NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We are a global technology company building the leading advertising platform for the open Internet. We strive to deliver impactful business results at scale to commerce companies and consumer brands by meeting their multiple marketing goals at their targeted return on investment. Using shopping data, predictive technology and large consumer reach, we help our clients drive Awareness, Consideration and Conversion for their products and services
1
, and help retailers generate advertising revenues from brands. Our data is pooled among our clients and offers deep insights into consumer intent and purchasing habits. To drive measurable results for clients, we activate our data assets through proprietary artificial intelligence ("AI") technology to engage consumers in real time through the pricing and delivery of highly relevant digital advertisements ("ads"), across devices and environments. By pricing our offering on a range of pricing models and measuring our value based on clear, well-defined performance metrics, we make the return on investment transparent and easy to measure for advertisers.
In these notes, Criteo S.A. is referred to as the "Parent" company and together with its subsidiaries, collectively, as "Criteo," the "Company," the "Group," or "we".
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements included herein (the "Unaudited Condensed Consolidated Financial Statements") have been prepared by Criteo S.A. pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report filed on Form 10-K for the year ended
December 31, 2018
, filed with the SEC on March 1, 2019. The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.
Conformity with U.S. GAAP requires the use of estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. We base our estimates and judgments on historical information and on various other assumptions that we believe are reasonable under the circumstances. Our actual results may differ from these estimates. U.S. GAAP requires us to make estimates and judgments in several areas, including, but not limited to: (1) revenue recognition criteria (2) allowances for doubtful accounts, (3) research tax credits (4) income taxes, including i) recognition of deferred tax assets arising from the subsidiaries projected taxable profit for future years, ii) evaluation of uncertain tax positions associated with our transfer pricing policy and iii) recognition of income tax position in respect of the tax reform in France voted in December 2018, (5) assumptions used in valuing acquired assets and assumed liabilities in business combinations, (6) assumptions used in the valuation of goodwill and intangible assets, and (7) assumptions used in the valuation model to determine the fair value of share-based compensation plan.
There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for the accounting pronouncements adopted below.
Accounting Pronouncements adopted in 2019
Effective January 1, 2019, we have adopted the Financial Accounting Standards Board, ("FASB") Accounting Standards Update ("ASU") 842 No. 2016-02,
Leases (Topic 842)
(ASU 2016-02), which generally requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet for operating leases with terms of more than 12 months, in addition to those currently recorded. In August 2018, the FASB issued ASU 2018-11,
Target Improvements to ASC 842,
which included an option not to restate comparative periods in transition and use the effective date of ASC 842,
Leases
, as the date of the initial application of transition, which we elected. Prior periods have not been adjusted and continue to be accounted for in accordance with ASC 840. As a result of adopting ASU 842, we recognized total operating lease liabilities of
$223.5 million
and operating right-of-use assets of
$204.3 million
as of January 1, 2019. The adoption of ASC 842 had an immaterial impact on our condensed consolidated statements of income and our condensed consolidated statement of cash flows for the three month period ended March 31, 2019. Refer to Note 8. Leases, for additional information and required disclosures.
Effective January 1, 2019, we have adopted ASU 2018 - 07,
Improvements to Non-Employee Sharebased Payment Accounting
. The amendments in this ASU expands Topic 718 to include share base payments for goods or services to non employees. The adoption of ASU 2018-07 did not have a material impact on our financial position or results of operations.
Recently Issued Accounting Pronouncements not yet adopted
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 August 2017, the FASB issued ASU 2017-12
Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities.
ASU 2017-12
was issued with the objective of improving the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements as well as to simplify the application of hedge accounting guidance in current GAAP. We intend to adopt the standard on the effective date of January 1, 2020. The adoption of ASU 2017-12 is not expected to have a material impact on our financial position or results of operations.
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 disclosure requirements such as reasons for transfers from 1 to 2 level, policy of timing of transfers 2) modifying existing disclosure requirements, such as a rollforward of level 3 assets, investments in entities that calculate net asset value, and the measurement uncertainty disclosure 3) Adds additional disclosures such as changes in unrealized gains and losses in OCI, and the range and weight of significant unobservable inputs. We intend to adopt the standard on the effective date of January 1, 2020. The adoption of ASU 2018-13 is not expected to have a material impact on our financial position or results of operations.
