Criteo 10Q 2019 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended June 30, 2019



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

for the transition period from _________ to _________

Commission file number: 001-36153

Criteo S.A.

(Exact name of registrant as specified in its charter)



France			Not Applicable
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification Number)

32, rue Blanche	Paris	France	75009
(Address of principal executive offices)			(Zip Code)

+33 1 40 40 22 90

(Registrant’s telephone number, including area code)

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



Title of each class		Trading Symbol(s)	Name of each exchange on which registered
American Depositary Shares, each representing one Ordinary Share, nominal value €0.025 per share		CRTO	Nasdaq Global Select Market
Ordinary Shares, nominal value €0.025 per share	*		Nasdaq Global Select Market	*

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No x

As of July 31, 2019, the registrant had 65,171,310 ordinary shares, nominal value €0.025 per share, outstanding.

TABLE OF CONTENTS

General

Except where the context otherwise requires, all references in this Quarterly Report on Form 10-Q ("Form 10-Q") to the "Company," "Criteo," "we," "us," "our" or similar words or phrases are to Criteo S.A. and its subsidiaries, taken together. In this Form 10-Q, references to "$" and "US$" are to United States dollars. Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or "U.S. GAAP."

Trademarks

“Criteo,” the Criteo logo and other trademarks or service marks of Criteo appearing in this Form 10-Q are the property of Criteo. Trade names, trademarks and service marks of other companies appearing in this Form 10-Q are the property of their respective holders.

Special Note Regarding Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than present and historical facts and conditions contained in this Form 10-Q , including statements regarding our future results of operations and financial position, business strategy, plans and objectives for future operations, are forward-looking statements. When used in this Form 10-Q, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:


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


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


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


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


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


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


•	our ability to manage our international operations and expansion and the integration of our acquisitions;


•	the effects of increased competition in our market;


•	our ability to adapt to regulatory, legislative or self-regulatory developments regarding internet privacy matters;


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


•	our ability to enhance our brand;


•	our ability to enter new marketing channels and new geographies;


•	our ability to effectively scale our technology platform;


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


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


•	failures in our systems or infrastructure.

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

You should read this Form 10-Q and the documents that we reference in this Form 10-Q and have filed as exhibits to this Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This Form 10-Q may contain market data and industry forecasts that were obtained from industry publications. These data and forecasts involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such information. We have not independently verified any third-party information. While we believe the market position, market opportunity and market size information included in this Form 10-Q is generally reliable, such information is inherently imprecise.

PART I

Item 1. Financial Statements.

CRITEO S.A. CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)



	Notes	December 31, 2018			June 30, 2019
		(in thousands)
Assets
Current assets:
Cash and cash equivalents	3	$	364,426		$	422,053
Trade receivables, net of allowances of $25.9 million and $19.5 million at December 31, 2018 and June 30, 2019, respectively	4	473,901			374,949
Income taxes		19,370			18,185
Other taxes		53,338			56,090
Other current assets	5	22,816			18,751
Total current assets		933,851			890,028
Property, plant and equipment, net		184,013			192,651
Intangible assets, net	6	112,036			103,113
Goodwill	6	312,881			317,093
Right of use assets - operating lease	8	—			183,725
Non-current financial assets		20,460			21,613
Deferred tax assets		33,894			41,346
Total non-current assets		663,284			859,541
Total assets		$	1,597,135		$	1,749,569
Liabilities and shareholders' equity
Current liabilities:
Trade payables		$	425,376		$	332,735
Contingencies	14	2,640			4,156
Income taxes		7,725			7,065
Financial liabilities - current portion	3	1,018			2,030
Operating lease liabilities - current portion	8	—			47,964
Other taxes		55,592			56,929
Employee - related payables		65,878			68,702
Other current liabilities	7	47,115			33,986
Total current liabilities		605,344			553,567
Deferred tax liabilities		10,770			8,489
Retirement benefit obligation		5,537			8,002
Financial liabilities - non current portion	3	2,490			2,051
Operating lease liabilities - non current portion	8	—			148,170
Other non-current liabilities		5,103			4,327
Total non-current liabilities		23,900			171,039
Total liabilities		629,244			724,606
Commitments and contingencies
Shareholders' equity:
Common shares, €0.025 par value, 67,708,203 and 66,161,523 shares authorized, issued and outstanding at December 31, 2018 and June 30, 2019, respectively.		2,201			2,157
Treasury stock, 3,459,119 and 1,118,969 shares at cost as of December 31, 2018 and June 30, 2019, respectively.		(79,159		)	(26,564		)
Additional paid-in capital		663,281			652,572
Accumulated other comprehensive (loss)		(30,522		)	(33,293		)
Retained earnings		387,869			401,209
Equity-attributable to shareholders of Criteo S.A.		943,670			996,081
Non-controlling interests		24,221			28,882
Total equity		967,891			1,024,963
Total equity and liabilities		$	1,597,135		$	1,749,569

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

CRITEO S.A.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)



			Three Months Ended						Six Months Ended
	Notes		June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019
		(in thousands, except share per data)

Revenue	9		$	537,185		$	528,147		$	1,101,349		$	1,086,270

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

Gross profit			200,265			194,859			410,624			404,508

Operating expenses:
Research and development expenses			(47,544		)	(44,015		)	(92,862		)	(90,592		)
Sales and operations expenses			(92,726		)	(95,503		)	(188,375		)	(191,412		)
General and administrative expenses			(35,644		)	(35,767		)	(70,235		)	(69,537		)
Total operating expenses			(175,914		)	(175,285		)	(351,472		)	(351,541		)
Income from operations			24,351			19,574			59,152			52,967
Financial income (expense)	11		(1,006		)	(1,354		)	(2,331		)	(3,328		)
Income before taxes			23,345			18,220			56,821			49,639
Provision for income taxes	12		(8,638		)	(5,683		)	(21,024		)	(15,701		)
Net income			$	14,707		$	12,537		$	35,797		$	33,938

Net income available to shareholders of Criteo S.A.			$	13,726		$	10,823		$	33,535		$	29,943
Net income available to non-controlling interests			$	981		$	1,714		$	2,262		$	3,995

Net income allocated to shareholders of Criteo S.A. per share:
Basic	13		$	0.21		$	0.17		$	0.51		$	0.46
Diluted	13		$	0.20		$	0.16		$	0.50		$	0.45

Weighted average shares outstanding used in computing per share amounts:
Basic	13		66,347,599			64,581,476			66,254,476			64,459,867
Diluted	13		67,488,311			65,624,505			67,479,513			65,833,642

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

CRITEO S.A.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)



	Three Months Ended						Six Months Ended
	June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019
	(in thousands)

Net income	$	14,707		$	12,537		$	35,797		$	33,938
Foreign currency translation differences, net of taxes	(34,555		)	9,598			(8,671		)	(894		)
Actuarial (losses) gains on employee benefits, net of taxes	413			(585		)	413			(1,638		)
Other comprehensive income (loss)	$	(34,142	)	$	9,013		$	(8,258	)	$	(2,532	)
Total comprehensive income (loss)	$	(19,435	)	$	21,550		$	27,539		$	31,406
Attributable to shareholders of Criteo S.A.	$	(19,706	)	$	19,069		$	25,051		$	26,842
Attributable to non-controlling interests	$	271		$	2,481		$	2,488		$	4,564

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

CRITEO S.A.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)



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



	Share capital		Treasury Stock		Additional paid-in capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings	Equity - attributable to shareholders of Criteo S.A.	Non controlling interest	Total equity
	Common shares		Shares
	(in thousands, except share amounts )
Balance at December 31, 2018	67,708,203	$2,201	(3,459,119)	$(79,159)	$663,281	$(30,522)	$387,869	$943,670	$24,221	$967,891
Net income	—	—	—	—	—	—	19,120	19,120	2,281	21,401
Other comprehensive income (loss)	—	—	—	—	—	(11,347)	—	(11,347)	(198)	(11,545)
Issuance of ordinary shares	28,596	1	—	—	372	—	—	373	—	373
Change in treasury stocks	(1,594,288)	(45)	1,786,715	40,080	(36,091)	—	(3,944)	—	—	—
Share-Based Compensation	—	—	—	—	13,533	—	—	13,533	(11)	13,522
Other changes in equity	—		—	—	(1)	—	155	154	—	154
Balance at March 31, 2019	66,142,511	$2,157	(1,672,404)	$(39,079)	$641,094	$(41,869)	$403,200	$965,503	$26,293	$991,796
Net income	—	—	—	—	—	—	10,823	10,823	1,714	12,537
Other comprehensive income (loss)	—	—	—	—	—	8,246	—	8,246	767	9,013
Issuance of ordinary shares	19,012	—	—	—	252	—	—	252	—	252
Change in treasury stocks	—	—	553,435	12,515	—	—	(12,515)	—	—	—
Share-Based Compensation	—	—	—	—	11,254	—	—	11,254	108	11,362
Other changes in equity	—	—	—	—	(28)	330	(299)	3	—	3
Balance at June 30, 2019	66,161,523	$2,157	(1,118,969)	$(26,564)	$652,572	$(33,293)	$401,209	$996,081	$28,882	$1,024,963

