Criteo S.A. - FORM 10-Q - November 5, 2018

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EX-32.1 - EXHIBIT 32.1 - Criteo S.A.exhibit321ceocfo10qq32018.htm
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EX-31.1 - EXHIBIT 31.1 - Criteo S.A.exhibit311ceo10qq32018.htm
 
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 September 30, 2018
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,” “smaller reporting company” and "emerging growth 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
¨
 
 
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 Exchange Act).   Yes ¨    No x
          As of October 31, 2018, the registrant had 67,361,360 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, as well as responses to such developments by our counterparties, which may affect us;
•
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, 2017, 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.

2

CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 
Notes
 
December 31, 2017

 
September 30, 2018

 
 
 
 
 
 
 
 
 
(in thousands)
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
    Cash and cash equivalents
5
 
$
414,111

 
458,690

    Trade receivables, net of allowance
5
 
484,101

 
356,792

    Income taxes
 
 
8,882

 
20,316

    Other taxes
 
 
58,346

 
48,722

    Other current assets
7
 
26,327

 
26,855

    Total current assets
 
 
991,767

 
911,375

Property, plant and equipment, net
 
 
161,738

 
183,777

Intangible assets, net
8
 
96,223

 
96,848

Goodwill
8
 
236,826

 
268,734

Non-current financial assets
 
 
19,525

 
20,491

Deferred tax assets
 
 
25,221

 
34,718

    Total non-current assets
 
 
539,533

 
604,568

Total assets
 
 
$
1,531,300

 
$
1,515,943

Liabilities and shareholders' equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
    Trade payables
 
 
$
417,032

 
$
332,388

    Contingencies
15
 
1,798

 
2,411

    Income taxes
 
 
9,997

 
2,510

    Financial liabilities - current portion
10
 
1,499

 
2,498

    Other taxes
 
 
58,783

 
45,233

    Employee - related payables
 
 
66,219

 
53,709

    Other current liabilities
9
 
65,677

 
59,463

    Total current liabilities
 
 
621,005

 
498,212

Deferred tax liabilities
 
 
2,497

 
6,438

Retirement benefit obligation
 
 
5,149

 
5,942

Financial liabilities - non current portion
10
 
2,158

 
2,766

Other non-current liabilities
 
 
2,793

 
3,669

    Total non-current liabilities
 
 
12,597

 
18,815

Total liabilities
 
 
633,602

 
517,027

Commitments and contingencies
 
 


 


Shareholders' equity:
 
 
 
 
 
Common shares, €0.025 par value, 66,085,097 and 67,231,036 shares authorized, issued and outstanding at December 31, 2017 and September 30, 2018, respectively.
 
2,152

 
2,182

Additional paid-in capital
 
 
591,404

 
648,139

Accumulated other comprehensive (loss)
 
 
(12,241
)
 
(25,788
)
Retained earnings
 
 
300,210

 
355,003

Equity-attributable to shareholders of Criteo S.A.
 
 
881,525

 
979,536

Non-controlling interests
 
 
16,173

 
19,380

Total equity
 
 
897,698

 
998,916

Total equity and liabilities
 
 
$
1,531,300

 
$
1,515,943

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

3

CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
 
 
Three Months Ended
 
Nine Months Ended
 
Notes
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
 
(in thousands, except share per data)
 
 
 
 
 
 
 
 
 
 
Revenue
3
 
$
563,973

 
$
528,869

 
$
1,622,661

 
$
1,630,218

 
 
 

 

 

 

Cost of revenue:
 
 

 

 

 

Traffic acquisition costs
 
 
(329,576
)
 
(305,387
)
 
(958,469
)
 
(936,096
)
Other cost of revenue
 
 
(29,951
)
 
(32,921
)
 
(89,914
)
 
(92,937
)
 
 
 

 

 

 

Gross profit
 
 
204,446

 
190,561

 
574,278

 
601,185

 
 
 

 

 

 

Operating expenses:
 
 

 

 

 

Research and development expenses
 
 
(43,860
)
 
(41,796
)
 
(126,992
)
 
(134,658
)
Sales and operations expenses
 
 
(95,184
)
 
(90,526
)
 
(283,815
)
 
(278,901
)
General and administrative expenses
 
 
(32,389
)
 
(32,463
)
 
(96,143
)
 
(102,698
)
Total operating expenses
 
 
(171,433
)
 
(164,785
)
 
(506,950
)
 
(516,257
)
Income from operations
 
 
33,013

 
25,776

 
67,328

 
84,928

Financial income (expense), net
12
 
(2,886
)
 
(1,007
)
 
(7,313
)
 
(3,338
)
Income before taxes
 
 
30,127

 
24,769

 
60,015

 
81,590

Provision for income taxes
13
 
(7,858
)
 
(6,821
)
 
(15,724
)
 
(27,845
)
Net income
 
 
$
22,269

 
$
17,948

 
$
44,291

 
$
53,745

 
 
 
 
 
 
 
 
 
 
Net income available to shareholders of Criteo S.A.
 
 
$
19,774

 
$
17,143

 
$
38,185

 
$
50,678

Net income available to non-controlling interests
 
 
$
2,495

 
$
805

 
$
6,106

 
$
3,067

 
 
 
 
 
 
 
 
 
 
Net income allocated to shareholders of Criteo S.A. per share:
 
 
 
 
 
 
 
 
 
Basic
14
 
$
0.30


$
0.26


$
0.59


$
0.76

Diluted
14
 
$
0.29


$
0.25


$
0.56


$
0.75

 
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing per share amounts:
 
 
 
 
 
 
 
 
 
Basic
14
 
65,412,326


67,075,453


64,881,751


66,531,371

Diluted
14
 
68,200,343


68,625,673


67,876,791


67,864,802

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


4

CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
(in thousands)
 
 
 
 
 
 
 
 
 
Net income
 
$
22,269

 
$
17,948

 
$
44,291

 
$
53,745

Foreign currency translation differences, net of taxes
 
20,972

 
(5,539
)
 
66,826

 
(14,210
)
Foreign currency translation differences
 
20,972

 
(5,539
)
 
66,826

 
(14,210
)
Income tax effect
 
—

 
—

 
—

 
—

Actuarial (losses) gains on employee benefits, net of taxes
 
155

 
23

 
745

 
436

Actuarial gains on employee benefits
 
184

 
23

 
882

 
436

Income tax effect
 
(29
)
 
—

 
(137
)
 
—

Comprehensive income (loss)
 
$
43,396

 
$
12,432

 
$
111,862

 
$
39,971

Attributable to shareholders of Criteo S.A.
 
$
41,002

 
$
12,076

 
$
105,391

 
$
37,127

Attributable to non-controlling interests
 
$
2,394

 
$
356

 
$
6,471

 
$
2,844

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

5

CRITEO S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
(in thousands)
Net income
 
$
22,269


$
17,948


$
44,291


$
53,745

Non-cash and non-operating items
 
61,995

 
51,993

 
146,443

 
159,982

    - Amortization, depreciation and provisions
 
25,990

 
27,891

 
72,681

 
79,040

    - Equity awards compensation expense (1)
 
22,028

 
17,262

 
51,887

 
56,333

    - Interest accrued and non-cash financial income and expenses
 
(25
)
 
20

 
7

 
66

    - Change in deferred taxes
 
(8,164
)
 
(1,806
)
 
(20,569
)
 
(9,341
)
    - Income tax for the period
 
16,022

 
8,626

 
36,293

 
37,186

    - Other (2)
 
6,144

 
—

 
6,144

 
(3,302
)
Changes in working capital related to operating activities
 
(12,372
)
 
3,929

 
13,418

 
17,573

    - (Increase) / Decrease in trade receivables
 
(991
)
 
12,931

 
35,220

 
114,377

    - Increase / (Decrease) in trade payables
 
(5,031
)
 
13,091

 
(31,284
)
 
(76,599
)
    - (Increase) / Decrease in other current assets
 
4,001

 
(8,229
)
 
6,581

 
5,550

    - Increase / (Decrease) in other current liabilities (2)
 
(10,351
)
 
(13,864
)
 
2,901

 
(25,755
)
Income taxes paid
 
(10,165
)
 
(23,614
)
 
(37,696
)
 
(56,174
)
CASH FROM OPERATING ACTIVITIES
 
61,727

 
50,256

 
166,456

 
175,126

Acquisition of intangible assets, property, plant and equipment
 
(20,999
)
 
(60,627
)
 
(74,275
)
 
(86,920
)
Change in accounts payable related to intangible assets, property, plant and equipment
 
(6,774
)
 
30,971

 
(8,760
)
 
6,850

Disposal of (Payment for) business, net of cash acquired (disposed)
 
73

 
(38,100
)
 
1,125

 
(48,911
)
Change in other non-current financial assets
 
(157
)
 
(45
)
 
1,117

 
(3
)
CASH USED FOR INVESTING ACTIVITIES
 
(27,857
)
 
(67,801
)
 
(80,793
)
 
(128,984
)
Issuance of long-term borrowings
 
2,220

 
—

 
3,674

 
—

Repayment of borrowings
 
(4,672
)
 
(248
)
 
(83,893
)
 
(721
)
Proceeds from capital increase
 
5,164

 
212

 
29,619

 
774

Change in other financial liabilities (2)
 
15,082

 
(136
)
 
15,346

 
16,674

CASH (USED FOR) FROM FINANCING ACTIVITIES
 
17,794

 
(172
)
 
(35,254
)
 
16,727

 
 
 
 
 
 
 
 
 
CHANGE IN NET CASH AND CASH EQUIVALENTS
 
51,664

 
(17,717
)
 
50,409

 
62,869

Net cash and cash equivalents at beginning of period
 
308,185

 
480,285

 
270,317

 
414,111

Effect of exchange rates changes on cash and cash equivalents (2)
 
(1,866
)
 
(3,878
)
 
37,257

 
(18,290
)
Net cash and cash equivalents at end of period
 
$
357,983

 
$
458,690

 
$
357,983

 
$
458,690

(1) Of which $21.4 million and $17.1 million of equity awards compensation expense consisted of share-based compensation expense according to ASC 718 Compensation - stock compensation for the three months ended September 30, 2017 and 2018, respectively, and $50.7 million and $55.3 million of equity awards compensation expense consisted of share-based compensation expense according to ASC 718 Compensation - stock compensation for the nine month period ended September 30, 2017 and 2018, respectively.
(2) During the three months ended and nine months ended September 30, 2018, 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.

6

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

Criteo S.A. is a global commerce marketing technology company. We help commerce companies and brand manufacturers acquire, convert and re-engage their customers, using shopping data, predictive technology and large consumer reach. We strive to deliver post-click sales at scale to our clients across different marketing objectives to meet their targeted return on investment. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive sales for our clients, we activate our data assets through proprietary machine-learning algorithms to engage consumers in real time through the pricing and delivery of highly relevant digital advertisements, across devices and environments. By pricing our offering on a cost-per-click and measuring our value based on post-click sales, we make the return on investment transparent and easy to measure for our clients. 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".


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, 2017, filed with the SEC on March 1, 2018. 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 and particularly, the determination as to whether revenue should be reported on a gross or a net basis; (2) the evaluation of our trade receivables and the recognition of a valuation allowance for doubtful accounts; (3) the recognition of our deferred tax assets considering the subsidiaries projected taxable profit for future years (4) the evaluation of uncertain tax positions considering our transfer pricing policies and research tax credits in the United States and France; (5) the recognition and measurement of income tax positions considering the 2017 Tax Cuts and Jobs Act enacted in December 2017 in the United States, and particularly the measurement of the base erosion anti-avoidance tax ("BEAT"); (6) the recognition and measurement of goodwill and intangible assets and particularly costs capitalized in relation to our customized internal-use software; and (7) the measurement of share-based compensation and related expenses.