In August 2018, the FASB issued ASU 2018 - 14,
Compensation - Retirement Benefits - Defined Benefit Plans - General
. The purpose of this update is to modify disclosure requirements for Defined Benefit Plans. It removes requirements to disclose the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year among others. It adds disclosure requirements for the items such as an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. We intend to adopt the standard on the effective date of January 1, 2021. The adoption of ASU 2018-14 is not expected to have a material impact on our financial position or results of operations but 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 was issued to clarify the accounting for implementation costs incurred for SaaS agreements. Previously the guidance only referred to development of internal use software and the accounting for SaaS agreements was not clarified. This ASU states that the implementation costs should be capitalized. The ASU will be effective for periods after December 15, 2019. We are currently evaluating the impact on our financial position, results of operations, and statement of cash flows.
Note 2. Significant Events and Transactions of the Period
Change in estimated useful life of servers and other data center equipment
On January 1, 2019 we revised our estimate of the useful life of all servers and other equipment used in our data centers from
3
to
5 years
. This change in estimate was determined based on a revised commissioning plan which extends the period equipment is used to 5 years prior to disposal. This resulted in an increase in income from operations of
$10.8 million
, increase net income of
$9.2 million
, or
$0.14
per share, from that which would have been reported had the previous expected useful life of
3 years
been used.
Share repurchase program
On October 25, 2018 Criteo's Board of Directors authorized a share repurchase program of up to
$80.0 million
of the Company’s outstanding American Depositary Shares. As of December 31, 2018,
3.5 million
shares were held as treasury shares.
On February 8, 2019, the Board of Directors authorized the reduction of capital resulting in the formal retirement of
1.6 million
treasury shares. As of March 31, 2019, we have
1.7 million
treasury shares remaining which may be used primarily to satisfy the company's obligations under its employee equity plans upon RSU vestings in lieu of issuing new shares.
|
|
|
|
|
|
|
|
|
Number of Treasury Shares
|
|
Amount
(in thousands of dollars)
|
Balance at January 1, 2018
|
—
|
|
|
$
|
—
|
|
Treasury Shares Repurchased to potentially use for M&A
|
1,751,147
|
|
|
40,000
|
|
Treasury Shares Repurchased for RSU Vesting
|
1,748,111
|
|
|
40,000
|
|
Treasury Shares Issued for RSU Vesting
|
(40,139
|
)
|
|
(841
|
)
|
Balance at December 31, 2018
|
3,459,119
|
|
|
$
|
79,159
|
|
Treasury Shares Retired
|
(1,594,288
|
)
|
|
$
|
(36,137
|
)
|
Treasury Shares Issued for RSU Vesting
|
(192,427
|
)
|
|
(3,943
|
)
|
Balance at March 31, 2019
|
1,672,404
|
|
|
$
|
39,079
|
|
Note 3. Financial Instruments
Financial assets
The maximum exposure to credit risk at the end of each reported period is represented by the carrying amount of financial assets, and summarized in the following table:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
(in thousands)
|
Trade receivables, net of allowance
|
473,901
|
|
|
386,792
|
|
Other taxes
|
53,338
|
|
|
56,828
|
|
Other current assets
|
22,816
|
|
|
24,737
|
|
Non-current financial assets
|
20,460
|
|
|
20,331
|
|
Total
|
$
|
570,515
|
|
|
$
|
488,688
|
|
Credit Risk
We maintain an allowance for estimated credit losses. During the period ended March 31, 2019 and the year ended December 31, 2018, our net change in allowance for doubtful accounts was
$0.7 million
and
$5.1 million
, respectively.
For our financial assets, the fair value approximates the carrying amount, given the nature of the financial assets and the maturity of the expected cash flows.
Trade Receivables
Credit risk is defined as an unexpected loss in cash and earnings if the client is unable to pay its obligations in due time. We perform internal ongoing credit risk evaluations of our clients. When a possible risk exposure is identified, we require prepayments.
As of December 31, 2018 and
March 31, 2019
, no customer accounted for 10% or more of trade receivables.
