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 September 30, 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 November 1, 2017

Common Stock, $0.001 par value per share

 

126,079,380 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


 

TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended September 30, 2017

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Unaudited Condensed Consolidated Financial Statements

 

  

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016

  

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016

  

4

Unaudited Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 201 6

  

5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 201 7

  

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 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

  

25

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

  

55

Item 3. Defaults Upon Senior Securities

  

56

Item 4. Mine Safety Disclosures

  

56

Item 5. Other Information

  

56

Item 6. Exhibits

  

56

 

Signatures

  

57

 

 

 

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 September 30,

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenue

 

$

439

 

 

$

421

 

 

$

1,235

 

 

$

1,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

20

 

 

 

19

 

 

 

56

 

 

 

55

 

Selling and marketing (2)

 

 

247

 

 

 

210

 

 

 

683

 

 

 

584

 

Technology and content (2)

 

 

61

 

 

 

62

 

 

 

184

 

 

 

185

 

General and administrative (2)

 

 

42

 

 

 

38

 

 

 

115

 

 

 

110

 

Depreciation

 

 

19

 

 

 

18

 

 

 

57

 

 

 

51

 

Amortization of intangible assets

 

 

8

 

 

 

8

 

 

 

25

 

 

 

23

 

Total costs and expenses

 

 

397

 

 

 

355

 

 

 

1,120

 

 

 

1,008

 

Operating income

 

 

42

 

 

 

66

 

 

 

115

 

 

 

156

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4

)

 

 

(3

)

 

 

(11

)

 

 

(10

)

Interest income and other, net

 

 

-

 

 

 

-

 

 

 

3

 

 

 

-

 

Total other income (expense), net

 

 

(4

)

 

 

(3

)

 

 

(8

)

 

 

(10

)

Income before income taxes

 

 

38

 

 

 

63

 

 

 

107

 

 

 

146

 

Provision for income taxes

 

 

(13

)

 

 

(8

)

 

 

(42

)

 

 

(27

)

Net income

 

$

25

 

 

$

55

 

 

$

65

 

 

$

119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.38

 

 

$

0.46

 

 

$

0.82

 

Diluted

 

$

0.18

 

 

$

0.37

 

 

$

0.46

 

 

$

0.81

 

Weighted average common shares outstanding (Note 4):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

139

 

 

 

146

 

 

 

141

 

 

 

146

 

Diluted

 

 

139

 

 

 

147

 

 

 

142

 

 

 

147

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired technology included in amortization of intangible assets

 

$

2

 

 

$

2

 

 

$

6

 

 

$

5

 

Amortization of website development costs included in depreciation

 

 

14

 

 

 

12

 

 

 

39

 

 

 

33

 

 

 

$

16

 

 

$

14

 

 

$

45

 

 

$

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

5

 

 

$

5

 

 

$

16

 

 

$

15

 

Technology and content

 

$

12

 

 

$

11

 

 

$

31

 

 

$

30

 

General and administrative

 

$

9

 

 

$

6

 

 

$

25

 

 

$

19

 

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

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

25

 

 

$

55

 

 

$

65

 

 

$

119

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

10

 

 

 

3

 

 

 

30

 

 

 

4

 

Total other comprehensive income (loss)

 

 

10

 

 

 

3

 

 

 

30

 

 

 

4

 

Comprehensive income

 

$

35

 

 

$

58

 

 

$

95

 

 

$

123

 

 

(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)

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

2017

 

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 5)

 

$

750

 

 

$

612

 

Short-term marketable securities (Note 5)

 

 

13

 

 

 

118

 

Accounts receivable, net of allowance for doubtful accounts of $15 and $9, respectively

 

 

254

 

 

 

189

 

Prepaid expenses and other current assets

 

 

25

 

 

 

31

 

Total current assets

 

 

1,042

 

 

 

950

 

Long-term marketable securities (Note 5)

 

 

6

 

 

 

16

 

Property and equipment, net of accumulated depreciation of $166 and $111, respectively

 

 

266

 

 

 

260

 

Intangible assets, net of accumulated amortization of $107 and $80, respectively

 

 

150

 

 

 

167

 

Goodwill

 

 

756

 

 

 

736

 

Deferred income taxes, net

 

 

58

 

 

 

42

 

Other long-term assets

 

 

70

 

 

 

67

 

TOTAL ASSETS

 

$

2,348

 

 

$

2,238

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15

 

 

$

14

 

Deferred merchant payables

 

 

203

 

 

 

128

 

Deferred revenue

 

 

65

 

 

 

64

 

Current portion of debt (Note 6)

 

 

7

 

 

 

80

 

Taxes payable

 

 

4

 

 

 

10

 

Accrued expenses and other current liabilities

 

 

128

 

 

 

127

 

Total current liabilities

 

 

422

 

 

 

423

 

Long-term debt (Note 6)

 

 

265

 

 

 

91

 

Deferred income taxes, net

 

 

16

 

 

 

12

 

Other long-term liabilities

 

 

228

 