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

CRITEO S.A.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



		Three Months Ended						Six Months Ended
		June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019
	(in thousands)
Net income		$	14,707		$	12,537		$	35,797		$	33,938
Non-cash and non-operating items		35,677			28,961			75,427			53,959
- Amortization and provisions		25,099			18,282			51,149			37,926
- Equity awards compensation expense ⁽¹⁾		20,241			11,713			39,070			25,595
- Change in deferred taxes		(4,389		)	7,252			(7,535		)	1,336
- Change in income taxes		(5,316		)	(8,696		)	(4,000		)	(10,630		)
- Other ⁽²⁾		42			410			(3,257		)	(268		)
Changes in working capital related to operating activities		(10,043		)	11,466			13,644			32,287
- Decrease in trade receivables		10,154			19,325			101,446			105,343
- Decrease in trade payables		(26,745		)	(14,995		)	(89,690		)	(73,480		)
- Decrease in other current assets		5,821			7,504			13,779			1,512
- Increase/(Decrease) in other current liabilities ⁽²⁾		727			3,015			(11,891		)	5,451
- Change in operating lease liabilities and right of use assets		—			(3,383		)	—			(6,539		)
CASH FROM OPERATING ACTIVITIES		40,341			52,964			124,868			120,184
Acquisition of intangible assets, property, plant and equipment		(18,880		)	(28,812		)	(26,293		)	(42,104		)
Change in accounts payable related to intangible assets, property, plant and equipment		1,033			(3,980		)	(24,121		)	(14,372		)
(Payment for) disposal of a business, net of cash acquired (disposed)		—			637			(10,811		)	(4,688		)
Change in other non-current financial assets		154			(1,152		)	42			(1,184		)
CASH USED FOR INVESTING ACTIVITIES		(17,693		)	(33,307		)	(61,183		)	(62,348		)
Repayment of borrowings		(235		)	(167		)	(473		)	(339		)
Net payments related to equity award activities		396			(98		)	562			(87		)
Change in other financial liabilities ⁽²⁾		(35		)	(209		)	16,810			(239		)
CASH FROM (USED FOR) FINANCING ACTIVITIES		126			(474		)	16,899			(665		)
Effect of exchange rates changes on cash and cash equivalents ⁽²⁾		(26,363		)	7,099			(14,410		)	456
Net increase (decrease) in cash and cash equivalents		(3,589		)	26,282			66,174			57,627
Net cash and cash equivalents at beginning of period		483,874			395,771			414,111			364,426
Net cash and cash equivalents at end of period		$	480,285		$	422,053		$	480,285		$	422,053

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for taxes, net of refunds		(18,343		)	(7,127		)	(32,560		)	(24,995		)
Cash paid for interest, net of amounts capitalized		(432		)	(351		)	(840		)	(758		)

⁽¹⁾ Share-based compensation expense according to ASC 718 Compensation - stock compensation accounted for $19.8 million and $11.4 million of equity awards compensation expense for the quarter ended June 30, 2018 and 2019, respectively, and$38.2 million and $24.9 million of equity awards compensation for the six months ended June 30, 2018 and 2019, respectively.

⁽²⁾During the quarter ended June 30, 2018, and the six months ended June 30, 2018, respectively, the Company reported the cash impact of the settlement of hedging derivatives related to financing activities in cash from (used for) financing activities in the unaudited consolidated statements of cash flows

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

CRITEO S.A.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

In these notes, Criteo S.A. is referred to as the "Parent" company and together with its subsidiaries, collectively, as "Criteo," the "Company," the "Group," or "we".

^{___________________________________________________}

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

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

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

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

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for the accounting pronouncements adopted below.

Accounting Pronouncements adopted in 2019

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

Effective January 1, 2019, we have adopted ASU 2018 - 07, Improvements to Non-Employee Sharebased Payment Accounting. The amendments in this ASU expands Topic 718 to include share base payments for goods or services to non employees. The adoption of ASU 2018-07 did not have a material impact on our financial position or results of operations.

Recently Issued Accounting Pronouncements not yet adopted

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2016-13 (ASU 2016-13) Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. This will result in earlier recognition of credit losses. We will adopt ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. We are currently evaluating new credit loss models and updating our processes and controls in preparation for the adoption of ASU 2016-13. The adoption of the standard is expected to mainly impact our process for estimating the allowance for doubtful accounts; however, the impact on the consolidated financial statements is not expected to be material.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal Use Software - Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. This ASU was issued to clarify the accounting for implementation costs incurred for SaaS agreements. Previously the guidance only referred to development of internal use software and the accounting for SaaS agreements was not clarified. This ASU states that the implementation costs should be capitalized. We will adopt ASU 2018-15 effective January 1, 2020. We are currently evaluating the impact on our financial position, results of operations, and statement of cash flows.

Note 2. Significant Events and Transactions of the Period

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

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

Restructuring

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



	Three Months Ended		Six Months Ended
	June 30, 2019
	(in thousands)
Gain from forfeitures of share-based compensation expense	2,678		2,678
Depreciation and amortization (expense)	(1,228	)	(1,228	)
Payroll costs and Facilities related costs	(2,178	)	(4,068	)
Total restructuring costs	(728	)	(2,618	)

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

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



	(in thousands)
Restructuring liability as of January 1, 2019	$	—
Restructuring costs	2,618
Restructuring costs - non cash item	2,930
Amounts paid	(1,920		)
Restructuring liability as of June 30, 2019	$	3,628

Share repurchase program

On October 25, 2018 Criteo's Board of Directors authorized a share repurchase program of up to $80.0 million of the Company’s outstanding American Depositary Shares. As of December 31, 2018, 3.5 million shares were held as treasury shares.

On February 8, 2019, the Board of Directors authorized the reduction of capital resulting in the formal retirement of 1.6 million treasury shares. As of June 30, 2019, we have 1.1 million treasury shares remaining which may be used primarily to satisfy the company's obligations under its employee equity plans upon RSU vestings in lieu of issuing new shares.



	Number of Treasury Shares		Amount (in thousands of dollars)
Balance at January 1, 2018	—		$	—
Treasury Shares Repurchased to potentially use for M&A	1,751,147		40,000
Treasury Shares Repurchased for RSU Vesting	1,748,111		40,000
Treasury Shares Issued for RSU Vesting	(40,139	)	(841		)
Balance at December 31, 2018	3,459,119		$	79,159
Treasury Shares Retired	(1,594,288	)	$	(36,137	)
Treasury Shares Issued for RSU Vesting	(745,862	)	(16,458		)
Balance at June 30, 2019	1,118,969		$	26,564

Note 3. Financial Instruments

Financial assets

The maximum exposure to credit risk at the end of each reported period is represented by the carrying amount of financial assets, and summarized in the following table:



	December 31, 2018		June 30, 2019
	(in thousands)
Trade receivables, net of allowance	473,901		374,949
Other taxes	53,338		56,090
Other current assets	22,816		18,751
Non-current financial assets	20,460		21,613
Total	$	570,515	$	471,403

Credit Risk

We maintain an allowance for estimated credit losses. During the period ended December 31, 2018 and the six-month period ended June 30, 2019, our net change in allowance for doubtful accounts was $5.1 million and $(6.4) million, respectively.

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

Trade Receivables

Credit risk is defined as an unexpected loss in cash and earnings if the client is unable to pay its obligations in due time. We perform internal ongoing credit risk evaluations of our clients. When a possible risk exposure is identified, we require prepayments.