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
March 31, 2019
|
|
|
|
|
|
(in thousands)
|
Trade payables
|
$
|
425,376
|
|
|
$
|
345,923
|
|
Other taxes
|
55,592
|
|
|
58,192
|
|
Employee-related payables
|
65,878
|
|
|
63,459
|
|
Other current liabilities
|
47,115
|
|
|
37,256
|
|
Financial liabilities
|
3,508
|
|
|
3,882
|
|
Total
|
$
|
597,469
|
|
|
$
|
508,712
|
|
For our financial liabilities, the fair value approximates the carrying amount, given the nature of the financial liabilities and the maturity of the expected cash flows.
We are party to several loan agreements and a revolving credit facility, or RCF, with third-party financial institutions. There have been no significant changes from what was disclosed in Note 13 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Fair Value Measurements
We measure the fair value of our cash equivalents, which include interest-bearing bank deposits, as level 2 measurements because they are valued using observable market data.
Financial assets or liabilities include derivative financial instruments used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
Derivative Financial Instruments
Derivatives consist of foreign currency forward contracts that we use to hedge intercompany transactions and other monetary assets or liabilities denominated in currencies other than the local currency of a subsidiary. We recognize gains and losses on these contracts in financial income (expense), and their position on the balance sheet is based on their fair value at the end of each respective period. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
Derivative Assets:
|
|
|
|
Included in other current assets
|
$
|
1,703
|
|
|
$
|
—
|
|
|
|
|
|
Derivative Liabilities:
|
|
|
|
Included in financial liabilities - current portion
|
$
|
—
|
|
|
$
|
603
|
|
For our derivative financial instruments, the fair value approximates the carrying amount, given the nature of the derivative financial instruments and the maturity of the expected cash flows.
Cash and Cash Equivalents
Investments in interest–bearing bank deposits which meet ASC 230—
Statement of Cash flows
criteria: short-term, highly liquid investments, for which the risks of changes in value are considered to be insignificant. Interest-bearing bank deposits are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
Cash equivalents
|
$
|
125,442
|
|
|
$
|
141,260
|
|
Cash on hand
|
238,984
|
|
|
254,511
|
|
Total cash and cash equivalents
|
$
|
364,426
|
|
|
$
|
395,771
|
|
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.
Note 4. Trade Receivables
The following table shows the breakdown in trade receivables net book value for the presented periods:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
Trade accounts receivables
|
$
|
499,819
|
|
|
$
|
411,961
|
|
(Less) Allowance for doubtful accounts
|
(25,918
|
)
|
|
(25,169
|
)
|
Net book value at end of period
|
$
|
473,901
|
|
|
$
|
386,792
|
|
Changes in allowance for doubtful accounts are summarized below:
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2019
|
|
|
|
|
|
|
(in thousands)
|
Balance at January 1
|
$
|
(20,818
|
)
|
|
$
|
(25,918
|
)
|
Allowance for doubtful accounts
|
(4,436
|
)
|
|
(5,282
|
)
|
Reversal of provision
|
1,460
|
|
|
5,931
|
|
Currency translation adjustment
|
(166
|
)
|
|
100
|
|
Balance at March 31
|
$
|
(23,960
|
)
|
|
$
|
(25,169
|
)
|
The change in allowance for doubtful accounts during the three months ended March 31, 2019, related mainly to increased business with categories of clients associated with a higher credit risk. The Company mitigates its credit risk with respect to accounts receivables by performing credit evaluations and monitoring agencies and advertisers' accounts receivables balances.
Note 5. Other Current Assets
The following table shows the breakdown in other current assets net book value for the presented periods:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
Prepayments to suppliers
|
$
|
4,056
|
|
|
$
|
9,126
|
|
Other debtors
|
4,762
|
|
|
4,562
|
|
Prepaid expenses
|
12,295
|
|
|
11,049
|
|
Derivative instruments
|
1,703
|
|
|
—
|
|
Gross book value at end of period
|
22,816
|
|
|
24,737
|
|
Net book value at end of period
|
$
|
22,816
|
|
|
$
|
24,737
|
|
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.
Note 6. Intangible assets and Goodwill
There have been no significant changes in intangible assets or goodwill since December 31, 2018. In addition, no triggering events have occurred that would indicate impairment in the balance of either intangible assets or goodwill.