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, 2017, except for the accounting pronouncements adopted below.


7

Accounting Pronouncements adopted in 2018

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (Topic 605), and requires the Company to recognize revenue when control of promised services is transferred to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services. We adopted the new standard effective January 1, 2018 using the modified retrospective method. The new standard had no significant impact on our Unaudited Condensed Consolidated Financial Statements, except for related disclosures (see Note 2 for further details).

In January 2017, the FASB issued Accounting Standards Update No. 2017-01 (ASU 2017-01) “Business Combinations (Topic 805): Clarifying the Definition of a Business.” ASU 2017-01 provides guidance to evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. If substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single asset or a group of similar assets, the assets acquired (or disposed of) are not considered a business. We adopted ASU 2017-01 as of January 1, 2018 on a prospective basis and it did not have a material impact on our financial position, results of operations or cash flows.
In May 2017, the FASB issued ASU 2017-09 Compensation - Stock Compensation (Topic 718). ASU 2017-09 was issued to provide clarity and reduce diversity in practice and complexity when applying the guidance in Topic 718 to a change in terms or conditions of a share-based payment award. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. We adopted ASU 2017-09 as of January 1, 2018 on a prospective basis and it did not have a material impact on our financial position, results of operations or cash flows.
In March 2017, FASB issued ASU 2017-07 Compensation-Retirements Benefits (Topic 715). ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. We adopted ASU 2017-07 as of January 1, 2018 and it did not have a material impact on our financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). Among other clarifications, ASU 2016-15 clarifies certain items, including the classification of payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued interest, which will now be included in the Financing Activities section in the Consolidated Statement of Cash Flows. We adopted ASU 2016 - 15 as of January 1, 2018 and it did not have a material impact on our financial position, results of operations or cash flows, including classification as operating, financing, or investing activities.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers Other than Inventory (ASU 2016-16), which requires companies to recognize the income-tax consequences of an intra-entity transfer of an asset other than inventory. We adopted ASU 2016-16 as of January 1, 2018 on a modified retrospective basis. It did not have a material impact on our Consolidated Financial Statements.
 

8

Recently Issued Accounting Pronouncements not yet adopted
    
In February 2016, the FASB issued Accounting Standards Update 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. We have selected a lease accounting system and are currently implementing this system as well as modifying our processes in conjunction with our review of existing lease agreements. Our implementation of this system is on schedule. We will adopt Topic 842 effective January 1, 2019 and expect to elect certain available transitional practical expedients. We anticipate this standard will have a material impact on our financial position and results of operations. While we are continuing to assess all potential impacts of the new standard, we currently believe the most significant impact relates to the accounting for office and datacenter operating leases.
    
In January 2017, the FASB issued ASU 2017-04 Goodwill and Other (Topic 350). ASU 2017-04 simplifies the subsequent measurement of goodwill and reduces the cost and complexity of evaluating goodwill for impairment. It eliminates the need for entities to calculate the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Under this amendment, an entity will perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge is recognized for the amount by which the carrying value exceeds the reporting unit's fair value. This update will be effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of ASU 2017-04 is not expected to have a material impact on our financial position or results of operations.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. ASU 2018-09 was issued to provide minor corrections, clarifications, and eliminate inconsistencies within the codification. The adoption of ASU 2018 - 09 is not expected to have a material impact on our financial statements.
In July 2018, the FASB issued ASU 2018 -10, Codification Improvements to Topic 842, Leases, and ASU 2018 - 11, Leases (Topic 842): Targeted Improvements. These updates will be effective January 1, 2019 in conjunction with ASU 2016-02 discussed above. We are assessing these updates as part of our Lease Accounting Transition project and they are not expected to have a significant impact on our initial conclusions discussed above.
    In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurement. This ASU modifies disclosure requirements for Fair Value including 1) removing existing requirements, 2) modifying existing requirements, and 3) adding additional disclosure requirements. This update will be effective for fiscal years beginning after December 15, 2019. The adoption of ASU 2018-13, is not expected to have a material impact on our financial position or results of operations; however, it may have an impact on our disclosures.
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 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). This update will be effective periods beginning after December 15, 2019. The adoption of ASU 2018-15 is not expected to have a material impact on our financial position or results of operations.

9

Note 2. Significant Events

Acquisition of Storetail

On August 3rd, 2018 we completed the acquisition of Storetail Marketing Services SAS ("Storetail") for a total consideration of €41.3 million ($47.9 million). Refer to Note 8. Intangible Assets and Goodwill for further information.

Note 3. Revenue

Adoption of ASC Topic 606, “Revenue from contracts with customers”
On January 1, 2018, we adopted Topic 606 using the modified retrospective method. The new standard had no significant impact on our Consolidated Financial Statements, except for related disclosures which are presented under Topic 606 for reporting periods beginning after January 1, 2018, while prior period disclosures are reported in accordance with previous Topic 605.
Nature of services
We generate revenues from our performance marketing service portfolio currently comprised of the following services:
•
Criteo Dynamic Retargeting drives post-click sales for our commerce clients by engaging consumers with personalized advertisements offering products or services for which they have already expressed shopping intent.
•
Criteo Sponsored Products drives post-click sales for our brand clients by pricing and delivering in real time sponsored product advertisements to consumers demonstrating intent, or actively searching for a specific product or product category, on the websites of retailers selling such brand product.
•
Criteo Customer Acquisition drives post-click sales for our commerce clients by helping them to acquire new prospective customers, using intent information across a large pool of retailers and engaging such prospective customers with personalized advertisements offering products or services that are predicted to be of interest to them.
•
Criteo Audience Match drives more post-click sales for our commerce clients by accurately targeting and re-engaging their existing customers with personalized advertisements offering new products or services that they have not yet purchased.
Excluding our core product, Criteo Dynamic Retargeting, no other product accounted for more than 10% of total consolidated revenue for the periods presented.


10

Disaggregation of revenue
The following table presents our revenues disaggregated by geographical area:
 
Americas
 
EMEA
 
Asia-Pacific
 
Total
For the three months ended
(in thousands)
 
 
 
 
 
 
 
 
September 30, 2017
$
228,326

 
$
207,168

 
$
128,479

 
$
563,973

September 30, 2018
$
211,247

 
$
195,230

 
$
122,392

 
$
528,869

 
Americas
 
EMEA
 
Asia-Pacific
 
Total
For the nine months ended
(in thousands)

 
 
 
 
 
 
 
September 30, 2017
$
665,731

 
$
587,942

 
$
368,988

 
$
1,622,661

September 30, 2018
$
636,723

 
$
618,921

 
$
374,574

 
$
1,630,218


Revenue recognition accounting policies
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.
All our services consist mainly in serving relevant advertising and banner to clients’ users, using Criteo’s technology, when client’s users are surfing on the web. Our contracts typically include a single promise to stand ready, to display the advertising or banner until a client’s user clicks. This represents a series of distinct repetitive services (units of time) that are substantially the same, with the same pattern of transfer to the client. Accordingly, the promise to stand ready is accounted for as a single performance obligation.
Each performance obligation is satisfied over time as the client continuously receives and consumes the benefits of the services. We generally price our advertising campaigns on a cost per click basis (CPC) model based on the number of clicks generated by users on each advertisement we deliver in our advertising campaigns (variable consideration) which means that we have a right to invoice our clients when a user clicks on an advertisement displayed by us. Advertising campaigns are billed and paid on a monthly basis. This amount is representative of the value of the service delivered to the client and therefore, applying the right-to-bill practical expedient, we recognize revenue over time based on the users’ clicks.
We act as principal in our arrangements because (i) we control the advertising inventory (spaces on websites) before it is transferred to our clients; (ii) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and (iii) we have full discretion in establishing prices. Therefore, based on these factors, we report revenue earned and the costs incurred related on a gross basis.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

11

Note 4. Restructuring
Restructuring of our China Operations
    
In May 2017, the Company announced it would no longer continue to serve the domestic market in China and would refocus its China operations entirely on the export business. For the nine months ended September 30, 2017, we recognized $3.3 million in restructuring charges as detailed below:

 
Nine Months Ended
 
September 30, 2017
 
(in thousands)
Severance costs
$802
Facility exit costs
2,265
Other
232
Total restructuring costs
$3,299

For the nine months ended September 30, 2017, $2.5 million was included in Other Cost of Revenue, $0.7 million in Sales and Operations expenses, and $0.1 million was included in General and Administrative expenses.    

No additional charges related to restructuring were recorded in the three months ended September 30, 2017.

As of December 31, 2017, we had a restructuring liability of $0.4 million included in other current liabilities on the consolidated statement of financial position. No additional expenses were recorded related to this restructuring in the nine months ended September 30, 2018 and the remaining $0.4 million was paid during the period resulting in the extinguishment of the restructuring liability as of September 30, 2018.
    
Discontinuation of Criteo Predictive Search
    
On October 31, 2017, the Company announced that it had decided to discontinue the Criteo Predictive Search product. $4.1 million was recognized as restructuring charges in 2017. For the nine months ended September 30, 2018, we recognized a gain of $0.1 million. This gain was due to employees being relocated within the company rather than being terminated and a reduction of share-based compensation expenses which was partially offset by additional charges for facilities and employee severance agreements.


 
Nine Months Ended
 
September 30, 2018
 
(in thousands)
Severance costs
$127
Facility exit costs
297
Other
(477)
Total restructuring costs / (gain)
$(53)

    
For the nine months ended September 30, 2018, $0.2 million was included in Sales and Operations expenses and $(0.3) million in Research and Development expenses. Other costs relate to a reduction of share-based compensation expenses of $(0.5) million due to forfeitures.
    
No additional charges related to restructuring were recorded in the three months ended September 30, 2018.
    

12

The following table summarizes restructuring activities as of September 30, 2018 included in other current liabilities on the balance sheet:

 
Restructuring Liability
 
(in thousands)
Restructuring liability - January 1, 2018
$2,351
Restructuring costs / (gain)
(53)
Amounts paid
(2,060)
Other
472
Restructuring liability - September 30, 2018
$710

13


Note 5. Financial Instruments
Credit Risk
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, 2017

 
September 30, 2018

 
(in thousands)
Cash and cash equivalents
$
414,111

 
$
458,690

Trade receivables, net of allowance
484,101

 
356,792

Other taxes
58,346

 
48,722

Other current assets
26,327

 
26,855

Non-current financial assets
19,525

 
20,491

Total
$
1,002,410

 
$
911,550

As of December 31, 2017 and September 30, 2018, no customer accounted for 10% or more of trade receivables.
We perform ongoing credit evaluations of our customers and do not require collateral. We maintain an allowance for estimated credit losses. During the year ended December 31, 2017 and the nine-month period ended September 30, 2018, our allowance for doubtful accounts increased by $9.2 million and $3.5 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.
For each period presented, the aging of trade receivables and allowances for potential losses is as follows:
 
December 31, 2017
 
September 30, 2018
 
Gross value

 
%
 
Allowance

 
%
 
Gross value

 
%
 
Allowance

 
%
 
(in thousands)

 
 
 
(in thousands)

 
 
 
(in thousands)

 
 
 
(in thousands)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not yet due
$
304,233

 
60.3
%
 
$
(168
)
 
0.8
%
 
$
302,305

 
79.3
%
 
$
(1,942
)
 
8.0
%
0 - 30 days
121,957

 
24.2
%
 
—

 
—
%
 
7,503

 
2.0
%
 
(1,045
)
 
4.3
%
31 - 60 days
29,325

 
5.8
%
 
(21
)
 
0.1
%
 
22,381

 
5.9
%
 
(396
)
 
1.6
%
61 - 90 days
7,498

 
1.5
%
 
(35
)
 
0.2
%
 
8,396

 
2.2
%
 
(87
)
 
0.4
%
> 90 days
41,906

 
8.3
%
 
(20,594
)
 
98.9
%
 
40,549

 
10.6
%
 
(20,872
)
 
85.8
%
Total
$
504,919

 
100
%
 
$
(20,818
)
 
100
%
 
$
381,134

 
100
%
 
$
(24,342
)
 
100
%


14

Financial Liabilities
 
December 31, 2017
 
September 30, 2018
 
 
 
 
 
(in thousands)
Trade payables
$
417,032

 
$
332,388

Other taxes
58,783

 
45,233

Employee-related payables
66,219

 
53,709

Other current liabilities
65,677

 
59,463

Financial liabilities
3,657

 
5,264

Total
$
611,368

 
$
496,057

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.
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.
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, 2017

 
September 30, 2018

 
 
 
 
 
(in thousands)
Derivative Assets:
 
 
 
Included in other current assets
$
5,159

 
$
—

 
 
 
 
Derivative Liabilities:
 
 
 
Included in financial liabilities - current portion
$
—

 
$
1,613

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.

