Quarterly Report


 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from                      to                      

Commission file number: 001-35362

 

TRIPADVISOR, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0743202

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 


400 1 st Avenue

Needham, MA 02494

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:

(781) 800-5000

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  (Do not check if a small reporting company)

  

Small reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

 

Class

 

Outstanding Shares at May 4, 2017

Common Stock, $0.001 par value per share

 

128,426,960 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


 

TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended March 31, 2017

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Unaudited Condensed Financial Statements

 

  

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016

  

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016

  

4

Unaudited Condensed Consolidated Balance Sheets at March 31, 2017 and December 31, 2016

  

5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 201 7

  

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

  

7

Notes to Unaudited Condensed Consolidated Financial Statements

  

8

 

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

  

23

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

40

Item 4. Controls and Procedures

  

41

 

Part II—Other Information

  

 

 

Item 1. Legal Proceedings

  

41

Item 1A. Risk Factors

  

41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

56

Item 3. Defaults Upon Senior Securities

  

56

Item 4. Mine Safety Disclosures

  

56

Item 5. Other Information

  

57

Item 6. Exhibits

  

58

 

Signatures

  

59

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three months ended March 31,

 

 

 

2017

 

 

2016

 

Revenue

 

$

372

 

 

$

352

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

17

 

 

 

16

 

Selling and marketing (2)

 

 

207

 

 

 

172

 

Technology and content (2)

 

 

59

 

 

 

61

 

General and administrative (2)

 

 

35

 

 

 

37

 

Depreciation

 

 

19

 

 

 

16

 

Amortization of intangible assets

 

 

8

 

 

 

8

 

Total costs and expenses:

 

 

345

 

 

 

310

 

Operating income

 

 

27

 

 

 

42

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(3

)

 

 

(4

)

Interest income and other, net

 

 

1

 

 

 

-

 

Total other expense, net

 

 

(2

)

 

 

(4

)

Income before income taxes

 

 

25

 

 

 

38

 

Provision for income taxes

 

 

(12

)

 

 

(9

)

Net income

 

$

13

 

 

$

29

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders (Note 4):

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

$

0.20

 

Diluted

 

$

0.09

 

 

$

0.20

 

Weighted average common shares outstanding (Note 4):

 

 

 

 

 

 

 

 

Basic

 

 

144

 

 

 

145

 

Diluted

 

 

145

 

 

 

147

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

Amortization of acquired technology included in amortization of intangible assets

 

$

2

 

 

$

2

 

Amortization of website development costs included in depreciation

 

 

12

 

 

 

11

 

 

 

$

14

 

 

$

13

 

 

 

 

 

 

 

 

 

 

(2) Includes stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

Selling and marketing

 

$

5

 

 

$

4

 

Technology and content

 

$

7

 

 

$

9

 

General and administrative

 

$

7

 

 

$

6

 

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

 

 

 

3


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Net income

 

$

13

 

 

$

29

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

7

 

 

 

9

 

Total other comprehensive income

 

 

7

 

 

 

9

 

Comprehensive income

 

$

20

 

 

$

38

 

 

 

(1)

Foreign currency translation adjustments exclude income taxes due to our practice and intention to indefinitely reinvest the earnings of our foreign subsidiaries in those operations.  

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

 

 

 

4


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except number of shares and per share amounts)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2017

 

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 5)

 

$

731

 

 

$

612

 

Short-term marketable securities (Note 5)

 

 

15

 

 

 

118

 

Accounts receivable, net of allowance for doubtful accounts of $9 and $9, respectively

 

 

232

 

 

 

189

 

Prepaid expenses and other current assets

 

 

25

 

 

 

31

 

Total current assets

 

 

1,003

 

 

 

950

 

Long-term marketable securities (Note 5)

 

 

3

 

 

 

16

 

Property and equipment, net of accumulated depreciation of $128 and $111, respectively

 

 

262

 

 

 

260

 

Intangible assets, net of accumulated amortization of $87 and $80, respectively

 

 

161

 

 

 

167

 

Goodwill

 

 

741

 

 

 

736

 

Deferred income taxes, net

 

 

37

 

 

