Notes to Unaudited Consolidated Financial Statements
1
.
BASIS OF PRESENTATION
Management of Booking Holdings Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2017
.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, priceline, KAYAK, agoda, Rentalcars.com and OpenTable. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiaries is generally the respective local currency. Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date. Income statement amounts are translated at the average exchange rates for the period. Translation gains and losses are included as a component of "
Accumulated other comprehensive income (loss)
" in the accompanying Unaudited Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for any subsequent quarter or the full year.
Change in Presentation
In the first quarter of 2018, the Company changed the presentation of "Performance advertising", "Brand advertising", and "Sales and marketing" to "Performance marketing", "Brand marketing" and "Sales and other expenses" in the Unaudited Consolidated Statements of Operations. The descriptions of these new lines are as follows:
"Performance marketing" expenses are marketing expenses generally measured by return on investment or an increase in bookings over a specified time period. These expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements, including certain incentive programs.
"Brand marketing" expenses are marketing expenses to build brand awareness over a specified time period. These expenses consist primarily of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing expenses such as public relations, trade shows and sponsorships.
"Sales and other expenses" are generally variable in nature and consist primarily of: (1) credit cards and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) provisions for customer chargebacks associated with merchant transactions; (4) customer relations costs; (5) provisions for bad debt, primarily related to agency accommodation commission receivables; and (6) insurance claim costs.
Reclassification
In conjunction with the adoption of the current revenue standard effective January 1, 2018, the Company reclassified certain expenses from "Cost of revenues" to "Sales and other expenses" or "General and administrative" expenses in its Unaudited Consolidated Statement of Operations for the
three
and
nine
months ended
September 30, 2017
to conform to the current period presentation.
The change in presentation and the reclassification for the
three
and
nine
months ended
September 30, 2017
had no impact on operating income or net income and are summarized below (in thousands):
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|
Previously Reported
|
|
Three Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2017
|
|
Cost of revenues
|
|
$
|
59,476
|
|
|
$
|
217,387
|
|
|
Performance advertising
|
|
1,224,345
|
|
|
3,352,707
|
|
|
Brand advertising
|
|
112,796
|
|
|
306,995
|
|
|
Sales and marketing
|
|
165,539
|
|
|
411,309
|
|
|
General and administrative
|
|
142,823
|
|
|
420,004
|
|
|
|
|
|
|
|
Current Presentation
|
|
Three Months Ended
September 30, 2017
|
|
Nine Months Ended
September 30, 2017
|
|
Cost of revenues
|
|
$
|
54,181
|
|
|
$
|
202,007
|
|
|
Performance marketing
|
|
1,231,074
|
|
|
3,364,589
|
|
|
Brand marketing
|
|
125,877
|
|
|
337,016
|
|
|
Sales and other expenses
|
|
151,024
|
|
|
382,538
|
|
|
General and administrative
|
|
142,823
|
|
|
422,252
|
|
Balance Sheet Reclassification
In the second quarter of 2018, the Company changed the presentation of "Long-term investments" to include investments in private companies, which were previously included in "Other assets" in the Unaudited Consolidated Balance Sheets. Therefore, the Company reclassified
$450.9 million
for investments in private companies to conform its Consolidated Balance Sheet at December 31, 2017 to this current period presentation. See the section "Long-term Equity Investments without Readily Determinable Fair Value" within Note 5 for more detail.
Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents at
September 30, 2018
and
December 31, 2017
principally relates to the minimum cash requirement for Rentalcars.com's insurance business established in the fourth quarter of 2017. The following table reconciles cash, cash equivalents and restricted cash and cash equivalents reported in the Unaudited Consolidated Balance Sheets to the total amount shown in the Unaudited Consolidated Statements of Cash Flows (in thousands):
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|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
As included in the Unaudited Consolidated Balance Sheets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,973,096
|
|
|
$
|
2,541,604
|
|
Restricted cash and cash equivalents included in prepaid expenses and other current assets
|
|
21,376
|
|
|
21,737
|
|
Total cash, cash equivalents and restricted cash and cash equivalents as shown in the Unaudited Consolidated Statements of Cash Flows
|
|
$
|
2,994,472
|
|
|
$
|
2,563,341
|
|
Recent Accounting Pronouncements Adopted
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the Financial Accounting Standards Board (“FASB”) issued a new accounting update to shorten the premium amortization period of purchased callable debt securities with non-contingent call features that are callable at fixed prices and on preset dates from their contractual maturity to the earliest call date. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the third quarter of 2018. The adoption of this update did not have an impact to the Unaudited Consolidated Financial Statements.
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued a new accounting update to make targeted improvement to the disclosure requirement for fair value measurements as part of its disclosure framework project. This update eliminates, adds and modifies
certain disclosure requirements primarily related to Level 3 fair value measurements. For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the third quarter of 2018. The adoption of this update did not have an impact to the Unaudited Consolidated Financial Statements.
Improvements to Non-employee Share-Based Payment Accounting
In June 2018, the FASB issued a new accounting update which amends the guidance on share-based payments granted to non-employees for goods and services to align it with the guidance for share-based payments to employees. Under this new guidance, share-based awards to non-employees will be generally measured at fair value on the grant date of the awards and entities will need to assess the probability of satisfying performance conditions, if any are present, to determine expense to be recognized.
This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the second quarter of 2018 and applied this update as of January 1, 2018. The adoption of this update did not have a material impact to the Unaudited Consolidated Financial Statements.
Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued a new accounting update which amends the guidance on the recognition and measurement of financial instruments. The update (1) requires an entity to measure equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income rather than accumulated other comprehensive income, (2) allows an entity to elect to measure those equity investments that do not have a readily determinable fair value 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, (3) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and (4) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s evaluation of their other deferred tax assets.
This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this update in the first quarter of 2018. The Company recorded an increase of
$241.1 million
to retained earnings for the net unrealized gain, net of tax, related to its investment in Ctrip equity securities, with an offsetting adjustment to accumulated other comprehensive income as of January 1, 2018. Changes in fair value of the Company's investments in marketable equity securities subsequent to January 1, 2018 are recognized in net income (see Note
5
). In addition, the Company elected to continue to use the cost method of accounting for equity investments without a readily determinable fair value.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that was designed to create greater comparability for financial statement users across industries and jurisdictions. The core principle of this new standard is that an "entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This new standard also requires enhanced disclosures on the nature, amount, timing and uncertainty of revenue from contracts with customers. Since May 2014, the FASB has issued several amendments to this new standard, including additional guidance, and deferred the effective date for public business entities to annual and interim periods beginning after December 15, 2017.
The Company adopted this new standard on January 1, 2018. The Company recorded a net increase to its retained earnings of
$188.5 million
, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the new standard, with substantially all of the impact related to the Company’s travel reservation services. See Note
2
for more information on the effects of the adoption of this standard.
Other Recent Accounting Pronouncements
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the FASB issued a new accounting update to address a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption allowed. The Company plans to adopt this update on January 1, 2019 and apply it on a prospective basis. The Company does not expect a material impact to the Unaudited Consolidated Financial Statements resulting from the adoption.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued a new accounting update to simplify the test for goodwill impairment by eliminating Step 2, 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 update, an entity would perform its quantitative annual or interim goodwill impairment test using the current Step 1 test and recognize an impairment charge for the excess of the carrying value of a reporting unit over its fair value.
For public business entities, this update is effective for their annual or any interim goodwill impairment tests 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 update will be applied prospectively. The Company has not early adopted this update.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued a new accounting update 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 update 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 update 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 update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to apply this update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this update and does not expect there to be a material impact.
Leases
In February 2016, the FASB issued a new accounting standard intended to improve the financial reporting of lease transactions. The new accounting standard requires lessees to recognize an asset and a liability on the balance sheet for the rights and obligations created by entering into a lease transaction. The new standard retains the dual-model concept by requiring entities to determine if a lease is an operating or financing lease. The lessor accounting model remains largely unchanged. The new standard expands qualitative and quantitative disclosures for lessees.
The standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach applied to the earliest comparative period in the
financial statements. In July 2018, the FASB approved a new transition method that would permit issuers to apply the standard as of January 1, 2019. Early adoption is permitted.
The Company will adopt this standard in the first quarter of 2019 and apply it as of January 1, 2019. The Company is in the process of implementing a software platform to facilitate compliance with the new accounting and disclosure requirements. The Company will elect to use its previous evaluations regarding if an arrangement contains a lease, if a lease is an operating or financing lease and what costs are capitalized as initial direct costs prior to adoption, as permitted under this standard.
The most significant change will be related to the recognition of right-of-use assets and lease liabilities in the Company's Consolidated Balance Sheet for real estate operating leases. The Company will elect to combine lease and non-lease components and to include leases which have an initial term of less than one year in the calculation of the lease liability and right-of-use assets for its real estate leases. The Company performed an assessment of its real estate leases, which comprises a substantial portion of its total operating leases, and estimates that the lease liability and corresponding right-of-use asset would be approximately
$450 million
to
$550 million
at January 1, 2019, based on outstanding leases, incremental borrowing rates and foreign exchange rates in effect as of September 30, 2018. This estimate could change significantly by the adoption date due to several factors, including changes in the Company’s real estate lease portfolio, changes in foreign exchange rates and/or changes in the interest rate environment. The Company is in the process of reviewing its remaining operating leases, including its data center leases. The Company does not expect a material impact to its Consolidated Statement of Operations and Statement of Cash Flows resulting from the adoption.
2
.
REVENUE
RECOGNITION
Adoption of ASC Topic 606,
Revenues from Contracts with Customers
On January 1, 2018, the Company adopted ASC 606,
Revenue from Contracts with Customers
, using a modified retrospective method applied to all contracts as of January 1, 2018. Therefore, for reporting periods beginning after December 31, 2017, the financial statements are prepared in accordance with the current revenue standard and the financial statements for all periods prior to January 1, 2018 are presented under the previous revenue standard.
For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. For example, revenues for accommodation reservation services, which were principally recognized at check-out under the previous revenue standard, are now recognized at check-in under the current revenue standard. The Company currently expects that this timing change will not have a significant impact to its annual revenues and net income, although the effects on quarterly revenues and net income are expected to be more significant.
In addition, revenues from priceline's
Name Your Own Price
®
transactions were previously presented on a gross basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard,
Name Your Own Price
®
revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, the Company no longer presents "Cost of revenues" or "Gross profit" in its Consolidated Statements of Operations. Total revenues reported in 2018 are comparable to gross profit reported in previous years.
Billing and cash collections remain unchanged and, therefore, "Net cash provided by operating activities" as presented in the Consolidated Statements of Cash Flows is not impacted.
The Company recorded a net increase to its retained earnings of
$188.5 million
, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the current revenue standard, with substantially all of the impact related to the Company’s travel reservation services. In addition, since the Company is using the modified retrospective method of adopting the current revenue standard, the Company is required to disclose the financial impacts to its Consolidated Balance Sheets and Consolidated Statements of Operations for all 2018 reporting periods (refer to the disclosures below for this additional information).
