,714
12,537
Other comprehensive income (loss)
8,246
8,246
767
9,013
Issuance of ordinary shares
19,012
252
252
252
Change in treasury stocks
553,435
12,515
(12,515)
Share-Based Compensation
11,254
11,254
108
11,362
Other changes in equity
(28)
330
(299)
3
3
Balance at June 30, 2019
66,161,523
$2,157
(1,118,969)
$(26,564)
$652,572
$(33,293)
$401,209
$996,081
$28,882
$1,024,963

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


6


CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
Six Months Ended
 
 
June 30, 2018

 
June 30, 2019

June 30, 2018

 
June 30, 2019

 
(in thousands)
Net income
 
$
14,707

 
$
12,537

$
35,797

 
$
33,938

Non-cash and non-operating items
 
35,677

 
28,961

75,427

 
53,959

    - Amortization and provisions
 
25,099

 
18,282

51,149

 
37,926

    - Equity awards compensation expense (1)
 
20,241

 
11,713

39,070

 
25,595

    - Change in deferred taxes
 
(4,389
)
 
7,252

(7,535
)
 
1,336

    - Change in income taxes
 
(5,316
)
 
(8,696
)
(4,000
)
 
(10,630
)
    - Other (2)
 
42

 
410

(3,257
)
 
(268
)
Changes in working capital related to operating activities
 
(10,043
)
 
11,466

13,644

 
32,287

    - Decrease in trade receivables
 
10,154

 
19,325

101,446

 
105,343

    - Decrease in trade payables
 
(26,745
)
 
(14,995
)
(89,690
)
 
(73,480
)
    - Decrease in other current assets
 
5,821

 
7,504

13,779

 
1,512

    - Increase/(Decrease) in other current liabilities (2)
 
727

 
3,015

(11,891
)
 
5,451

    - Change in operating lease liabilities and right of use assets
 

 
(3,383
)

 
(6,539
)
CASH FROM OPERATING ACTIVITIES
 
40,341

 
52,964

124,868

 
120,184

Acquisition of intangible assets, property, plant and equipment
 
(18,880
)
 
(28,812
)
(26,293
)
 
(42,104
)
Change in accounts payable related to intangible assets, property, plant and equipment
 
1,033

 
(3,980
)
(24,121
)
 
(14,372
)
(Payment for) disposal of a business, net of cash acquired (disposed)
 

 
637

(10,811
)
 
(4,688
)
Change in other non-current financial assets
 
154

 
(1,152
)
42

 
(1,184
)
CASH USED FOR INVESTING ACTIVITIES
 
(17,693
)
 
(33,307
)
(61,183
)
 
(62,348
)
Repayment of borrowings
 
(235
)
 
(167
)
(473
)
 
(339
)
Net payments related to equity award activities
 
396

 
(98
)
562

 
(87
)
Change in other financial liabilities (2)
 
(35
)
 
(209
)
16,810

 
(239
)
CASH FROM (USED FOR) FINANCING ACTIVITIES
 
126

 
(474
)
16,899

 
(665
)
Effect of exchange rates changes on cash and cash equivalents (2)
 
(26,363
)
 
7,099

(14,410
)
 
456

Net increase (decrease) in cash and cash equivalents
 
(3,589
)
 
26,282

66,174

 
57,627

Net cash and cash equivalents at beginning of period
 
483,874

 
395,771

414,111

 
364,426

Net cash and cash equivalents at end of period
 
$
480,285

 
$
422,053

$
480,285

 
$
422,053

 
 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 
 
 
 
 
 
Cash paid for taxes, net of refunds
 
(18,343
)
 
(7,127
)
(32,560
)
 
(24,995
)
Cash paid for interest, net of amounts capitalized
 
(432
)
 
(351
)
(840
)
 
(758
)
(1) Share-based compensation expense according to ASC 718 Compensation - stock compensation accounted for $19.8 million and $11.4 million of equity awards compensation expense for the quarter ended June 30, 2018 and 2019, respectively, and$38.2 million and $24.9 million of equity awards compensation for the six months ended June 30, 2018 and 2019, respectively.
(2) During the quarter ended June 30, 2018, and the six months ended June 30, 2018, respectively, the Company reported the cash impact of the settlement of hedging derivatives related to financing activities in cash from (used for) financing activities in the unaudited consolidated statements of cash flows
The accompanying notes form an integral part of these unaudited condensed consolidated financial statements.