 

42

 

Other long-term assets

 

 

67

 

 

 

67

 

TOTAL ASSETS

 

$

2,274

 

 

$

2,238

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

12

 

 

$

14

 

Deferred merchant payables

 

 

218

 

 

 

128

 

Deferred revenue

 

 

87

 

 

 

64

 

Current portion of debt (Note 6)

 

 

7

 

 

 

80

 

Taxes payable

 

 

6

 

 

 

10

 

Accrued expenses and other current liabilities (Note 8)

 

 

122

 

 

 

127

 

Total current liabilities

 

 

452

 

 

 

423

 

Long-term debt (Note 6)

 

 

210

 

 

 

91

 

Deferred income taxes, net

 

 

13

 

 

 

12

 

Other long-term liabilities

 

 

215

 

 

 

210

 

Total Liabilities

 

 

890

 

 

 

736

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity: (Note 10)

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 100,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 0 and 0

 

 

 

 

 

 

 

 

Common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 1,600,000,000

 

 

 

 

 

 

 

 

Shares issued: 135,318,415 and 134,706,467, respectively

 

 

 

 

 

 

 

 

Shares outstanding: 128,393,005 and 131,310,980, respectively

 

 

 

 

 

 

 

 

Class B common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 400,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 12,799,999 and 12,799,999, respectively

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

843

 

 

 

831

 

Retained earnings

 

 

958

 

 

 

945

 

Accumulated other comprehensive loss

 

 

(70

)

 

 

(77

)

Treasury stock-common stock, at cost, 6,925,410 and 3,395,487 shares, respectively

 

 

(347

)

 

 

(197

)

Total Stockholders’ Equity

 

 

1,384

 

 

 

1,502

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,274

 

 

$

2,238

 

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

 

5


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2017

(in millions, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2016

 

 

134,706,467

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

831

 

 

$

945

 

 

$

(77

)

 

 

(3,395,487

)

 

$

(197

)

 

$

1,502

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

7

 

Issuance of common stock related to exercises of options and vesting of RSUs

 

 

611,948

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,529,923

)

 

 

(150

)

 

 

(150

)

Withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2017

 

 

135,318,415

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

843

 

 

$

958

 

 

$

(70

)

 

 

(6,925,410

)

 

$

(347

)

 

$

1,384

 

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

 

 

6


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three months ended March 31,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

13

 

 

$

29

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment, including amortization of internal-use

   software and website development

 

 

19

 

 

 

16

 

Amortization of intangible assets

 

 

8

 

 

 

8

 

Stock-based compensation expense

 

 

19

 

 

 

19

 

Deferred tax expense

 

 

7

 

 

 

2

 

Other, net

 

 

(1

)

 

 

-

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

(35

)

 

 

(65

)

Accounts payable, accrued expenses and other liabilities

 

 

(8

)

 

 

14

 

Deferred merchant payables

 

 

88

 

 

 

72

 

Income tax receivables/payables, net

 

 

-

 

 

 

(1

)

Deferred revenue

 

 

24

 

 

 

30

 

Net cash provided by operating activities

 

 

134

 

 

 

124

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, including internal-use software and website development

 

 

(18

)

 

 

(17

)

Purchases of marketable securities

 

 

-

 

 

 

(16

)

Sales of marketable securities

 

 

102

 

 

 

33

 

Maturities of marketable securities

 

 

14

 

 

 

11

 

Net cash provided by investing activities

 

 

98

 

 

 

11

 

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(150

)

 

 

(1

)

Proceeds from 2015 credit facility

 

 

270

 

 

 

-

 

Payments to 2015 credit facility

 

 

(151

)

 

 

(90

)

Payments to 2016 credit facility

 

 

(73

)

 

 

-

 

Proceeds from exercise of stock options

 

 

3

 

 

 

2

 

Payment of withholding taxes on net share settlements of equity awards

 

 

(13

)

 

 

(9

)

Net cash used in financing activities

 

 

(114

)

 

 

(98

)

Effect of exchange rate changes on cash and cash equivalents

 

 

1

 

 

 

2

 

Net increase in cash and cash equivalents

 

 

119

 

 

 

39

 

Cash and cash equivalents at beginning of period

 

 

612

 

 

 

614

 

Cash and cash equivalents at end of period

 

$

731

 

 

$

653

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Stock-based compensation capitalized with internal-use software and website development costs

 

$

3

 

 

$

3

 

 

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

 


7


 

TRIPADVISOR, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

We refer to TripAdvisor, Inc. and our wholly-owned subsidiaries as “TripAdvisor,” “the Company,” “us,” “we” and “our” in these notes to the unaudited condensed consolidated financial statements.