The cumulative effects of the revenue accounting changes on the Company's Unaudited Consolidated Balance Sheet as of January 1, 2018 were as follows (in thousands):
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Balance at December 31, 2017
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Adjustments
|
|
Balance at January 1, 2018
|
ASSETS
|
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|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,217,801
|
|
|
$
|
205,324
|
|
|
$
|
1,423,125
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
667,523
|
|
|
$
|
171,644
|
|
|
$
|
839,167
|
|
Accrued expenses and other current liabilities
|
|
1,138,980
|
|
|
44,374
|
|
|
1,183,354
|
|
Deferred merchant bookings
|
|
980,455
|
|
|
(201,647
|
)
|
|
778,808
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
481,139
|
|
|
2,414
|
|
|
483,553
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Retained earnings
|
|
13,938,869
|
|
|
188,539
|
|
|
14,127,408
|
|
The following tables summarize the impacts of adopting the current revenue standard (in thousands, except per share data):
Unaudited Consolidated Balance Sheets at
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (current revenue standard)
|
|
Current period adjustments
|
|
As adjusted (previous revenue standard)
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,719,059
|
|
|
$
|
(93,439
|
)
|
|
$
|
1,625,620
|
|
Prepaid expenses and other current assets
|
|
617,616
|
|
|
18,563
|
|
|
636,179
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,174,599
|
|
|
$
|
(70,609
|
)
|
|
$
|
1,103,990
|
|
Accrued expenses and other current liabilities
|
|
1,654,370
|
|
|
(1,108
|
)
|
|
1,653,262
|
|
Deferred merchant bookings
|
|
1,101,255
|
|
|
88,594
|
|
|
1,189,849
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
491,160
|
|
|
(95
|
)
|
|
491,065
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Retained earnings
|
|
17,720,656
|
|
|
(94,781
|
)
|
|
17,625,875
|
|
Accumulated other comprehensive income (loss)
|
|
(233,806
|
)
|
|
3,123
|
|
|
(230,683
|
)
|
Unaudited Consolidated Statements of Operations for the Three Months Ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (current revenue standard)
|
|
Current period adjustments
|
|
As adjusted (previous revenue standard)
|
|
|
|
|
|
|
|
Agency revenues
|
|
$
|
3,540,874
|
|
|
$
|
55,148
|
|
|
$
|
3,596,022
|
|
Merchant revenues
|
|
1,049,661
|
|
|
48,712
|
|
|
1,098,373
|
|
Advertising and other revenues
|
|
258,555
|
|
|
(6
|
)
|
|
258,549
|
|
Cost of revenues
|
|
|
|
44,936
|
|
|
44,936
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Performance marketing
|
|
1,314,055
|
|
|
3,250
|
|
|
1,317,305
|
|
Sales and other expenses
|
|
242,974
|
|
|
206
|
|
|
243,180
|
|
General and administrative
|
|
183,228
|
|
|
86
|
|
|
183,314
|
|
Foreign currency transactions and other
|
|
(17,072
|
)
|
|
951
|
|
|
(16,121
|
)
|
Income tax expense
|
|
473,268
|
|
|
11,742
|
|
|
485,010
|
|
Net income
|
|
1,767,578
|
|
|
44,585
|
|
|
1,812,163
|
|
Net income applicable to common stockholders per basic common share
|
|
37.39
|
|
|
0.95
|
|
|
38.34
|
|
Net income applicable to common stockholders per diluted common share
|
|
37.02
|
|
|
0.93
|
|
|
37.95
|
|
Unaudited Consolidated Statements of Operations for the Nine Months Ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported (current revenue standard)
|
|
Current period adjustments
|
|
As adjusted (previous revenue standard)
|
|
|
|
|
|
|
|
Agency revenues
|
|
$
|
8,220,506
|
|
|
$
|
107,826
|
|
|
$
|
8,328,332
|
|
Merchant revenues
|
|
2,285,992
|
|
|
150,389
|
|
|
2,436,381
|
|
Advertising and other revenues
|
|
807,887
|
|
|
98
|
|
|
807,985
|
|
Cost of revenues
|
|
|
|
134,886
|
|
|
134,886
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Performance marketing
|
|
3,562,155
|
|
|
4,254
|
|
|
3,566,409
|
|
Sales and other expenses
|
|
612,367
|
|
|
206
|
|
|
612,573
|
|
General and administrative
|
|
504,120
|
|
|
1,120
|
|
|
505,240
|
|
Foreign currency transactions and other
|
|
(40,174
|
)
|
|
1,740
|
|
|
(38,434
|
)
|
Income tax expense
|
|
850,934
|
|
|
25,829
|
|
|
876,763
|
|
Net income
|
|
3,352,160
|
|
|
93,758
|
|
(1)
|
3,445,918
|
|
Net income applicable to common stockholders per basic common share
|
|
70.00
|
|
|
1.96
|
|
|
71.96
|
|
Net income applicable to common stockholders per diluted common share
|
|
69.07
|
|
|
1.94
|
|
|
71.01
|
|
(1) The current period adjustment represents the net income recorded directly to retained earnings on January 1, 2018 of
$188.5 million
that would have been recognized in the first quarter of 2018 under the previous revenue standard, partially offset by
$94.8 million
that would have been recognized in the fourth quarter of 2018 under the previous revenue standard.
Revenue Recognition
Online travel reservation services
For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. Substantially all of the Company's revenues are generated by
providing online travel reservation services, which principally allows travelers to book travel reservations (e.g., accommodation, rental car and airline ticket reservations) with travel service providers (i.e., a hotel or other accommodation, rental car company or airline) through the Company’s websites and mobile apps. While the Company generally refers to a consumer that books travel reservation services on the Company's platforms as its customer, for accounting purposes, the Company's "customers" are the travel service providers and, in certain merchant transactions, the travelers. The Company's contracts with the travel service providers give them the ability to market their reservation availability without transferring responsibility to deliver the travel service to the Company; therefore, the Company's revenues are presented on a net basis in the Consolidated Statements of Operations. These contracts include payment terms and establish the consideration to which the Company is entitled, which includes either a commission or a margin on the travel transaction. Revenue is measured based on the expected consideration specified in the contract with the travel service provider, considering the effects of sales incentives, "no show" cancellations (where the traveler has not cancelled the reservation and does not arrive on the scheduled reservation date) and "late" cancellations (where the travel service provider accepts a cancellation after its cancellation cut-off date). Estimates for cancellations are based on historical experience.
Online travel reservation services are recorded at a point in time when the Company has completed its post-booking services and the travelers begin using the arranged travel services. These services are classified into two categories:
|
|
•
|
Agency revenues are derived from travel-related transactions where the Company does not receive payments from travelers for the travel reservation services provided. The Company invoices the travel service providers for its commissions in the month that travel is completed. Agency revenues consist almost entirely of travel reservation commissions, as well as certain global distribution system ("GDS") reservation booking fees and certain travel insurance fees.
|
|
|
•
|
Merchant revenues are derived from services where the Company receives payments from travelers for the travel reservation services provided, generally at the time of booking. The Company records cash collected from travelers, which includes the amounts owed to the travel service providers and the Company’s commission or margin and fees, as deferred merchant bookings until the arranged travel service begins. Merchant revenues include net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) and travel reservation commissions in connection with our accommodation reservations and rental car services; ancillary fees, including travel insurance-related revenues, credit card processing rebates and certain GDS reservation booking fees; and customer processing fees. Substantially all merchant revenues are for merchant services derived from transactions where travelers book accommodations reservations or rental car reservations from travel service providers.
|
Pursuant to the terms of the Company's merchant services, travel service providers are permitted to bill the Company for the underlying cost of the services during a specified period of time. If the Company is not billed by the travel service provider within the specified period of time, the Company increases its revenue by the unbilled amount.
Tax Recovery Charge, Occupancy Taxes and State and Local Taxes
For merchant transactions, the Company charges the traveler an amount intended to cover the taxes that the Company anticipates the travel service provider will remit to the local taxing authorities ("tax recovery charge"). Tax rate information for calculating the tax recovery charge is provided to the Company by the travel service providers.
In certain taxing jurisdictions, the Company is required by statute, regulation or court order to collect and remit certain local occupancy tax, general excise and/or sales tax (“transaction-related taxes”) imposed upon its margin and/or service fees. In other taxing jurisdictions, the Company is required to collect from the traveler and remit directly to the taxing jurisdiction transaction-related taxes imposed on the full amount of the transaction, which includes taxes on the margin, service fees and the underlying rate provided by the travel service provider. The rate information for calculating these taxes is provided to the Company directly from the taxing jurisdictions. The taxes collected from travelers are reported on a net basis in Revenues in the Unaudited Consolidated Statements of Operations.
Advertising and Other Revenues
Advertising and other revenues are primarily recognized by KAYAK and OpenTable and to a lesser extent by priceline for advertising placements on their websites and by Booking.com for its BookingSuite branded accommodation marketing and business analytics services. KAYAK recognizes advertising revenue primarily by sending referrals to online travel companies ("OTCs") and travel service providers and from advertising placements on its websites and mobile apps. Revenue related to
referrals is recognized when a customer clicks on a referral placement or upon completion of the travel. Revenue for advertising placements is recognized based upon when a customer clicks on an advertisement or when KAYAK displays an advertisement. OpenTable recognizes reservation fees when diners are seated through its online restaurant reservation service and subscription fees for restaurant management services on a straight-line basis over the contractual period in accordance with how the service is provided.
Loyalty Programs
The Company provides various loyalty programs, where participating travelers or diners are awarded loyalty incentives on current transactions that can be redeemed for future qualifying reservations booked with the travel service provider through the Company's websites or mobile apps or, in the case of OpenTable, at participating restaurants. The estimated fair value of the incentives that are expected to be redeemed is recognized as a reduction of revenues at the time the incentives are granted. In the first quarter of 2018, OpenTable introduced a three-year time-based expiration for points earned by diners, which resulted in a reduction of a portion of the loyalty liability of approximately
$27 million
. At
September 30, 2018
and December 31,
2017
, liabilities of
$80.0 million
and
$104.7 million
, respectively, for loyalty incentives were included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets.
Disaggregation of revenue
Geographic Information
The Company's international information consists of the results of Booking.com, Rentalcars.com and agoda and the results of the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using the Company's services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
Total revenues for the Three Months Ended
September 30,
|
|
United States
|
|
The Netherlands
|
|
Other
|
|
Total
|
|
2018
|
|
$
|
441,470
|
|
(1)
|
$
|
3,888,255
|
|
|
$
|
519,365
|
|
|
$
|
4,849,090
|
|
(1)
|
2017
|
|
429,587
|
|
(2)
|
3,533,906
|
|
|
470,536
|
|
|
4,434,029
|
|
(2)
|
(1) Total revenues have been reduced for cost of revenues for
Name Your Own Price
®
transactions of
$44.9 million
in 2018.
(2) Total revenues have not been reduced for cost of revenues for
Name Your Own Price
®
transactions of
$54.2 million
in 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
Total revenues for the Nine Months Ended
September 30,
|
|
United States
|
|
The Netherlands
|
|
Other
|
|
Total
|
|
2018
|
|
$
|
1,243,428
|
|
(1)
|
$
|
8,717,681
|
|
|
$
|
1,353,276
|
|
|
$
|
11,314,385
|
|
(1)
|
2017
|
|
1,251,079
|
|
(2)
|
7,499,464
|
|
|
1,127,446
|
|
|
9,877,989
|
|
(2)
|
(1) Total revenues have been reduced for cost of revenues for
Name Your Own Price
®
transactions of
$134.9 million
in 2018.
(2) Total revenues have not been reduced for cost of revenues for
Name Your Own Price
®
transactions of
$202.0 million
in 2017.
Revenue by Type of Service
Approximately
88%
and
87%
of the Company's revenue for the
three
and
nine
months ended
September 30, 2018
, respectively, relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services or advertising and other revenues each represent less than 10% of the Company's total revenues.
Deferred Revenue
Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Unaudited Consolidated Balance Sheets and are comprised principally of amounts owed to the travel service providers as well as the Company's deferred revenue for its commission or margin and fees. At
September 30, 2018
and
December 31, 2017
, deferred merchant bookings includes deferred revenue of
$176.8 million
and
$151.2 million
, respectively. The Company expects to complete its service obligation within one year of booking. In the
nine
months ended
September 30, 2018
, the Company recognized revenue of
$107.3 million
and cancellations of
$10.3 million
related to the deferred revenue balance at December 31, 2017. In addition, the Company reduced the December 31, 2017 balance by
$32.4 million
for the impact of the adoption of the current revenue standard on January 1, 2018. The offsetting increase in the deferred revenue balance for the
nine
months ended
September 30, 2018
is principally driven by payments received from travelers, net of amounts payable to travel service providers, of
$185.5 million
for those online travel reservations in the current period.
3
.
STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately
$70.1 million
and
$66.4 million
for the
three
months ended
September 30, 2018
and
2017
, respectively, and
$216.0 million
and
$192.2 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively.
Stock-based compensation expense is recognized in the financial statements based upon fair value. Fair value is recognized as an expense on a straight-line basis over the employee's requisite service period and forfeitures are accounted for when they occur. The fair value of performance share units and restricted stock units is determined based on the number of units granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation expense related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition dates.
Restricted Stock Units and Performance Share Units
The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the
nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Share-Based Awards
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Unvested at December 31, 2017
|
|
524,696
|
|
|
|
$
|
1,431.88
|
|
|
Granted
|
|
156,896
|
|
|
|
$
|
2,032.81
|
|
|
Vested
|
|
(194,461
|
)
|
|
|
$
|
1,288.07
|
|
|
Performance Shares Adjustment
|
|
15,338
|
|
|
|
$
|
1,657.61
|
|
|
Forfeited/Canceled
|
|
(33,396
|
)
|
|
|
$
|
1,690.38
|
|
|
Unvested at September 30, 2018
|
|
469,073
|
|
|
|
$
|
1,681.48
|
|
|
At
September 30, 2018
, there was
$418.8 million
of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of
1.9
years.
During the
nine
months ended
September 30, 2018
, the Company made broad-based grants of
107,175
restricted stock units that generally have a
three
-year vesting period, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of
$217.8 million
based on a weighted-average grant date fair value per share of
$2,032.36
.
In addition, during the
nine
months ended
September 30, 2018
, the Company granted
49,721
performance share units to executives and certain other employees. The performance share units had a total grant date fair value of
$101.1 million
based on a weighted-average grant date fair value per share of
$2,033.79
. The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units generally must continue their service through the requisite service period in order to receive any shares. Stock-based compensation related to performance share
units reflects the estimated probable outcome at the end of the performance period. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which generally ends
December 31, 2020
, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances. At
September 30, 2018
, the estimated number of probable shares to be issued is a total of
47,575
shares, net of performance share units that were forfeited or vested since the grant date. If the maximum performance thresholds are met at the end of the performance period, a maximum number of
95,150
total shares could be issued. If the minimum performance thresholds are not met,
36,265
shares would be issued at the end of the performance period.
2017
Performance Share Units
During the year ended
December 31, 2017
, the Company granted
73,893
performance share units with a grant date fair value of
$128.2 million
, based on a grant date fair value per share of
$1,735.10
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends
December 31, 2019
, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.
At
September 30, 2018
, there were
63,265
unvested 2017 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At
September 30, 2018
, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of
86,630
shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of
125,622
shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
49,554
shares would be issued at the end of the performance period.