7


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

We are a global technology company building the leading advertising platform for the open Internet. We strive to deliver impactful business results at scale to commerce companies and consumer brands by meeting their multiple marketing goals at their targeted return on investment. Using shopping data, predictive technology and large consumer reach, we help our clients drive Awareness, Consideration and Conversion for their products and services1, and help retailers generate advertising revenues from brands. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive measurable results for clients, we activate our data assets through proprietary artificial intelligence ("AI") technology to engage consumers in real time through the pricing and delivery of highly relevant digital advertisements ("ads"), across devices and environments. By pricing our offering on a range of pricing models and measuring our value based on clear, well-defined performance metrics, we make the return on investment transparent and easy to measure for advertisers.
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".




































___________________________________________________ 
1 Driving Awareness for a brand means exposing its brand name to consumers who have not been in touch with the brand before, thereby creating brand awareness from such consumers. Driving Consideration for an advertiser's products or services means attracting prospective new consumers to consider engaging with and/or buying this advertiser's products or services. Driving Conversion for an advertisers' products or services means triggering a purchase by consumers who have already engaged with this advertisers products or services in the past.


8


Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements included herein (the "Unaudited Condensed Consolidated Financial Statements") have been prepared by Criteo S.A. pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

Conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. Our actual results may differ from these estimates. U.S. GAAP requires us to make estimates and judgments in several areas, including, but not limited to: (1) revenue recognition criteria (2) allowances for doubtful accounts, (3) research tax credits (4) income taxes, including i) recognition of deferred tax assets arising from the subsidiaries projected taxable profit for future years, ii) evaluation of uncertain tax positions associated with our transfer pricing policy and iii) recognition of income tax position in respect of the tax reform in France voted in December 2018, (5) assumptions used in valuing acquired assets and assumed liabilities in business combinations, (6) assumptions used in the valuation of goodwill and intangible assets, and (7) assumptions used in the valuation model to determine the fair value of share-based compensation plan.

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, 2018, except for the accounting pronouncements adopted below.


Accounting Pronouncements adopted in 2019

Effective January 1, 2019, we have adopted the Financial Accounting Standards Board, ("FASB") Accounting Standards Update ("ASU") 842 No. 2016-02, Leases (Topic 842) (ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet for operating leases with terms of more than 12 months, in addition to those currently recorded. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, which included an option not to restate comparative periods in transition and use the effective date of ASC 842, Leases, as the date of the initial application of transition, which we elected. Prior periods have not been adjusted and continue to be accounted for in accordance with ASC 840. As a result of adopting ASU 842, we recognized total operating lease liabilities of $223.5 million and operating right-of-use assets of $204.3 million as of January 1, 2019. The adoption of ASC 842 had an immaterial impact on our condensed consolidated statements of income and our condensed consolidated statement of cash flows for the three month and the six month period ended June 30, 2019. Refer to Note 8. Leases, for additional information and required disclosures.
Effective January 1, 2019, we have adopted ASU 2018 - 07, Improvements to Non-Employee Sharebased Payment Accounting. The amendments in this ASU expands Topic 718 to include share base payments for goods or services to non employees. The adoption of ASU 2018-07 did not have a material impact on our financial position or results of operations.

9



 
Recently Issued Accounting Pronouncements not yet adopted
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13 (ASU 2016-13) Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are currently evaluating new credit loss models and updating our processes and controls in preparation for the adoption of ASU 2016-13. The adoption of the standard is expected to mainly impact our process for estimating the allowance for doubtful accounts; however, the impact on the consolidated financial statements is not expected to be material.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU was issued to clarify the accounting for implementation costs incurred for SaaS agreements. Previously the guidance only referred to development of internal use software and the accounting for SaaS agreements was not clarified. This ASU states that the implementation costs should be capitalized. We will adopt ASU 2018-15 effective January 1, 2020. We are currently evaluating the impact on our financial position, results of operations, and statement of cash flows.