Description of Business

TripAdvisor is an online travel company, empowering users to plan and book the perfect trip. TripAdvisor’s travel platform aggregates reviews and opinions of members about destinations, accommodations, activities and attractions, and restaurants throughout the world so that our users have access to trusted advice wherever their trips take them. Our platform helps users plan their trips with our unique user-generated content and enables users to compare real-time pricing and availability so that they can book hotels, flights, cruises, vacation rentals, activities and attractions, and restaurant reservations.

Our flagship brand is TripAdvisor.  TripAdvisor-branded websites include tripadvisor.com in the United States and localized versions of the website in 48 markets and 28 languages worldwide. In addition to the flagship TripAdvisor brand, we manage and operate the following 23 other travel media brands, connected by the common goal of providing users the most comprehensive travel-planning and trip-taking resources in the travel industry: www.airfarewatchdog.com, www.bookingbuddy.com, www.citymaps.com, www.cruisecritic.com, www.familyvacationcritic.com, www.flipkey.com, www.thefork.com (including www.lafourchette.com, www.eltenedor.com, www.iens.nl, and www.dimmi.com.au), www.gateguru.com, www.holidaylettings.co.uk, www.holidaywatchdog.com, www.housetrip.com, www.independenttraveler.com, www.jetsetter.com, www.niumba.com, www.onetime.com, www.oyster.com, www.seatguru.com, www.smartertravel.com, www.tingo.com, www.travelpod.com, www.tripbod.com, www.vacationhomerentals.com, and www.viator.com.

We have two reportable segments: Hotel and Non-Hotel. We derive the substantial portion of our revenue from our Hotel segment, through the sale of advertising, primarily through click-based advertising and commission-based transactions via our instant booking feature and, to a lesser extent, display-based advertising, subscription-based hotel advertising, hotel room reservations sold through our websites, and from content licensing. Our Non-Hotel segment consists of our Vacation Rentals, Restaurants and Attractions businesses. We derive revenue from our Non-Hotel segment from subscription and commission-based transaction offerings from our Vacation Rental business; destination activities primarily sold through Viator; and online restaurant reservations booked primarily through thefork.com. For further information on our segments see “Note 12: Segment Information,” in these notes to our unaudited condensed consolidated financial statements.  

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited condensed consolidated financial statements include TripAdvisor, our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. All inter-company accounts and transactions have been eliminated in consolidation.

One of our subsidiaries that operates in China has a variable interest in an affiliated entity in China in order to comply with Chinese laws and regulations, which restrict foreign investment in Internet content provision businesses. Although we do not own the capital stock of this Chinese affiliate, we consolidate its results as we are the primary beneficiary of the cash losses or profits of this variable interest affiliate and have the power to direct the activity of this affiliate. Our variable interest entity is not material for all periods presented.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period have been included. These adjustments consist of normal recurring items. We prepared the unaudited condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, we have condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. Our interim unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2016, previously filed with the SEC.  The unaudited condensed consolidated balance sheet as of December 31, 2016 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures including notes required by GAAP.

8


 

Accounting Estimates

We use estimates and assumptions in the preparation of our unaudited condensed consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our unaudited condensed consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our unaudited condensed consolidated financial statements include: (i) recognition and recoverability of goodwill, intangible and other long-lived assets; (ii) accounting for income taxes; and (iii) stock-based compensation.