2016
Performance Share Units
During the year ended December 31, 2016, the Company granted
85,735
performance share units with a grant date fair value of
$111.7 million
, based on a weighted-average grant date fair value per share of
$1,302.25
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends
December 31, 2018
.
At
September 30, 2018
, there were
65,218
unvested 2016 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At
September 30, 2018
, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of
105,037
shares. If the maximum thresholds are met at the end of the performance period, a maximum of
143,240
shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
39,418
shares would be issued at the end of the performance period.
Stock Options
All outstanding employee stock options were assumed in acquisitions. The following table summarizes the activity for stock options during the
nine
months ended
September 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
Number of Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
Balance, December 31, 2017
|
|
30,675
|
|
|
|
$
|
401.61
|
|
|
|
$
|
40,986
|
|
|
3.9
|
Exercised
|
|
(3,300
|
)
|
|
|
$
|
493.87
|
|
|
|
|
|
|
Forfeited
|
|
(13
|
)
|
|
|
$
|
241.83
|
|
|
|
|
|
|
Balance, September 30, 2018
|
|
27,362
|
|
|
|
$
|
390.64
|
|
|
|
$
|
43,598
|
|
|
3.0
|
Vested and exercisable at September 30, 2018
|
|
27,289
|
|
|
|
$
|
399.10
|
|
|
|
$
|
43,541
|
|
|
3.0
|
Vested and exercisable at September 30, 2018 and expected to vest thereafter
|
|
27,362
|
|
|
|
$
|
390.64
|
|
|
|
$
|
43,598
|
|
|
3.0
|
The aggregate intrinsic value of employee stock options exercised during the
nine
months ended
September 30, 2018
and
2017
was
$5.1 million
and
$21.4 million
, respectively. During the
nine
months ended
September 30, 2018
and
2017
, stock options vested for
98
and
1,246
shares, respectively.
4
.
NET INCOME PER SHARE
The Company computes basic net income per share by dividing net income applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
Common equivalent shares related to stock options, restricted stock units, and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average number of basic common shares outstanding
|
|
47,268
|
|
|
48,981
|
|
|
47,887
|
|
|
49,100
|
|
Weighted-average dilutive stock options, restricted stock units and performance share units
|
|
230
|
|
|
273
|
|
|
270
|
|
|
278
|
|
Assumed conversion of Convertible Senior Notes
|
|
253
|
|
|
718
|
|
|
373
|
|
|
686
|
|
Weighted-average number of diluted common and common equivalent shares outstanding
|
|
47,751
|
|
|
49,972
|
|
|
48,530
|
|
|
50,064
|
|
Anti-dilutive potential common shares
|
|
1,428
|
|
|
1,948
|
|
|
1,366
|
|
|
2,006
|
|
Anti-dilutive potential common shares for the
three
and
nine
months ended
September 30, 2018
include approximately
1.0 million
shares that could be issued under the Company's outstanding convertible notes. Under the treasury stock method, the convertible notes will generally have an anti-dilutive impact on net income per share if the conversion prices for the convertible notes exceed the Company's average stock price.
5
.
INVESTMENTS
Short-term and Long-term Investments in Marketable Securities
The Company has classified its investments in marketable debt securities as available-for-sale securities. These securities are reported at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of taxes, reflected as a part of "
Accumulated other comprehensive income (loss)
" in the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term investment is based upon the maturity of the debt securities. As of
September 30, 2018
, the Company does not consider any of its investments to be
other-than-temporarily impaired.
The Company's investments in marketable equity securities are reported at estimated fair value in the Unaudited Consolidated Balance Sheets. Pursuant to the adoption of the accounting update on financial instruments (see Note 1), for periods beginning after December 31, 2017, changes in fair value of these equity securities are recognized in net income rather than accumulated other comprehensive income. Therefore, the Company reclassified net unrealized gains of
$298.7 million
(
$241.1 million
net of tax) as of January 1, 2018 from "Accumulated other comprehensive income (loss)" to "Retained earnings" in the Unaudited Consolidated Balance Sheet. For the
three
and
nine
months ended
September 30, 2018
, the Company recognized
$30.9 million
and
$107.2 million
, respectively, in "Net unrealized gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.
The following table summarizes, by major security type, the Company's investments in marketable securities at
September 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
389,789
|
|
|
$
|
6
|
|
|
$
|
(523
|
)
|
|
$
|
389,272
|
|
U.S. government securities
|
|
809,241
|
|
|
—
|
|
|
(3,856
|
)
|
|
805,385
|
|
Corporate debt securities
|
|
2,952,065
|
|
|
426
|
|
|
(11,561
|
)
|
|
2,940,930
|
|
U.S. government agency securities
|
|
4,916
|
|
|
—
|
|
|
(7
|
)
|
|
4,909
|
|
Commercial paper
|
|
17,080
|
|
|
—
|
|
|
—
|
|
|
17,080
|
|
Certificate of deposit
|
|
500
|
|
|
—
|
|
|
—
|
|
|
500
|
|
Total
|
|
$
|
4,173,591
|
|
|
$
|
432
|
|
|
$
|
(15,947
|
)
|
|
$
|
4,158,076
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
790,653
|
|
|
$
|
1,205
|
|
|
$
|
(986
|
)
|
|
$
|
790,872
|
|
U.S. government securities
|
|
370,987
|
|
|
—
|
|
|
(10,053
|
)
|
|
360,934
|
|
Corporate debt securities
|
|
4,747,084
|
|
|
4,817
|
|
|
(59,563
|
)
|
|
4,692,338
|
|
Investments in Ctrip:
|
|
|
|
|
|
|
|
|
Convertible debt securities
|
|
1,275,000
|
|
|
21,500
|
|
|
(38,668
|
)
|
|
1,257,832
|
|
Equity securities
|
|
655,311
|
|
|
153,553
|
|
|
(4,781
|
)
|
|
804,083
|
|
Meituan Dianping equity securities
|
|
450,270
|
|
|
257,134
|
|
|
—
|
|
|
707,404
|
|
Total
|
|
$
|
8,289,305
|
|
|
$
|
438,209
|
|
|
$
|
(114,051
|
)
|
|
$
|
8,613,463
|
|
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. At
September 30, 2018
, the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately
1.2
years with an average credit quality of A+/A1/A+.
The Company invests in international government securities with high credit quality. At
September 30, 2018
, investments in international government securities principally included debt securities issued by the governments of the Netherlands, France, Belgium, Austria, Finland, and Germany.
The following table summarizes, by major security type, the Company's investments in marketable securities at
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
725,566
|
|
|
$
|
246
|
|
|
$
|
(436
|
)
|
|
$
|
725,376
|
|
U.S. government securities
|
|
996,112
|
|
|
5
|
|
|
(1,999
|
)
|
|
994,118
|
|
Corporate debt securities
|
|
3,067,703
|
|
|
449
|
|
|
(4,837
|
)
|
|
3,063,315
|
|
U.S. government agency securities
|
|
4,444
|
|
|
—
|
|
|
(30
|
)
|
|
4,414
|
|
Commercial paper
|
|
72,650
|
|
|
—
|
|
|
—
|
|
|
72,650
|
|
Total
|
|
$
|
4,866,475
|
|
|
$
|
700
|
|
|
$
|
(7,302
|
)
|
|
$
|
4,859,873
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
607,000
|
|
|
$
|
1,588
|
|
|
$
|
(678
|
)
|
|
$
|
607,910
|
|
U.S. government securities
|
|
844,910
|
|
|
2
|
|
|
(10,636
|
)
|
|
834,276
|
|
Corporate debt securities
|
|
6,689,747
|
|
|
8,399
|
|
|
(41,722
|
)
|
|
6,656,424
|
|
U.S. government agency securities
|
|
500
|
|
|
—
|
|
|
(6
|
)
|
|
494
|
|
Investments in Ctrip:
|
|
|
|
|
|
|
|
|
Convertible debt securities
|
|
1,275,000
|
|
|
103,100
|
|
|
(9,600
|
)
|
|
1,368,500
|
|
Equity securities
|
|
655,311
|
|
|
299,697
|
|
|
(1,012
|
)
|
|
953,996
|
|
Total
|
|
$
|
10,072,468
|
|
|
$
|
412,786
|
|
|
$
|
(63,654
|
)
|
|
$
|
10,421,600
|
|
Investments in Ctrip
On May 26, 2015 and August 7, 2014, the Company invested
$250 million
and
$500 million
, respectively, in
five
-year senior convertible notes issued at par value by Ctrip. On December 11, 2015, the Company invested
$500 million
in a Ctrip
ten
-year senior convertible note issued at par value, which included a put option allowing the Company, at its option, to require a prepayment in cash from Ctrip at the end of the sixth year of the note. On September 12, 2016, the Company invested
$25 million
in a Ctrip
six
-year senior convertible note issued at par value, which included a put option allowing the Company, at its option, to require prepayment in cash from Ctrip at the end of the third year of the note. The Company determined that the economic characteristics and risks of the put option are clearly and closely related to the note, and therefore were not embedded derivatives.
The Company evaluated the conversion features for all Ctrip senior convertible notes and only the conversion feature associated with the September 2016 investment met the definition of an embedded derivative (see Note
6
). The Company monitors the conversion features of these notes to determine whether they meet the definition of an embedded derivative during each reporting period. The Ctrip convertible notes have been marked-to-market in accordance with the accounting guidance for available-for-sale securities. At
September 30, 2018
, the Company had also invested
$655.3 million
in Ctrip American Depositary Shares ("ADSs").
In connection with the Company's investments in Ctrip's convertible notes, Ctrip granted the Company the right to appoint an observer to its board of directors and permission to acquire its shares (through the acquisition of Ctrip ADSs in the open market) so that combined with ADSs issuable upon conversion of the August 2014, May 2015 and September 2016 convertible notes, the Company could hold up to an aggregate of approximately
15%
of Ctrip's outstanding equity plus any ADSs issuable upon the conversion of the December 2015 convertible notes. At
September 30, 2018
, the Company did not have significant influence over Ctrip.
Investment in Meituan Dianping
In October 2017, the Company invested
$450 million
in preferred shares of Meituan Dianping, the leading e-commerce platform for local services in China. As a result of Meituan Dianping's initial public offering in September 2018, the Company classified its investment as a marketable equity security (see the table above that summarizes the Company's investments in marketable securities at
September 30, 2018
) and recognized an unrealized gain of
$257.1 million
for the
three
and
nine
months ended
September 30, 2018
, which was included in "Net unrealized gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.
Long-term Equity Investments without Readily Determinable Fair Value
The Company held investments in equity securities of private companies, which are typically at an early stage of development, of
$500.8 million
and
$450.9 million
at
September 30, 2018
and
December 31, 2017
, respectively. The investments of
$450.9 million
at
December 31, 2017
principally related to the Company's investment in Meituan Dianping prior to its initial public offering in September 2018. In July 2018, the Company invested
$500 million
in preferred shares of Didi Chuxing, the leading mobile transportation and ride-hailing platform in China. These investments are measured 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 and are included in "Long-term investments" in the Company's Unaudited Consolidated Balance Sheets. The Company determined that there was no change in the carrying value of these investments at
September 30, 2018
.
Subsequent Event
In October 2018, the Company invested
$200 million
in preferred shares of Grab, the leading on-demand transportation and mobile service platform in Southeast Asia.
6
.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value at
September 30, 2018
are classified in the categories described in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,385,451
|
|
|
$
|
—
|
|
|
$
|
2,385,451
|
|
International government securities
|
|
—
|
|
|
6,883
|
|
|
6,883
|
|
U.S. government securities
|
|
—
|
|
|
2,009
|
|
|
2,009
|
|
Commercial paper
|
|
—
|
|
|
4,372
|
|
|
4,372
|
|
Time deposits
|
|
4,519
|
|
|
—
|
|
|
4,519
|
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
389,272
|
|
|
389,272
|
|
U.S. government securities
|
|
—
|
|
|
805,385
|
|
|
805,385
|
|
Corporate debt securities
|
|
—
|
|
|
2,940,930
|
|
|
2,940,930
|
|
U.S. government agency securities
|
|
—
|
|
|
4,909
|
|
|
4,909
|
|
Commercial paper
|
|
—
|
|
|
17,080
|
|
|
17,080
|
|
Certificate of deposit
|
|
500
|
|
|
—
|
|
|
500
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
790,872
|
|
|
790,872
|
|
U.S. government securities
|
|
—
|
|
|
360,934
|
|
|
360,934
|
|
Corporate debt securities
|
|
—
|
|
|
4,692,338
|
|
|
4,692,338
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,257,832
|
|
|
1,257,832
|
|
Ctrip equity securities
|
|
804,083
|
|
|
—
|
|
|
804,083
|
|
Meituan Dianping equity securities
|
|
707,404
|
|
|
—
|
|
|
707,404
|
|
Derivatives:
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
—
|
|
|
914
|
|
|
914
|
|
Total assets at fair value
|
|
$
|
3,901,957
|
|
|
$
|
11,273,730
|
|
|
$
|
15,175,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
1,617
|
|
|
$
|
1,617
|
|
Financial assets and liabilities carried at fair value at
December 31, 2017
are classified in the categories described in the tables below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
Cash and restricted cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,895,272
|
|
|
$
|
—
|
|
|
$
|
1,895,272
|
|
U.S. government securities
|
|
—
|
|
|
22,265
|
|
|
22,265
|
|
Corporate debt securities
|
|
—
|
|
|
6,674
|
|
|
6,674
|
|
Commercial paper
|
|
—
|
|
|
96,321
|
|
|
96,321
|
|
Time deposits
|
|
17,896
|
|
|
—
|
|
|
17,896
|
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
725,376
|
|
|
725,376
|
|
U.S. government securities
|
|
—
|
|
|
994,118
|
|
|
994,118
|
|
Corporate debt securities
|
|
—
|
|
|
3,063,315
|
|
|
3,063,315
|
|
U.S. government agency securities
|
|
—
|
|
|
4,414
|
|
|
4,414
|
|
Commercial paper
|
|
—
|
|
|
72,650
|
|
|
72,650
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
607,910
|
|
|
607,910
|
|
U.S. government securities
|
|
—
|
|
|
834,276
|
|
|
834,276
|
|
Corporate debt securities
|
|
—
|
|
|
6,656,424
|
|
|
6,656,424
|
|
U.S. government agency securities
|
|
—
|
|
|
494
|
|
|
494
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,368,500
|
|
|
1,368,500
|
|
Ctrip equity securities
|
|
953,996
|
|
|
—
|
|
|
953,996
|
|
Derivatives:
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
—
|
|
|
1,767
|
|
|
1,767
|
|
Total assets at fair value
|
|
$
|
2,867,164
|
|
|
$
|
14,454,504
|
|
|
$
|
17,321,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
127
|
|
There are three levels of inputs to measure fair value. The definition of each input is described below:
|
|
Level
1
:
|
Quoted prices in active markets that are accessible by the Company at the measurement date for
|
identical assets and liabilities.