10


Note 2. Significant Events and Transactions of the Period

Change in estimated useful life of servers and other data center equipment

During the first quarter of 2019, we revised our estimate of the useful life of all servers and other equipment used in our data centers from 3 to 5 years. This change in estimate was determined based on a revised commissioning plan which extends the period equipment from 3 to 5 years prior to disposal. This resulted in an increase in income from operations of $21.0 million, increase in net income of $17.9 million, or $0.28 per share, from that which would have been reported had the previous expected useful life of 3 years been used for the six months period ended June 30, 2019. The impact on the three month period ended June 30, 2019 was an increase in income from operations of $10.2 million, an increase in net income of $8.7 million, or $0.14 per share.

Restructuring

As part of a new organization structure designed to best support its multi-product platform strategy and accelerate execution, the Company incurred net restructuring costs of $0.7 million and $2.6 million for the three month and six month period ended June 30, 2019, respectively, comprising of costs for termination of facilities and payroll expenses, offset by gains from forfeitures of share-based compensation expense.

 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
(in thousands)
Gain from forfeitures of share-based compensation expense
2,678

 
2,678

Depreciation and amortization (expense)
(1,228
)
 
(1,228
)
Payroll costs and Facilities related costs
(2,178
)
 
(4,068
)
Total restructuring costs
(728
)
 
(2,618
)


For the three month period ended June 30, 2019, $(0.1) million was included in Research and Development expenses, $(0.2) million in Sales and Operations expenses, and $(0.4) million in General and Administrative expenses. For the six month period ended June 30, 2019, $(0.1) million was included in Research and Development expenses, $(2.1) million in Sales and Operations expenses, and $(0.4) million in General and Administrative expenses.

The following table summarizes restructuring activities as of June 30, 2019 included in current liabilities as of June 30, 2019.

 
(in thousands)
Restructuring liability as of January 1, 2019
$

Restructuring costs
2,618

Restructuring costs - non cash item
2,930

Amounts paid
(1,920
)
Restructuring liability as of June 30, 2019
$
3,628





11


Share repurchase program
On October 25, 2018 Criteo's Board of Directors authorized a share repurchase program of up to $80.0 million of the Company’s outstanding American Depositary Shares. As of December 31, 2018, 3.5 million shares were held as treasury shares.
On February 8, 2019, the Board of Directors authorized the reduction of capital resulting in the formal retirement of 1.6 million treasury shares. As of June 30, 2019, we have 1.1 million treasury shares remaining which may be used primarily to satisfy the company's obligations under its employee equity plans upon RSU vestings in lieu of issuing new shares.
 
Number of Treasury Shares
 
Amount
(in thousands of dollars)
Balance at January 1, 2018

 
$

Treasury Shares Repurchased to potentially use for M&A
1,751,147

 
40,000

Treasury Shares Repurchased for RSU Vesting
1,748,111

 
40,000

Treasury Shares Issued for RSU Vesting
(40,139
)
 
(841
)
Balance at December 31, 2018
3,459,119

 
$
79,159

Treasury Shares Retired
(1,594,288
)
 
$
(36,137
)
Treasury Shares Issued for RSU Vesting
(745,862
)
 
(16,458
)
Balance at June 30, 2019
1,118,969

 
$
26,564




12


Note 3. Financial Instruments
Financial assets
The maximum exposure to credit risk at the end of each reported period is represented by the carrying amount of financial assets, and summarized in the following table:
 