As of December 31, 2018 and June 30, 2019, no customer accounted for 10% or more of trade receivables.

Financial Liabilities



	December 31, 2018		June 30, 2019

	(in thousands)
Trade payables	$	425,376	$	332,735
Other taxes	55,592		56,929
Employee-related payables	65,878		68,702
Other current liabilities	47,115		33,986
Financial liabilities	3,508		4,081
Total	$	597,469	$	496,433

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

We are party to several loan agreements and a revolving credit facility, or RCF, with third-party financial institutions. There have been no significant changes from what was disclosed in Note 13 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Fair Value Measurements

We measure the fair value of our cash equivalents, which include interest-bearing bank deposits, as level 2 measurements because they are valued using observable market data.

Financial assets or liabilities include derivative financial instruments used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.

Derivative Financial Instruments

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



	December 31, 2018		June 30, 2019

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

Derivative Liabilities:
Included in financial liabilities - current portion	$	—	$	539

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

Cash and Cash Equivalents

Investments in interest–bearing bank deposits which meet ASC 230—Statement of Cash flows criteria: short-term, highly liquid investments, for which the risks of changes in value are considered to be insignificant. Interest-bearing bank deposits are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.



	December 31, 2018		June 30, 2019

	(in thousands)
Cash equivalents	$	125,442	$	148,584
Cash on hand	238,984		273,469
Total cash and cash equivalents	$	364,426	$	422,053

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

Note 4. Trade Receivables

The following table shows the breakdown in trade receivables net book value for the presented periods:



	December 31, 2018			June 30, 2019

	(in thousands)
Trade accounts receivables	$	499,819		$	394,495
(Less) Allowance for doubtful accounts	(25,918		)	(19,546		)
Net book value at end of period	$	473,901		$	374,949

Changes in allowance for doubtful accounts are summarized below:



	2018			2019

	(in thousands)
Balance at January 1	$	(20,818	)	$	(25,918	)
Allowance for doubtful accounts	(6,315		)	(6,042		)
Reversal of provision	3,303			12,318
Currency translation adjustment	450			96
Balance at June 30	$	(23,380	)	$	(19,546	)

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

Note 5. Other Current Assets

The following table shows the breakdown in other current assets net book value for the presented periods:



	December 31, 2018		June 30, 2019

	(in thousands)
Prepayments to suppliers	$	4,056	$	5,869
Other debtors	4,762		3,477
Prepaid expenses	12,295		9,405
Derivative instruments	1,703		—
Gross book value at end of period	22,816		18,751
Net book value at end of period	$	22,816	$	18,751

Derivative financial instruments include foreign currency swaps or forward purchases or sales contracts used to manage our exposure to the risk of exchange rate fluctuations. These instruments are considered level 2 financial instruments as they are measured using valuation techniques based on observable market data.

Note 6. Intangible assets and Goodwill

There have been no significant changes in intangible assets or goodwill since December 31, 2018. In addition, no triggering events have occurred that would indicate impairment in the balance of either intangible assets or goodwill.

The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:



	Software		Technology and customer relationships		Total
	(in thousands)
From July 1 to December 31, 2019	$	4,415	$	10,757	$	15,172
2020	7,424		16,864		24,288
2021	5,585		16,864		22,449
2022	2,712		11,486		14,198
2023	715		10,325		11,040
Thereafter	16		15,950		15,966
Total	$	20,867	$	82,246	$	103,113

Note 7. Other Current Liabilities

Other current liabilities are presented in the following table:



	December 31, 2018		June 30, 2019

	(in thousands)
Clients' prepayments	$	10,328	$	12,057
Credit notes	13,183		12,749
Accounts payable relating to capital expenditures	21,454		6,255
Other creditors	1,527		2,565
Deferred revenue	623		360
Total	$	47,115	$	33,986

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

Note 8. Leases

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) which requires companies to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet.

We have adopted Topic 842 effective January 1, 2019 on a modified retrospective basis and elected not to restate comparative periods. We chose to use certain practical expedients offered by the standard including:


•	We did not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases, or the initial direct costs for any existing leases.


•	We do not recognize a lease liability or right of use asset for leases with a term of 12 months or less, and


•	We used hindsight in determining the lease term.

We lease space under non-cancellable operating leases for our offices as well as our data centers. Our office leases typically include free rent periods or rent escalation periods, and may also include leasehold improvement incentives. Leases for data centers may also include free rent periods or rent escalation periods. These leases typically do not include residual value guarantees. Both office and data center leases may contain both lease components (rent) and non-lease components (maintenance, electrical costs, and other service charges). Non-lease components are accounted for separately.

Both office and data center leases typically contain options to renew, and/or early terminate. We have evaluated management's expectations for these options as of June 30, 2019. Options have been included in the lease term if management has determined it is reasonably certain it will be exercised.

Operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate at lease commencement to determine the present value of future payments. We have a centralized treasury function, and the majority of our leases are negotiated and signed by representatives of Criteo SA. As such, the incremental borrowing rate of Criteo SA is used for all of our contracts. It is then adjusted in consideration of the currency of the lease and the lease term as of the lease commencement date.

Lease expense is recognized for minimum lease payments on a straight-line basis over the lease term. Variable costs are expensed in the period incurred. Variable expenses include changes in indexation. Leases for data centers may have variable costs based on electrical usage.

The components of lease expense are as follows:



	Three Months Ended								Six Months Ended
	June 30, 2019								June 30, 2019
	Offices			Data Centers		Total			Offices			Data Centers		Total
	(in thousands)
Lease expense	$	8,574		$	6,154	$	14,728		$	16,914		$	11,341	$	28,255
Short term lease expense	523			525		1,048			1,448			1,055		2,503
Variable lease expense	1,821			239		2,060			1,821			353		2,174
Sublease income	(693		)	—		(693		)	(1,769		)	—		(1,769		)
Total operating lease expense	$	10,225		$	6,918	$	17,143		$	18,414		$	12,749	$	31,163

As of June 30, 2019, we had future minimum lease payments as follows:



	June 30, 2019
	Offices			Data Centers			Total
	(in thousands)
Remainder of 2019	$	17,314		$	11,486		$	28,800
2020	34,360			19,497			53,857
2021	31,915			12,615			44,530
2022	29,193			8,675			37,868
2023	20,060			2,198			22,258
Thereafter	27,759			—			27,759
Total minimum lease payments	160,601			54,471			215,072
Impact of Discount Rate	(17,407		)	(1,531		)	(18,938		)
Total Lease Liability	$	143,194		$	52,940		$	196,134

The weighted average remaining lease term and discount rates as of June 30, 2019 are as follows:



	June 30, 2019
Weighted average remaining lease term (years)
Offices	5.19
Data Centers	2.81
Weighted average discount rate
Offices	2.64	%
Data Centers	1.75	%

Supplemental cash flow information related to our operating leases is as follows for the period ended June 30, 2019:



	Three Months Ended			Six Months Ended
	June 30, 2019
	(in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Cash flow for operating activities	$	(13,967	)	$	(27,931	)
Right of use assets obtained in exchange for new operating lease liabilities	$	594		$	11,520

As of June 30, 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 $15.8 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 June 30, 2018, we recognized expense for office leases of $9.5 million and data centers costs of $12.4 million. For the six months ended June 30, 2018 we recognized expense for office leases of $19.2 million and data center costs of $24.7 million. The rent expense recognized in prior periods included amounts which are now considered non-lease components such as maintenance services and electricity charges.

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)

June 30, 2018	$	212,781	$	201,080	$	123,324	$	537,185
June 30, 2019	$	213,974	$	194,359	$	119,814	$	528,147



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

June 30, 2018	$	425,476	$	423,691	$	252,182	$	1,101,349
June 30, 2019	$	431,967	$	404,002	$	250,301	$	1,086,270

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 six months ended June 30, 2019, there was three grants of RSUs and one of OSAs 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.


•	On April 25, 2019, 257,291 RSUs were granted to Criteo management subject to continued employment and an additional 257,291 RSUs were granted to members of the management, subject to condition of presence and the achievement of internal performance objectives. In addition, a special supplemental grant of 327,916 RSUs was also granted to members of management subject to continued employment.


•	On June 25, 2019, 195,420 RSUs and 62,880 OSAs were granted to Criteo employees and certain senior managers 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 except for the special supplemental grant to management on April 25, 2019 which have a vesting schedule as follows:


•	70% at the expiration of a two year period


•	15% at the expiration of each year following the first two years-period.