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
|
|
|
Technology and customer relationships
|
|
|
Total
|
|
|
(in thousands)
|
From April 1 to December 31, 2019
|
$
|
5,069
|
|
|
$
|
16,373
|
|
|
$
|
21,442
|
|
2020
|
6,405
|
|
|
16,828
|
|
|
23,233
|
|
2021
|
4,588
|
|
|
16,828
|
|
|
21,416
|
|
2022
|
2,810
|
|
|
11,450
|
|
|
14,260
|
|
2023
|
706
|
|
|
10,281
|
|
|
10,987
|
|
Thereafter
|
16
|
|
|
15,864
|
|
|
15,880
|
|
Total
|
$
|
19,594
|
|
|
$
|
87,624
|
|
|
$
|
107,218
|
|
Note 7. Other Current Liabilities
Other current liabilities are presented in the following table:
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
(in thousands)
|
Clients' prepayments
|
$
|
10,328
|
|
|
$
|
11,177
|
|
Credit notes
|
13,183
|
|
|
13,868
|
|
Accounts payable relating to capital expenditures
|
21,454
|
|
|
10,156
|
|
Other creditors
|
1,527
|
|
|
1,342
|
|
Deferred revenue
|
623
|
|
|
713
|
|
Total
|
$
|
47,115
|
|
|
$
|
37,256
|
|
The changes in "accounts payable relating to capital expenditures" relate to significant data centers equipment and leasehold improvements acquisitions in 2018 paid during the three months ended March 31, 2019.
Note 8. Leases
On January 1, 2019, we adopted Accounting Standards Update No. 2016-02,
Leases (Topic 842)
which requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet.
We have adopted Topic 842 effective January 1, 2019 on a modified retrospective basis and elected not to restate comparative periods. We chose to use certain practical expedients offered by the standard including:
|
|
•
|
We did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or the initial direct costs for any existing leases.
|
|
|
•
|
We do not recognize a lease liability or right of use asset for leases with a term of 12 months or less, and
|
|
|
•
|
We used hindsight in determining the lease term.
|
We lease space under non-cancellable operating leases for our offices as well as our data centers. Our office leases typically include free rent periods or rent escalation periods, and may also include leasehold improvement incentives. Leases for data centers may also include free rent periods or rent escalation periods. These leases typically do not include residual value guarantees. Both office and data center leases may contain both lease components (rent) and non-lease components (maintenance, electrical costs, and other service charges). Non-lease components are accounted for separately.
Both office and data center leases typically contain options to renew, and/or early terminate. We have evaluated management's expectations for these options as of March 31, 2019. Options have been included in the lease term if management has determined it is reasonably certain it will be exercised.
Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to determine the present value of future payments. We have a centralized treasury function, and the majority of our leases are negotiated and signed by representatives of Criteo SA. As such, the incremental borrowing rate of Criteo SA is used for all of our contracts. It is then adjusted in consideration of the currency of the lease and the lease term as of the lease commencement date.
Lease expense is recognized for minimum lease payments on a straight-line basis over the lease term. Variable costs are expensed in the period incurred. Variable expenses include changes in indexation. Leases for data centers may have variable costs based on electrical usage.