December 31, 2018

 
June 30, 2019

 
(in thousands)
Trade receivables, net of allowance
473,901

 
374,949

Other taxes
53,338

 
56,090

Other current assets
22,816

 
18,751

Non-current financial assets
20,460

 
21,613

Total
$
570,515

 
$
471,403



Credit Risk
We maintain an allowance for estimated credit losses. During the period ended December 31, 2018 and the six-month period ended June 30, 2019, our net change in allowance for doubtful accounts was $5.1 million and $(6.4) million, respectively.
For our financial assets, the fair value approximates the carrying amount, given the nature of the financial assets and the maturity of the expected cash flows.
Trade Receivables
Credit risk is defined as an unexpected loss in cash and earnings if the client is unable to pay its obligations in due time. We perform internal ongoing credit risk evaluations of our clients. When a possible risk exposure is identified, we require prepayments.
As of December 31, 2018 and June 30, 2019, no customer accounted for 10% or more of trade receivables.
Financial Liabilities
 
December 31, 2018
 
June 30, 2019
 
 
 
 
 
(in thousands)
Trade payables
$
425,376

 
$
332,735

Other taxes
55,592

 
56,929

Employee-related payables
65,878

 
68,702

Other current liabilities
47,115

 
33,986

Financial liabilities
3,508

 
4,081

Total
$
597,469

 
$
496,433


For our financial liabilities, the fair value approximates the carrying amount, given the nature of the financial liabilities and the maturity of the expected cash flows.
We are party to several loan agreements and a revolving credit facility, or RCF, with third-party financial institutions. There have been no significant changes from what was disclosed in Note 13 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

13



Fair Value Measurements     
We measure the fair value of our cash equivalents, which include interest-bearing bank deposits, as level 2 measurements because they are valued using observable market data.
Financial assets or liabilities include derivative financial instruments used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.

Derivative Financial Instruments
Derivatives consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts in financial income (expense), and their position on the balance sheet is based on their fair value at the end of each respective period. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.

 
December 31, 2018

 
June 30, 2019

 
 
 
 
 
(in thousands)
Derivative Assets:
 
 
 
Included in other current assets
$
1,703

 
$

 
 
 
 
Derivative Liabilities:
 
 
 
Included in financial liabilities - current portion
$

 
$
539


For our derivative financial instruments, the fair value approximates the carrying amount, given the nature of the derivative financial instruments and the maturity of the expected cash flows.
Cash and Cash Equivalents
Investments in interest–bearing bank deposits which meet ASC 230—Statement of Cash flows criteria: short-term, highly liquid investments, for which the risks of changes in value are considered to be insignificant. Interest-bearing bank deposits are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
 
December 31, 2018

 
June 30, 2019

 
 
 
 
 
(in thousands)
Cash equivalents
$
125,442

 
$
148,584

Cash on hand
238,984

 
273,469

Total cash and cash equivalents
$
364,426

 
$
422,053



For our cash and cash equivalents, the fair value approximates the carrying amount, given the nature of the cash and cash equivalents and the maturity of the expected cash flows.


14


Note 4. Trade Receivables
The following table shows the breakdown in trade receivables net book value for the presented periods:
 
December 31, 2018

 
June 30, 2019

 
 
 
 
 
(in thousands)
Trade accounts receivables
$
499,819

 
$
394,495

(Less) Allowance for doubtful accounts
(25,918
)
 
(19,546
)
Net book value at end of period
$
473,901

 
$
374,949

Changes in allowance for doubtful accounts are summarized below:
 
2018

 
2019

 
 
 
 
 
(in thousands)
Balance at January 1
$
(20,818
)
 
$
(25,918
)
Allowance for doubtful accounts
(6,315
)
 
(6,042
)
Reversal of provision
3,303

 
12,318

Currency translation adjustment
450

 
96

Balance at June 30
$
(23,380
)
 
$
(19,546
)

The amount charged to allowance for doubtful accounts for the six months ended June 30, 2019 remained consistent with the same period in the prior year due to a consistent application of the Company credit policy. However, the balance of allowance for doubtful accounts decreased during the six months period ended June 30, 2019,mainly due to write-offs of long outstanding receivables already reserved for which it is certain we will not collect. The Company mitigates its credit risk with respect to accounts receivables by performing credit evaluations and monitoring agencies and advertisers' accounts receivables balances.