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	62,880		1,240,098		—	1,302,978
Exercised (OSA/BSPCE/BSA)	(47,608	)	—		—	(47,608	)
Vested (RSU)	—		(764,079	)	—	(764,079	)
Forfeited	(591,442	)	(700,791	)	—	(1,292,233	)
Expired	—		—		—	—
Balance at June 30, 2019	2,611,295		4,555,365		291,670	7,458,330

Breakdown of the Closing Balance



	OSA/BSPCE		RSU	BSA
Number outstanding	2,611,295		4,555,365	291,670
Weighted-average exercise price	€	25.56	NA	€	13.02
Number vested	2,132,876		NA	121,342
Weighted-average exercise price	€	24.91	NA	€	20.07
Weighted-average remaining contractual life of options outstanding, in years	6.05		NA	7.43

Reconciliation with the Unaudited Consolidated Statements of Income



	Three Months Ended
	June 30, 2018												June 30, 2019

	(in thousands)
	R&D			S&O			G&A			Total			R&D			S&O			G&A			Total
RSUs	$	(6,446	)	$	(8,059	)	$	(4,101	)	$	(18,606	)	$	(3,952	)	$	(4,669	)	$	(3,496	)	$	(12,117	)
Share options / BSPCE	(326		)	(602		)	(284		)	(1,212		)	624			777			(646		)	755
Total share-based compensation	(6,772		)	(8,661		)	(4,385		)	(19,818		)	(3,328		)	(3,892		)	(4,142		)	(11,362		)
BSAs	—			—			(423		)	(423		)	—			—			(351		)	(351		)
Total equity awards compensation expense	$	(6,772	)	$	(8,661	)	$	(4,808	)	$	(20,241	)	$	(3,328	)	$	(3,892	)	$	(4,493	)	$	(11,713	)



	Six Months Ended
	June 30, 2018												June 30, 2019

	(in thousands)
	R&D			S&O			G&A			Total			R&D			S&O			G&A			Total
RSUs	$	(11,063	)	$	(14,930	)	$	(9,249	)	$	(35,242	)	$	(7,798	)	$	(10,624	)	$	(6,012	)	$	(24,434	)
Share options / BSPCE	(391		)	(962		)	(1,619		)	(2,972		)	445			531			(1,426		)	(450		)
Total share-based compensation	(11,454		)	(15,892		)	(10,868		)	(38,214		)	(7,353		)	(10,093		)	(7,438		)	(24,884		)
BSAs	—			—			(856		)	(856		)	—			—			(711		)	(711		)
Total equity awards compensation expense	$	(11,454	)	$	(15,892	)	$	(11,724	)	$	(39,070	)	$	(7,353	)	$	(10,093	)	$	(8,149	)	$	(25,595	)

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
	June 30, 2018			June 30, 2019
	(in thousands)

Financial income from cash equivalents	$	279		$	608
Interest and fees	(488		)	(481		)
Interest on debt	(546		)	(443		)
Fees	58			(38		)
Foreign exchange gain (loss)	(777		)	(1,089		)
Other financial expense	(20		)	(392		)
Total financial income (expense)	$	(1,006	)	$	(1,354	)



	Six Months Ended
	June 30, 2018			June 30, 2019
	(in thousands)

Financial income from cash equivalents	$	504		$	785
Interest and fees	(1,044		)	(1,004		)
Interest on debt	(1,033		)	(873		)
Fees	(11		)	(131		)
Foreign exchange gain (loss)	(1,747		)	(2,687		)
Other financial expense	(44		)	(422		)
Total financial income (expense)	$	(2,331	)	$	(3,328	)

The $1.4 million and the $3.3 million financial expense for the three month period ended June 30, 2019 and for the six month period ended June 30, 2019, respectively, were driven by the non-utilization costs incurred as part of our available Revolving Credit Facility (RCF) financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging. At June 30, 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.

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:



	Six Months Ended
	June 30, 2018			June 30, 2019
	(in thousands)
Current income tax	$	(28,559	)	$	(14,365	)
Net change in deferred taxes	7,535			(1,336		)
Provision for income taxes	$	(21,024	)	$	(15,701	)

For the six months ended June 30, 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 June 30, 2018 and 2019, respectively. The difference between the annual estimated tax rate and the effective tax rate for the six months ended June 30, 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 six months ended June 30, 2018 resulting in no difference between the annual estimated tax rate and the effective tax rate.

For the six months ended June 30, 2019, our estimated effective tax rate includes in particular our preliminary estimates for the tax reform in France voted in December 2018. Our estimates are preliminary, and our effective tax rate may be impacted as more information becomes available regarding the tax reform in France.

For the six months ended June 30, 2018, our estimated annual effective tax rate included our 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 reduced the U.S. federal income tax rate from 35% to 21% and created new taxes on certain related-party payments, referred to as a base erosion anti-avoidance tax, or “BEAT”.

Current tax assets and liabilities

The total amount of current tax assets consists mainly of prepayments of income taxes and credits of Criteo SA, Criteo Corp. , Criteo Gmbh 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				Six Months Ended
	June 30, 2018		June 30, 2019		June 30, 2018		June 30, 2019
Net income attributable to shareholders of Criteo S.A.	$	13,726	$	10,823	$	33,535	$	29,943
Weighted average number of shares outstanding	66,347,599		64,581,476		66,254,476		64,459,867
Basic earnings per share	$	0.21	$	0.17	$	0.51	$	0.46

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 June 30, 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				Six Months Ended
	June 30, 2018		June 30, 2019		June 30, 2018		June 30, 2019
Net income attributable to shareholders of Criteo S.A.	$	13,726	$	10,823	$	33,535	$	29,943
Weighted average number of shares outstanding of Criteo S.A.	66,347,599		64,581,476		66,254,476		64,459,867
Dilutive effect of :
Restricted share awards ("RSUs")	721,154		737,992		793,096		1,027,671
Share options and BSPCE	382,066		274,298		394,936		305,473
Share warrants	37,492		30,739		37,005		40,631
Weighted average number of shares outstanding used to determine diluted earnings per share	67,488,311		65,624,505		67,479,513		65,833,642
Diluted earnings per share	$	0.20	$	0.16	$	0.50	$	0.45

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		Six Months Ended
	June 30, 2018	June 30, 2019	June 30, 2018	June 30, 2019

Restricted share awards	2,651,262	1,305,872	2,276,195	894,012
Share options and BSPCE	—	2,795	—	34,147
Weighted average number of anti-dilutive securities excluded from diluted earnings per share	2,651,262	1,308,667	2,276,195	928,159

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 ($398.3 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 ($24.5 million) in the aggregate under the short-term credit lines and overdraft facilities. As of June 30, 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	243			1,781			2,024
Provision used	(26		)	—			(26		)
Provision released not used	(56		)	(365		)	(421		)
Currency translation adjustments	—			(61		)	(61		)
Balance at June 30, 2019	$	405		$	3,751		$	4,156
- of which current	405			3,751			4,156

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


•	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)
June 30, 2018	$	212,781	$	201,080	$	123,324	$	537,185
June 30, 2019	$	213,974	$	194,359	$	119,814	$	528,147

Revenue generated in France, the country of incorporation of the Parent, amounted to $37.0 million and $35.2 million for the three months ended June 30, 2018 and 2019, respectively.



	Americas		EMEA		Asia-Pacific		Total
For the six months ended:	(in thousands)
June 30, 2018	$	425,476	$	423,691	$	252,182	$	1,101,349
June 30, 2019	$	431,967	$	404,002	$	250,301	$	1,086,270

Revenue generated in France amounted to $78.4 million and $72.6 million for the six months ended June 30, 2018 and 2019, respectively.

Revenue generated in other significant countries where we operate is presented in the following table:



	Three Months Ended				Six Months Ended
	June 30, 2018		June 30, 2019		June 30, 2018		June 30, 2019
	(in thousands)
Americas
United States	$	187,368	$	192,815	$	373,420	$	388,606
EMEA
Germany	$	48,632	$	46,998	$	103,147	$	100,593
United Kingdom	$	22,544	$	21,180	$	48,778	$	42,948
Asia-Pacific
Japan	$	84,060	$	82,263	$	176,324	$	175,431

As of June 30, 2018 and 2019, our largest client represented 2.4% 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
June 30, 2019	$	135,141	$	121,254	$	107,486	$	23,230	$	16,139	$	10,321	$	1,512	$	295,764

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 except as follows:

On June 25, 2019, Criteo announced that Chief Operating Officer Mollie Spilman has decided to leave the Company to pursue a new career opportunity. She has left the Company as of July 5, 2019.