15

Cash and Cash Equivalents
Cash and cash equivalents include investments in money market funds and 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. Money market funds are considered level 1 financial instruments as they are valued using quoted market prices. Interest-bearing bank deposits are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
 
December 31, 2017

 
September 30, 2018

 
 
 
 
 
(in thousands)
Cash and cash equivalents
$
267,236

 
$
287,533

Money market funds
—

 
—

Interest-bearing bank deposits
146,875

 
171,157

Total cash and cash equivalents
$
414,111

 
$
458,690


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.


16

Note 6. Trade Receivables
The following table shows the breakdown in trade receivables net book value for the presented periods:
 
December 31, 2017

 
September 30, 2018

 
(in thousands)
Trade accounts receivables
$
504,919

 
$
381,134

(Less) allowance for doubtful accounts
(20,818
)
 
(24,342
)
Net book value at end of period
$
484,101

 
$
356,792

Changes in allowance for doubtful accounts are summarized below:
 
2017

 
2018

 
 
 
 
 
(in thousands)
Balance at January 1
$
(11,598
)
 
$
(20,818
)
Allowance for doubtful accounts
(7,849
)
 
(13,609
)
Reversal of provision
3,378

 
9,382

Currency translation adjustment
(651
)
 
703

Balance at September 30
$
(16,720
)
 
$
(24,342
)
The change in allowance for doubtful accounts during the nine months ended September 30, 2018 related mainly to increased business with categories of clients associated with a higher credit risk.

Note 7. Other Current Assets
The following table shows the breakdown in other current assets net book value for the presented periods:
 
December 31, 2017
 
September 30, 2018
 
 
 
 
 
(in thousands)
Prepayments to suppliers
$
3,244

 
$
5,958

Employee-related receivables
—


155

Other debtors
5,694

 
4,949

Prepaid expenses
12,230

 
15,793

Derivative instruments
5,159

 
—

Gross book value at end of period
26,327

 
26,855

(Less) Allowance for doubtful accounts
$
—

 
$
—

Net book value at end of period
$
26,327

 
$
26,855

Prepaid expenses mainly consist of office rental advance payments.
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.

17

Note 8. Intangible assets and Goodwill
There have been no significant changes in intangible assets or goodwill since December 31, 2017 except for the technology and marketing solution identified following the preliminary purchase price allocation described below. 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 October 1 to December 31, 2018
$
2,310

 
$
4,140

 
$
6,450

2019
5,237

 
15,722

 
20,959

2020
4,174

 
11,532

 
15,706

2021
2,381

 
11,532

 
13,913

2022
1,201

 
11,532

 
12,733

Thereafter
—

 
27,087

 
27,087

Total
$
15,303

 
$
81,545

 
$
96,848

    
On August 3, 2018, we acquired all of the outstanding shares of Storetail, a pioneering retail media technology platform that enables retailers to monetize native placements on their ecommerce sites on a CPM basis, for total consideration of €41.3 million ($47.9 million). The total consideration is comprised of €37.7 million cash ($43.7 million) financed by the available cash resources at the acquisition date and €3.6 million ($4.2 million) of Criteo shares to be delivered two years following the acquisition date. This business combination has been accounted for under the acquisition method in accordance with ASC 805 - Business Combinations. A preliminary valuation of the fair value of Storetail’s assets acquired, liabilities assumed and the related allocation of purchase price has been performed as of September 30, 2018, resulting in the identification of a technology and related marketing solution asset of €12.2 million ($14.1 million) and related deferred tax liability of €4.2 million ($4.9 million). Residual goodwill has been valued at €28.5 million ($33.0 million). Once this valuation analysis is finalized, the estimate of the fair value of the assets acquired and liabilities assumed may be adjusted. In addition, acquisition costs amounting to €0.4 million ($0.5 million) were fully expensed as incurred.
The 2016 Hooklogic acquisition, and the subsequent Criteo Sponsored Products solution, have allowed Criteo to partner more deeply with retailers from an on-site monetization perspective to reach and engage shoppers. The addition of Storetail’s highly complementary technology is an important building block to enable Criteo to offer a full monetization platform to retailers.

18

Note 9. Other Current Liabilities
Other current liabilities are presented in the following table:
 
December 31, 2017
 
September 30, 2018
 
 
 
 
 
(in thousands)
Clients' prepayments
$
33,495

 
$
20,742

Accounts payable relating to capital expenditures
30,736

 
36,340

Other creditors
740

 
1,567

Deferred revenue
706

 
814

Total
$
65,677

 
$
59,463

The changes in "Client's prepayments" mainly related to the customers' cash advances for the Criteo Sponsored Products travel business disposed in the first quarter of 2018. The changes in "accounts payable relating to capital expenditures" relate to significant data centers equipment and leasehold improvements acquisitions in 2017 paid during the nine-month period ended September 30, 2018 offset by additional acquisitions in the third quarter of 2018 which have not yet been paid.

Note 10. Financial Liabilities
The changes in current and non-current financial liabilities during the period ended September 30, 2018 are illustrated in the following schedules:
 
As of January 1, 2018
 
New borrowings
 
Repayments
 
Change in scope (2)
 
Other (1)
 
Currency translation adjustment
 
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Borrowings
$
982

 
$
—

 
$
(721
)
 
$
—

 
$
653

 
$
(29
)
 
$
885

Other financial liabilities
517

 
—

 
(514
)
 
—

 
—

 
(3
)
 
—

Derivative instruments
—

 
—

 
—

 
—

 
1,664

 
(51
)
 
1,613

Current portion
1,499

 
—

 
(1,235
)
 
—

 
2,317

 
(83
)
 
2,498

Borrowings
1,798

 
—

 
—

 
1,235

 
(653
)
 
(47
)
 
2,333

Other financial liabilities
360

 
73

 
—

 
—

 
—

 
—

 
433

Non current portion
2,158

 
73

 
—

 
1,235

 
(653
)
 
(47
)
 
2,766

Borrowings
2,780

 
—

 
(721
)
 
1,235

 
—

 
(76
)
 
3,218

Other financial liabilities
877

 
73

 
(514
)
 
—

 
—

 
(3
)
 
433

Derivative instruments
—

 
—

 
—

 
—

 
1,664

 
(51
)
 
1,613

Total
$
3,657

 
$
73

 
$
(1,235
)
 
$
1,235

 
$
1,664

 
$
(130
)
 
$
5,264

 (1) Includes reclassification from non-current to current portion based on maturity of the financial liabilities as well a changes in the fair value of derivative instruments.
(2) Includes existing debt from acquired entities.
Borrowings are financial liabilities at amortized cost and are measured using level 2 fair value measurements.
We are party to several loan agreements and revolving credit facilities, 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, 2017.

19


Note 11. 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 nine months ended September 30, 2018, there were six grants of RSUs and two grants of OSAs under the Employee Share Option Plan 10 as defined in Note 18 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
•
On March 1, 2018, 122,448 RSUs were granted to Criteo employees subject to continued employment.
•
On March 16, 2018, 1,295,513 RSUs were granted to Criteo employees subject to continued employment and 794,733 OSAs were granted to senior management subject to continued employment.
•
On April 25, 2018, 101,377 RSUs were granted to Criteo employees subject to continued employment.
•
On June 26, 2018 142,390 RSUs were granted to Criteo employees and 152,833 OSAs were granted to senior management subject to continued employment.
•
On July 26, 2018, 203,333 RSUs were granted were granted to senior management subject to achievement of internal performance objectives and continued employment. Based on the assumptions known as of September 30, 2018, we determined share-based compensation expense by applying the probability of performance objectives completion and 469,414 RSUs were granted to Criteo employees subject to continued employment.
There have been no changes in the vesting and method of valuation of the BSPCEs, OSAs, RSUs, or BSAs from what was disclosed in Note 18 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018, except for one grant of OSAs to a member of senior management which will vest as follows:
•
up to a half of OSAs at the expiration of a two (2) year period from the date hereof,
•
as from the expiration of the initial aforementioned two (2) year period, in increments of 1/16th at the end of each elapsed quarter (i.e., per successive three-month periods), for 2 years from that date.


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

 
RSU

 
BSA

 
Total

Balance at January 1, 2018
3,192,708

 
4,212,508

 
186,276

 
7,591,492

Granted
947,566

 
2,334,475

 
—

 
3,282,041

Exercised (OSA/BSPCE/BSA)
(117,516
)
 
—

 
—

 
(117,516
)
Vested (RSU)
—

 
(868,431
)
 
—

 
(868,431
)
Forfeited
(659,624
)
 
(839,696
)
 
(19,606
)
 
(1,518,926
)
Expired
—

 
—

 
—

 
—

Balance at September 30, 2018
3,363,134

 
4,838,856

 
166,670

 
8,368,660






20




Breakdown of the Closing Balance
 
OSA/BSPCE

 
RSU

 
BSA

Number outstanding
3,363,134


4,838,856


166,670

Weighted-average exercise price
€
27.01

 
NA

 
€
22.79

Number vested
2,219,976

 
NA

 
95,140

Weighted-average exercise price
€
25.04

 
NA

 
€
16.90

Weighted-average remaining contractual life of options outstanding, in years
6.84

 
NA

 
6.76

Reconciliation with the Unaudited Consolidated Statements of Income

 
Three Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
R&D

 
S&O

 
G&A

 
Total

 
R&D

 
S&O

 
G&A

 
Total

RSUs
$
(5,929
)
 
$
(9,896
)
 
$
(3,956
)
 
$
(19,781
)
 
$
(4,723
)
 
$
(6,604
)
 
$
(4,236
)
 
$
(15,563
)
Share options / BSPCE
(432
)
 
(1
)
 
(1,169
)
 
(1,602
)
 
(178
)
 
(348
)
 
(962
)
 
(1,488
)
Total share-based compensation
(6,361
)
 
(9,897
)
 
(5,125
)
 
(21,383
)
 
(4,901
)
 
(6,952
)
 
(5,198
)
 
(17,051
)
BSAs
—

 
—

 
(645
)
 
(645
)
 
—

 
—

 
(211
)
 
(211
)
Total equity awards compensation expense
(6,361
)
 
(9,897
)
 
(5,770
)
 
(22,028
)
 
(4,901
)
 
(6,952
)
 
(5,409
)
 