 

 

210

 

Total Liabilities

 

 

931

 

 

 

736

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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: 135,510,995 and 134,706,467, respectively

 

 

 

 

 

 

 

 

Shares outstanding: 126,036,505 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

 

 

901

 

 

 

831

 

Retained earnings

 

 

1,010

 

 

 

945

 

Accumulated other comprehensive income (loss)

 

 

(47

)

 

 

(77

)

Treasury stock-common stock, at cost, 9,474,490 and 3,395,487 shares, respectively

 

 

(447

)

 

 

(197

)

Total Stockholders’ Equity

 

 

1,417

 

 

 

1,502

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,348

 

 

$

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 NINE MONTHS ENDED SEPTEMBER 30, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

 

 

30

 

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

 

 

804,528

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,079,003

)

 

 

(250

)

 

 

(250

)

Withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2017

 

 

135,510,995

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

901

 

 

$

1,010

 

 

$

(47

)

 

 

(9,474,490

)

 

$

(447

)

 

$

1,417

 

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)

 

 

 

Nine months ended September 30,

 

 

 

2017

 

 

2016

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

65

 

 

$

119

 

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

 

 

57

 

 

 

51

 

Amortization of intangible assets

 

 

25

 

 

 

23

 

Stock-based compensation expense

 

 

72

 

 

 

64

 

Deferred tax (benefit) expense

 

 

(12

)

 

 

(14

)

Other, net

 

 

6

 

 

 

4

 

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

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

(58

)

 

 

(40

)

Accounts payable, accrued expenses and other liabilities

 

 

(2

)

 

 

2

 

Deferred merchant payables

 

 

62

 

 

 

42

 

Income tax receivables/payables, net

 

 

5

 

 

 

19

 

Deferred revenue

 

 

-

 

 

 

6

 

Net cash provided by operating activities

 

 

220

 

 

 

276

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, including internal-use software and website development

 

 

(50

)

 

 

(57

)

Acquisitions, net of cash acquired

 

 

-

 

 

 

(23

)

Purchases of marketable securities

 

 

(16

)

 

 

(145

)

Sales of marketable securities

 

 

105

 

 

 

62

 

Maturities of marketable securities

 

 

25

 

 

 

22

 

Other investing activities, net

 

 

-

 

 

 

1

 

Net cash provided by (used in) investing activities

 

 

64

 

 

 

(140

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(250

)

 

 

(21

)

Proceeds from Chinese credit facilities

 

 

-

 

 

 

2

 

Proceeds from 2015 credit facility, net of financing costs

 

 

413

 

 

 

10

 

Payments to 2015 credit facility

 

 

(241

)

 

 

(190

)

Proceeds from 2016 credit facility, net of financing costs

 

 

-

 

 

 

73

 

Payments to 2016 credit facility

 

 

(73

)

 

 

-

 

Proceeds from exercise of stock options

 

 

3

 

 

 

6

 

Payment of withholding taxes on net share settlements of equity awards

 

 

(15

)

 

 

(13

)

Net cash used in financing activities

 

 

(163

)

 

 

(133

)

Effect of exchange rate changes on cash and cash equivalents

 

 

17

 

 

 

(6

)

Net increase (decrease) in cash and cash equivalents

 

 

138

 

 

 

(3

)

Cash and cash equivalents at beginning of period

 

 

612

 

 

 

614

 

Cash and cash equivalents at end of period

 

$

750

 

 

$

611

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

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

 

$

10

 

 

$

9

 

 

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 20 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.jetsetter.com, www.niumba.com, www.onetime.com, www.oyster.com, www.seatguru.com, www.smartertravel.com, www.tingo.com, www.vacationhomerentals.com, and www.viator.com.

We have two reportable segments: Hotel and Non-Hotel. We derive a majority of our revenue from our Hotel segment, through the sale of advertising, primarily through click-based advertising, as well as from commission-based transactions via our instant booking feature, 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 Attractions, Restaurants, and Vacation Rentals businesses. We derive revenue from our Non-Hotel segment from subscription and commission-based transaction offerings from our Vacation Rentals business; destination activities primarily sold through Viator; and online restaurant reservations booked primarily through thefork.com. For further information on our segments see “Note 11: 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. Additionally, certain prior period amounts have been reclassified for comparability with the current period presentation. 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.

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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 second and third quarters of a year, as it is a key period for leisure travel research and trip-taking, which includes the seasonal peak in traveler hotel and vacation rental stays, and tours and attractions taken, 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 May 2017, the Financial Accounting Standard Board (“FASB”) issued new accounting guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications which will reduce diversity in practice. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if the award’s fair value (or calculated value or intrinsic value, if those measurement methods are used), the award’s vesting conditions, and the award’s classification as an equity or liability instrument are the same immediately before and after the change. The guidance also states that an entity is not required to estimate the value of the award immediately before and after the change if the change does not affect any of the inputs to the model used to value the award. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and will be applied prospectively to awards modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. We anticipate adopting this new guidance on January 1, 2018. Upon adoption, we believe the new guidance will likely result in fewer changes to the terms of an award being accounted for as modifications.  