|
|
Level
2
:
|
Inputs that are observable, either directly or indirectly. Such prices may be based upon quoted
|
prices for identical or comparable securities in active markets or inputs not quoted on active
markets, but corroborated by market data.
|
|
Level
3
:
|
Unobservable inputs are used when little or no market data is available.
|
Investments in corporate debt securities, U.S. and international government securities, commercial paper, government agency securities and convertible debt securities are considered "Level
2
" valuations because the Company has access to quoted prices, but does not have visibility into the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace. See Note
5
for information on the carrying value of the Company's investments in marketable securities.
The Company's derivative instruments are valued using pricing models. Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates. Derivatives are considered "Level
2
" fair value measurements. The Company's derivative instruments are typically short-term in nature.
At
September 30, 2018
and
December 31, 2017
, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings, are carried at cost which approximates their fair value because of the short-term nature of these items. See Note
8
for the estimated fair value of the Company's outstanding Senior Notes and Note
12
for the Company's contingent liability associated with a business acquisition.
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company mitigates these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value. Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur. Changes in the fair value of derivatives designated as net investment hedges were recorded as foreign currency translation adjustments to offset a portion of the foreign currency translation adjustment from Euro-denominated net assets held by certain subsidiaries and were recognized in the Unaudited Consolidated Balance Sheets in "
Accumulated other comprehensive income (loss)
."
Derivatives Not Designated as Hedging Instruments
— The Company is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risks from short-term currency exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. At
September 30, 2018
and
December 31, 2017
, there were
no
outstanding derivative contracts related to foreign currency translation risks.
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Derivative assets are included in "Prepaid expenses and other current assets" and derivative liabilities are included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets. Derivatives associated with these transaction risks resulted in foreign currency losses of
$8.6 million
and
$38.2 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to foreign currency gains of
$10.7 million
and
$38.3 million
for the
three
and
nine
months ended
September 30, 2017
, respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net losses of
$15.1 million
and
$32.3 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, and net losses of
$7.6 million
and
$18.7 million
for the
three
and
nine
months ended
September 30, 2017
, respectively. The net impacts related to these derivatives are reported in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The settlement of derivative contracts not designated as hedging instruments resulted in net cash outflows of
$35.6 million
and net cash inflows of
$38.2 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively, and are reported within "
Net cash provided by operating activities
" in the Unaudited Consolidated Statements of Cash Flows.
Embedded Derivative
— In September 2016, the Company invested
$25 million
in a Ctrip convertible note (see Note
5
). The Company determined that the conversion option for this note met the definition of an embedded derivative. At
September 30, 2018
and
December 31, 2017
, the embedded derivative had an estimated fair value of
$0.4 million
and
$1.8 million
, respectively, and is reported in the Unaudited Consolidated Balance Sheets with its host contract in "Long-term investments." The embedded derivative is bifurcated for measurement purposes only. The mark-to-market adjustments are included in "Foreign currency transactions and other" in the Company's Unaudited Consolidated Statements of Operations.
7
.
INTANGIBLE ASSETS AND GOODWILL
The Company's intangible assets at
September 30, 2018
and
December 31, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortization
Period
|
|
Weighted-
Average
Useful Life
|
Supply and distribution agreements
|
$
|
1,081,543
|
|
|
$
|
(396,584
|
)
|
|
$
|
684,959
|
|
|
$
|
1,056,660
|
|
|
$
|
(355,000
|
)
|
|
$
|
701,660
|
|
|
3 - 20 years
|
|
16 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
171,419
|
|
|
(118,017
|
)
|
|
53,402
|
|
|
137,288
|
|
|
(104,478
|
)
|
|
32,810
|
|
|
1 - 7 years
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
1,623
|
|
|
(1,623
|
)
|
|
—
|
|
|
1,623
|
|
|
(1,623
|
)
|
|
—
|
|
|
15 years
|
|
15 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet domain names
|
40,903
|
|
|
(29,767
|
)
|
|
11,136
|
|
|
42,265
|
|
|
(28,802
|
)
|
|
13,463
|
|
|
5 - 20 years
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
1,785,284
|
|
|
(417,600
|
)
|
|
1,367,684
|
|
|
1,779,076
|
|
|
(350,447
|
)
|
|
1,428,629
|
|
|
4-20 years
|
|
19 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
900
|
|
|
(806
|
)
|
|
94
|
|
|
21,900
|
|
|
(21,639
|
)
|
|
261
|
|
|
4 years
|
|
4 years
|
Total intangible assets
|
$
|
3,081,672
|
|
|
$
|
(964,397
|
)
|
|
$
|
2,117,275
|
|
|
$
|
3,038,812
|
|
|
$
|
(861,989
|
)
|
|
$
|
2,176,823
|
|
|
|
|
|
Intangible assets are amortized on a straight-line basis. Amortization expense was approximately
$43.0 million
and
$135.3 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, and
$45.3 million
and
$129.5 million
for the
three
and
nine
months ended
September 30, 2017
, respectively.
The amortization expense for intangible assets for the remainder of
2018
and the annual expense for the next five years and thereafter is expected to be as follows (in thousands):
|
|
|
|
|
Remainder of 2018
|
$
|
42,591
|
|
2019
|
168,473
|
|
2020
|
160,708
|
|
2021
|
154,745
|
|
2022
|
152,006
|
|
2023
|
150,007
|
|
Thereafter
|
1,288,745
|
|
|
$
|
2,117,275
|
|
A roll-forward of goodwill for the
nine
months ended
September 30, 2018
consisted of the following (in thousands):
|
|
|
|
|
Balance at December 31, 2017
|
$
|
2,737,671
|
|
Acquisition
|
131,583
|
|
Currency translation adjustments
|
(24,125
|
)
|
Balance at September 30, 2018
|
$
|
2,845,129
|
|
Annual Goodwill Impairment Test
A substantial portion of the Company's intangibles and goodwill relates to the acquisitions of OpenTable in July 2014 and KAYAK in May 2013. As of
September 30, 2018
, the Company performed its annual goodwill impairment testing and concluded that there was no impairment of goodwill. Other than OpenTable, the fair values of the Company's reporting units
substantially exceeded their respective carrying values as of
September 30, 2018
. In addition, at
September 30, 2018
, the Company did not identify any impairment indicator for the Company's other long-lived assets.
The Company estimated OpenTable’s fair value using a combination of standard valuation techniques, including an income approach (discounted cash flows) and market approaches (EBITDA multiples of comparable publicly-traded companies and precedent transactions). At
September 30, 2018
, OpenTable's estimated fair value was approximately
13%
higher than its carrying value, therefore there was no impairment to OpenTable's goodwill.
Acquisition
In April 2018, the Company paid
$139.4 million
, net of cash acquired, and issued shares of the Company's common stock in the amount of
$110.4 million
in connection with an acquisition of a local activities and experiences booking software provider. In respect to the shares issued, as shown in the supplemental disclosure in the Unaudited Consolidated Statement of Cash Flows,
$59.7 million
relates to purchase price consideration and
$50.7 million
relates to shares restricted for trading purposes until the required post-acquisition services are completed by certain employees. At September 30, 2018, the Company's Unaudited Consolidated Balance Sheet includes approximately
$17 million
in "Prepaid expenses and other current assets" and approximately
$27 million
in "Other assets" related to this deferred compensation charge associated with these restricted shares. The purchase price allocation was completed as of
September 30, 2018
.
8
.
DEBT
Short-term Borrowing
On
September 30, 2018
, the Company had a bank overdraft of
$3.9 million
, which was reported in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet at September 30, 2018 and was repaid in October 2018.
Revolving Credit Facility
In June 2015, the Company entered into a
$2.0 billion
five
-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
.
The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility would be used for working capital and general corporate purposes, which could include acquisitions, share repurchases or debt repayments. There were
no
borrowings outstanding and
$4.7 million
and
$3.8 million
of letters of credit issued under the facility, respectively, at
September 30, 2018
and
December 31, 2017
.
Outstanding Debt
Outstanding debt at
September 30, 2018
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Long-term debt:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
999,950
|
|
|
$
|
(45,225
|
)
|
|
$
|
954,725
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(66,841
|
)
|
|
933,159
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,161,500
|
|
|
(5,073
|
)
|
|
1,156,427
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
871,125
|
|
|
(3,927
|
)
|
|
867,198
|
|
2.75% Senior Notes due March 2023
|
|
500,000
|
|
|
(2,747
|
)
|
|
497,253
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,161,500
|
|
|
(10,709
|
)
|
|
1,150,791
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(2,959
|
)
|
|
497,041
|
|
3.6% Senior Notes due June 2026
|
|
1,000,000
|
|
|
(6,250
|
)
|
|
993,750
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,161,500
|
|
|
(4,709
|
)
|
|
1,156,791
|
|
3.55% Senior Notes due March 2028
|
|
500,000
|
|
|
(3,234
|
)
|
|
496,766
|
|
Total long-term debt
|
|
$
|
8,855,575
|
|
|
$
|
(151,674
|
)
|
|
$
|
8,703,901
|
|
Outstanding debt at
December 31, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Short-term debt:
|
|
|
|
|
|
|
1.0% Convertible Senior Notes due March 2018
|
|
$
|
714,304
|
|
|
$
|
(3,394
|
)
|
|
$
|
710,910
|
|
Long-term debt:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000,000
|
|
|
$
|
(64,825
|
)
|
|
$
|
935,175
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(83,272
|
)
|
|
916,728
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,200,800
|
|
|
(6,238
|
)
|
|
1,194,562
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
900,600
|
|
|
(4,683
|
)
|
|
895,917
|
|
2.75% Senior Notes due March 2023
|
|
500,000
|
|
|
(3,203
|
)
|
|
496,797
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,200,800
|
|
|
(12,240
|
)
|
|
1,188,560
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(3,290
|
)
|
|
496,710
|
|
3.6% Senior Notes due June 2026
|
|
1,000,000
|
|
|
(6,840
|
)
|
|
993,160
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,200,800
|
|
|
(5,136
|
)
|
|
1,195,664
|
|
3.55% Senior Notes due March 2028
|
|
500,000
|
|
|
(3,485
|
)
|
|
496,515
|
|
Total long-term debt
|
|
$
|
9,003,000
|
|
|
$
|
(193,212
|
)
|
|
$
|
8,809,788
|
|
Based on the closing price of the Company's common stock for the prescribed measurement period for three months ended
September 30, 2018
and
December 31, 2017
, the contingent conversion thresholds on the 2020 Notes (as defined below) and 2021 Notes (as defined below) were not exceeded, therefore, these notes were not convertible at the option of the holder and were reported as non-current liabilities in the Unaudited Consolidated Balance Sheets.
The 2020 Notes were convertible at the option of the holders at March 31 and June 30, 2018 as the contingent conversion threshold was exceeded. Therefore, the Company reported the carrying value of the 2020 Notes as a current liability and reclassified the unamortized debt discount from additional paid-in-capital to convertible debt in mezzanine in the Company's Unaudited Consolidated Balance Sheets at March 31 and June 30, 2018. As the 2020 Notes were not convertible at
September 30, 2018
, the Company reclassified the unamortized debt discount in the amount of
$45.6 million
from convertible debt in mezzanine to additional paid-in-capital in the Company's Unaudited Consolidated Balance Sheet at
September 30, 2018
.
The 2018 Notes (as defined below) became convertible on December 15, 2017, at the option of the holders, and remained convertible until the scheduled trading day immediately preceding the maturity date of March 15, 2018. Therefore, at
December 31, 2017
, the Company reported the carrying value of the 2018 Notes as a current liability and reclassified the unamortized debt discount for the 2018 Notes in the amount of
$3.0 million
before tax from additional paid-in-capital to convertible debt in the mezzanine section in the Consolidated Balance Sheet as of that date.