Effective July 26, 2019, Criteo S.A. and Mr. Dan Teodosiu, the Company’s Chief Technology Officer, mutually agreed that Mr. Teodosiu would step down from his role as Chief Technology Officer and separate from employment as of September 30th, 2019.

Note 17. Subsequent Events

On July 31, 2019 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 to satisfy employee equity plan vesting in lieu of issuing new shares and potentially in connection with M&A transactions. In addition, the Company may use repurchased 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 June 30, 2019 through the date of issuance of the unaudited condensed consolidated financial statements and determined there are no significant events that require adjustments.

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, 2018, filed with the Securities and Exchange Commission, or "SEC", on March 1, 2019.

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, 2018, except for the adoption of ASC 842 as of January 1, 2019. 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 2019.

Use of Non-GAAP Financial Measures

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

Revenue ex-TAC is our revenue excluding traffic acquisition costs ("TAC") generated over the applicable measurement period and Revenue ex-TAC by Region reflects our Revenue ex-TAC by our core geographies. Revenue ex-TAC, 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 core business and across our core geographies. 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.

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.

Condensed Consolidated Statements of Income Data (Unaudited):



		Three Months Ended						Six Months Ended
		June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019
	(in thousands, except share and per share data)

Revenue		$	537,185		$	528,147		$	1,101,349		$	1,086,270

Cost of revenue ⁽²⁾:
Traffic acquisition costs		(306,963		)	(304,229		)	(630,709		)	(626,658		)
Other cost of revenue		(29,957		)	(29,059		)	(60,016		)	(55,104		)
Gross profit		200,265			194,859			410,624			404,508

Operating expenses
Research and development expenses ⁽²⁾		(47,544		)	(44,015		)	(92,862		)	(90,592		)
Sales and operations expenses ⁽²⁾		(92,726		)	(95,503		)	(188,375		)	(191,412		)
General and administrative expenses ⁽²⁾		(35,644		)	(35,767		)	(70,235		)	(69,537		)
Total operating expenses		(175,914		)	(175,285		)	(351,472		)	(351,541		)
Income from operations		24,351			19,574			59,152			52,967
Financial income (expense)		(1,006		)	(1,354		)	(2,331		)	(3,328		)
Income before taxes		23,345			18,220			56,821			49,639
Provision for income taxes		(8,638		)	(5,683		)	(21,024		)	(15,701		)
Net income		$	14,707		$	12,537		$	35,797		$	33,938
Net income available to shareholders of Criteo S.A. ⁽¹⁾		$	13,726		$	10,823		$	33,535		$	29,943
Net income available to shareholders of Criteo S.A. per share:
Basic		$	0.21		$	0.17		$	0.51		$	0.46
Diluted		$	0.20		$	0.16		$	0.50		$	0.45

Weighted average shares outstanding used in computing per share amounts:
Basic		66,347,599			64,581,476			66,254,476			64,459,867
Diluted		67,488,311			65,624,505			67,479,513			65,833,642

⁽¹⁾For the three months ended June 30, 2018 and 2019, this excludes $1.0 million and $1.7 million, respectively, of net income attributable to non-controlling interests held by Yahoo! Japan in our Japanese subsidiary Criteo KK. For the six months ended June 30, 2018 and 2019, this excludes $2.3 million and $4.0 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:

Detailed Information on Selected Items (unaudited):



		Three Months Ended				Six Months Ended
		June 30, 2018		June 30, 2019		June 30, 2018			June 30, 2019
	(in thousands)
Equity awards compensation expense
Research and development expenses		$	6,771	$	4,203	$	11,326		$	8,228
Sales and operations expenses		8,668		5,693		16,499			11,894
General and administrative expenses		4,806		4,495		11,723			8,151
Total equity awards compensation expense		$	20,245	$	14,391	$	39,548		$	28,273

Pension service costs
Research and development expenses		212		191		432			384
Sales and operations expenses		75		71		154			143
General and administrative expenses		132		129		267			258
Total pension service costs ^(a)		$	419	$	391	$	853		$	785

Depreciation and amortization expense
Cost of revenue		15,050		10,847		30,299			19,982
Research and development expenses ^(b)		2,245		3,534		4,466			7,011
Sales and operations expenses ^(c)		4,518		5,109		8,972			9,973
General and administrative expenses		1,747		1,825		3,469			3,645
Total depreciation and amortization expense		$	23,560	$	21,315	$	47,206		$	40,611

Restructuring costs ⁽¹⁾
Research and development expenses		16		124		(332		)	124
Sales and operations expenses		183		175		290			2,065
General and administrative expenses		—		429		(11		)	429
Total Restructuring costs ⁽¹⁾		$	199	$	728	$	(53	)	$	2,618

⁽¹⁾ For the three months ended June 30, 2019 and the six months ended June 30, 2019, respectively, the Company recognized restructuring charges for its new organizational structure implemented to support its multi-product platform strategy as detailed below:



	Three Months Ended		Six Months Ended
	June 30, 2019
	(in thousands)
(Gain) from forfeitures of share-based compensation awards	(2,678	)	(2,678	)
Depreciation and amortization expense	1,228		1,228
Payroll and Facilities related costs	2,178		4,068
Total restructuring costs	728		2,618

(a) Effective January 1, 2012, actuarial gains and losses are recognized in other comprehensive income.

(b) Includes acquisition-related amortization of intangible assets of $1.3 million and $2.7 million for the three months ended June 30, 2018 and 2019, respectively and $2.5 million and $5.4 million for the six months ended June 30, 2018 and 2019, respectively.

(c) Includes acquisition-related amortization of intangible assets of $2.2 million and $2.8 million for the three months ended June 30, 2018 and 2019, respectively and $4.4 million and $5.5 million for the six months ended June 30, 2018 and 2019, respectively.

Consolidated Statements of Financial Position Data (unaudited):



	December 31, 2018		June 30, 2019

	(in thousands)
Cash and cash equivalents	$	364,426	$	422,053
Total assets	1,597,135		1,749,569
Trade receivables, net of allowances for doubtful accounts	473,901		374,949
Total financial liabilities	3,508		4,081
Total liabilities	629,244		724,606
Total equity	$	967,891	$	1,024,963

Other Financial and Operating Data (unaudited):



		Three Months Ended				Six Months Ended
		June 30, 2018		June 30, 2019		June 30, 2018		June 30, 2019
	(in thousands, except client data)
Number of clients		18,936		19,733		18,936		19,733
Revenue ex-TAC ⁽³⁾		$	230,222	$	223,918	$	470,640	$	459,612
Adjusted Net Income ⁽⁴⁾		$	35,482	$	30,730	$	76,001	$	70,435
Adjusted EBITDA⁽⁵⁾		$	68,774	$	56,399	$	146,706	$	125,254

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



		Three Months Ended						Six Months Ended
		June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019

	(in thousands)
Revenue		$	537,185		$	528,147		$	1,101,349		$	1,086,270
Adjustment:
Traffic acquisition costs		(306,963		)	(304,229		)	(630,709		)	(626,658		)
Revenue ex-TAC		$	230,222		$	223,918		$	470,640		$	459,612

⁽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						Six Months Ended
	June 30, 2018			June 30, 2019			June 30, 2018			June 30, 2019
	(in thousands)
Net income	$	14,707		$	12,537		$	35,797		$	33,938
Adjustments:
Equity awards compensation expense	20,245			14,391			39,548			28,273
Amortization of acquisition-related intangible assets	3,448			5,465			6,905			10,937
Restructuring costs ⁽¹⁾	199			728			(53		)	2,618
Tax impact of the above adjustments	(3,117		)	(2,391		)	(6,196		)	(5,331		)
Adjusted Net Income	$	35,482		$	30,730		$	76,001		$	70,435



	Three Months Ended		Six Months Ended
	June 30, 2019
	( in thousands)
(Gain) from forfeitures of share-based compensation awards	(2,678	)	(2,678	)
Depreciation and amortization expense	1,228		1,228
Payroll and Facilities related costs	2,178		4,068
Total restructuring costs	728		2,618