15


Note 5. Other Current Assets
The following table shows the breakdown in other current assets net book value for the presented periods:
 
December 31, 2018

 
June 30, 2019

 
 
 
 
 
(in thousands)
Prepayments to suppliers
$
4,056

 
$
5,869

Other debtors
4,762

 
3,477

Prepaid expenses
12,295

 
9,405

Derivative instruments
1,703

 

Gross book value at end of period
22,816

 
18,751

Net book value at end of period
$
22,816

 
$
18,751


Derivative financial instruments include foreign currency swaps or forward purchases or sales contracts 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.

16


Note 6. Intangible assets and Goodwill
There have been no significant changes in intangible assets or goodwill since December 31, 2018. In addition, no triggering events have occurred that 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

 
(in thousands)
From July 1 to December 31, 2019
$
4,415

 
$
10,757

 
$
15,172

2020
7,424

 
16,864

 
24,288

2021
5,585

 
16,864

 
22,449

2022
2,712

 
11,486

 
14,198

2023
715

 
10,325

 
11,040

Thereafter
16

 
15,950

 
15,966

Total
$
20,867

 
$
82,246

 
$
103,113



Note 7. Other Current Liabilities
Other current liabilities are presented in the following table:
 
December 31, 2018

 
June 30, 2019

 
 
 
 
 
(in thousands)
Clients' prepayments
$
10,328

 
$
12,057

Credit notes
13,183

 
12,749

Accounts payable relating to capital expenditures
21,454

 
6,255

Other creditors
1,527

 
2,565

Deferred revenue
623

 
360

Total
$
47,115

 
$
33,986

The changes in "accounts payable relating to capital expenditures" relate to significant data centers equipment and leasehold improvements acquisitions in 2018 paid during the six months period ended June 30, 2019.

17


Note 8. Leases
On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) which requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet.
We have adopted Topic 842 effective January 1, 2019 on a modified retrospective basis and elected not to restate comparative periods. We chose to use certain practical expedients offered by the standard including:
We did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or the initial direct costs for any existing leases.
We do not recognize a lease liability or right of use asset for leases with a term of 12 months or less, and
We used hindsight in determining the lease term.
We lease space under non-cancellable operating leases for our offices as well as our data centers. Our office leases typically include free rent periods or rent escalation periods, and may also include leasehold improvement incentives. Leases for data centers may also include free rent periods or rent escalation periods. These leases typically do not include residual value guarantees. Both office and data center leases may contain both lease components (rent) and non-lease components (maintenance, electrical costs, and other service charges). Non-lease components are accounted for separately.
Both office and data center leases typically contain options to renew, and/or early terminate. We have evaluated management's expectations for these options as of June 30, 2019. Options have been included in the lease term if management has determined it is reasonably certain it will be exercised.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to determine the present value of future payments. We have a centralized treasury function, and the majority of our leases are negotiated and signed by representatives of Criteo SA. As such, the incremental borrowing rate of Criteo SA is used for all of our contracts. It is then adjusted in consideration of the currency of the lease and the lease term as of the lease commencement date.
Lease expense is recognized for minimum lease payments on a straight-line basis over the lease term. Variable costs are expensed in the period incurred. Variable expenses include changes in indexation. Leases for data centers may have variable costs based on electrical usage.
The components of lease expense are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2019
 
June 30,
2019
 
Offices
 
Data Centers
 
Total
 
Offices
 
Data Centers
 
Total
 
(in thousands)
Lease expense
$
8,574

 
$
6,154

 
$
14,728

 
$
16,914

 
$
11,341

 
$
28,255

Short term lease expense
523

 
525

 
1,048

 
1,448

 
1,055

 
2,503

Variable lease expense
1,821

 
239

 
2,060

 
1,821

 
353

 
2,174

Sublease income
(693
)
 

 
(693
)
 
(1,769
)
 

 
(1,769
)
Total operating lease expense
$
10,225

 
$
6,918

 
$
17,143

 
$
18,414

 
$
12,749

 
$
31,163