Seasonality

Traveler expenditures in the global travel market tend to follow a seasonal pattern. As such, expenditures by travel advertisers to market to potential travelers and, therefore, our financial performance, or revenue and profits, tend to be seasonal as well. As a result, our financial performance tends to be seasonally highest in the third quarter of a year, as it is a key period for travel research and trip-taking, compared to the first and fourth quarters which represent seasonal low points. Further significant shifts in our business mix or adverse economic conditions could result in future seasonal patterns that are different from historical trends.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements Not Yet Adopted

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which shortens the amortization period for the premium paid on certain purchased callable debt securities to the earliest call date instead of the bond’s maturity. The amendments do not require an accounting change for securities held at a discount; instead, the discount continues to be amortized to maturity. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements and related disclosures as well as the date we will adopt this new guidance.

 

In January 2017, the FASB issued new accounting guidance  to clarify the definition of a business and provide additional guidance to assist entities with evaluating whether transactions should be accounted for as asset acquisitions (or asset disposals) or business combinations (or disposals of a business). Under this new guidance, an entity first determines whether substantially all of the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this criterion is met, the transaction should be accounted for as an asset acquisition as opposed to a business combination. This distinction is important because the accounting for an asset acquisition significantly differs from the accounting for a business combination. This new guidance eliminates the requirement to evaluate whether a market participant could replace missing elements (e.g. inputs or processes), narrows the definition of outputs and requires that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.  This new guidance will be effective for us in the first quarter of 2018, with early adoption permitted including for interim or annual periods in which the financial statements have not been issued or made available for issuance. The new guidance will be applied prospectively to any transactions occurring within the period of adoption. We are currently considering our timing of adoption. Upon adoption, the new guidance will impact how we assess acquisitions (or disposals) of assets or businesses and do not expect it will have a material impact on our consolidated financial statements and related disclosures.

 

In January 2017, the FASB issued new accounting guidance to simplify the accounting for goodwill impairment. The new guidance removes Step two of the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill, which requires a hypothetical purchase price allocation, with the carrying amount of that reporting unit’s goodwill. Under this new guidance, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.  The new guidance is effective for annual and interim periods in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim or annual goodwill impairment tests occurring after January 1, 2017. The new guidance will be applied prospectively. We are currently evaluating the date we will adopt this guidance and what the impact upon adoption will be, if any .

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In November 2016, the FASB issued new accounting guidance on the classification and presentation of restricted cash in the statement of cash flows to address the diversity in practice. This new guidance requires entities to show changes in cash, cash equivalents and restricted cash on a combined basis in the statement of cash flows. In addition, this accounting guidance requires a reconciliation of the total c ash, cash equivalent and restricted cash in the statement of cash flows to the related captions in the balance sheet if cash, cash equivalents and restricted cash are presented in more than one line item in the balance sheet. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includ es that interim period.  Upon adoption, an entity may apply the new guidance only retrospectively to all prior periods presented in the financial statements.  We anticipate adopting this new guidance on January 1, 2018, on a retrospective basis, and curren tly do not expect it will have a material impact on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued new accounting guidance on income tax accounting associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  Upon adoption, an entity may apply the new guidance only on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We expect to adopt this new guidance on January 1, 2018 and are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued new accounting guidance which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. The new guidance specifically addresses the following cash flow topics in an effort to reduce diversity in practice: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted.  Upon adoption, an entity may apply the new guidance only retrospectively to all prior periods presented in the financial statements. We anticipate adopting this new guidance on January 1, 2018, on a retrospective basis, and we do not expect it will have a material impact on our consolidated financial statements and related disclosures.

In June 2016, the FASB issued new accounting guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. For financial assets measured at amortized cost, this new guidance requires an entity to: (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected; (2) recognize this allowance and changes in the allowance during subsequent periods through net income; and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. For available-for-sale debt securities, this new guidance made several targeted amendments to the existing other-than-temporary impairment model, including: (1) requiring disclosure of the allowance for credit losses; (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities; (3) limiting impairment to the difference between the amortized cost basis and fair value; and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted, including interim periods within those fiscal years beginning after December 15, 2018. We are currently considering our timing of adoption and in the process of evaluating the impact of adopting this guidance on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued new guidance related to accounting for leases. The new standard requires the recognition of assets (right-of-use-assets) and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. The new guidance will classify leases as either finance or operating leases, with classification determining the presentation of expenses and cash flows on our consolidated financial statements. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. The transition guidance also provides specific guidance for sale and leaseback transactions, build-to-suit leases and amounts previously recognized in accordance with the business combinations guidance for leases. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and to help financial statement users better

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understand the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for fiscal years, and interim periods w ithin those fiscal years, beginning after December 15, 2018, with early adoption permitted, which will require the recognition and measurement of leases at the beginning of the earliest comparative period presented in the financial statements using a modif ied retrospective approach. We have not yet determined the date we will adopt this new guidance.  