⁽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				Six Months Ended
	June 30, 2018		June 30, 2019		June 30, 2018			June 30, 2019
	(in thousands)
Net income	$	14,707	$	12,537	$	35,797		$	33,938
Adjustments:
Financial expense (income)	1,006		1,354		2,331			3,328
Provision for income taxes	8,638		5,683		21,024			15,701
Equity awards compensation expense	20,245		14,391		39,548			28,273
Pension service costs	419		391		853			785
Depreciation and amortization expense	23,560		21,315		47,206			40,611
Restructuring costs ⁽¹⁾	199		728		(53		)	2,618
Total net adjustments	54,067		43,862		110,909			91,316
Adjusted EBITDA	$	68,774	$	56,399	$	146,706		$	125,254



	Three Months Ended		Six Months Ended
	June 30, 2019
	(in thousands)
(Gain) from forfeitures of share-based compensation awards	(2,678	)	(2,678	)
Depreciation and amortization expense	1,228		1,228
Payroll and Facilities related costs	2,178		4,068
Total restructuring costs	728		2,618

Results of Operations for the Periods Ended June 30, 2018 and 2019 (Unaudited)

Revenue

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended
	June 30, 2018		June 30, 2019		2018 vs 2019

	(in thousands)
Revenue as reported	$	537,185	$	528,147	(2	)%
Conversion impact U.S dollar/other currencies			15,704
Revenue at constant currency ⁽¹⁾	537,185		543,851		1	%
Americas
Revenue as reported	212,781		213,974		1	%
Conversion impact U.S dollar/other currencies			1,105
Revenue at constant currency ⁽¹⁾	212,781		215,079		1	%
EMEA
Revenue as reported	201,080		194,359		(3	)%
Conversion impact U.S dollar/other currencies			12,158
Revenue at constant currency ⁽¹⁾	201,080		206,517		3	%
Asia-Pacific
Revenue as reported	123,324		119,814		(3	)%
Conversion impact U.S dollar/other currencies			2,441
Revenue at constant currency⁽¹⁾	$	123,324	$	122,255	(1	)%

⁽¹⁾Growth at constant currency excludes the impact of foreign currency fluctuations and is computed by applying the 2018 average exchange rates for the relevant period to 2019 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 June 30, 2019 decreased to $528.1 million, decreasing by (2)% (or increasing by 1% on a constant currency basis, as defined in footnote 1 directly above), compared to the three months ended June 30, 2018. The year-over-year increase in revenue was entirely driven by our business with new clients, offsetting the negative contribution of existing clients. We added 797 net new clients across regions and client sizes over the period, a slightly lower volume than the prior year period, primarily driven by our increased focus on higher-value midmarket clients until we complete the roll-out of our self-registration feature to address smaller midmarket prospects in a scalable way. Revenue from existing clients decreased slightly less than (2)% at constant currency over the period, as retargeting revenues were impacted by continued softness in the web environment, where users tend to progressively spend less time than in apps, where our solutions do not yet contribute significantly to our revenue growth, and despite the continued adoption of our new products.

Revenue in the Americas region increased 1% (or 1% on a constant currency basis, including 3% in the U.S.) to $214.0 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. Growth was driven by continued good traction in our Criteo Retail Media business in the U.S. and the acceleration of our midmarket new business thanks to improved sales productivity, offsetting softer business with existing large clients.

Revenue in EMEA decreased (3)% (or increased 3% on a constant currency basis) to 194.4 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This increase at constant currency was driven by accelerated growth in our midmarket business in the region, both with existing and new clients, positive traction from our new products to address the upper-funnel marketing goals, as well as lower headwinds from GDPR on the year over year growth following the anniversary of its implementation in the region.

Revenue in the Asia-Pacific region decreased (3)% (or (1)% on a constant currency basis) to $119.8 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. This decrease was driven by slower business with large clients in Japan and South-East Asia, offsetting double-digit growth in midmarket and continued positive momentum in Korea.

Additionally, our $528.1 million of revenue for the three months ended June 30, 2019 was negatively impacted by $15.7 million as a result of changes in foreign currency against the U.S. dollar compared to the three months ended June 30, 2018.

The year-over-year growth in revenue on a constant currency basis is entirely attributable to an increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us, offsetting the decrease in the average cost-per-click charged to advertisers.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended
	June 30, 2018		June 30, 2019		2018 vs 2019

	(in thousands)
Revenue as reported	$	1,101,349	$	1,086,270	(1	)%
Conversion impact U.S dollar/other currencies			39,745
Revenue at constant currency ⁽¹⁾	1,101,349		1,126,015		2	%
Americas
Revenue as reported	425,476		431,967		2	%
Conversion impact U.S dollar/other currencies			3,312
Revenue at constant currency ⁽¹⁾	425,476		435,279		2	%
EMEA
Revenue as reported	423,691		404,002		(5	)%
Conversion impact U.S dollar/other currencies			30,700
Revenue at constant currency ⁽¹⁾	423,691		434,702		3	%
Asia-Pacific
Revenue as reported	252,182		250,301		(1	)%
Conversion impact U.S dollar/other currencies			5,733
Revenue at constant currency⁽¹⁾	$	252,182	$	256,034	2	%

Revenue for the six months ended June 30, 2019 increased to $1,086.3 million, decreasing (1)% (or increasing 2% on a constant currency basis), compared to the six months ended June 30, 2018. Revenue from new clients contributed 94.0% to the year-over-year revenue growth, while revenue from existing clients contributed 6.0% to the year-over-year revenue growth. Over the period, the company added 797 net new clients across regions and client sizes, a slightly lower volume than the prior year period, primarily driven by our increased focus on higher-value midmarket clients until we complete the roll-out of our self-registration feature to address smaller midmarket prospects in a scalable way. Contribution from existing clients was impacted by continued softness in the web environment, where users tend to progressively spend less time than in apps, where our solutions do not yet contribute significantly to our revenue growth, and despite continued adoption of our new products.

Revenue in the Americas region increased 2% (or 2% on a constant currency basis) to $432.0 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase was driven by the acceleration of our midmarket business driven by larger midmarket clients, as well as continued good traction in our Criteo Retail Media business in the U.S.

Revenue in EMEA decreased (5)% (or increased 3% on a constant currency basis) to $404.0 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. This increase at constant currency was largely driven by accelerated growth in our midmarket business, as well as the positive traction of our Criteo Marketing Solutions, particularly to address the Consideration marketing goal, partly offset by headwinds related to GDPR in the first quarter.

Revenue in the Asia-Pacific region decreased (1)% (or increased 2% on a constant currency basis) to $250.3 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. This increase was the result of strong growth in Korea and our growing midmarket business across the region, offset by a slow-down in our large customer business in Japan and South-East Asia.

Additionally, our $1,086.3 million of revenue for the six months ended June 30, 2019 was negatively impacted by $39.7 million as a result of changes in foreign currency against the U.S. dollar compared to the six months ended June 30, 2018.

The year-over-year growth in revenue on a constant currency basis is entirely attributable to an increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us, offseting the decrease in the average cost-per-click charged to advertisers.

Cost of Revenue

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Traffic acquisition costs	$	(306,963	)	$	(304,229	)	(1)%
Other cost of revenue	$	(29,957	)	$	(29,059	)	(3)%
Total Cost of Revenue	$	(336,920	)	$	(333,288	)	(1)%
% of revenue	(63		)%	(63		)%
Gross profit %	37		%	37		%

Cost of revenue for the three months ended June 30, 2019 decreased $(3.6) million, or (1)%, compared to the three months ended June 30, 2018. This decrease was primarily the result of a decrease of $(2.7) million, or (1)% (or an increase of 2% on a constant currency basis) in traffic acquisition costs and a decrease of $(0.9) million, or (3)% (or (1)% on a constant currency basis) in other cost of revenue.

The increase in traffic acquisition costs on a constant currency basis related primarily to an increase of 9% in the number of impressions we purchased, reflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support the growth in our client demand for advertising campaigns. Over the period, the average cost per thousand impressions (or "CPM"), decreased by (9)% (or (7)% on a constant currency basis), driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers in the web and in apps, and remove intermediary fees in the process, as well as the growing share of in-app inventory in our business, which has inventory costs that tend to be slightly lower on average than that in the web browser environment.