 

In March 2017, the 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 anticipate adopting this new guidance on January 1, 2019 and based on the composition of our current investment portfolio we do not expect the new guidance will have a material impact on our consolidated financial statements and related disclosures.

 

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 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted including adoption in any 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 anticipate adopting this new guidance on January 1, 2018. Upon adoption, the new guidance will impact how we assess acquisitions (or disposals) of assets or businesses.

 

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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 b e applied prospectively. We are currently evaluating this guidance, including the date we will adopt this guidance and what the impact upon adoption will be, if any.

 

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 cash, 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 includes 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 and currently do not expect this new guidance 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. Early adoption is permitted as of the beginning of an annual reporting period for which interim or annual financial statements have not been issued. 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 anticipate adopting this new guidance on January 1, 2018 and do not expect this new guidance will have a material impact 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 and we do not expect this new guidance 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.

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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. We will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases which include, among other things, the computation and disclosure of our weighted average remaining lease term and discount rate, cash paid for amounts included in the measurement of lease liabilities, and supplemental non-cash information on lease liabilities arising from obtaining the right-of-use assets. These disclosures are intended to provide supplemental information to the amounts recorded in the financial statements so that users can better understand the nature of an entity’s leasing activities. This guidance is effective for fiscal years, and interim periods within 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 modified retrospective approach. We anticipate adopting this new guidance on January 1, 2019.

 

To date, we have made measurable progress toward evaluating the new lease guidance and have begun updating accounting policies, accounting position memos, and evaluating our existing population of contracts to ensure all contracts that meet the definition of a lease contract under the new standard upon adoption are identified. We are also in the process of implementing additional lease software to support our accounting and reporting process under the new lease accounting guidance, including the new quantitative and qualitative financial disclosure requirements. In addition, we are evaluating the impact of the system implementation on our internal controls. We will continue to provide updates of our assessment of the effect, that this new lease guidance will have on our consolidated financial statements, disclosures, systems and related controls, and will disclose any material effects, if any, when known.

 

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 based on the composition of our current investments, we do not expect the adoption of this guidance will have a material impact on our consolidated financial statements and related disclosures.

 

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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 a bout 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, t he 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 t wo 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 recognize d 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 will adopt this new guidance on January 1, 2018 under the modified retrospective method, which means that revenues for 2016 and 2017 will be reported on a historical basis and revenues for 2018 will be reported on the new basis and also disclosed on the historical basis.

 

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. To date, we have evaluated the significant majority of our revenue streams and based on the Company's preliminary analysis; we expect the revenue standard will change the timing of revenue recognition for our instant booking revenue recorded under the consumption model. Upon adoption, this revenue will be recognized at the transaction booking date for a hotel accommodation rather than upon completion of the stay by the traveler, which is how it is currently recorded.  The Company does not currently expect this timing change to have a material impact to its financial statements, either on an annual or quarterly basis. In addition to the changes in our instant booking revenue under the consumption model, the new guidance will result in other immaterial changes in the timing of certain other revenue streams. We currently do not expect any major reengineering required to our accounting systems or to our internal controls related to the above accounting changes or related to the additional disclosure requirements required by the standard. However, while we have made significant progress, and are in our implementation phase of this project, we are still evaluating less material portions of our revenue, and, in addition, our costs incurred to obtain or fulfill a contract. We will continue to update our assessment of the effect that the new revenue guidance will have on our consolidated financial statements, disclosures and related controls, and will disclose any material effects, if any, when known.

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 consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2016.

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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

 

 

Nine months ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

(in millions)

 

 

(in millions)

 

Selling and marketing

 

$

5

 

 

$

5

 

 

$

16

 

 

$

15

 

Technology and content

 

 

12

 

 

 

11

 

 

 

31

 

 

 

30

 

General and administrative

 

 

9

 

 

 

6

 

 

 

25

 

 

 

19

 

Total stock-based compensation

 

 

26

 

 

 

22

 

 

 

72

 

 

 

64

 

Income tax benefit from stock-based compensation

 

 

(9

)

 

 

(8

)

 

 

(27

)

 

 

(23

)

Total stock-based compensation, net of tax effect

 

$

17

 

 

$

14

 

 

$

45

 

 

$

41

 

During the three and nine months ended September 30, 2017, we capitalized $3 million and $10 million, respectively, of stock-based compensation expense as internal-use software and website development costs. During the three and nine months ended September 30, 2016, we capitalized $3 million and $9 million, respectively, 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 nine months ended September 30, 2017, we have issued 1,529,127 service-based non-qualified stock options under the Company’s Amended and Restated 2011 Stock and Annual Incentive Plan (the “2011 Incentive Plan”). Generally our stock options have a term of ten years from the date of grant and generally vest equally over a four-year requisite service period.

The following table presents a summary of our stock option activity during the nine months ended September 30, 2017:

 

 

 

 

 

 

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