(17,262
)

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
R&D

 
S&O

 
G&A

 
Total

 
R&D

 
S&O

 
G&A

 
Total

RSUs
$
(13,443
)
 
$
(23,028
)
 
$
(9,354
)
 
$
(45,825
)
 
$
(15,785
)
 
$
(21,539
)
 
$
(13,482
)
 
$
(50,806
)
Share options / BSPCE
(1,295
)
 
19

 
(3,570
)
 
(4,846
)
 
(569
)
 
(1,309
)
 
(2,583
)
 
(4,461
)
Total share-based compensation
(14,738
)
 
(23,009
)
 
(12,924
)
 
(50,671
)
 
(16,354
)
 
(22,848
)
 
(16,065
)
 
(55,267
)
BSAs
—

 
—

 
(1,216
)
 
(1,216
)
 
—

 
—

 
(1,066
)
 
(1,066
)
Total equity awards compensation expense
$
(14,738
)
 
$
(23,009
)
 
$
(14,140
)
 
$
(51,887
)
 
$
(16,354
)
 
$
(22,848
)
 
$
(17,131
)
 
$
(56,333
)

21


Note 12. Financial income (expense), net
The condensed consolidated statements of income line item “Financial income (expense), net” can be broken down as follows:
 
Three Months Ended
 
September 30,
2017

 
September 30,
2018

 
(in thousands)
Financial income from cash equivalents
$
189

 
$
294

Interest and fees
(830
)
 
(521
)
Interest on debt
(635
)
 
(455
)
Fees
(195
)
 
(66
)
Foreign exchange gain (loss)
(2,227
)
 
(760
)
Other financial expense
(18
)
 
(20
)
Total financial income (expense), net
$
(2,886
)
 
$
(1,007
)
The $1.0 million financial expense for the three months ended September 30, 2018 was mainly driven by the non-utilization costs and up-front fees amortization incurred as part of our available RCF financing. The intra-group position between Criteo S.A. and its U.S subsidiary in the context of the funding of the HookLogic acquisition is qualified as a net investment in a foreign operation from February 2018 and no longer requires hedging, resulting in reduced costs compared to the three months ended September 30, 2017.
 
Nine Months Ended
 
September 30,
2017


September 30,
2018

 
(in thousands)
Financial income from cash equivalents
$
639

 
$
798

Interest and fees
(2,242
)
 
(1,565
)
Interest on debt
(1,853
)
 
(1,488
)
Fees
(389
)
 
(77
)
Foreign exchange gain (loss)
(5,660
)
 
(2,507
)
Other financial expense
(50
)
 
(64
)
Total financial income (expense), net
$
(7,313
)
 
$
(3,338
)
The $3.3 million financial expense for the nine months ended September 30, 2018 was mainly driven by the non-utilization costs and up-front amortization incurred as part of our available RCF financing and hedging costs related to an intra-group position between Criteo S.A. and its U.S. subsidiary in the context of the funding of the HookLogic acquisition. As of February 2018, this position qualified as a net investment in a foreign operation and no longer requires hedging resulting in reduced costs compared to the nine months ended September 30, 2017.

22

Note 13. Income Taxes
Breakdown of Income Taxes
Our tax provision for interim periods is determined using an estimate of our annual effective tax rate (“AETR”), adjusted for discrete items arising in that quarter. To calculate our estimated AETR, we estimate our income before taxes and the related tax expense or benefit for the full fiscal year (total of expected current and deferred tax provisions), excluding the effect of significant unusual or infrequently occurring items or comprehensive income items not recognized in the statement of income. Each quarter, we update our estimate of the annual effective tax rate, and if our estimated annual tax rate does change, we make a cumulative adjustment in that quarter. Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, are subject to significant volatility due to several factors including our ability to accurately predict our income (loss) before provision for income taxes in multiple jurisdictions and the changes in foreign exchange rates. Our effective tax rate in the future will depend on the portion of our profits earned within and outside of France.
The condensed consolidated statements of income line item “Provision for income taxes” can be broken down as follows:
 
Nine Months Ended
 
September 30,
2017

 
September 30,
2018

 
(in thousands)
Current income tax
$
(36,293
)
 
$
(37,186
)
Net change in deferred taxes
20,569

 
9,341

Provision for income taxes
$
(15,724
)
 
$
(27,845
)
For the nine months ended September 30, 2017 and 2018, we used an annual estimated tax rate of 30% and 32%, respectively, to calculate the provision for income taxes. The increase in the annual estimated tax rate is primarily due to our preliminary estimates of the impact of the U.S. Tax Act. The effective tax rate was 26% and 34% for the nine months ended September 30, 2017 and 2018, respectively. The difference between the annual estimated tax rate and the effective tax rate for nine months ended September 30, 2017 and 2018 was due to the tax impact of discrete items such as share-based compensation in the United States.
Our estimated annual effective tax rate includes our preliminary estimates for the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act") which was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. federal income tax rate from 35% to 21% and creates new taxes on certain related-party payments, referred to as a base erosion anti-avoidance tax, or “BEAT”. The Tax Act also modifies the limitation on the amount of deductible interest expense and the limitation on the deductibility of certain executive compensation. Our estimates are preliminary, and our effective tax rate may be impacted as more information becomes available regarding the implementation guidelines of the tax reform.

Current tax assets and liabilities
The total amount of current tax assets consists mainly of prepayments of income taxes and credits of Criteo S.A., Criteo Corp., Criteo do Brasil LTDA, and Criteo B.V.. The current tax liabilities refers mainly to the net corporate tax payables of Criteo K.K. and Criteo Deutschland.
Ongoing tax inspection in the United States
On September 27, 2017, we received a draft notice of proposed adjustment "NOPA" from the Internal Revenue Service ("IRS") audit of Criteo Corp. for the year ended December 31, 2014, confirmed by the definitive notice dated February 8, 2018. If the IRS prevails in its position, it could result in an additional federal tax liability of an estimated maximum aggregate amount of approximately $15.0 million, excluding related fees, interest and penalties. We strongly disagree with the IRS's position as asserted in the notice of proposed adjustment and intend to contest it.

23


Note 14. 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
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
(in thousands, except share amount and per data)
Net income attributable to shareholders of Criteo S.A.
 
$
19,774

 
$
17,143

 
$
38,185

 
$
50,678

Weighted average number of shares outstanding
 
65,412,326

 
67,075,453

 
64,881,751

 
66,531,371

Basic earnings per share
 
$
0.30

 
$
0.26

 
$
0.59

 
$
0.76

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 11). There were no other potentially dilutive instruments outstanding as of September 30, 2017 and 2018. 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, non-employee warrant ("BSA"), restricted share unit ("RSU") or employee warrant ("BSPCE") is assessed as potentially dilutive if it is “in the money” (i.e., the exercise or settlement price is lower than the average market price).
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
(in thousands, except share amount and per data)
Net income attributable to shareholders of Criteo S.A.
 
$
19,774

 
$
17,143

 
$
38,185

 
$
50,678

Weighted average number of shares outstanding of Criteo S.A.
 
65,412,326

 
67,075,453

 
64,881,751

 
66,531,371

Dilutive effect of :
 

 

 

 

Restricted share awards ("RSUs")
 
1,615,344

 
1,093,830

 
1,497,121

 
893,341

Share options and BSPCE
 
1,116,117

 
417,873

 
1,421,857

 
402,581

Share warrants
 
56,556

 
38,517

 
76,062

 
37,509

Weighted average number of shares outstanding used to determine diluted earnings per share
 
68,200,343

 
68,625,673

 
67,876,791

 
67,864,802

Diluted earnings per share
 
$
0.29

 
$
0.25

 
$
0.56

 
$
0.75


24

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
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2018
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
Restricted share awards
 
1,168,812

 
893

 
470,125

 
1,517,761

Share options and BSPCE
 
516,668

 
114,065

 
362,861

 
38,022

Share warrants
 
—

 
—

 
—

 
—

Weighted average number of anti-dilutive securities excluded from diluted earnings per share
 
1,685,480

 
114,958

 
832,986

 
1,555,783


25

Note 15. Commitments and Contingencies
Commitments
Leases
We are party to various contractual commitments mainly related to our offices as well as hosting services.
During the three month ended September 30, 2018 we entered into additional operating lease agreements, relating to the rental of a new office and an additional data center, resulting in additional commitments of $14.3 million and $11.7 million, respectively, over 6 years and 5 years, respectively.
Except for what has been mentioned above, there have been no significant changes in future payment obligations for these contractual commitments from what was disclosed in Note 22 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. 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.
Rent expenses relating to our offices totaled $8.9 million and $9.5 million for the three-month period ended September 30, 2017 and 2018, respectively and $26.3 million and $28.6 million for the nine-month period ended September 30, 2017 and 2018, respectively.
Hosting costs totaled $13.1 million and $14.1 million for the three-month period ended September 30, 2017 and 2018, respectively and $44.2 million and $38.9 million for the nine-month period ended September 30, 2017 and 2018, respectively.

Revolving Credit Facilities, Credit Line Facilities and Bank Overdrafts     
As mentioned in Note 10, we are party to one RCF with a syndicate of banks which allow us to draw up to €350.0 million ($405.2 million). As of September 30, 2018, there was no amount drawn on the RCF.
This credit facility is unsecured and contains customary events of default and contains covenants, including compliance with a total net debt to Adjusted EBITDA ratio and restrictions on incurring additional indebtedness. As of September 30, 2018, 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
 
Other provisions
 
Total
 
(in thousands)
Balance at January 1, 2018
$
545

 
$
1,253

 
$
1,798

Increase
273

 
1,481

 
1,754

Provision used
(336
)
 
(220
)
 
(556
)
Provision released not used
(42
)
 
(456
)
 
(498
)
Currency translation adjustments
(39
)
 
(48
)
 
(87
)
Balance at September 30, 2018
$
401

 
$
2,010

 
$
2,411

 - of which current
401

 
2,010

 
2,411

The amount of the provisions represent management’s best estimate of the future outflow. As of September 30, 2018, provisions are mainly in relation to employee-related litigations and other operating provisions.

26

Note 16. 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
For the three months ended:
(in thousands)
 
 
 
 
 
 
 
 
September 30, 2017
$
228,326

 
$
207,168

 
$
128,479

 
$
563,973

September 30, 2018
$
211,247

 
$
195,230

 
$
122,392

 
$
528,869

Revenue generated in France, the country of incorporation of the Parent company, amounted to $38.2 million and $35.9 million for the three months ended September 30, 2017 and 2018, respectively.
 
Americas
 
EMEA
 
Asia-Pacific
 
Total
For the nine months ended
(in thousands)

 
 
 
 
 
 
 
September 30, 2017
$
665,731

 
$
587,942

 
$
368,988

 
$
1,622,661

September 30, 2018
$
636,723

 
$
618,921

 
$
374,574

 
$
1,630,218

Revenue generated in France amounted to $111.8 million and $114.3 million for the nine months ended September 30, 2017 and 2018, respectively.
    Revenue generated in other significant countries where we operate is presented in the following table:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
(in thousands)
Americas
 
 
 
 
 
 
 
United States
$
198,342

 
$
186,366

 
$
578,806

 
$
559,786

EMEA
 
 
 
 
 
 
 
Germany
$
48,318

 
$
47,460

 
$
132,814

 
$
150,607

United Kingdom
$
28,352

 
$
22,109

 
$
82,971

 
$
70,887

Asia-Pacific
 
 
 
 
 
 
 
Japan
$
94,103

 
$
83,792

 
$
266,813

 
$
260,116

As of September 30, 2017 and 2018, our largest client represented 2.1% and 2.3%, respectively, of our consolidated revenue.