The decrease in other cost of revenue includes a $4.2 million decrease in allocated depreciation and amortization expense following the changes in our estimation of the useful life of the servers and other equipment used in our datacenters from 3 to 5 years, partially offset by a $1.7 million increase in hosting costs, and a net $1.6 million increase in other costs including the provision for the expected Digital Tax in France ($0.8 million).

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Traffic acquisition costs	$	(630,709	)	$	(626,658	)	(1	)%
Other cost of revenue	$	(60,016	)	$	(55,104	)	(8	)%
Total Cost of Revenue	$	(690,725	)	$	(681,762	)	(1	)%
% of revenue	(63		)%	(63		)%
Gross profit %	37		%	37		%

Cost of revenue for the six months ended June 30, 2019 decreased $(9.0) million, or (1)%, compared to the six months ended June 30, 2018. This decrease was primarily the result of an decrease of (4.1) million, or (1)% (or an increase of 3% on a constant currency basis) in traffic acquisition costs and a decrease of $(4.9) million, or (8)% (or (6)% on a constant currency basis) in other cost of revenue.

The increase in traffic acquisition costs on a constant currency basis related primarily to an increase of 8% in the number of impressions we purchased, reflecting our expanding relationships with existing and new publisher partners, in particular through direct connections, to support the growth in our client demand for advertising campaigns. Over the period, the average cost per thousand impressions (or "CPM"), decreased by (8)% (or (5)% on a constant currency basis), driven by a combination of factors, including the effectiveness of our Criteo Direct Bidder, which allows us to buy quality inventory directly from large publishers in the web and in apps, and remove intermediary fees in the process, as well as the growing share of in-app inventory in our business, which has inventory costs that tend to be slightly lower on average than that in the web browser environment.

The decrease in other cost of revenue includes a $10.3 million decrease in allocated depreciation and amortization expense following the changes in our estimation of the useful life of the servers and other equipment used in our datacenters from 3 to 5 years, partially offset by a $2.4 million increase in other cost of sales including the provision for the expected Digital Tax in France ($1.6 million), including additional purchases of third-party data partially and a $3.0 million increase 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.

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

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



		Three Months Ended								Six Months Ended
	Region	June 30, 2018			June 30, 2019			Year over Year Change		June 30, 2018			June 30, 2019			Year over Year Change

Revenue:		(amounts in thousands, except percentages)
	Americas	$	212,781		$	213,974		1	%	$	425,476		$	431,967		2	%
	EMEA	201,080			194,359			(3	)%	423,691			404,002			(5	)%
	Asia-Pacific	123,324			119,814			(3	)%	252,182			250,301			(1	)%
	Total	537,185			528,147			(2	)%	1,101,349			1,086,270			(1	)%

Traffic acquisition costs:
	Americas	(125,502		)	(129,491		)	3	%	(257,023		)	(261,036		)	2	%
	EMEA	(112,577		)	(107,401		)	(5	)%	(232,470		)	(224,692		)	(3	)%
	Asia-Pacific	(68,884		)	(67,337		)	(2	)%	(141,216		)	(140,930		)	(0.2	)%
	Total	(306,963		)	(304,229		)	(1	)%	(630,709		)	(626,658		)	(1	)%

Revenue ex-TAC⁽¹⁾:
	Americas	87,279			84,483			(3	)%	168,453			170,931			1	%
	EMEA	88,503			86,958			(2	)%	191,221			179,310			(6	)%
	Asia-Pacific	54,440			52,477			(4	)%	110,966			109,371			(1	)%
	Total	$	230,222		$	223,918		(3	)%	$	470,640		$	459,612		(2	)%

⁽¹⁾We define Revenue ex-TAC as our revenue excluding traffic acquisition costs generated over the applicable measurement period. Revenue ex-TAC and Revenue, Traffic Acquisition Costs and Revenue ex-TAC by Region are not measures calculated in accordance with 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.

Constant Currency Reconciliation

Information in this Form 10-Q with respect to results presented on a constant currency basis was calculated by applying the 2018 average exchange rates for the relevant period to 2019 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								Six Months Ended
	June 30, 2018			June 30, 2019			YoY Change		June 30, 2018			June 30, 2019			YoY Change
	(amounts in thousands, except percentages)
	(amounts in thousands, except percentages)
Revenue as reported	$	537,185		$	528,147		(2	)%	$	1,101,349		$	1,086,270		(1	)%
Conversion impact U.S. dollar/other currencies				15,705								39,746
Revenue at constant currency	$	537,185		$	543,852		1	%	$	1,101,349		$	1,126,016		2	%

Traffic acquisition costs as reported	$	(306,963	)	$	(304,229	)	(1	)%	$	(630,709	)	$	(626,658	)	(1	)%
Conversion impact U.S. dollar/other currencies				(8,662		)						(22,132		)
Traffic Acquisition Costs at constant currency	$	(306,963	)	$	(312,891	)	2	%	$	(630,709	)	$	(648,790	)	3	%

Revenue ex-TAC as reported	$	230,222		$	223,918		(3	)%	$	470,640		$	459,612		(2	)%
Conversion impact U.S. dollar/other currencies				7,043								17,614
Revenue ex-TAC at constant currency	$	230,222		$	230,961		0.3	%	$	470,640		$	477,226		1	%
Revenue ex-TAC/Revenue as reported	43		%	42		%			43		%	42		%

Other cost of revenue as reported	$	(29,957	)	$	(29,059	)	(3	)%	$	(60,016	)	$	(55,104	)	(8	)%
Conversion impact U.S. dollar/other currencies				(643		)						(1,393		)
Other cost of revenue at constant currency	$	(29,957	)	$	(29,702	)	(1	)%	$	(60,016	)	$	(56,497	)	(6	)%

Adjusted EBITDA as reported	$	68,774		$	56,399		(18	)%	$	146,706		$	125,254		(15	)%
Conversion impact U.S. dollar/other currencies				1,638								5,973
Adjusted EBITDA at constant currency	$	68,774		$	58,037		(16	)%	$	146,706		$	131,227		(11	)%

Research and Development Expenses

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Research and development expenses	$	(47,544	)	$	(44,015	)	(7)%
% of revenue	(9		)%	(8		)%

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Research and development expenses	$	(92,862	)	$	(90,592	)	(2)%
% of revenue	(8		)%	(8		)%

Research and development expenses for the three months ended June 30, 2019 and the six months ended June 30, 2019 respectively decreased $(3.5) million and $(2.3) million, or (7)% and (2)%, compared to three months ended June 30, 2018 and the six months ended June 30, 2018. The decrease for the three month period and six month period mainly related to a decrease in headcount related costs due to a lower share-based compensation expense and an increase in the French Research Tax Credit, partially offset by an increase in amortization of acquisition-related intangible assets.

Sales and Operations Expenses

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Sales and operations expenses	$	(92,726	)	$	(95,503	)	3%
% of revenue	(17		)%	(18		)%

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Sales and operations expenses	$	(188,375	)	$	(191,412	)	2%
% of revenue	(17		)%	(18		)%

Sales and operations expenses for the three months ended June 30, 2019 and the six months ended June 30, 2019, respectively increased $2.8 million or $3.0 million, or 3% and 2%, compared to the three months ended June 30, 2018 and the six months ended June 30, 2018. The increase for the three month period and six month period ended mainly related to a $5.0 million increase following an exceptional charge related to an invoicing dispute, an increase in headcount related costs, an increase in facilities cost following the early termination of a lease and an increase in marketing costs, partially offset by lower share-based compensation expense and a decrease in bad debt expense.

General and Administrative Expenses

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
General and administrative expenses	$	(35,644	)	$	(35,767	)	0.3%
% of revenue	(7		)%	(7		)%

General and administrative expenses for the three months ended June 30, 2019 increased $0.1 million, or 0.3%, compared to the three months ended June 30, 2018. This increase was the result of a decrease in headcount related costs fully offset by an increase in rent and facilities costs.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
General and administrative expenses	$	(70,235	)	$	(69,537	)	(1)%
% of revenue	(6		)%	(6		)%

General and administrative expenses for the six months ended June 30, 2019 decreased (0.7) million, or (1)%, compared to the six months ended June 30, 2018. This decrease was the result of a decrease in headcount related costs due to a lower share-based compensation expense, partially offset by an increase in consulting fees for process optimization projects and the proceeds from the disposal of the HookLogic travel business in March 31, 2018.