The components of lease expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2019
|
|
Offices
|
|
Data Centers
|
|
Total
|
|
(in thousands)
|
Lease expense
|
$
|
8,340
|
|
|
$
|
5,187
|
|
|
$
|
13,527
|
|
Short term lease expense
|
925
|
|
|
530
|
|
|
1,455
|
|
Variable lease expense
|
—
|
|
|
114
|
|
|
114
|
|
Sublease income
|
(1,076
|
)
|
|
—
|
|
|
(1,076
|
)
|
Total operating lease expense
|
$
|
8,189
|
|
|
$
|
5,831
|
|
|
$
|
14,020
|
|
As of March 31, 2019, we had future minimum lease payments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2019
|
|
Offices
|
|
Data Centers
|
|
Total
|
|
(in thousands)
|
|
|
|
|
|
|
Remainder of 2019
|
$
|
22,220
|
|
|
$
|
17,103
|
|
|
$
|
39,323
|
|
2020
|
35,166
|
|
|
19,341
|
|
|
54,507
|
|
2021
|
33,118
|
|
|
12,521
|
|
|
45,639
|
|
2022
|
30,503
|
|
|
8,631
|
|
|
39,134
|
|
2023
|
21,467
|
|
|
2,198
|
|
|
23,665
|
|
Thereafter
|
29,550
|
|
|
—
|
|
|
29,550
|
|
Total minimum lease payments
|
172,024
|
|
|
59,794
|
|
|
231,818
|
|
Impact of Discount Rate
|
(13,608
|
)
|
|
(1,831
|
)
|
|
(15,439
|
)
|
Total Lease Liability
|
$
|
158,416
|
|
|
$
|
57,963
|
|
|
$
|
216,379
|
|
The weighted average remaining lease term and discount rates as of March 31, 2019 are as follows:
|
|
|
|
|
Three Months Ended
|
|
March 31,
2019
|
|
|
Weighted average remaining lease term (years)
|
|
Offices
|
5.4
|
|
Data Centers
|
3.0
|
|
Weighted average discount rate
|
|
Offices
|
2.6
|
%
|
Data Centers
|
1.73
|
%
|
Supplemental cash flow information related to our operating leases is as follows for the period ended March 31, 2019:
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2019
|
|
(in thousands)
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
Cash flow for operating activities
|
$
|
(13,964
|
)
|
Right of use assets obtained in exchange for new operating lease liabilities
|
$
|
10,926
|
|
As of March 31, 2019, we have additional operating leases, primarily for offices, that have not yet commenced which will result in additional operating lease liabilities and right of use assets of approximately
$14.0 million
. These operating leases will commence between 2019 and 2020.
For periods prior to January 1, 2019, we accounted for our lease commitments in accordance with ASC 840. We recognized rent expense for leases on a straight-line basis over the life of the lease. For the three months ended March 31, 2018, we recognized expense for office leases of
$9.7 million
and data centers costs of
$12.3 million
. The rent expense recognized in prior periods included amounts which are now considered non-lease components such as maintenance services and electricity charges.
Reduction of London office space
We evaluate our right of use assets for impairment. As of March 31, 2019, management has implemented a plan to reduce the occupied space of the London Office. In accordance with ASC 842, we have reviewed the right-of-use asset due to the London Office lease for impairment resulting in a
$1.9 million
impairment charge for the three months ended March 31, 2019. This charge was recognized in Sales and Operations expenses in our condensed consolidated statement of income.
Note 9. Revenue
Revenue Recognition
We sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies. Historically, the Criteo model has focused solely on converting our clients' website visitors into customers, enabling us to charge our clients only when users engage with an ad we deliver, usually by clicking on it. More recently, we have expanded our solutions to address a broader range of marketing goals for our clients.
We offer two families of solutions to our commerce and brand clients:
|
|
•
|
Criteo Marketing Solutions
allow commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web, mobile and offline store environments.
|
|
|
•
|
Criteo Retail Media
solutions allow retailers to generate advertising revenues from consumer brands, and/or to drive sales for themselves, by monetizing their data and audiences through personalized ads, either on their own digital property or on the open Internet, that address multiple marketing goals.
|
In conjunction with expanding our solutions, we have also started expanding our pricing models to now include a combination of cost-per-install and cost-per-impression for selected new solutions, in addition to cost-per-click.
We recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies, which we collectively refer to as our clients, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services.
For campaigns priced on a cost-per-click and cost-per-install basis, we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered, respectively. For these pricing models, we recognize revenue when a user clicks on an advertisement or installs an application.
For campaigns priced on a cost-per-impression basis, we bill our clients based on the number of times an advertisement is displayed to a user. For this pricing model, we recognize revenue when an advertisement is displayed.
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 related costs incurred on a gross basis.
Disaggregation of revenue
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.
The following table presents our revenues disaggregated by geographical area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
EMEA
|
|
Asia-Pacific
|
|
Total
|
For the three months ended
|
(in thousands)
|
|
|
|
|
|
|
|
|
March 31, 2018
|
$
|
212,695
|
|
|
$
|
222,611
|
|
|
$
|
128,858
|
|
|
$
|
564,164
|
|
March 31, 2019
|
$
|
217,993
|
|
|
$
|
209,643
|
|
|
$
|
130,487
|
|
|
$
|
558,123
|
|
Excluding our historical solution for driving Conversion through Criteo Marketing Solutions (formerly called Criteo Dynamic Retargeting), no individual solution accounted for more than 10% of total consolidated revenue for the periods presented.