27

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
 
Of which
 
 
 
Holding
 
Americas
 
United States
 
EMEA
 
Asia-Pacific
 
Japan
 
Singapore
 
Total
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
$
100,819

 
$
113,272

 
$
112,685

 
$
18,850

 
$
25,020

 
$
10,141

 
$
10,085

 
$
257,961

September 30, 2018
$
128,926

 
$
100,435

 
$
100,073

 
$
29,423

 
$
21,841

 
$
12,317

 
$
4,871

 
$
280,625

Note 17. Related Parties
There were no significant related-party transactions during the period nor any change in the nature of the transactions as described in Note 23 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Note 16 to the consolidated financial statements included in the Company's quarterly report on Form 10-Q for the period ended June 30, 2018.

Note 18. Subsequent Events
On October 29, 2018, Criteo acquired Manage.com, Inc, a Silicon Valley-based company with an attractive app install solution that helps advertisers acquire new customers in mobile apps.

On October 31, 2018 Criteo announced that its Board of Directors authorized a share repurchase program of up to $80 million of the Company’s outstanding American Depositary Shares. The Company intends to use repurchased shares in connection with M&A transactions. In addition, the Company may use repurchased shares to satisfy employee equity plan vesting in lieu of issuing new shares. The program does not require the purchase of any minimum number of shares and may be suspended, modified or discontinued at any time without prior notice.
    
The Company evaluated all other subsequent events that occurred after September 30, 2018 through the date of issuance of the unaudited condensed consolidated financial statements and determined there are no significant events that require adjustments or disclosure.

28

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, 2017, filed with the Securities and Exchange Commission, or "SEC", on March 1, 2018.

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, 2017, except for the adoption of ASC 606 as of January 1, 2018. Please refer to Note 1,"Summary of Significant Accounting Policies," of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the changes in accounting policies due to the adoption of this standard.

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 2018.

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 three regions. Revenue ex-TAC, Revenue ex-TAC by Region and Revenue ex-TAC margin are key measures used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of TAC from revenue can provide a useful measure for period-to-period comparisons of our business and across our three regions. Accordingly we believe that Revenue ex-TAC, Revenue ex-TAC by Region and Revenue ex-TAC margin provide useful information to investors and the market generally in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA is our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends, to prepare and approve our annual budget and to develop short‑ and long-term operational plans. In particular, we believe that by eliminating equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration, Adjusted EBITDA can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.


29

Adjusted Net Income is our net income adjusted to eliminate the impact of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration, and the tax impact of these adjustments. Adjusted Net Income and Adjusted Net Income per diluted share are key measures used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that by eliminating equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration and the tax impact of these adjustments, Adjusted Net Income and Adjusted Net Income per diluted share can provide useful measures for period-to-period comparisons of our business. Accordingly, we believe that Adjusted Net Income and Adjusted Net Income per diluted share provide useful information to investors and the market generally in understanding and evaluating our results of operations in the same manner as our management and board of directors.

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


30

Condensed Consolidated Statements of Income Data (Unaudited):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
(in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
Revenue
 
$
563,973

 
$
528,869

 
$
1,622,661

 
$
1,630,218

 
 

 

 

 

Cost of revenue (2):
 

 

 

 

Traffic acquisition costs
 
(329,576
)
 
(305,387
)
 
(958,469
)
 
(936,096
)
Other cost of revenue
 
(29,951
)
 
(32,921
)
 
(89,914
)
 
(92,937
)
Gross profit
 
204,446

 
190,561

 
574,278

 
601,185

 
 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
 
Research and development expenses (2)
 
(43,860
)
 
(41,796
)
 
(126,992
)
 
(134,658
)
Sales and operations expenses (2)
 
(95,184
)
 
(90,526
)
 
(283,815
)
 
(278,901
)
General and administrative expenses (2)
 
(32,389
)
 
(32,463
)
 
(96,143
)
 
(102,698
)
Total operating expenses
 
(171,433
)
 
(164,785
)
 
(506,950
)
 
(516,257
)
Income from operations
 
33,013

 
25,776

 
67,328

 
84,928

Financial income (expense), net
 
(2,886
)
 
(1,007
)
 
(7,313
)
 
(3,338
)
Income before taxes
 
30,127

 
24,769

 
60,015

 
81,590

Provision for income taxes
 
(7,858
)
 
(6,821
)
 
(15,724
)
 
(27,845
)
Net income
 
$
22,269

 
$
17,948

 
$
44,291

 
$
53,745

Net income available to shareholders of Criteo S.A. (1)
 
$
19,774

 
$
17,143

 
$
38,185

 
$
50,678

Net income available to shareholders of Criteo S.A. per share:
 

 

 

 

Basic
 
$
0.30

 
$
0.26

 
$
0.59

 
$
0.76

Diluted
 
$
0.29

 
$
0.25

 
$
0.56

 
$
0.75

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding used in computing per share amounts:
 
 
 
 
 
 
 
 
Basic
 
65,412,326

 
67,075,453

 
64,881,751

 
66,531,371

Diluted
 
68,200,343

 
68,625,673

 
67,876,791

 
67,864,802

(1) For the three months ended September 30, 2017 and 2018, this excludes $2.5 million and $0.8 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK. For the nine months ended September 30, 2017 and 2018, this excludes $6.1 million and $3.1 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK.
(2) Cost of revenue and operating expenses include equity awards compensation expense, pension service costs, depreciation and amortization expense, restructuring costs, acquisition-related costs and deferred price consideration as follows:






31

Detailed Information on Selected Items (unaudited):
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
(in thousands)
Equity awards compensation expense
 
 
 
 
 
 
 
 
Research and development expenses
 
$
6,361

 
$
4,901

 
$
14,738

 
$
16,227

Sales and operations expenses
 
9,897

 
6,952

 
23,009

 
23,451

General and administrative expenses
 
5,770

 
5,408

 
14,140

 
17,131

Total equity awards compensation expense
 
$
22,028

 
$
17,261

 
$
51,887

 
$
56,809

 
 
 
 
 
 
 
 
 
Pension service costs
 
 
 
 
 
 
 
 
Research and development expenses
 
161

 
208

 
459

 
640

Sales and operations expenses
 
65

 
83

 
184

 
237

General and administrative expenses
 
94

 
128

 
267

 
395

Total pension service costs (a)
 
$
320

 
$
419

 
$
910

 
$
1,272

 
 
 
 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
 
 
 
Cost of revenue
 
14,320

 
16,571

 
38,419

 
46,870

Research and development expenses (b)
 
2,822

 
2,724

 
8,857

 
7,190

Sales and operations expenses (c)
 
5,102

 
4,442

 
14,988

 
13,414

General and administrative expenses
 
1,511

 
1,882

 
3,968

 
5,351

Total depreciation and amortization expense
 
$
23,755

 
$
25,619

 
$
66,232

 
$
72,825

 
 
 
 
 
 
 
 
 
Acquisition-related costs
 
 
 
 
 
 
 
 
General and administrative expenses
 
—

 
516

 
—

 
516

Total acquisition-related costs
 
$
—

 
$
516

 
$
—

 
$
516

 
 
 
 
 
 
 
 
 
Restructuring
 
 
 
 
 
 
 
 
Cost of revenue
 
—

 
—

 
2,497

 
—

Research and development expenses
 
—

 
—

 
—

 
(332
)
Sales and operations expenses
 
—

 
—

 
690

 
290

General and administrative expenses
 
—

 
—

 
112

 
(11
)
Total Restructuring
 
$
—

 
$
—

 
$
3,299

 
$
(53
)
(a) Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income.
(b) Includes acquisition-related amortization of intangible assets of $1.9 million and $1.7 million for the three months ended September 30, 2017 and 2018, respectively, and $6.4 million and $4.2 million for the nine months ended September 30, 2017 and 2018, respectively.
(c) Includes acquisition-related amortization of intangible assets of $2.5 million and $2.2 million for the three months ended September 30, 2017 and 2018, respectively, and $7.4 million and $6.6 million for the nine months ended September 30, 2017 and 2018, respectively.





32


Consolidated Statements of Financial Position Data (Unaudited):
 
December 31,
2017

 
September 30,
2018

 
 
 
 
 
(in thousands)
Cash and cash equivalents
$
414,111

 
$
458,690

Total assets
1,531,300

 
1,515,943

Trade receivables, net of allowance for doubtful accounts
484,101

 
356,792

Total financial liabilities
3,657

 
5,264

Total liabilities
633,602

 
517,027

Total equity
$
897,698

 
$
998,916

Other Financial and Operating Data (Unaudited):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017

 
September 30,
2018

 
September 30,
2017

 
September 30,
2018

 
(in thousands, except client data)
Number of clients
17,299

 
19,213

 
17,299

 
19,213

Revenue ex-TAC (3)
$
234,397

 
$
223,482

 
$
664,192

 
$
694,122

Adjusted Net Income (4)
$
44,416

 
$
36,336

 
$
101,476

 
$
112,337

Adjusted EBITDA (5)
$
79,116

 
$
69,591

 
$
189,656

 
$
216,297

(3) We define Revenue ex-TAC 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
 
Nine Months Ended
 
September 30,
2017

 
September 30,
2018

 
September 30,
2017

 
September 30,
2018

 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
$
563,973

 
$
528,869

 
$
1,622,661

 
$
1,630,218

Adjustment:
 
 
 
 
 
 
 
Traffic acquisition costs
(329,576
)
 
(305,387
)
 
(958,469
)
 
(936,096
)
Revenue ex-TAC
$
234,397


$
223,482

 
$
664,192


$
694,122




33


(4) We define Adjusted Net Income as our net income adjusted to eliminate the impact of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration, and the tax impact of the foregoing adjustments. Adjusted Net Income is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted Net Income in this Form 10-Q because it is a key measure used by our management and board of directors to evaluate operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, we believe that the elimination of equity awards compensation expense, amortization of acquisition-related intangible assets, restructuring costs, acquisition-related costs and deferred price consideration, and the tax impact of the foregoing adjustments in calculating Adjusted Net Income can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted Net Income provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted Net Income has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) Adjusted Net Income does not reflect the potentially dilutive impact of equity-based compensation or the impact of certain acquisition related costs; and (b) other companies, including companies in our industry, may calculate Adjusted Net Income or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted Net Income alongside our other U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted Net Income to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2017

 
September 30, 2018

 
September 30, 2017

 
September 30, 2018

 
 
 
 
 
 
 
 
 
(in thousands)
Net income
$
22,269

 
$
17,948

 
$
44,291

 
$
53,745

Adjustments:
 
 
 
 
 
 
 
Equity awards compensation expense
22,028


17,261


51,887


56,809

Amortization of acquisition-related intangible assets
4,428

 
3,920

 
13,879

 
10,825

Acquisition-related costs
—


516


—


516

Restructuring
—


—


3,299


(53
)
Tax impact of the above adjustments
(4,309
)
 
(3,309
)
 
(11,880
)
 
(9,505
)
Total net adjustments
22,147

 
18,388

 
57,185

 
58,592

Adjusted Net Income
$
44,416

 
$
36,336

 
$
101,476

 
$
112,337


34

(5) We define Adjusted EBITDA as our consolidated earnings before financial income (expense), income taxes, depreciation and amortization, adjusted to eliminate the impact of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. We have included Adjusted EBITDA in this Form 10-Q because it is a key measure used by our management and board of directors to understand and evaluate our core operating performance and trends to prepare and approve our annual budget and to develop short and long-term operational plans. In particular, we believe that the elimination of equity awards compensation expense, pension service costs, restructuring costs, acquisition-related costs and deferred price consideration in calculating Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; (b) Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; (c) Adjusted EBITDA does not reflect the potentially dilutive impact of equity-based compensation; (d) Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and (e) other companies, including companies in our industry, may calculate Adjusted EBITDA or similarly titled measures differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Adjusted EBITDA alongside our other U.S. GAAP financial results, including net income. The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for each of the periods indicated:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
2017