We are currently evaluating the expected impact of this new standard and have made measurable progress to date. We are currently evaluating our existing population of leases under the new guidance, updating accounting policy and position memos, and assessing whether additional technology solutions are required internally to support the requirements under this accounting guidance. We will continue to evaluate the impact that this new guidance will have, if any, on the Company’s consolidated financial statements and related disclosures and provide further updates.

 

In January 2016, the FASB issued a new accounting update which amends the guidance on the classification and measurement of financial instruments. Although the accounting update retains many current requirements, it significantly revises accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The accounting update also amends certain fair value disclosures of financial instruments and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the entity’s evaluation of their other deferred tax assets. The update requires entities to carry all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures and limited liability companies at fair value, with fair value changes recognized through net income. This requirement does not apply to investments that qualify for equity method accounting, investments that result in consolidation of the investee or investments in which the entity has elected the practicability exception to fair value measurement. Under current GAAP, available-for-sale investments in equity securities, with a readily determinable fair value, are re-measured to fair value each reporting period with changes in fair value recognized in accumulated other comprehensive income (loss). However, under the new guidance, fair value adjustments will be recognized through net income. For equity securities currently accounted for under the cost method (as they do not have a readily determinable fair value), the new guidance requires those equity investments to be carried at fair value with changes in net income, unless an entity elects to measure those investments, at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company intends to elect this measurement alternative for equity securities without a readily determinable fair value. Additionally, this accounting update will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. In addition, this accounting update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost in the balance sheet. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Upon adoption, an entity will apply the new guidance on a modified retrospective basis, which is to record a cumulative-effect adjustment to beginning retained earnings as of the beginning of the first reporting period in which the guidance is adopted, with two exceptions. The amendments related to equity investments without readily determinable fair values (including disclosure requirements) will be effective prospectively. The requirement to use the exit price notion to measure the fair value of financial instruments for disclosure purposes will also be applied prospectively. We anticipate adopting this new guidance on January 1, 2018 and are still evaluating the impact to our consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers which will replace numerous requirements in GAAP, and provide companies with a single revenue recognition model for recognizing revenue from contracts with customers. The core principle of the new standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The two permitted transition methods under this new accounting guidance are the full retrospective method, in which case the guidance would be applied to each prior reporting period presented and the cumulative effect of applying the guidance would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the guidance would be recognized at the date of initial application. We anticipate adopting this new guidance on January 1, 2018.  

To date, we have made significant progress toward completing our evaluation of the potential changes from adopting the new standard on our future financial reporting and disclosures. We have established a cross-functional implementation team from across our organization and have made significant progress in the review of our contracts portfolio and our current accounting policies and practices to identify potential differences that could result from applying the requirements of the new standard to our revenue contracts.

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We continue to evaluate the impact that this new guidance will have, if any, on the Company’s consolidated financial statements, internal controls, and related disclosures and w ill provide further updates during the second quarter of 2017, including the selection of an adoption method .

Recently Adopted Accounting Pronouncements

In October 2016, the FASB issued new accounting guidance which amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control within the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. We adopted this new guidance on January 1, 2017, on a retrospective basis, with no impact on our consolidated financial statements and related disclosures.  

There have been no material changes to our significant accounting policies since December 31, 2016. For additional information about our accounting policies and estimates, refer to “Note 2: Significant Accounting Policies”, in the notes to our unaudited condensed consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.