Customer Credit Notes
We offer credit notes to certain customers as a form of incentive, which are accounted for as variable consideration. We estimate these amounts based on the expected amount to be provided to customers and they are recognized as a reduction of revenue. We believe that there will not be significant changes to our estimates of variable consideration.
Deferred Revenues
We record deferred revenues when cash payments are received or due in advance of our performance. Our payment terms vary depending on the service or the type of customer. For certain customers, we require payment before the services are delivered.
Practical Expedients
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.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and operating expenses.
Note 10. 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 three months ended March 31, 2019, there was one grant of RSUs under the Employee Share Option Plan 11 as defined in Note 19 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.
|
|
•
|
On March 1, 2019,
202,180
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 19 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019.
Change in Number of BSPCE/OSA/RSU/BSA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OSA/BSPCE
|
|
|
RSU
|
|
|
BSA
|
|
|
Total
|
|
Balance at January 1, 2019
|
3,187,465
|
|
|
4,780,137
|
|
|
291,670
|
|
|
8,259,272
|
|
Granted
|
—
|
|
|
202,180
|
|
|
—
|
|
|
202,180
|
|
Exercised (OSA/BSPCE/BSA)
|
(27,691
|
)
|
|
—
|
|
|
—
|
|
|
(27,691
|
)
|
Vested (RSU)
|
—
|
|
|
(203,720
|
)
|
|
—
|
|
|
(203,720
|
)
|
Forfeited
|
(22,023
|
)
|
|
(207,278
|
)
|
|
—
|
|
|
(229,301
|
)
|
Expired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at March 31, 2019
|
3,137,751
|
|
|
4,571,319
|
|
|
291,670
|
|
|
8,000,740
|
|
Breakdown of the Closing Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
OSA/BSPCE
|
|
|
RSU
|
|
|
BSA
|
|
Number outstanding
|
3,137,751
|
|
|
4,571,319
|
|
|
291,670
|
|
Weighted-average exercise price
|
€
|
27.05
|
|
|
NA
|
|
|
€
|
13.02
|
|
Number vested
|
2,393,803
|
|
|
NA
|
|
|
115,544
|
|
Weighted-average exercise price
|
€
|
26.12
|
|
|
NA
|
|
|
€
|
19.63
|
|
Weighted-average remaining contractual life of options outstanding, in years
|
6.32
|
|
|
NA
|
|
|
7.68
|
|
Reconciliation with the Unaudited Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
R&D
|
|
|
S&O
|
|
|
G&A
|
|
|
Total
|
|
|
R&D
|
|
|
S&O
|
|
|
G&A
|
|
|
Total
|
|
RSUs
|
$
|
(4,617
|
)
|
|
$
|
(6,872
|
)
|
|
$
|
(5,147
|
)
|
|
$
|
(16,636
|
)
|
|
$
|
(3,846
|
)
|
|
$
|
(5,955
|
)
|
|
$
|
(2,516
|
)
|
|
$
|
(12,317
|
)
|
Share options / BSPCE
|
(65
|
)
|
|
(359
|
)
|
|
(1,336
|
)
|
|
(1,760
|
)
|
|
(179
|
)
|
|
(246
|
)
|
|
(780
|
)
|
|
(1,205
|
)
|
Total share-based compensation
|
(4,682
|
)
|
|
(7,231
|
)
|
|
(6,483
|
)
|
|
(18,396
|
)
|
|
(4,025
|
)
|
|
(6,201
|
)
|
|
(3,296
|
)
|
|
(13,522
|
)
|
BSAs
|
—
|
|
|
—
|
|
|
(433
|
)
|
|
(433
|
)
|
|
—
|
|
|
—
|
|
|
(360
|
)
|
|
(360
|
)
|
Total equity awards compensation expense
|
$
|
(4,682
|
)
|
|
$
|
(7,231
|
)
|
|
$
|
(6,916
|
)
|
|
$
|
(18,829
|
)
|
|
$
|
(4,025
|
)
|
|
$
|
(6,201
|
)
|
|
$
|
(3,656
|
)
|
|
$
|
(13,882
|
)
|
Note 11. Financial Income and Expenses
The condensed consolidated statements of income line item “Financial income (expense)” can be broken down as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
|
March 31, 2019
|
|
|
(in thousands)
|
|
|
|
|
Financial income from cash equivalents
|
$
|
225
|
|
|
$
|
177
|
|
Interest and fees
|
(556
|
)
|
|
(523
|
)
|
Interest on debt
|
(487
|
)
|
|
(430
|
)
|
Fees
|
(69
|
)
|
|
(93
|
)
|
Foreign exchange gain (loss)
|
(972
|
)
|
|
(1,598
|
)
|
Other financial expense
|
(22
|
)
|
|
(30
|
)
|
Total financial income (expense)
|
$
|
(1,325
|
)
|
|
$
|
(1,974
|
)
|
The
$2.0 million
financial expense for the three months ended March 31, 2019 was driven by the non-utilization costs incurred as part of our available RCF financing and the recognition of negative impact of foreign exchange reevaluations net of related hedging. At March 31, 2019, our exposure to foreign currency risk was centralized at Criteo S.A. and hedged using foreign currency swaps or forward purchases or sales of foreign currencies.