 
September 30,
2018

 
September 30,
2017

 
September 30,
2018

 
(in thousands)
Net income
$
22,269

 
$
17,948

 
$
44,291

 
$
53,745

Adjustments:
 
 
 
 
 
 
 
Financial expense (income), net
2,886

 
1,007

 
7,313

 
3,338

Provision for income taxes
7,858

 
6,821

 
15,724

 
27,845

Equity awards compensation expense
22,028

 
17,261

 
51,887

 
56,809

Pension service costs
320

 
419

 
910

 
1,272

Depreciation and amortization expense
23,755

 
25,619

 
66,232

 
72,825

Acquisition-related costs
—

 
516

 
—

 
516

Restructuring
—

 
—

 
3,299

 
(53
)
Total net adjustments
56,847

 
51,643

 
145,365

 
162,552

Adjusted EBITDA
$
79,116

 
$
69,591

 
$
189,656

 
$
216,297




35

Results of Operations for the Periods Ended September 30, 2017 and 2018 (Unaudited)
Revenue
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
 
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018

 
 
 
 
 
 
 
(in thousands)
 
 
Revenue as reported
$
563,973

 
$
528,869

 
(6
)%
Conversion impact U.S dollar/other currencies

 
11,356

 

Revenue at constant currency (1)
563,973

 
540,225

 
(4
)%
Americas

 

 

Revenue as reported
228,326

 
211,247

 
(7
)%
Conversion impact U.S dollar/other currencies

 
3,344

 

Revenue at constant currency (1)
228,326

 
214,591

 
(6
)%
EMEA

 

 

Revenue as reported
207,168

 
195,230

 
(6
)%
Conversion impact U.S dollar/other currencies

 
6,647

 

Revenue at constant currency (1)
207,168

 
201,877

 
(3
)%
Asia-Pacific

 

 

Revenue as reported
128,479

 
122,392

 
(5
)%
Conversion impact U.S dollar/other currencies

 
1,365

 

Revenue at constant currency(1)
$
128,479

 
$
123,757

 
(4
)%
(1) Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2017 average exchange rates for the relevant period to 2018 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 September 30, 2018 was $528.9 million, declining by (6)% (or (4)% on a constant-currency basis), compared to the three months ended September 30, 2017. The year-over-year decline in revenue was entirely driven by our business with existing clients, significantly impacted by user coverage limitations, namely Apple’s Intelligent Tracking Prevention (“ITP”) feature, compared to the prior year, as well as by the discontinuation of certain products over the period. Business with our largest existing clients was generally resilient, while performance in the midmarket was weaker than in the prior year. We added 1,914 net new clients across regions and client sizes over the period, with softer revenue contribution of new clients, primarily because of lower sales capacity than anticipated due to delay in hiring and increased employee attrition in the midmarket, as well as extended sales cycles with large customers. Offsetting this, we saw increasing adoption of the Criteo Customer Acquisition and Criteo Audience Match products, a growing presence in mobile applications, and more direct connections with publishers through Criteo Direct Bidder.
Revenue in the Americas region decreased (7)% (or (6)% on a constant-currency basis) to $211.2 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, and the region remained the largest contributor to our global revenue. While we saw continued strength with our largest existing clients in the United States, execution was more difficult in the midmarket across the region. Contribution from new clients was negatively impacted by attrition and hiring delays within our sales teams, which offset the positive impact from the continued ramp up of our newest products, in particular in the United States. Revenue in EMEA decreased (6)% (or decreased (3)% on a constant-currency basis) to $195.2 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017.


36

Our business with both new and existing clients was negatively impacted by the implementation of the General Data Protection Regulation ("GDPR"), although to a lesser extent than we initially expected, as well as short-term disturbance related to the implementation of changes in our go-to-market model across the region. Business in Germany and the Nordic region was softer, with a weaker back-to-school effect than expected. We did acquire new clients across the region, although their contribution to revenue growth was not yet meaningful over the period. Revenue in the Asia-Pacific region decreased (5)% (or (4)% on a constant-currency basis) to $122.4 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. While we saw continued strong performance in Korea and India, Japan business was weak, primarily due to softer demand in the Classifieds vertical.
Additionally, our $528.9 million of revenue for the three months ended September 30, 2018 was negatively impacted by $11.4 million as a result of changes in foreign currency against the U.S. dollar compared to the three months ended September 30, 2017.
The year-over-year decline in revenue on a constant-currency basis is driven by a decrease in the average cost-per-click charged to advertisers, not entirely offset by a slight increase in the volume of clicks.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
 
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018

 
 
 
 
 
 
 
(in thousands)
 
 
Revenue as reported
$
1,622,661

 
$
1,630,218

 
0.5
 %
Conversion impact U.S dollar/other currencies

 
(31,126
)
 

Revenue at constant currency (1)
1,622,661

 
1,599,092

 
(1
)%
Americas
 
 
 
 

Revenue as reported
665,731

 
636,723

 
(4
)%
Conversion impact U.S dollar/other currencies

 
4,960

 

Revenue at constant currency (1)
665,731

 
641,683

 
(4
)%
EMEA
 
 
 
 

Revenue as reported
587,942

 
618,921

 
5
 %
Conversion impact U.S dollar/other currencies

 
(29,740
)
 

Revenue at constant currency (1)
587,942

 
589,181

 
0.2
 %
Asia-Pacific
 
 
 
 

Revenue as reported
368,988

 
374,574

 
2
 %
Conversion impact U.S dollar/other currencies

 
(6,346
)
 

Revenue at constant currency(1)
$
368,988

 
$
368,228

 
(0.2
)%
(1) Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2017 average exchange rates for the relevant period to 2018 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 nine months ended September 30, 2018 increased to $1,630.2 million, growing 0.5% (or decreasing (1)% on a constant-currency basis), compared to the nine months ended September 30, 2017. Revenue from new clients contributed 92% to the year-over-year revenue growth of the period, while revenue from existing clients contributed 8%, impacted by user coverage limitations, as well as by the discontinuation of certain products over the period. Business with our largest existing clients was generally resilient, while performance in the midmarket was weaker than in the prior year. We added 1,914 net new clients across regions and client sizes over the period, with softer revenue contribution of new clients, primarily because of lower sales capacity than anticipated due to delay in hiring and increased employee attrition in the midmarket, as well as extended sales cycles with large customers.

37

Offsetting this, we saw increasing adoption of the Criteo Customer Acquisition and Criteo Audience Match products, a growing presence in mobile applications, and more direct connections with publishers through Criteo Direct Bidder.
Revenue in the Americas region decreased (4)% (or (4)% on a constant-currency basis) to $636.7 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. While we saw continued strength with our largest existing clients in the United States, execution was more difficult in the midmarket across the region. Contribution from existing clients was negatively impacted by user coverage limitations across the region, as well as continued difficult market conditions in Latin America. Contribution from new clients was negatively impacted by attrition and hiring delays within our sales teams, which offset the positive impact from the continued ramp up of our newest products, in particular in the United States. Revenue in EMEA increased 5% (or 0.2% on a constant-currency basis) to $618.9 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. This was largely driven by solid growth in Germany, Russia and Middle-East, as well as the higher adoption of our newest products, Criteo Customer Acquisition and Criteo Audience Match, offset by the negative impact of external factors, including user coverage limitations, implementation of the GDPR, as well as some short-term disturbance related to the implementation of changes in our go-to-market model across the region. Revenue in the Asia-Pacific region increased 2% (or decreased (0.2)% on a constant-currency basis) to $374.6 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. Our business in India was strong, as well as in Korea thanks to growth in mobile applications and we introduced Criteo Customer Acquisition in some markets across the region, while Japan faced some industry-related challenges.
    Additionally, our $1,630.2 million of revenue for the nine months ended September 30, 2018 was positively impacted by $31.1 million as a result of changes in foreign currency against the U.S. dollar compared to the nine months ended September 30, 2017.
The year-over-year decline in revenue on a constant-currency basis is driven by a decrease in the average cost-per-click charged to advertisers, not entirely offset by a slight increase in the volume of clicks.
Cost of Revenue
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017


September 30, 2018

 
2017 vs 2018

 
 
 
 
 
 
 
(in thousands, except percentages)
 
 
Traffic acquisition costs
$
(329,576
)
 
$
(305,387
)
 
(7
)%
Other cost of revenue
$
(29,951
)
 
$
(32,921
)
 
10
 %
Total Cost of Revenue
$
(359,527
)
 
$
(338,308
)

(6
)%
% of revenue
(64
)%
 
(64
)%
 
 
Gross profit %
36
 %
 
36
 %
 
 
Cost of revenue for the three months ended September 30, 2018 decreased $(21.2) million, or (6)%, compared to the three months ended September 30, 2017. This decrease was primarily the result of a decrease of $(24.2) million, or (7)% (or (5)% on a constant-currency basis) in traffic acquisition costs and an increase of $3.0 million, or 10% (or 12% on a constant-currency basis), in other cost of revenue.
The decrease in traffic acquisition costs related primarily to (3)% decrease in the number of impressions we purchased over the period, driven by changes in the way we are charged for purchased impressions in mobile applications from certain publisher partners, as well as user coverage limitations. In addition, the average cost per thousand impressions (or "CPM") decreased by (4)% (or (1)% on a constant-currency basis), in part due to the broader deployment of Criteo Direct Bidder, which allows us to compete more effectively for inventory, and the growing share, in our overall business, of inventory purchased in mobile applications, which tend to come at lower price per unit or CPM, relative to web-based inventory.

38

Traffic acquisition costs in the Americas region decreased (11)% (or (9)% on a constant-currency basis) to $(126.4) million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, due to the lower volume of impressions, as well as the broader deployment of Criteo Direct Bidder in the region, and the growing share of inventory purchased in mobile applications. Traffic acquisition costs in EMEA decreased (4)% (or (1)% on a constant-currency basis) to $(111.1) million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, due to the lower volume of impressions, as well as the broader deployment of Criteo Direct Bidder in the region, and the growing share of inventory purchased in mobile applications. Traffic acquisition costs in the Asia-Pacific region decreased (6)% (or (5)% on a constant-currency basis) to $(67.9) million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, as we increased our share of inventory purchased in mobile applications, and maintained strong relationships with large premium publishers in the region, in particular in Japan.
The increase in other cost of revenue mainly includes a $1.0 million increase in hosting cost and a $2.2 million increase in allocated depreciation and amortization expense.
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.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018

 
 
 
 
 
 
 
(in thousands, except percentages)
 
 
Traffic acquisition costs
$
(958,469
)
 
$
(936,096
)
 
(2
)%
Other cost of revenue
$
(89,914
)
 
$
(92,937
)
 
3
 %
Total Cost of Revenue
$
(1,048,383
)
 
$
(1,029,033
)
 
(2
)%
% of revenue
(65
)%
 
(63
)%
 
 
Gross profit %
35
 %
 
37
 %
 
 
Cost of revenue for the nine months ended September 30, 2018 decreased $(19.4) million, or (2)%, compared to the nine months ended September 30, 2017. This decrease was primarily the result of a decrease of $(22.4) million, or (2)% (or (4)% on a constant-currency basis) in traffic acquisition costs and a $3.0 million, or 3% (or 3% on a constant-currency basis), increase in other cost of revenue.
The decrease in traffic acquisition costs at constant currency related primarily to a (4)% decrease in the average cost per thousand impressions (or "CPM") (or (6)% on a constant-currency basis), in part due to the broader deployment of Criteo Direct Bidder, which allows us to compete more effectively for inventory, and the growing share, in our overall business, of inventory purchased in mobile applications, which tend to come at lower price per unit or CPM, relative to web-based inventory. In addition, the number of impressions we purchased over the period increased by 2%, driven by both publishers with whom we have direct relationships, including Criteo Direct Bidder, and the main real-time bidding exchanges, on both the web and mobile applications.
Traffic acquisition costs in the Americas region decreased (8)% (or (7)% on a constant-currency basis) to $(383.4) million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, 2017, in part due to the broader deployment of Criteo Direct Bidder in the region, and the growing share of inventory purchased in mobile applications.