Fair Value of Debt
At
September 30, 2018
and
December 31, 2017
, the estimated fair value of the outstanding Senior Notes was approximately
$9.6 billion
and
$11.1 billion
, respectively, and was considered a "Level
2
" fair value measurement (see Note
6
). Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company's stock price at the end of the reporting period. A substantial portion of the market value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the Convertible Senior Notes.
Convertible Debt
If the note holders exercise their option to convert, the Company delivers cash to repay the principal amount of the notes and delivers shares of common stock or cash, at its option, to satisfy the conversion value in excess of the principal amount. If the Company's convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment is recognized. The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value. To estimate the fair value of the debt at the conversion date, the Company estimated its straight debt borrowing rate, considering its credit rating and straight debt of comparable corporate issuers.
Description of Senior Convertible Notes
In August 2014, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due September 15, 2021, with an interest rate of
0.9%
(the "2021 Notes"). The Company paid
$11.0 million
in debt issuance costs during the year ended December 31, 2014 related to this offering. The 2021 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of
$2,055.50
per share. The 2021 Notes are convertible, at the option of the holder, prior to September 15, 2021, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2021 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2021 Notes in an aggregate value ranging from
$0
to approximately
$375 million
depending upon the date of the transaction and the then current stock price of the Company. As of June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes, regardless of the Company's stock price. The 2021 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2021 Notes for cash in certain circumstances. Interest on the 2021 Notes is payable on March 15 and September 15 of each year.
In May 2013, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of
0.35%
(the "2020 Notes"). The 2020 Notes were issued with an initial discount of
$20.0 million
. The Company paid
$1.0 million
in debt issuance costs during the year ended December 31, 2013 related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of
$1,315.10
per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2020 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2020 Notes in an aggregate value ranging from
$0
to approximately
$397 million
depending upon the date of the transaction and the then current stock price of the Company. As of March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes, regardless of the Company's stock price. The 2020 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances. Interest on the 2020 Notes is payable on June 15 and December 15 of each year.
In March 2012, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due March 15, 2018, with an interest rate of
1.0%
(the "2018 Notes"). The 2018 Notes were convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$944.61
per share. For the three months ended March 31, 2018, in connection with the maturity of the remaining outstanding 2018 Notes, the Company paid
$714.3 million
to satisfy the aggregate principal amount due and paid an additional
$773.2 million
in satisfaction of the conversion value in excess of the principal amount.
Cash-settled convertible debt, such as the Company's Convertible Senior Notes, is separated into debt and equity components at issuance and each component is assigned a value. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The Company estimated the straight debt borrowing rates at debt origination to be
3.18%
for the 2021 Notes,
3.13%
for the 2020 Notes, and
3.50%
for the 2018 Notes. The yield to maturity was estimated at an at-market coupon priced at par.
Debt discount after tax of
$82.5 million
(
$142.9 million
before tax) less financing costs associated with the equity component of convertible debt of
$1.6 million
after tax was recorded in additional paid-in capital related to the 2021 Notes at December 31, 2014. Debt discount after tax of
$92.4 million
(
$154.3 million
before tax) less financing costs associated with the equity component of convertible debt of
$0.1 million
after tax was recorded in additional paid-in capital related to the 2020 Notes at June 30, 2013. Debt discount after tax of
$80.9 million
(
$135.2 million
before tax) less financing costs associated with the equity component of convertible debt of
$2.8 million
after tax was recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012.
For the
three
months ended
September 30, 2018
and
2017
, the Company recognized interest expense of
$15.2 million
and
$23.4 million
, respectively, related to convertible notes, which was comprised of
$3.1 million
and
$5.4 million
, respectively, related to the contractual coupon interest,
$11.8 million
and
$16.9 million
, respectively, related to the amortization of debt discount and
$0.3 million
and
$1.1 million
, respectively, related to the amortization of debt issuance costs. For the
three
months ended
September 30, 2018
and
2017
, included in the amortization of debt discount mentioned above was
$0.7 million
and
$0.8 million
, respectively, of original issuance discount related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity date for the respective debt. The weighted-average effective interest rates
for the
three
months ended
September 30, 2018
and
2017
are
3.2%
and
3.4%
, respectively.
For the
nine
months ended
September 30, 2018
and
2017
, the Company recognized interest expense of
$50.2 million
and
$71.4 million
, respectively, related to convertible notes, which was comprised of
$10.8 million
and
$16.4 million
, respectively, related to the contractual coupon interest,
$37.9 million
and
$51.4 million
, respectively, related to the amortization of debt discount and
$1.5 million
and
$3.6 million
respectively, related to the amortization of debt issuance costs. For the
nine
months ended
September 30, 2018
and
2017
, included in the amortization of debt discount mentioned above was
$2.2 million
of original issuance discount related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity date for the respective debt. The weighted-average effective interest rates
for the
nine
months ended
September 30, 2018
and
2017
are
3.2%
and
3.4%
, respectively.
Other Long-term Debt
In August 2017, the Company issued Senior Notes due March 15, 2023, with an interest rate of
2.75%
(the "2023 Notes") for an aggregate principal amount of
$500 million
. The 2023 Notes were issued with an initial discount of
$0.7 million
. In addition, the Company paid
$2.7 million
in debt issuance costs during the year ended December 31, 2017. Interest on the 2023 Notes is payable semi-annually on March 15 and September 15.
In August 2017, the Company issued Senior Notes due March 15, 2028, with an interest rate of
3.55%
(the "2028 Notes") for an aggregate principal amount of
$500 million
. The 2028 Notes were issued with an initial discount of
$0.4 million
. In addition, the Company paid
$3.2 million
in debt issuance costs during the year ended December 31, 2017. Interest on the 2028 Notes is payable semi-annually on March 15 and September 15.
In March 2017, the Company issued Senior Notes due March 10, 2022, with an interest rate of
0.8%
(the "March 2022 Notes") for an aggregate principal amount of
1.0 billion
Euros. The March 2022 Notes were issued with an initial discount of
2.1 million
Euros. In addition, the Company paid
$5.0 million
in debt issuance costs during the year ended December 31,
2017. Interest on the March 2022 Notes is payable annually on March 10. Subject to certain limited exceptions, all payments of interest and principal for the March 2022 Notes will be made in Euros.
In May 2016, the Company issued Senior Notes due June 1, 2026, with an interest rate of
3.6%
(the "2026 Notes") for an aggregate principal amount of
$1.0 billion
. The 2026 Notes were issued with an initial discount of
$1.9 million
. In addition, the Company paid
$6.2 million
in debt issuance costs during the year ended December 31, 2016. Interest on the 2026 Notes is payable semi-annually on June 1 and December 1.
In November 2015, the Company issued Senior Notes due November 25, 2022, with an interest rate of
2.15%
(the "November 2022 Notes") for an aggregate principal amount of
750 million
Euros. The November 2022 Notes were issued with an initial discount of
2.2 million
Euros. In addition, the Company paid
$3.7 million
in debt issuance costs during the year ended December 31, 2015. Interest on the November 2022 Notes is payable annually on November 25. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the November 2022 Notes will be made in Euros.
In March 2015, the Company issued Senior Notes due March 15, 2025, with an interest rate of
3.65%
(the "2025 Notes") for an aggregate principal amount of
$500 million
. The 2025 Notes were issued with an initial discount of
$1.3 million
. In addition, the Company paid
$3.2 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2025 Notes is payable semi-annually on March 15 and September 15.
In March 2015, the Company issued Senior Notes due March 3, 2027, with an interest rate of
1.8%
(the "2027 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2027 Notes were issued with an initial discount of
0.3 million
Euros. In addition, the Company paid
$6.3 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2027 Notes is payable annually on March 3. Subject to certain limited exceptions, all payments of interest and principal for the 2027 Notes will be made in Euros.
In September 2014, the Company issued Senior Notes due September 23, 2024, with an interest rate of
2.375%
(the "2024 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2024 Notes were issued with an initial discount of
9.4 million
Euros. In addition, the Company paid
$6.5 million
in debt issuance costs during the year ended December 31, 2014. Interest on the 2024 Notes is payable annually on September 23. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the 2024 Notes, will be made in Euros.
The aggregate principal value of the March 2022 Notes, November 2022 Notes, 2024 Notes and 2027 Notes and accrued interest thereon are designated as a hedge of the Company's net investment in certain Euro functional currency subsidiaries. The foreign currency transaction gains or losses on these liabilities are measured based upon changes in spot rates and are recorded in "
Accumulated other comprehensive income (loss)
" in the Unaudited Consolidated Balance Sheets. The Euro-denominated net assets of these subsidiaries are translated into U.S. Dollars at each balance sheet date, with the effects of foreign currency changes also reported in "
Accumulated other comprehensive income (loss)
" in the Unaudited Consolidated Balance Sheets. Since the notional amount of the recorded Euro-denominated debt and related interest are not greater than the notional amount of the Company's net investment, the Company does not expect to incur any ineffectiveness on this hedge.
Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The Company estimated the effective interest rates at debt origination to be
2.78%
for the 2023 Notes,
3.56%
for the 2028 Notes,
0.84%
for the March 2022 Notes,
3.62%
for the 2026 Notes,
2.20%
for the November 2022 Notes,
3.68%
for the 2025 Notes,
1.80%
for the 2027 Notes and
2.48%
for the 2024 Notes.
For the
three
months ended
September 30, 2018
and
2017
, the Company recognized interest expense of
$42.3 million
and
$38.5 million
, respectively, related to other long-term debt, which was almost entirely comprised of
$40.6 million
and
$36.9 million
, respectively, related to the contractual coupon interest. The remaining interest expense relates to the amortization of debt discount and debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.
For the
nine
months ended
September 30, 2018
and
2017
, the Company recognized interest expense of
$128.4 million
and
$102.2 million
, respectively, related to other long-term debt, which was principally comprised of
$123.3 million
and
$98.1 million
, respectively, related to the contractual coupon interest. The remaining interest expense relates to the amortization of debt discount and debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.
In March 2016, the Company received a
ten
-year loan from the State of Connecticut in the amount of
$2.5 million
with an interest rate of
1%
in connection with the construction of office space in Connecticut. In 2017,
$1.0 million
of the loan was forgiven as a result of meeting certain employment and salary conditions. The remaining balance of the loan will be forgiven in 2019 if additional employment and salary conditions are met. At
September 30, 2018
and
December 31, 2017
, the loan in the amount of
$1.5 million
is reported in "
Other long-term liabilities
" in the Unaudited Consolidated Balance Sheets.
9
.
TREASURY STOCK
At December 31, 2017, the Company had a total remaining authorization of
$2.4 billion
to repurchase its common stock related to programs authorized by the Company's Board of Directors in 2016 and 2017 for
$3.0 billion
and
$2.0 billion
, respectively. In the first quarter of 2018, the Company's Board of Directors authorized an additional program to repurchase up to
$8.0 billion
of the Company's common stock. At
September 30, 2018
, the Company had a remaining authorization of
$6.4 billion
to repurchase its common stock. The Company may make repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any repurchase of common stock and the amount of common stock repurchased will be determined at the Company's discretion. Additionally, the Board of Directors has given the Company the general authorization to repurchase shares of its common stock withheld to satisfy employee withholding tax obligations related to stock-based compensation.
In the
three
months ended
September 30, 2018
, the Company repurchased a total of
1,149,324
shares of its common stock in the open market for an aggregate cost of
$2.2 billion
, which included
1,145,120
shares for
$2.2 billion
acquired through its general repurchase programs and
4,204
shares for
$8.5 million
withheld to satisfy employee withholding tax obligations related to stock-based compensation. In the
nine
months ended
September 30, 2018
, the Company repurchased a total of
2,095,017
shares of its common stock in the open market for an aggregate cost of
$4.2 billion
, which included
2,019,106
shares for
$4.0 billion
acquired through its general repurchase programs and
75,911
shares for
$154.8 million
withheld to satisfy employee withholding tax obligations related to stock-based compensation.
In the
three
months ended
September 30, 2017
, the Company repurchased a total of
319,488
shares of its common stock in the open market for an aggregate cost of
$586.5 million
, which included
316,016
shares for
$580.0 million
acquired through its general repurchase programs and
3,472
shares for
$6.5 million
withheld to satisfy employee withholding tax obligations related to stock-based compensation. In the
nine
months ended
September 30, 2017
, the Company repurchased a total of
632,006
shares of its common stock in the open market for an aggregate cost of
$1.1 billion
, which included
577,568
shares for
$1.0 billion
acquired through its general repurchase programs and
54,438
shares for
$95.1 million
withheld to satisfy employee withholding tax obligations related to stock-based compensation.
In the three months ended
September 30, 2018
, stock repurchases in September 2018 of
51,240
shares for an aggregate cost of
$101.3 million
were settled in October 2018. In the three months ended December 31, 2017, stock repurchases in December 2017 of
18,217
shares for an aggregate cost of
$32.0 million
were settled in January 2018.
The Company remitted employee withholding taxes of
$8.9 million
and
$153.9 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, and
$9.0 million
and
$95.5 million
for the
three
and
nine
months ended
September 30, 2017
, respectively, to the tax authorities, which is different from the aggregate cost of the shares withheld for taxes for each period due to the timing in remitting the taxes. The cash remitted to the tax authorities is included in financing activities in the Unaudited Consolidated Statements of Cash Flows.