Financial Income (Expense)

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Financial income (expense)	$	(1,006	)	$	(1,354	)	35%
% of revenue	(0.2		)%	(0.3		)%

Six months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended				% change
	June 30, 2018		June 30, 2019		2018 vs 2019

	(in thousands, except percentages)
Financial income (expense)	(2,331	)	(3,328	)	43%
% of revenue	(0.2	)%	(0.3	)%

The Financial expense for the three month ended June 30, 2019 and the six month ended June 30, 2019, respectively, increased by $0.3 million and $1.0 million, or 35% and 43%, compared to the three months ended June 30, 2018 and the six months ended June 30, 2019.The $1.4 million financial expense for the three months ended June 30, 2019 and the $2.3 million financial expense for the six months ended June 30, 2019 were driven by the non-utilization costs incurred as part of our available Revolving Credit Facility (RCF) financing and the recognition of a negative impact of foreign exchange reevaluations net of related hedging.

Provision for Income Taxes

Six months ended June 30, 2019 compared to the three months ended June 30, 2018



	Six Months Ended						% change
	June 30, 2018			June 30, 2019			2018 vs 2019

	(in thousands, except percentages)
Provision for income taxes	$	(21,024	)	$	(15,701	)	(25)%
% of revenue	(2		)%	(1		)%
Effective tax rate	37		%	32		%

For the six months ended June 30, 2018 and June 30, 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 six months ended June 30, 2018 and 2019, respectively. The difference between the annual estimated tax rate and the effective tax rate for three months ended June 30, 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 six months ended June 30, 2018, resulting in no difference between the annual estimated tax rate and the effective tax rate.

For the six months ended June 30, 2018, our estimated annual effective tax rate included our 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”.

Net Income

Three months ended June 30, 2019 compared to the three months ended June 30, 2018



	Three Months Ended					% change
	June 30, 2018			June 30, 2019		2018 vs 2019

	(in thousands, except percentages)
Net income	$	14,707		12,537		(15)%
% of revenue	3		%	2	%

Net income for the three months ended June 30, 2019, decreased $(2.2) million, or (15)%, compared to the three months ended June 30, 2018. This decrease was the result of the factors discussed above, in particular, a $4.8 million decrease in income from operations and a $2.9 million decrease in provision for income taxes partially offset by a $0.3 million increase in financial expense, compared to the three months ended June 30, 2018.

Six months ended June 30, 2019 compared to the six months ended June 30, 2018



	Six Months Ended					% change
	June 30, 2018			June 30, 2019		2018 vs 2019

	(in thousands, except percentages)
Net income	$	35,797		33,938		(5)%
% of revenue	3		%	3	%

Net income for the six months ended June 30, 2019 decreased $(1.9) million, or (5)%, compared to the six months ended June 30, 2018. This decrease was the result of the factors discussed above, in particular, a $6.2 million decrease in income from operations and a $5.3 million decrease in provision for income taxes partially offset by a $1.0 million increase in financial expense, compared to the six months ended June 30, 2018.

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents and cash generated from operating activities. 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. In 2018, we completed an $80 million share repurchase program. In July 2019, the Board of Directors authorized a new share repurchase program of up to $80 million of the Company’s outstanding American Depositary Shares. Other than these repurchase programs, we intend to retail all available funds any future earnings to fund our growth. As discussed in Note 3 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 June 30, 2019 were held for working capital and general corporate purposes, which could include acquisitions, and amounted to $422.1 million as of June 30, 2019. The $57.6 million increase in cash and cash equivalents compared with December 31, 2018 primarily resulted from $120.2 million in cash from operating activities, partially offset by a $62.3 million in cash used for investing activities and a $0.7 million used for financing activities over the period. The cash used for investing activities is mainly related to $56.5 million in capital expenditures and $4.7 million following a business acquisition that was not material to our consolidated financial statements. The cash used for financing activities is primarily related to $0.3 million of repayment of borrowings. In addition, the increase in cash includes a $0.5 million positive 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 six months ended June 30, 2018 and 2019, our capital expenditures were $50.4 million and $56.5 million, respectively. In 2019, these capital expenditures were primarily related to the acquisition of data center and server equipment, and IT systems. We expect our capital expenditures to remain at, or slightly below, 5% of revenue for 2019, as we plan to continue to build and maintain additional data center equipment capacity in all regions and significantly increase our redundancy capacity to strengthen our infrastructure.

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 will 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.

Historical Cash Flows

The following table sets forth our cash flows for the six month period ended June 30, 2018 and 2019 :



	Six Months Ended
	June 30, 2018			June 30, 2019

	(in thousands)
Cash from operating activities	$	124,868		$	120,184
Cash used in investing activities	$	(61,183	)	$	(62,348	)
Cash from (used for) financing activities	$	16,899		$	(665	)

Operating Activities

Cash provided by operating activities is primarily impacted by the increase in the number of clients using our solution and by the amount of cash we invest in personnel to support the anticipated growth of our business. Cash provided by operating activities has typically been 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 six months ended June 30, 2019, net cash provided by operating activities was $120.2 million and consisted of net income of $33.9 million, $54.0 million in adjustments for certain non-cash and non-operating items and changes in working capital of $32.3 million. Adjustments for certain non-operating items primarily consisted of depreciation and amortization expense of $37.9 million, equity awards compensation expense of $25.6 million, $1.3 million of changes in deferred tax assets partially offset by change in income taxes of $10.6 million and $0.3 million for other items. The $32.3 million increase in cash from changes in working capital primarily consisted of a $105.3 million decrease in trade receivables, a $5.5 million increase in other current liabilities such as payroll and payroll related expenses and value-added tax ("VAT") payables, a $1.5 million decrease in other current assets including prepaid expenses and VAT receivables, partially offset by a $73.5 million decrease in trade payables, and a $6.5 million decrease in lease liabilities and right of use assets.

Investing Activities

Our investing activities to date have consisted primarily of purchases servers and other data-center equipment and business acquisitions.

For the six months ended June 30, 2019, net cash used in investing activities was $62.3 million and primarily consisted of $56.5 million in capital expenditures, mainly comprised of purchases of servers and other data-center equipment and a $4.7 million payment for a business acquisition.

Financing Activities

For the six months ended June 30, 2019, net cash used for financing activities was $0.7 million resulting from a $0.3 million repayment of borrowings, a $0.2 million change in other other financial liabilities and a $0.1 million related to net payments for equity award activities.

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 six months ended period June 30, 2019.

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, 2018.

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:



	Six Months Ended
	June 30, 2018					June 30, 2019

	(in thousands)
GBP/USD	+10%			-10%		+10%			-10%
Net income impact	$	(550	)	$	550	$	(759	)	$	759



	Six Months Ended
	June 30, 2018					June 30, 2019

	(in thousands)
BRL/USD	+10%			-10%		+10%			-10%
Net income impact	$	(200	)	$	200	$	(58	)	$	58



	Six Months Ended
	June 30, 2018					June 30, 2019

	(in thousands)
JPY/USD	+10%		-10%			+10%		-10%
Net income impact	$	439	$	(439	)	$	775	$	(775	)



	Six Months Ended
	June 30, 2018					June 30, 2019

	(in thousands)
EUR/USD	+10%		-10%			+10%		-10%
Net income impact	$	5,428	$	(5,428	)	$	4,332	$	(4,332	)

Credit Risk and Trade receivables

For a description of our credit risk and trade receivables, please see "Note 3. Financial instruments" in the Notes to the Consolidated Financial Statements.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Based on their evaluation as of June 30, 2019, 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.

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, 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, 2018.

Item 6. Exhibits.

Exhibit Index



		Incorporated by Reference
Exhibit	Description	Schedule/ Form	File Number	Exhibit	File Date
10.1#	Mutually agreed termination of a permanent employment contract and approval application, dated as of June 19, 2019 by and between the registrant and Dan Teodosiu
31.1#	Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
31.2#	Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended
32.1*	Certificate of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.

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: August 2, 2019	Name:	Benoit Fouilland
	Title:	Chief Financial Officer
		(Principal financial officer and duly authorized signatory)

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Criteo (CRTO) 10-Q2019 Q2 Quarterly report

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