39

Traffic acquisition costs in EMEA increased 4% (or decreased by (1)% on a constant-currency basis) to $(343.6) million for the September 30, 2018 compared to the nine months ended September 30, 2017, as we further deployed Criteo Direct Bidder in the region and increased our share of inventory purchased in mobile applications. Traffic acquisition costs in the Asia-Pacific region decreased (2)% (or decreased by (3)% on a constant-currency basis) to $(209.1) million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, as we increased our share of inventory purchased in mobile applications, and maintained strong relationships with large premium publishers in the region, in particular in Japan.
The increase in other cost of revenue mainly includes a $8.2 million increase in depreciation and amortization expense partially offset by a $5.3 million decrease in hosting 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.

Research and Development Expenses
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
Research and development expenses
$
(43,860
)

$
(41,796
)
 
(5)%
% of revenue
(8
)%

(8
)%
 
 
Research and development expenses for the three months ended September 30, 2018 decreased $(2.1) million, or (5)%, compared to the three months ended September 30, 2017. This decrease was mainly the result of a decrease in headcount-related costs due to lower equity award compensation expense and performance bonus despite an increase of 3% in employees, an increase in the French Research Tax Credit, partially offset by an increase in costs for marketing events.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
Research and development expenses
$
(126,992
)

$
(134,658
)

6%
% of revenue
(8
)%

(8
)%


Research and development expenses for the nine months ended September 30, 2018 increased $7.7 million, or 6%, compared to the nine months ended September 30, 2017. This increase was mainly the result of a growth of 3% in employees resulting in additional headcount related costs, an increase in the French Research Tax Credit and an increase in costs for marketing events.


40

Sales and Operations Expenses
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
Sales and operations expenses
$
(95,184
)

$
(90,526
)
 
(5)%
% of revenue
(17
)%
 
(17
)%
 

 
Sales and operations expenses for the three months ended September 30, 2018 decreased $(4.7) million, or (5)%, compared to the three months ended September 30, 2017. This decrease was mainly the result of a decrease in headcount-related costs driven by lower equity award compensation expense and performance bonus expense coupled with a decrease of 1% in employees. In addition, operating taxes in Brazil and Singapore decreased. These decrease were partially offset by an increase of bad debt expense.
Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
Sales and operations expenses
$
(283,815
)

$
(278,901
)

(2)%
% of revenue
(17
)%

(17
)%


 
Sales and operations expenses for the nine months ended September 30, 2018 decreased $(4.9) million, or (2)%, compared to the nine months ended September 30, 2017. This decrease was mainly the result of a decrease in headcount-related costs driven by lower performance bonuses and a decrease of 1% in employees, a decrease in internal and marketing events and a decrease in operating taxes in Brazil and Singapore. This decrease was partially offset by an increase of bad debt expense.

General and Administrative Expenses
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
General and administrative expenses
$
(32,389
)

$
(32,463
)

0.2%
% of revenue
(6
)%

(6
)%


General and administrative expenses for the three months ended September 30, 2018 increased $0.1 million, or 0.2%, compared to the three months ended September 30, 2017. This slight increase was mainly the result of an increase in consulting and professional fees relating to business combinations, which was partially offset by a decrease in headcount-related costs (despite an increase of 6% in employees) due to a decrease in performance bonuses.

41

Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
General and administrative expenses
$
(96,143
)
 
$
(102,698
)
 
7%
% of revenue
(6
)%
 
(6
)%
 
 
General and administrative expenses for the nine months ended September 30, 2018 increased $6.6 million, or 7%, compared to the nine months ended September 30, 2017. This increase was the result of a growth of 6% in employees resulting in additional headcount-related costs and an increase in allocated facilities-related costs.
Financial income (expense), net
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
 except percentages)
 
 
Financial income (expense), net
(2,886
)

(1,007
)
 
(65)%
% of revenue
(0.5
)%

(0.2
)%
 

Financial expense for the three months ended September 30, 2018 decreased by $(1.9) million, or (65)%, compared to the three months ended September 30, 2017. The $1.0 million financial expense for the three months ended September 30, 2018 was mainly driven by the non-utilization costs and up-front fees amortization incurred as part of our available RCF financing. The intra-group position between Criteo S.A. and its U.S subsidiary in the context of the funding of HookLogic acquisition is qualified as a net investment in a foreign operation from February 2018 and no longer requires hedging, resulting in reduced costs compared to the three months ended September 30, 2017.
Nine months ended September 30, 2018 compared to the Nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
 except percentages)
 
 
Financial income (expense), net
$
(7,313
)

$
(3,338
)

(54)%
% of revenue
(0.5
)%

(0.2
)%


Financial expense for the nine months ended September 30, 2018 decreased by $(4.0) million, or (54)%, compared to the nine months ended September 30, 2017. The $3.3 million financial expense for the nine months ended September 30, 2018 was driven by the non-utilization costs and up-front fees amortization incurred as part of our available RCF financing and hedging costs related to an intra-group position between Criteo S.A. and its U.S. subsidiary in the context of the funding of the HookLogic acquisition. As of February 2018, this position qualified as a net investment in a foreign operation and no longer requires hedging resulting in reduced costs compared to the nine months ended September 30, 2017.

42


Provision for Income Taxes
Our estimated annual effective tax rate includes our preliminary estimates for the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act") which was enacted on December 22, 2017 and introduces significant changes to U.S. income tax law. Effective in 2018, the Tax Act reduces the U.S. federal income tax rate from 35% to 21% and creates new taxes on certain related-party payments, referred to as a base erosion anti-avoidance tax, or “BEAT”. The Tax Act also modifies the limitation on the amount of deductible interest expense and the limitation on the deductibility of certain executive compensation. Our estimates are preliminary, and our effective tax rate may be impacted as more information becomes available regarding the implementation guidelines of the tax reform.

Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
except percentages)
 
 
Provision for income taxes
$
(15,724
)
 
$
(27,845
)
 
77%
% of revenue
(1
)%
 
(2
)%
 
 
Effective tax rate
26
 %
 
34
 %
 
 
For the nine months ended September 30, 2017 and September 30, 2018, we used an annual estimated tax rate of 30% and 32%, respectively, to calculate the provision for income taxes. The increase in the annual estimated tax rate is primarily due to our preliminary estimates of the impact of the U.S. Tax Act. The effective tax rate was 26% and 34% for the nine months ended September 30, 2017 and 2018, respectively. The difference between the annual estimated tax rate and the effective tax rate for nine months ended September 30, 2017 was due to the tax impact of discrete items such as share-based compensation in the United States.
    
Net Income
Three months ended September 30, 2018 compared to the three months ended September 30, 2017
 
Three Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
 except percentages)
 
 
Net income
$
22,269


17,948


(19)%
% of revenue
4
%

3
%


 
Net income for the three months ended September 30, 2018 decreased $(4.3) million, or (19)%, compared to the three months ended September 30, 2017. This decrease was the result of the factors discussed above, in particular, a $7.2 million decrease in income from operations partially offset by a $1.9 million decrease in financial expense and a $1.0 million decrease in provision for income taxes compared to the three months ended September 30, 2017.


43


Nine months ended September 30, 2018 compared to the nine months ended September 30, 2017
 
Nine Months Ended
 
% change
 
September 30, 2017

 
September 30, 2018

 
2017 vs 2018
 
 
 
 
 
 
 
(in thousands,
 except percentages)
 
 
Net income
$
44,291


53,745


21%
% of revenue
3
%

3
%


 
Net income for the nine months ended September 30, 2018 increased $9.5 million, or 21%, compared to the nine months ended September 30, 2017. This increase was the result of the factors discussed above, in particular, a $17.6 million increase in income from operations and a $4.0 million decrease in financial expense partially offset by a $12.1 million increase in provision for income taxes compared to the nine months ended September 30, 2017.


44

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

 
 
 
Three Months Ended
 
 
 
Nine Months Ended
 
 
 
Region
 
September 30, 2017


September 30, 2018

 
Year over Year Change
 
September 30, 2017

 
September 30, 2018

 
Year over Year Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue:
 
(amounts in thousands, except percentages)
 
Americas
 
$
228,326

 
$
211,247

 
(7
)%
 
$
665,731

 
$
636,723

 
(4
)%
 
EMEA
 
207,168

 
195,230

 
(6
)%
 
587,942

 
618,921

 
5
 %
 
Asia-Pacific
 
128,479

 
122,392

 
(5
)%
 
368,988

 
374,574

 
2
 %
 
Total
 
563,973

 
528,869

 
(6
)%
 
1,622,661

 
1,630,218

 
0.5
 %
 
 
 

 

 

 

 

 

Traffic acquisition costs:
 

 

 

 

 

 
Americas
 
(141,869
)
 
(126,406
)
 
(11
)%
 
(416,025
)
 
(383,429
)
 
(8
)%
 
EMEA
 
(115,446
)
 
(111,131
)
 
(4
)%
 
(329,635
)
 
(343,601
)
 
4
 %
 
Asia-Pacific
 
(72,261
)
 
(67,850
)
 
(6
)%
 
(212,809
)
 
(209,066
)
 
(2
)%
 
Total
 
(329,576
)
 
(305,387
)
 
(7
)%
 
(958,469
)
 
(936,096
)
 
(2
)%
 
 
 

 

 

 

 

 

Revenue ex-TAC (1):
 

 

 

 

 

 

 
Americas
 
86,457

 
84,841

 
(2
)%
 
249,706

 
253,294

 
1
 %
 
EMEA
 
91,722

 
84,099

 
(8
)%
 
258,307

 
275,320

 
7
 %
 
Asia-Pacific
 
56,218

 
54,542

 
(3
)%
 
156,179

 
165,508

 
6
 %
 
Total
 
$
234,397

 
$
223,482

 
(5
)%
 
$
664,192

 
$
694,122

 
5
 %

(1) We define Revenue ex-TAC as our revenue excluding traffic acquisition costs, or TAC, generated over the applicable measurement period. Revenue ex-TAC and revenue, traffic acquisition costs and Revenue ex-TAC by Region are not measures calculated in accordance with U.S. GAAP. We have included Revenue ex-TAC and revenue, traffic acquisition costs and Revenue ex-TAC by Region in this Form 10-Q because they are key measures used by our management and board of directors to evaluate operating performance and generate future operating plans. In particular, we believe that the elimination of TAC from revenue and review of these measures by region can provide useful measures for period-to-period comparisons of our core business. Accordingly, we believe that Revenue ex-TAC and revenue, traffic acquisition costs and Revenue ex-TAC by Region provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors. Our use of Revenue ex-TAC and revenue, traffic acquisition costs and Revenue ex-TAC by Region has limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our financial results as reported under U.S. GAAP. Some of these limitations are: (a) other companies, including companies in our industry which have similar business arrangements, may address the impact of TAC differently; (b) other companies may report revenue, traffic acquisition costs and Revenue ex-TAC by Region or similarly titled measures but define the regions differently, which reduces their effectiveness as a comparative measure; and (c) other companies may report Revenue ex-TAC or similarly titled measures but calculate them differently, which reduces their usefulness as a comparative measure. Because of these and other limitations, you should consider Revenue ex-TAC and revenue, traffic acquisition costs and Revenue ex-TAC by Region alongside our other U.S. GAAP financial results, including revenue. The above table provides a reconciliation of Revenue ex-TAC by Region to revenue by region. Please also refer to footnote 3 to the Other Financial and Operating Data table in "Item 2—Management's Discussion and Analysis" of this Form 10-Q for a reconciliation of Revenue ex-TAC to revenue, the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP.