At
September 30, 2018
, there were
16,311,836
shares of the Company's common stock held in treasury.
10
.
INCOME TAXES
Income tax expense consists of U.S. and international income taxes, determined using an estimate of the Company's annual effective tax rate, which is based upon the applicable tax rates and tax laws of the countries in which the income is generated. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, tax planning strategies, the carryforward periods available for tax reporting purposes, and other relevant factors.
The Company's effective tax rate for the
three
and
nine
months ended
September 30, 2018
was
21.1%
and
20.2%
, respectively, compared to
16.8%
and
16.2%
for the
three
and
nine
months ended
September 30, 2017
, respectively. The
Company's 2018 effective tax rates differ from the 2018 U.S. federal statutory tax rate of
21%
, primarily due to the benefit of the Netherlands Innovation Box Tax (discussed below) and current year excess tax benefits recognized from the vesting of equity awards, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with the Company's current year international earnings, resulting from the introduction of the Tax Act, as well as certain nondeductible expenses. The Company's 2017 effective tax rates differ from the 2017 U.S. federal statutory tax rate of
35%
, primarily as a result of lower international tax rates and current year excess tax benefits recognized from the vesting of equity awards, partially offset by certain nondeductible expenses.
The Company's effective tax rates were higher for the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, primarily as a result of U.S. federal and state tax associated with the Company's current year international earnings, resulting from the introduction of the Tax Act, and the increase in the Netherlands Innovation Box Tax rate from
5%
to
7%
as discussed below.
During the
three
and
nine
months ended
September 30, 2018
and
2017
, a substantial majority of the Company's income was generated in the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of
7%
("Innovation Box Tax") for periods beginning on or after January 1, 2018 rather than the Dutch statutory rate of
25%
. Previously, the Innovation Box Tax rate had been
5%
. A portion of Booking.com's earnings during the
three
and
nine
months ended
September 30, 2018
and
2017
qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods.
U.S. Tax Reform
On December 22, 2017, the Tax Act was enacted into law in the United States. The Tax Act made significant changes to U.S. federal tax law, including a reduction in the U.S. federal statutory tax rate from
35%
to
21%
, effective January 1, 2018. The Tax Act imposed a one-time deemed repatriation tax on accumulated unremitted international earnings, to be paid over eight years. The Company recorded provisional income tax expense of approximately
$1.6 billion
during the year ended December 31, 2017, which included U.S. state income taxes and international withholding taxes, related to the mandatory deemed repatriation of estimated accumulated international earnings of approximately
$16.5 billion
. The Company also recorded a provisional net income tax benefit of approximately
$217.0 million
during the year ended December 31, 2017 related to the remeasurement of the Company’s U.S. deferred tax assets and liabilities due to the reduction of the U.S. federal statutory rate from
35%
to
21%
.
At
September 30, 2018
, the Company had not completed its accounting for the tax effects of the Tax Act that were recorded as provisional during the year ended December 31, 2017 in accordance with Staff Accounting Bulletin No. 118 ("SAB 118"). The Company is continuing to analyze its accumulated unremitted international earnings, the majority of which will be generated by entities with a tax year that ends subsequent to September 30, 2018, that are subject to the U.S. federal deemed repatriation tax. This analysis includes a review of income tax returns, some of which are not yet due. The Company expects to complete its accounting within the measurement period. The Company’s final accounting for the tax effects of the Tax Act may materially differ from the provisional amounts recorded during the year ended December 31, 2017 as a result of regulatory guidance that may be issued and changes in our assumptions and interpretations based on this guidance.
The Tax Act also introduced in 2018 a tax on 50% of Global Intangible Low-Taxed Income (“GILTI”), which is income determined to be in excess of a specified routine rate of return. Since the Company is still reviewing the GILTI provisions and expects further guidance from the U.S. Treasury Department, Internal Revenue Service, state tax authorities and/or other authorities on the application of these provisions, the Company has not yet adopted an accounting policy as to whether the Company will treat taxes on GILTI as period costs or whether the Company will recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal.
11
.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below provides the balances for each classification of accumulated other comprehensive income (loss) at
September 30, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
Foreign currency translation adjustments, net of tax
(1)
|
|
$
|
(106,638
|
)
|
|
$
|
(15,700
|
)
|
|
|
|
|
|
Net unrealized gains on marketable securities, net of tax:
|
|
|
|
|
Net unrealized gains on marketable equity securities, net of tax
(2)
|
|
—
|
|
|
241,088
|
|
Net unrealized (losses) gains on marketable debt securities, net of tax
(3)
|
|
(127,168
|
)
|
|
11,594
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
(233,806
|
)
|
|
$
|
236,982
|
|
(1) Foreign currency translation adjustments, net of tax, at
September 30, 2018
and
December 31, 2017
, include accumulated net losses from fair value adjustments of
$35.0 million
after tax (
$52.6 million
before tax) associated with previously settled derivatives that were designated as net investment hedges.
Foreign currency translation adjustments, net of tax, include foreign currency transaction losses of
$79.4 million
after tax (
$89.5 million
before tax) and
$190.4 million
after tax (
$237.2 million
before tax) at
September 30, 2018
and
December 31, 2017
, respectively, associated with the Company's Euro-denominated debt. The Company's Euro-denominated debt is designated as a hedge against the impact of currency fluctuations on its Euro-denominated net assets (see Note
8
).
The remaining balance in foreign currency translation adjustments relates to the cumulative impacts of currency fluctuations on the Company's non-U.S. Dollar denominated net assets. During the
three
and
nine
months ended
September 30, 2018
, the Company recorded deferred tax benefits of
$5.7 million
and
$16.2 million
, respectively, related to its one-time deemed repatriation tax liability recorded at December 31, 2017 and current year foreign earnings subject to U.S. federal and state income tax, resulting from the introduction of the Tax Act. Prior to January 1, 2018, foreign currency translation adjustments excluded U.S. federal and state income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States.
(2)
Net unrealized gains on marketable equity securities, net of tax, at
December 31, 2017
related to changes in the fair value of the Company's investment in Ctrip equity securities (see Note
5
). Net unrealized gains before tax on equity securities at
December 31, 2017
were
$298.7 million
, of which unrealized gains of
$319.9 million
were not subject to income tax in the Netherlands. Unrealized losses of
$21.2 million
were taxable at a
25%
tax rate in the Netherlands, which resulted in a tax benefit of
$5.3 million
at
December 31, 2017
. The Company also recorded U.S. tax charges of
$62.9 million
at
December 31, 2017
related to these investments. Changes in fair value subsequent to January 1, 2018 are recognized in net income (see Note
1
).
(3) Net unrealized losses before tax on marketable debt securities of
$223.8 million
and
$85.3 million
at
September 30, 2018
and
December 31, 2017
, respectively, were not subject to income tax in the Netherlands. Unrealized gains before tax of
$129.3 million
and
$129.8 million
at
September 30, 2018
and
December 31, 2017
, respectively, were taxable at a
25%
tax rate in the Netherlands, resulting in tax charges of
$32.2 million
and
$32.4 million
, respectively. The Company also recorded U.S. tax charges of
$0.2 million
and
$0.5 million
at
September 30, 2018
and
December 31, 2017
, respectively, related to these investments. The remaining net unrealized losses on marketable debt securities and related tax benefit at
September 30, 2018
were associated with marketable debt securities held by a U.S. subsidiary.
12
.
COMMITMENTS AND CONTINGENCIES
Competition Reviews
At times, the online travel industry is the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. The Company is or has been involved in investigations related to whether Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, are anti-competitive because they require accommodation providers to provide Booking.com with room rates that are at least as low as those offered to other OTCs or through the accommodation provider's website. Some investigations relate to other issues such as reservation and cancellation clauses, commission payments, consumer protection issues and pricing behavior. For instance, on September 8, 2017, the Swiss Price Surveillance Office opened an investigation into the level of commissions of Booking.com in Switzerland.
In Europe, investigations into Booking.com's price parity provisions were initiated in 2013 and 2014 by NCAs in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland. A number of other NCAs have also looked at these issues. On April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted "commitments" offered by Booking.com to resolve and close the investigations in France, Italy and Sweden. Under the commitments, Booking.com replaced its existing price parity agreements with accommodation providers with "narrow" price parity agreements. Under a narrow price parity agreement, subject to certain exceptions, an accommodation provider is still required to offer the same or better rates on Booking.com as it offers to a consumer directly online, but it is no longer required to offer the same or better rates on Booking.com as it offers to other OTCs. The commitments also allow an accommodation provider to, among other things, offer different terms and conditions (e.g., free WiFi) and availability to consumers that book with OTCs that offer lower rates of commission or other benefits, offer lower rates to consumers that book through offline channels and continue to discount through, among other things, accommodation loyalty programs, as long as those rates are not published or marketed online. The commitments apply to accommodations in France, Italy and Sweden and were effective on July 1, 2015. The foregoing description is a summary only and is qualified in its entirety by reference to the commitments published by the NCAs on April 21, 2015.
On July 1, 2015, Booking.com voluntarily implemented the commitments given to the French, Italian and Swedish NCAs throughout the European Economic Area and Switzerland. Nearly all NCAs in the European Economic Area have now closed their investigations following Booking.com's implementation of the commitments in their jurisdictions. Booking.com has also agreed with the NCAs in Australia, New Zealand, Georgia, Turkey and Brazil to implement the narrow price parity clause in these countries. However, the Australian NCA re-opened its investigation into Booking.com's use of price parity clauses in agreements with accommodation providers. The Company is currently unable to predict the long-term impact the implementation of these commitments will have on Booking.com's business, on investigations by other countries, or on industry practice more generally.
On December 23, 2015, the German NCA issued a final decision prohibiting Booking.com's narrow price parity agreements with accommodations in Germany. The German NCA did not issue a fine, but has reserved its position regarding an order for disgorgement of profits. Booking.com is appealing the German NCA's decision.
A working group of
ten
European NCAs (France, Germany, Belgium, Hungary, Ireland, Italy, the Netherlands, Czech Republic, the United Kingdom and Sweden) was established by the European Commission in December 2015 to monitor the effects of the narrow price parity clause in Europe. This working group (the "ECN Working Group") issued questionnaires during 2016 to OTCs, including Booking.com and Expedia, online price comparison sites (or "meta-search" sites) and hotels about the narrow price parity agreement. On April 6, 2017, the ECN Working Group published the results of this monitoring exercise. The report indicated that the replacement of the "wide" price parity agreement with the narrow price parity agreement generally improved conditions for competition. Although neither the European Commission nor any of the participating NCAs has opened a new investigation following the publication of the report, the ECN Working Group decided to keep the sector under review and re-assess the competitive situation in due course. The Company is unable to predict whether further action in Europe will be taken as a result of the ECN Working Group's ongoing review.
A number of European countries have adopted legislation making price parity agreements illegal, and it is possible other countries may adopt similar legislation in the future. For example, in August 2015, French legislation known as the "Macron Law" became effective. Among other things, the Macron Law makes price parity agreements illegal, including the narrow price parity agreements agreed to by the French NCA in April 2015. Legislation prohibiting narrow price parity agreements became effective in Austria on December 31, 2016, in Italy on August 29, 2017 and in Belgium on July 19, 2018. A motion calling on the Swiss government to introduce legislation prohibiting the narrow price parity clause was approved by the Swiss Parliament on September 18, 2017.
The Company is unable to predict how any current or future parity-related investigations may be resolved or the long-term impact of parity-related investigations, litigation or legislation on the Company's business. More immediate results could include the imposition of fines or a requirement to remove parity clauses from the Company's contracts in the relevant jurisdiction.
NCAs are continuing to review the activities of online platforms, including through the use of consumer protection powers. A number of authorities are investigating or conducting information gathering exercises in respect of compliance by OTCs with consumer protection laws. Other NCAs are reviewing the online hotel booking sector more widely through market inquiries. For example, in October 2017 the United Kingdom's NCA (the Competition and Markets Authority, or CMA) launched a consumer protection law investigation into the clarity, accuracy and presentation of information on hotel booking sites with a specific focus on the display of search results, claims regarding discounts, methods of "pressure selling" (such as creating false impressions regarding room availability) and failure to disclose hidden charges. In connection with this investigation, in June 2018, the CMA announced that it would proceed with enforcement action against a number of hotel booking sites. Similarly, the consumer protection department of the German NCA opened a sector inquiry into online price comparison sites in various sectors including travel and hotels in October 2017. Further, in March 2018, the Danish NCA began a review of the competitive conditions of the online hotel booking market. Outside Europe, in April 2018 the Singaporean NCA launched a market review into the online travel sector, with a focus on agreements between booking platforms and flight and hotel service providers. We are cooperating with regulators where applicable, but we are unable to predict what, if any, effect such actions will have on our business, industry practices or online commerce more generally.
Competition-related investigations, legislation or issues could also give rise to private litigation. For example, Booking.com is involved in private litigation in Sweden related to its narrow price parity provisions. In July 2018, the Swedish Patent and Market Court determined that the narrow price parity clause had to be removed from Booking.com's agreements with hotels in Sweden. Booking.com is appealing the court's decision. We are unable to predict how this litigation will ultimately be resolved, or whether it will impact Booking.com's business in Sweden.