NOTE 3: STOCK BASED AWARDS AND OTHER EQUITY INSTRUMENTS

Stock-Based Compensation Expense

The following table presents the amount of stock-based compensation expense related to stock-based awards, primarily stock options and restricted stock units (“RSUs”), on our unaudited condensed consolidated statements of operations during the periods presented:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(in millions)

 

Selling and marketing

 

$

5

 

 

$

4

 

Technology and content

 

 

7

 

 

 

9

 

General and administrative

 

 

7

 

 

 

6

 

Total stock-based compensation

 

 

19

 

 

 

19

 

Income tax benefit from stock-based compensation

 

 

(7

)

 

 

(7

)

Total stock-based compensation, net of tax effect

 

$

12

 

 

$

12

 

During both the three months ended March 31, 2017 and 2016, respectively, we capitalized $3 million of stock-based compensation expense as internal-use software and website development costs.  

 

Stock-Based Award Activity and Valuation

2017 Stock Option Activity

During the three months ended March 31, 2017, we have issued 1,485,903 service-based non-qualified stock options under the Company’s Amended and Restated 2011 Stock and Annual Incentive Plan (the “2011 Incentive Plan”). These stock options generally have a term of ten years from the date of grant and generally vest equally over a four-year requisite service period.

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A summary of the status and activity for stock option awards relating to our common stock for the three months ended March 31, 2017, is presented below:

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Exercise

 

 

Remaining

 

 

Aggregate

 

 

 

Options

 

 

Price Per

 

 

Contractual

 

 

Intrinsic

 

 

 

Outstanding

 

 

Share

 

 

Life

 

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

(in years)

 

 

(in millions)

 

Options outstanding at December 31, 2016

 

 

5,818

 

 

$

57.60

 

 

 

 

 

 

 

 

 

Granted

 

 

1,486

 

 

 

42.89

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(374

)

 

 

29.10

 

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

(170

)

 

 

85.55

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2017

 

 

6,760

 

 

$

55.24

 

 

 

6.4

 

 

$

13

 

Exercisable as of March 31, 2017

 

 

2,885

 

 

$

47.97

 

 

 

4.9

 

 

$

12

 

Vested and expected to vest after March 31, 2017 (2)

 

 

6,760

 

 

$

55.24

 

 

 

6.4

 

 

$

13

 

 

(1)

Inclusive of 219,451 of options which were not converted into shares due to net share settlement in order to cover the aggregate exercise price and the required amount of employee withholding taxes. Potential shares that had been convertible under stock options that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Incentive Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited condensed consolidated statements of cash flows.

 

(2)

The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures as allowed under GAAP and   therefore do not include a forfeiture rate in our vested and expected to vest calculation unless necessary for a performance condition award.

Aggregate intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on The NASDAQ Global Select Market as of March 31, 2017 was $43.16. The total intrinsic value of stock options exercised was $7 million and $12 million,   for the three months ended March 31, 2017 and 2016, respectively.

The fair value of stock option grants under the 2011 Incentive Plan has been estimated at the date of grant using the Black–Scholes option pricing model with the following weighted average assumptions for the periods presented:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Risk free interest rate

 

 

1.91

%

 

 

1.28

%

Expected term (in years)

 

 

5.35

 

 

 

5.18

 

Expected volatility

 

 

41.53

%

 

 

41.64

%

Expected dividend yield

 

—  %

 

 

—  %

 

 

 

The weighted-average grant date fair value of options granted was $17.20 and $24.41 for the three months ended March 31, 2017 and 2016, respectively. The total fair value of stock options vested was $13 million and $23 million, for the three months ended March 31, 2017 and 2016, respectively. Cash received from stock option exercises was $3 million and $2 million for the three months ended March 31, 2017 and 2016, respectively.

2017 RSU Activity

During the three months ended March 31, 2017, we issued 3,732,145 RSUs under the 2011 Incentive Plan for which the fair value was measured based on the quoted price of our common stock on the date of grant. These RSUs generally vest over a four-year requisite service period.