45

Constant-Currency Reconciliation
Information in this Form 10-Q with respect to results presented on a constant-currency basis was calculated by applying the 2017 average exchange rates for the relevant period to 2018 figures. We have included information with respect to our results presented on a constant-currency basis because it is a key measure used by our management and board of directors to evaluate operating performance. Management reviews and analyzes business results excluding the effect of foreign currency translation because they believe this better represents our underlying business trends. Below is a table which reconciles the actual results presented in this section with the results presented on a constant-currency basis:  

 
 
Three Months Ended
 
 
 
Nine months ended
 
 
 
 
September 30, 2017

 
September 30, 2018

 
YoY Change

 
September 30, 2017

 
September 30, 2018

 
YoY Change

 
 
(amounts in thousands, except percentages)
 
 
Revenue as reported
 
$
563,973

 
$
528,869

 
(6
)%
 
$
1,622,661

 
$
1,630,218

 
0.5
 %
Conversion impact U.S. dollar/other currencies
 


 
11,355

 


 


 
(31,125
)
 


Revenue at constant currency
 
$
563,973

 
$
540,224

 
(4
)%
 
$
1,622,661

 
$
1,599,093

 
(1
)%
 
 


 


 


 


 


 


Traffic acquisition costs as reported
 
$
(329,576
)
 
$
(305,387
)
 
(7
)%
 
$
(958,469
)
 
$
(936,096
)
 
(2
)%
Conversion impact U.S. dollar/other currencies
 


 
(6,280
)
 


 


 
17,076

 


Traffic Acquisition Costs at constant currency
 
$
(329,576
)
 
$
(311,667
)
 
(5
)%
 
$
(958,469
)
 
$
(919,020
)
 
(4
)%
 
 


 


 


 


 


 


Revenue ex-TAC as reported
 
$
234,397

 
$
223,482

 
(5
)%
 
$
664,192

 
$
694,122

 
5
 %
Conversion impact U.S. dollar/other currencies
 


 
5,076

 


 


 
(14,048
)
 


Revenue ex-TAC at constant currency
 
$
234,397

 
$
228,558

 
(2
)%
 
$
664,192

 
$
680,074

 
2
 %
Revenue ex-TAC/Revenue as reported
 
42
%
 
42
%
 


 
41
%
 
43
%
 


 
 


 


 


 


 


 


Other cost of revenue as reported
 
$
(29,951
)
 
$
(32,921
)
 
10
 %
 
$
(89,914
)
 
$
(92,937
)
 
3
 %
Conversion impact U.S. dollar/other currencies
 


 
(480
)
 


 


 
123

 


Other cost of revenue at constant currency
 
$
(29,951
)
 
$
(33,401
)
 
12
 %
 
$
(89,914
)
 
$
(92,814
)
 
3
 %
 
 


 


 


 


 


 


Adjusted EBITDA as reported
 
$
79,116

 
$
69,591

 
(12
)%
 
$
189,656

 
$
216,297

 
14
 %
Conversion impact U.S. dollar/other currencies
 


 
522

 


 


 
(12,576
)
 


Adjusted EBITDA at constant currency
 
$
79,116

 
$
70,113

 
(11
)%
 
$
189,656

 
$
203,721

 
7
 %


46

Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents and cash generated from operating activities. We also benefited to a much lesser extent from the proceeds of the exercise of share options and warrants and expect to continue to do so in the future, as such securities are exercised by holders. We have never declared or paid any cash dividends on our ordinary shares. We do not anticipate paying cash dividends on our equity securities in the foreseeable future and intend to retain all available funds and any future earnings to fund our growth. As discussed in Note 10 to the unaudited condensed consolidated financial statements in Item 1 to this Form 10-Q, we are party to several loan agreements and revolving credit facilities with third-party financial institutions.
Our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return. Our cash and cash equivalents at September 30, 2018 were held for working capital and general corporate purposes, which could include acquisitions, and amounted to $458.7 million as of September 30, 2018. The $44.6 million increase in cash and cash equivalents compared with December 31, 2017 primarily resulted from $175.1 million in cash from operating activities and $16.7 million in cash from financing activities. This was partially offset by $129.0 million used for investing activities over the period. The cash used for investing activities is mainly related to $80.1 million in capital expenditures, $38.1 million for the Storetail acquisition and $10.8 million upon disposal of an activity. The cash used for financing activities is primarily related to $17.1 million cash impact of the settlement of hedging derivatives related to financing activities. In addition, the increase in cash includes a $18.3 million negative impact of changes in foreign exchange rates on our cash position over the period. We do not enter into investments for trading or speculative purposes. Our policy is to invest any cash in excess of our immediate requirements in investments designed to preserve the principal balance and provide liquidity. Accordingly, our cash and cash equivalents are invested primarily in demand deposit accounts that are currently providing only a minimal return.
Operating and Capital Expenditure Requirements
For the nine months ended September 30, 2017 and 2018, our capital expenditures were $83.0 million and $80.1 million, respectively. In 2018, these capital expenditures were primarily related to the acquisition of data center and server equipment for our data centers as well as furnishing and leasehold improvements of new offices and office expansions. We believe our existing cash balances will be sufficient to meet our anticipated cash requirements through at least the next 12 months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, the amount and timing of our investments in personnel and capital equipment, and the timing and extent of our introduction of new products and product enhancements. If our cash and cash equivalents balances and cash flows from operating activities are insufficient to satisfy our liquidity requirements, we may need to raise additional funds through equity, equity-linked or debt financings to support our operations, and such financings may not be available to us on acceptable terms, or at all. We may also need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies, assets or products. If we are unable to raise additional funds when needed, our operations and ability to execute our business strategy could be adversely affected. If we raise additional funds through the incurrence of indebtedness, such indebtedness would have rights that are senior to holders of our equity securities and could contain covenants that restrict our operations. Any additional equity financing could be dilutive to our shareholders.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. We therefore believe that we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

47

Historical Cash Flows
The following table sets forth our cash flows for the nine month period ended September 30, 2017 and 2018:
 
Nine Months Ended
 
September 30,
2017

 
September 30,
2018

 
 
 
 
 
(in thousands)
Cash from operating activities
$
166,456

 
$
175,126

Cash used in investing activities
$
(80,793
)
 
$
(128,984
)
Cash (used for) from financing activities
$
(35,254
)
 
$
16,727

Operating Activities
Cash provided by operating activities is primarily generated from net income and by changes in our operating assets and liabilities, particularly in the areas of accounts receivable and accounts payable and accrued expenses, adjusted for certain non-cash and non-operating items such as depreciation, amortization and share-based compensation, deferred tax assets and income taxes.
For the nine months ended September 30, 2018, net cash provided by operating activities was $175.1 million and consisted of net income of $53.7 million, $160.0 million in adjustments for certain non-cash and non-operating items and changes in working capital of $17.6 million partially offset by $56.2 million of income taxes paid during the first nine months of 2018. Adjustments for certain operating items primarily consisted of depreciation and amortization expense of $79.0 million, equity awards compensation expense of $56.3 million, $37.2 million of accrued income taxes partially offset by $9.3 million of changes in deferred tax assets and $3.3 million for other items. The $17.6 million increase in cash from changes in working capital primarily consisted of a $114.4 million decrease in trade receivables, a $5.6 million decrease in other current assets including prepaid expenses and VAT receivables partially offset by a $76.6 million decrease in trade payables and a $25.8 million decrease in other current liabilities such as payroll and payroll related expenses and value-added tax ("VAT") payables.
Investing Activities
Our investing activities to date have consisted primarily of purchases of property and equipment and business acquisitions.
For the nine months ended September 30, 2018, net cash used in investing activities was $129.0 million and mainly consisted of $80.1 million for purchases of property and equipment, $38.1 million for the Storetail acquisition and $10.8 million for the disposal of an activity.
Financing Activities
For the nine months ended September 30, 2018, net cash from financing activities was $16.7 million resulting from the $17.1 million cash impact of the settlement of hedging derivatives related to financing activities and $0.8 million of share option exercises, partially offset by $0.7 million in repayments of borrowings and a $0.5 million change in other financial liabilities.
    


48

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

We are mainly exposed to foreign currency exchange rate fluctuations. There have been no material changes to our exposure to market risk during the first nine months of 2018.
    
For a description of our foreign exchange risk, please see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - B. Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2017.
A 10% increase or decrease of the Pound Sterling, the euro, the Japanese yen or the Brazilian real against the U.S. dollar would have impacted the Condensed Consolidated Statements of Income as follows:
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
(in thousands)
GBP/USD
+10%

 
-10%

 
+10%

 
-10%

Net income impact
$
(192
)
 
$
192

 
$
(829
)
 
$
829

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
(in thousands)
BRL/USD
+10%

 
-10%

 
+10%

 
-10%

Net income impact
$
(52
)
 
$
52

 
$
(335
)
 
$
335

 
Nine Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
(in thousands)
JPY/USD
+10%

 
-10%

 
+10%

 
-10%

Net income impact
$
1,061

 
$
(1,061
)
 
$
595

 
$
(595
)
 
Nine Months Ended
 
September 30, 2017
 
September 30, 2018
 
 
 
 
 
 
 
 
 
(in thousands)
EUR/USD
+10%

 
-10%

 
+10%

 
-10%

Net income impact
$
6,800

 
$
(6,800
)
 
$
8,433

 
$
(8,433
)
Credit Risk and Trade receivables
For a description of our credit risk and trade receivables, please see "Note 4. Financial instruments" in the Notes to the Consolidated Financial Statements.


49

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Based on their evaluation as of September 30, 2018, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were effective to provide reasonable assurance that (i) the information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and (ii) such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitation on Effectiveness of Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Criteo have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies and procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error of fraud may occur and not be detected.


50

PART II
Item 1.    Legal Proceedings.
From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, would individually or taken together have a material adverse effect on our business, financial condition, results of operations or cash flows. Regardless of the outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A. Risk Factors.

You should carefully consider the risks described below and under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018. These risks and uncertainties are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any such risks materialize, our business, financial condition and results of operations could be materially harmed and the trading price of our ADSs could decline. These risks are not exclusive and additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. There have been no material changes to the Risk Factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.


 






51

Item 6. Exhibits.
Exhibit Index
 
 
 
 
Incorporated by Reference
Exhibit
 
Description
 
Schedule/ Form
 
File
Number
 
Exhibit
 
File
Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document
 
 
 
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
 

#    Filed herewith.
*    Furnished herewith.


52

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 CRITEO S.A.
 
 
 (Registrant)
 
 
 
 
By:
/s/ Benoit Fouilland
Date: November 5, 2018
Name:
 Benoit Fouilland
 
Title:
 Chief Financial Officer
 
 
 (Principal financial officer and duly authorized signatory)

53

Criteo S.A. Reports