Tax Matters
French tax authorities conducted an audit of Booking.com of the years 2003 through 2012. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to those tax years for approximately
356 million
Euros, the majority of which would represent penalties and interest. The Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company is contesting the assessments. The Company's objection to the assessments was denied by the French tax authorities. If the Company is unable to resolve the matter with the French tax authorities, it would expect to challenge the assessments in the French courts. In order to contest the assessments in court, the Company may be required to pay, upfront, the full amount or a significant part of any such assessments, though such payment would not constitute an admission by the Company that it owes the taxes. Alternatively, any resolution or settlement of the matter with the French tax authorities may also require a payment as part of such resolution or settlement. French tax authorities have begun a similar audit of the tax years 2013 through 2015, which could result in additional assessments.
Italian authorities are reviewing Booking.com's activities to determine whether Booking.com has a permanent establishment in Italy. They are also reviewing Booking.com's transfer pricing practices in Italy. The Company believes that Booking.com has been, and continues to be, in compliance with Italian tax law. The Company is cooperating with the investigation but intends to contest any allegation that Booking.com has a permanent establishment in Italy. It is unclear at this stage of the investigation what actions, if any, the Italian authorities will take. Such actions could include closing the investigation, assessing Booking.com additional taxes, as well as the imposition of interest, fines and penalties, or even bringing criminal charges.
As a result of an internal review of tax policies and positions at one of the Company's smaller subsidiaries, the Company identified an issue related to the application of certain non-income-based tax laws to that subsidiary's business. In the third quarter of 2018, the Company accrued related travel transaction taxes of approximately
$29 million
, based on the Company's current estimate of the probable tax owed related to prior periods, including applicable interest and penalties, and included this expense in "General and administrative" expense in the Unaudited Consolidated Statements of Operations. The internal review is ongoing and the Company currently estimates that the reasonably possible loss related to this matter in excess of the amount accrued is approximately
$20 million
.
From time to time, the Company is involved in other tax-related audits, investigations or proceedings, which could relate to income taxes, value-added taxes, sales taxes, employment taxes, etc. For example, the Company is subject to legal proceedings in the United States related to travel transaction taxes (e.g., hotel occupancy taxes, sales taxes, etc.).
Turkish Matter
From time to time the Company has been subject to legal proceedings and claims regarding whether it is subject to local registration requirements, such as requirements to register as a travel agent. In March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents. Although Booking.com is appealing the order and believes it to be without basis, this order has had a negative impact on the Company's growth and results of operations, and is expected to continue to negatively impact the Company's results of operations.
Other Matters
The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts are not material to the Company's balance sheets and provisions recorded have not been material to the Company's results of operations or cash flows. An estimate of a reasonably possible loss or range of loss cannot be reasonably made.
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.
Contingent Consideration for Business Acquisition
At
September 30, 2018
and
December 31, 2017
, the Company's Unaudited Consolidated Balance Sheets included a liability of
$17.1 million
and
$9.2 million
, respectively, for estimated contingent payments for a business acquisition in 2015. As of September 30, 2018, based on current forecasts, the estimated fair value of the liability increased by
$7.9 million
and the associated expense was included in "General and administrative" expense in the Company's Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2018. The fair value of the liability, which is considered a "Level 3" fair value measurement (see Note
6
), was based upon probability-weighted average payments for specific performance factors from the acquisition date through the performance period which ends on March 31, 2019. The range of undiscounted outcomes for the estimated contingent payments is
$0
to approximately
$90 million
.
Building Construction
In September 2016, the Company signed a turnkey agreement for approximately
270 million
Euros to construct an office building for Booking.com’s headquarters in the Netherlands. Upon signing this agreement, the Company paid approximately
48 million
Euros to the developer, which included approximately
43 million
Euros for the acquired land-use rights and approximately
5 million
Euros for the building construction. The land-use rights are included in "Other assets" and the building construction-in-progress is included in "Property and equipment, net" in the Unaudited Consolidated Balance Sheets. The remaining
222 million
Euro obligation related to the turnkey agreement principally relates to the building construction cost. During the nine months ended September 30, 2018, the Company paid
61 million
Euros related to its obligation under the turnkey agreement and has a
161 million
Euro obligation remaining as of September 30, 2018, which will be paid periodically until early 2021 when the Company anticipates construction will be complete.
In addition to the turnkey agreement, the Company is obligated to pay approximately
78 million
Euros over the term of the acquired land lease, which expires in 2065. No payments have been made as of September 30, 2018 related to the land lease. The land-use rights and land lease are recognized as rent expense on a straight-line basis over the lease term and are recognized in "General and administrative" expense in the Unaudited Consolidated Statements of Operations.
In addition to the turnkey agreement and land lease, the Company will also make additional capital expenditures to fit out and furnish the office space.
Business Acquisition
In July 2018, the Company signed a definitive agreement to acquire a hotel meta-search company and will pay approximately
$140 million
in cash in connection with this acquisition. The transaction is expected to close later this year,
subject to regulatory approval and other closing conditions.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled
"
Special Note Regarding Forward-Looking Statements
"
at the end of this Item 2. As discussed in more detail in the Section entitled
"
Special Note Regarding Forward-Looking Statements,
"
this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in
"
Risk Factors
"
and elsewhere in this Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Overview
Our mission is to help people experience the world. We aim to achieve our mission to help people experience the world through global leadership in online travel and restaurant reservation and related services by:
|
|
•
|
providing consumers with the best choices and prices at any time, in any place, on any device;
|
|
|
•
|
making it easy for people to find, book and experience their travel desires; and
|
|
|
•
|
providing platforms, tools and insights to our business partners to help them be successful.
|
We operate six primary brands:
|
|
•
|
Booking.com - the world’s leading brand for booking online accommodation reservations, based on room nights booked.
|
|
|
•
|
priceline - a leading hotel, rental car, airline ticket and vacation package reservation service in the United States.
|
|
|
•
|
KAYAK - a leading meta-search service allowing consumers to easily search and compare travel itineraries and prices, including airline ticket, accommodation and rental car reservation information, from hundreds of travel websites at once.
|
|
|
•
|
agoda - a leading accommodation reservation service catering primarily to consumers in the Asia-Pacific region.
|
|
|
•
|
Rentalcars.com - a leading worldwide rental car reservation service (which began operating as part of Booking.com on January 1, 2018).
|
|
|
•
|
OpenTable - a leading provider of restaurant reservation and information services to consumers and restaurant reservation management and customer acquisition services to restaurants (which began operating as part of KAYAK on July 1, 2018).
|
Results for KAYAK include the Momondo Group since it was acquired in July 2017. We refer to our company and all of our subsidiaries and brands collectively as "Booking Holdings," the "Company," "we," "our" or "us."
Our business is driven primarily by international results, which consist of the results of Booking.com, Rentalcars.com and agoda and the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com at a hotel in New York by a consumer in the United States is part of our international results. During the year ended
December 31, 2017
, our international business (the substantial majority of which is generated by Booking.com) represented approximately
89%
of our consolidated gross profit.
We derive substantially all of our revenue from the following sources:
|
|
•
|
Commissions earned from facilitating reservations of accommodations, rental cars and other travel services on an agency basis;
|
|
|
•
|
Transaction net revenues and travel reservation commissions on a merchant basis and customer processing fees from our accommodation, rental car, airline ticket, attractions and in-stay services and vacation package reservation services;
|
|
|
•
|
Advertising revenues primarily earned by KAYAK from sending referrals to online travel companies ("OTCs") and travel service providers, as well as from advertising placements on KAYAK's websites and mobile apps;
|
|
|
•
|
Reservation revenues paid by restaurants for diners seated through OpenTable's online reservation services, subscription fees for restaurant reservation management services provided by OpenTable; and
|
|
|
•
|
Ancillary revenues including travel insurance-related revenues, credit card processing rebates, global distribution system ("GDS") reservation booking fees and customer processing fees, in each case related to certain of our travel services.
|
Our priceline brand offers merchant
Name Your Own Price
®
opaque travel services, which were previously recorded in revenue on a "gross" basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard,
Name Your Own Price
®
revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, we no longer present "Cost of revenues" or "Gross profit" in our Consolidated Statements of Operations. Total revenues for periods beginning after December 31, 2017 are comparable to gross profit reported in prior periods. For further information on the adoption of the current revenue standard, see Note 2 to the Unaudited Consolidated Financial Statements.
Trends
Over the last several years we have experienced strong growth in our accommodation reservation services. We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices and the growth of travel overall, including in higher growth emerging markets such as Asia-Pacific and South America. We also believe this growth is the result of the continued innovation and execution by our teams around the world to add accommodations to our travel reservation services, increase and improve content, build distribution and improve the consumer experience on our websites and mobile apps, as well as consistently and effectively marketing our brands through performance and brand marketing efforts. These year-over-year growth rates have generally decelerated. Given the size of our accommodation reservation business, we expect that our year-over-year growth rates will generally continue to decelerate, though the rate of deceleration may fluctuate and there may be periods of acceleration from time to time.
Our international business represents the substantial majority of our financial results, and we expect our operating results and other financial metrics to continue to be largely driven by international performance. The size of the travel market outside of the United States is substantially greater than that within the United States, and recent international online travel growth rates have exceeded, and are expected to continue to exceed, the growth rates within the United States. Over the long term, we expect that international online travel growth rates will follow a similar trend to that experienced in the United States. In addition, the base of hotel properties in Europe and Asia is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the leading online accommodation reservation service provider in the world as measured by room nights booked. We believe that the opportunity to continue to grow our business exists for the markets in which we operate.
Our growth has primarily been generated by our worldwide accommodation reservation service brand, Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large and growing number of instantly bookable properties through Booking.com. Booking.com included approximately
2,065,000
properties on its website at
September 30, 2018
, consisting of approximately
430,000
hotels, motels and resorts and approximately
1,635,000
homes, apartments and other unique places to stay, compared to approximately
1,475,000
properties (including approximately
385,000
hotels, motels and resorts and approximately
1,090,000
homes, apartments, and other unique places to stay) at
September 30, 2017
. Booking.com categorizes properties listed on its website as either (a) hotels, motels and resorts, which groups together more traditional accommodation types (including hostels and inns), or (b) homes, apartments and other unique places to stay, also referred to as alternative accommodations, which encompasses all other types of accommodations, including bed and breakfasts, apart-hotels, villas and beyond.
We intend to continue to invest in adding accommodations available for reservation on our platforms, such as hotels, motels, resorts, homes, apartments and other unique places to stay. Many of the newer accommodations we add to our travel reservation services, especially in highly-penetrated markets, may have fewer rooms or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts). Because alternative accommodations are often either a single unit or a small collection of independent units, these properties generally represent more limited booking opportunities than hotels, motels and resorts, which generally have more units to rent per property. Further, alternative accommodations in general may be subject to increased seasonality due to local tourism seasons, weather or other factors or may not be available at peak times due to use by the property owners. We may also experience lower profit margins with respect to these properties due to certain additional costs related to offering these accommodations on our websites. As we increase our alternative accommodation business, these different characteristics could negatively impact our profit margins; and, to the extent these
properties represent an increasing percentage of the properties added to our websites, we expect that our gross bookings growth rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of alternative accommodation properties increases, the number of reservations per property will likely continue to decrease. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.
As part of our strategy to increase the number and variety of accommodations available on Booking.com, Booking.com is increasingly processing transactions on a merchant basis where it receives payments on behalf of customers. This allows Booking.com to process transactions for properties that do not accept credit cards and to increase its ability to offer secure and flexible transaction terms to consumers, such as the form and timing of payment. We believe that adding these types of properties and service offerings will benefit our customers and our gross bookings, room night and earnings growth rates. However, this results in additional expenses for personnel, payment processing, customer chargebacks and other expenses related to these transactions, which are recorded in "Personnel" and "Sales and other expenses" in our Unaudited Statements of Operations, as well as associated incremental revenues in the form of credit card rebates, for example, which are recorded in "Merchant revenues." As this business continues to grow, we may experience a significant increase in these expenses that may not be fully offset by an increase in associated incremental revenues, which would negatively impact our operating margins.
Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, rising unemployment rates and weakening currencies and concerns over government responses such as higher taxes and reduced government spending, could impair consumer spending and adversely affect travel demand. Further, political uncertainty, conditions or events, such as the United Kingdom's decision to leave the European Union ("Brexit") and concerns regarding certain E.U. members with sovereign debt default risks can also negatively affect consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates, increased cancellation rates and weaker trends in hotel average daily rates ("ADRs") across many regions of the world, particularly in those countries that appear to be most affected by economic and political uncertainties, which we believe are due at least in part to these macro-economic conditions and concerns. For more detail, see Part II Item 1A Risk Factors - "
Declines or disruptions in the travel industry could adversely affect our business and financial performance.
"
These and other macro-economic uncertainties, such as geopolitical tensions and differing central bank monetary policies, have led to significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in currency exchange rates, stock markets and oil prices can also impact consumer travel behavior.