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The following table presents a summary of ou r RSU activity during the three months ended March 31, 2017:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Grant-

 

 

Aggregate

 

 

 

RSUs

 

 

Date Fair

 

 

Intrinsic

 

 

 

Outstanding

 

 

Value Per Share

 

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

(in millions)

 

Unvested RSUs outstanding as of December 31, 2016

 

 

2,856

 

 

$

69.35

 

 

 

 

 

Granted

 

 

3,732

 

 

 

42.90

 

 

 

 

 

Vested and released (1)

 

 

(692

)

 

 

67.30

 

 

 

 

 

Cancelled

 

 

(104

)

 

 

63.40

 

 

 

 

 

Unvested RSUs outstanding as of March 31, 2017

 

 

5,792

 

 

$

52.65

 

 

$

250

 

Expected to vest after March 31, 2017 (2)

 

 

5,792

 

 

$

52.65

 

 

$

250

 

 

 

(1)

Inclusive of 212,894 RSUs withheld due to net share settlement to satisfy required employee tax withholding requirements. Potential shares which had been convertible under RSUs that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Incentive Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited condensed consolidated statements of cash flows.

 

(2)

The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures as allowed under GAAP and   therefore do not include a forfeiture rate in our expected to vest calculation unless necessary for a performance condition award.

Total current income tax benefits during the three months ended March 31, 2017 and 2016 associated with the exercise or settlement of all TripAdvisor stock-based awards held by our employees were $14 million and $12 million, respectively.

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized stock-based compensation expense and the weighted average remaining amortization period at March 31, 2017 related to our non-vested stock options and RSU awards is presented below (in millions, except in years information):

 

 

 

Stock

 

 

 

 

 

 

 

Options

 

 

RSUs

 

Unrecognized compensation expense

 

$

64

 

 

$

283

 

Weighted average period remaining (in years)

 

 

2.9

 

 

 

3.4

 

 

 

NOTE 4: EARNINGS PER SHARE

Basic Earnings Per Share Attributable to Common Stockholders

We compute basic earnings per share (“Basic EPS”) by dividing net income by the weighted average number of common shares outstanding during the period. We compute the weighted average number of common shares outstanding during the reporting period using the total of common stock and Class B common stock outstanding as of the last day of the previous year end reporting period plus the weighted average of any additional shares issued and outstanding less the weighted average of any common shares repurchased during the reporting period.

Diluted Earnings Per Share Attributable to Common Stockholders

Diluted earnings per share (“Diluted EPS”) include the potential dilution of common equivalent shares outstanding that could occur from stock-based awards and other stock-based commitments using the treasury stock method.  We compute Diluted EPS by dividing net income by the sum of the weighted average number of common and common equivalent shares outstanding during the period. We computed the weighted average number of common and common equivalent shares outstanding during the period using the sum of (i) the number of shares of common stock and Class B common stock used in the basic earnings per share calculation as indicated above, and (ii) if dilutive, the incremental weighted average common stock that we would issue upon the assumed exercise of outstanding common equivalent shares related to stock options and the vesting of restricted stock units using the treasury stock method, and (iii) if dilutive, performance based awards based on the number of shares that would be issuable as of the end of the reporting period assuming the end of the reporting period was also the end of the contingency period.

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Under the treasury stock method, the assumed proceeds calculation includes the actual proceeds to be received from the employee upon exercise of outstanding equity awards and the average unrecognized compensation cost during the perio d. The treasury stock method assumes that a company uses the proceeds from the exercise of an equity award to repurchase common stock at the average market price for the reporting period.

Below is a reconciliation of the weighted average number of shares of common stock outstanding in calculating Diluted EPS (shares in thousands and dollars in millions, except per share amounts) for the periods presented:

 

 

Three months ended March 31,

 

 

 

2017

 

 

2016

 

Numerator:

 

 

 

 

 

 

 

 

Net income

 

$

13

 

 

$

29

 

Denominator:

 

 

 

 

 

 

 

 

Weighted average shares used to compute Basic EPS

 

 

143,632

 

 

 

145,445

 

Weighted average effect of dilutive securities:

 

 

 

 

 

 

 

 

Stock options

 

 

516

 

 

 

1,185

 

RSUs

 

 

569

 

 

 

273

 

Weighted average shares used to compute Diluted EPS

 

 

144,717

 

 

 

146,903