The
$1.3 million
financial expense for the three months ended March 31, 2018 was driven by the non-utilization costs 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.
Note 12. 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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2018
|
|
|
March 31, 2019
|
|
|
(in thousands)
|
Current income tax
|
$
|
(15,532
|
)
|
|
$
|
(15,934
|
)
|
Net change in deferred taxes
|
3,146
|
|
|
5,916
|
|
Provision for income taxes
|
$
|
(12,386
|
)
|
|
$
|
(10,018
|
)
|
For the three months ended March 31, 2018 and 2019, we used an annual estimated tax rate of
37%
and
30%
, respectively, to calculate the provision for income taxes. The effective tax rate was
37%
and
32%
for the three months ended March 31, 2018 and 2019, respectively. The difference between the annual estimated tax rate and the effective tax rate for three months ended March 31, 2019 was due to the tax impact of discrete items such as share-based compensation in the United States. Discrete items were immaterial for the three months ended March 31, 2018 resulting in no difference between the annual estimated tax rate and the effective tax rate.
For the three months ended March 31, 2019, our estimated effective tax rate includes in particular our preliminary estimates for the tax reform in France voted in December 2018. For the three months ended March 31, 2018, our estimated annual effective tax rate included 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”. Our estimates are preliminary, and our effective tax rate may be impacted as more information becomes available regarding 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 GMBH, Criteo do Brasil LTDA, and Criteo B.V.. The current tax liabilities refers mainly to the net corporate tax payables of Criteo K.K.
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. Although we disagree with the IRS's position and are currently contesting this issue, the ultimate resolution of this litigation is uncertain and, if resolved in a manner unfavorable to us, 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.
Note 13. Earnings Per Share
Basic Earnings Per Share
We calculate basic earnings per share by dividing the net income for the period attributable to shareholders of the Parent by the weighted average number of shares outstanding.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2018
|
|
|
March 31, 2019
|
|
Net income attributable to shareholders of Criteo S.A.
|
|
$
|
19,809
|
|
|
$
|
19,120
|
|
Weighted average number of shares outstanding
|
|
66,160,375
|
|
|
64,336,777
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
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 10). There were no other potentially dilutive instruments outstanding as of
March 31, 2018
and
2019
. 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
|
|
|
March 31, 2018
|
|
|
March 31, 2019
|
|
Net income attributable to shareholders of Criteo S.A.
|
|
$
|
19,809
|
|
|
$
|
19,120
|
|
Weighted average number of shares outstanding of Criteo S.A.
|
|
66,160,375
|
|
|
64,336,777
|
|
Dilutive effect of :
|
|
|
|
|
Restricted share awards ("RSUs")
|
|
865,039
|
|
|
1,317,350
|
|
Share options and BSPCE
|
|
407,806
|
|
|
336,647
|
|
Share warrants
|
|
36,518
|
|
|
50,522
|
|
Weighted average number of shares outstanding used to determine diluted earnings per share
|
|
67,469,738
|
|
|
66,041,296
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
The weighted average number of securities that were anti-dilutive for diluted EPS for the periods presented but which could potentially dilute EPS in the future are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31, 2018
|
|
|
March 31, 2019
|
|
|
|
|
|
|
Restricted share awards
|
|
1,901,128
|
|
|
482,152
|
|
Share options and BSPCE
|
|
—
|
|
|
65,500
|
|
Weighted average number of anti-dilutive securities excluded from diluted earnings per share
|
|
1,901,128
|
|
|
547,652
|
|
Note 14. Commitments and contingencies
Commitments
Revolving Credit Facilities, Credit Line Facilities and Bank Overdrafts
As mentioned in Note 3, we are party to one RCF with a syndicate of banks which allow us to draw up to
€350.0 million
(
$393.2 million
).
We are also party to short-term credit lines and overdraft facilities with HSBC plc, BNP Paribas and LCL. We are authorized to draw up to a maximum of
€21.5 million
(
$24.2 million
) in the aggregate under the short-term credit lines and overdraft facilities. As of March 31, 2019, we had not drawn on any of these facilities. Any loans or overdraft under these short-term facilities bear interest based on the one month EURIBOR rate or three month EURIBOR rate. As these facilities are exclusively short-term credit and overdraft facilities, our banks have the ability to terminate such facilities on short notice.
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, 2019
|
$
|
244
|
|
|
$
|
2,396
|
|
|
$
|
2,640
|
|
Increase
|
—
|
|
|
1,000
|
|
|
1,000
|
|
Provision used
|
(32
|
)
|
|
—
|
|
|
(32
|
)
|
Provision released not used
|
—
|
|
|
(365
|
)
|
|
(365
|
)
|
Currency translation adjustments
|
(4
|
)
|
|
(24
|
)
|
|
(28
|
)
|
Balance at March 31, 2019
|
$
|
208
|
|
|
$
|
3,007
|
|
|
$
|
3,215
|
|
- of which current
|
208
|
|
|
3,007
|
|
|
3,215
|
|
The amount of the provisions represents management’s best estimate of the future outflow.
Note 15. 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
|
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)
|
March 31, 2018
|
$
|
212,695
|
|
|
$
|
222,611
|
|
|
$
|
128,858
|
|
|
$
|
564,164
|
|
March 31, 2019
|
$
|
217,993
|
|
|
$
|
209,643
|
|
|
$
|
130,487
|
|
|
$
|
558,123
|
|
Revenue generated in France, the country of incorporation of the Parent, amounted to
$41.5 million
and
$37.4 million
for the three months ended March 31, 2018 and 2019, respectively.
Revenue generated in other significant countries where we operate is presented in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
2018
|
|
|
March 31,
2019
|
|
|
(in thousands)
|
Americas
|
|
|
|
United States
|
$
|
186,052
|
|
|
$
|
195,791
|
|
EMEA
|
|
|
|
Germany
|
$
|
54,515
|
|
|
$
|
53,595
|
|
United Kingdom
|
$
|
26,234
|
|
|
$
|
21,768
|
|
Asia-Pacific
|
|
|
|
Japan
|
$
|
92,263
|
|
|
$
|
93,168
|
|
As of March 31, 2018 and 2019, our largest client represented
2.2%
and
1.4%
, respectively, of our consolidated revenue.
Other Information
For each reported period, non-current assets (corresponding to the net book value of tangible and intangible assets, excluding right of use assets related to lease agreements) 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, 2018
|
$
|
123,388
|
|
|
$
|
125,654
|
|
|
$
|
125,312
|
|
|
$
|
27,898
|
|
|
$
|
19,109
|
|
|
$
|
11,630
|
|
|
$
|
2,992
|
|
|
$
|
296,049
|
|
March 31, 2019
|
$
|
124,679
|
|
|
$
|
118,896
|
|
|
$
|
118,557
|
|
|
$
|
26,174
|
|
|
$
|
17,846
|
|
|
$
|
10,822
|
|
|
$
|
2,545
|
|
|
$
|
287,595
|
|
Note 16. 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 24 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Note 17. Subsequent Events
The Company evaluated all subsequent events that occurred after
March 31, 2019
through the date of issuance of the unaudited condensed consolidated financial statements and determined there are no significant events that require adjustments or disclosure.