As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to movements in currency exchange rates as the financial results and the financial condition of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. As a result, both the absolute amounts of and percentage changes in our foreign-currency-denominated net assets, gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are affected by currency exchange rate changes. Our foreign-currency-denominated gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are lower for the
three
months ended
September 30, 2018
in each case than they would have been had foreign exchange rates remained where they were in the corresponding period in 2017. Conversely, each of these items, except for net income due to seasonality, as expressed in U.S. Dollars are higher for the nine months ended September 30, 2018 than they would have been had foreign exchange rates remained where they were in the corresponding period in 2017. For example, total revenues in 2018 compared to gross profit in 2017 from our international operations grew
11.0%
and
17.5%
for the
three
and
nine
months ended
September 30, 2018
, respectively, as compared to the
three
and
nine
months ended
September 30, 2017
, but, without the impact of changes in currency exchange rates, grew year-over-year on a constant-currency basis by approximately
14%
and
15%
, respectively. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. The aggregate principal value of our Euro-denominated long-term debt, and accrued interest thereon, provide a hedge against the impact of currency exchange rate fluctuations on the net assets of certain of our Euro functional currency subsidiaries (see Note
6
to our Unaudited Consolidated Financial Statements). For more information, see Part II Item 1A Risk Factors - "
We are exposed to fluctuations in currency exchange rates."
We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on the translation of our consolidated operating results into U.S. Dollars. However, such derivative instruments are short-term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings or revenues (see Note
6
to our Unaudited Consolidated Financial Statements for additional information on our derivative contracts).
We compete globally with both online and traditional providers of travel and restaurant reservation and related services. The markets for the services we offer are intensely competitive and current and new competitors can launch new services to compete with us at relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have access to significantly greater and more diversified resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market, including by establishing a flight meta-search product (Google Flights) and a hotel meta-search business (Google Hotel Ads) that are growing rapidly, as well as its "Book on Google" reservation functionality and its Google Trips app. Our markets are also subject to rapidly changing conditions, including technological developments, consumer behavior changes, regulatory changes and travel service provider consolidation. We expect these trends to continue. For example, we have experienced a significant shift of both direct and indirect business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. In addition, the revenue earned on a mobile transaction may be less than a typical desktop transaction due to different consumer purchasing patterns. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay, have lower ADRs and are not made as far in advance. For more detail regarding the competitive trends and risks we face, see Part II Item 1A Risk Factors - "
Intense competition could reduce our market share and harm our financial performance.
" and "
Consumer adoption and use of mobile devices creates new challenges and may enable device companies such as Apple to compete directly with us.
" and "
We may not be able to keep up with rapid technological changes.
"
Although we believe that providing an extensive collection of properties, excellent customer service and an intuitive, easy to use website or mobile experience are important factors influencing a consumer's decision to make a reservation, for many consumers, particularly in certain markets, the price of the travel service is the primary factor determining whether a consumer will book a reservation. We have observed an increase in promotional pricing to closed user groups (such as loyalty program participants or consumers with registered accounts), including through mobile apps. In addition, many large hotel chains and OTCs have launched initiatives, such as increased discounting and incentives, to encourage consumers to book accommodations through their websites. Discounting and couponing coupled with a high degree of consumer shopping behavior is particularly common in Asian markets. In some cases, our competitors are willing to make little or no profit on a transaction, or offer travel services at a loss, in order to gain market share.
We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Both our performance and brand marketing expenses have increased significantly in recent years, and we expect our performance and brand marketing expenses to continue to increase. For the
nine
months ended
September 30, 2018
and
2017
, our total performance marketing expense was approximately
$3.6 billion
and
$3.4 billion
, respectively, primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites. Growth of some of these channels has slowed. We also invested approximately
$385 million
and
$337 million
in brand marketing for the
nine
months ended
September 30, 2018
and
2017
, respectively, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook), online display advertising and other brand marketing. We intend to continue a strategy of promoting brand awareness through both online and offline marketing efforts, including by expanding brand campaigns into additional markets, which may significantly increase our brand marketing expenses. We have observed increased brand marketing by OTCs, meta-search services and travel service providers, which may make our brand marketing efforts more expensive and less effective.
Performance marketing efficiency, expressed as performance marketing expense as a percentage of total revenues in 2018 or as a percentage of gross profit in 2017, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our websites or mobile apps for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs per click and reduce our performance marketing efficiency. In recent years, we experienced significant increases in our cancellation rates, which negatively affected our marketing efficiency and results of operations. More recently our cancellation rates have decreased, which has benefited our marketing efficiency and results of operations. We believe that many factors influence cancellation rates, and it is uncertain whether future cancellation rates will continue to decrease, stabilize or continue their prior trend of generally increasing over time. Further, cancellation rates could vary period to period without following a discernible trend. Changes by Google in how it presents travel search results, including by placing its own offerings at or near the top of search results, or the manner in which it conducts the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites. Similarly, changes by our other search and meta-search partners in how they present travel search results or the manner in which they conduct the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites.
We have observed a long-term trend of decreasing performance marketing returns on investment ("ROIs"), a trend we expect to continue, though the rate of decrease may fluctuate and there may be periods of stable or increasing ROIs from time to time. In addition, we may from time to time, as we did over the past five quarters, pursue a strategy of improving our performance marketing ROIs, which could negatively impact growth and positively impact performance marketing efficiency and profitability. When evaluating our performance marketing spend, we consider several factors for each channel, such as the customer experience on the advertising platform, the incrementality of the traffic we receive and the anticipated repeat rate from a particular platform, as well as other factors. The amount of business we obtain through each performance marketing channel is impacted by numerous factors, including bidding decisions by us and our competitors (including decisions to optimize performance marketing ROIs) and the marketing efforts and success of those channels to attract consumers and generate demand. See Part II Item 1A Risk Factors
- "
We rely on performance and brand marketing channels to generate a significant amount of traffic to our websites and grow our business.
" and "
Our business could be negatively affected by changes in internet search engine algorithms and dynamics or traffic-generating arrangements.
"
We estimate our effective tax rate for 2018 to be approximately 18-21%, which represents our best estimate of our tax expense including the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act"), estimated U.S. state income taxes and international withholding taxes on our international earnings, and an increase in the Innovation Box Tax rate in the Netherlands from 5% to 7%. The provisions of the Tax Act are broad and complex, and further interpretation and clarification of the Tax Act is expected from U.S. tax authorities
.
As a result, our estimate is based on our current understanding and could change as more information becomes available. See Part I Item 1A Risk Factors - "
We may have exposure to additional tax liabilities.
" and "
We may not be able to maintain our 'Innovation Box Tax' benefit.
"
Many national governments have conducted or are conducting investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Some countries have adopted or proposed legislation that could also affect business practices within the online travel industry. For example, France and Italy, among others, have adopted legislation making price parity agreements illegal and similar legislation is under consideration in other countries. Also, a number of governments are investigating or conducting information-gathering exercises in respect of compliance by OTCs with consumer protection laws, including practices related to the display of search results and search ranking algorithms, claims regarding discounts, disclosure of charges and availability, and similar messaging. For more information on these investigations and their potential effects on our business, see Note
12
to our Unaudited Consolidated Financial Statements and Part II Item 1A Risk Factors - "
As the size of our business grows, we may become increasingly subject to the scrutiny of anti-trust, competition and consumer protection regulators.
" In addition to the price parity and consumer protection investigations, from time to time national competition authorities, other governmental agencies, trade associations and private parties take legal actions, including commencing legal proceedings, that may affect our operations. For example, in March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents. Although Booking.com is appealing the order and believes it to be without basis, this order has had a negative impact on the Company's growth and results of operations, and is expected to continue to negatively impact the Company's results of operations. In general, increased regulatory focus on online businesses, including online travel businesses like ours, could result in increased compliance costs or otherwise adversely affect our business.
Seasonality
A meaningful amount of our gross bookings is generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, historically we generally have not recognized revenue from these bookings until the travel is completed (at "check-out") or for periods beginning after December 31, 2017 when the travel begins (at "check-in"), which, in either case, can be in a quarter other than when the reservation is booked. In contrast, we expense the substantial majority of our marketing activities as the expense is incurred, which, in the case of performance marketing in particular, is typically in the quarter in which associated reservations are booked. As a result of this potential timing difference between when we record marketing expense and when we recognize associated revenue, we experience our highest levels of profitability in the third quarter of the year, which is when we experience the highest levels of accommodation check-ins for the year for our European and North American businesses. The first quarter of the year is typically our lowest level of profitability and may experience additional volatility in earnings growth rates due to these seasonal timing factors. For our Asia-Pacific business, we experience the highest levels of accommodation bookings in the third and fourth quarters of the year, and the highest levels of accommodation check-ins in the fourth quarter. As the relative growth rates for our businesses fluctuate, the quarterly distribution of our operating results may vary.
In recent years, we experienced an expansion of the booking window (the average time between the making of a travel reservation and the travel), which impacts the relationship between our gross bookings (recognized at the time of booking) and
our revenues (recognized at the time of check-out or, for periods beginning after December 31, 2017, at the time of check-in). More recently we have seen a contraction of the booking window. Future changes in the booking window will affect the degree to which our gross bookings and revenues occur in the same period and, as a result, whether our gross bookings growth rates and revenue growth rates converge or diverge.
Upon adoption of the current revenue standard, for periods beginning after December 31, 2017, the timing of revenue recognition for travel reservation services changed. For example, revenue for accommodation reservation services, which was primarily recognized at check-out under the previous revenue standard, changed to be recognized at check-in under the new revenue standard. We estimate that total revenues recognized at check-in for the fourth quarter of 2018 would be reduced by slightly less than 5% if recognized at check-out, which was how revenues were recognized in the fourth quarter of 2017.
In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2017, our second quarter year-over-year growth rates in revenue, gross profit, operating income and operating margins were positively impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. Conversely, our first quarter 2017 year-over-year growth rates in revenue, gross profit, operating income and operating margins were adversely impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. Similar to 2017, in 2018 Easter fell in the second quarter instead of the first quarter. However, because Easter was on April 1, 2018 and a meaningful amount of Easter travel commenced in the week leading up to Easter (i.e., during the first quarter), Easter had a positive effect on our first quarter 2018 year-over-year growth rates and had a negative effect on our second quarter 2018 year-over-year growth rates due to the change in our revenue recognition policy from "check-out" to "check-in." In 2019, Easter will be on April 21, and the associated Easter-related travel will generally begin in the second quarter of 2019. As a result, the shift in timing of Easter relative to 2018 will have a negative effect on our year-over-year growth rates in the first quarter of 2019 and a positive effect on our year-over-year growth rates in the second quarter of 2019. The timing of other holidays such as Ramadan can also impact our quarterly year-over-year growth rates.
The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable marketing expense. In addition, revenue growth is typically less impacted by decelerating gross bookings growth in the near term due to the benefit of revenue related to reservations booked in previous quarters, but any such deceleration would negatively impact revenue growth in subsequent periods. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable marketing expense. In addition, revenue growth is typically less impacted by accelerating gross bookings growth in the near term, but any such acceleration would positively impact revenue growth in subsequent periods as a portion of the revenue recognized from such gross bookings will occur in future quarters.
Other Factors
We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services. Factors beyond our control, such as oil prices, stock market volatility, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika and MERS, political instability, changes in economic conditions, regional hostilities, imposition of taxes or surcharges by regulatory authorities, changes in trade or immigration policies or travel-related accidents, can disrupt travel or otherwise result in declines in travel demand. Because these events or concerns, and the full impact of their effects, are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers, and therefore demand for our services, which can adversely affect our business and results of operations. See Part II Item 1A Risk Factors - "
Declines or disruptions in the travel industry could adversely affect our business and financial performance.
"
We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. We have experienced pressure on operating margins as we prioritize initiatives that drive growth. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, acquisitions. As the overall size of our business has grown, the competitive pressure to innovate will encompass a wider range of services and technologies, including services and technologies that may be outside of our historical core business, and our ability to keep pace may slow. Potential competitors, such as emerging start-ups, may be able to innovate and focus on developing a particularly new product or service faster than we can or may foresee consumer need for new services or technologies before us. Some of our larger competitors or potential competitors have more resources or more established or diversified relationships with consumers than we do, and they could use these advantages in ways that could affect our competitive position, including by making acquisitions, entering or investing in travel reservation businesses, investing in
research and development, and competing aggressively for highly-skilled employees. For example, because consumers often utilize other online services more frequently than online travel services, a competitor or potential competitor that has established other, more frequent online interactions with consumers may be able to more easily or cost-effectively acquire customers for its online travel services than we can. Our goal is to grow revenue and achieve healthy operating margins in an effort to maintain profitability. The uncertain and highly competitive environment in which we operate makes the prediction of future results of operations difficult, and accordingly, we may not be able to sustain revenue growth and profitability.
Critical Accounting Policies and Estimates for Valuation of Goodwill and Other Long-Lived Assets
A substantial portion of the Company's intangibles and goodwill relates to the acquisitions of OpenTable in July 2014 and KAYAK in May 2013. As of
September 30, 2018
, we performed our annual goodwill impairment testing and concluded that there was no impairment of goodwill. Other than OpenTable, the fair values of our reporting units substantially exceeded their respective carrying values as of
September 30, 2018
. In addition, at
September 30, 2018
, we did not identify any impairment indicator for our other long-lived assets.
We estimated OpenTable’s fair value using a combination of standard valuation techniques, including an income approach (discounted cash flows) and market approaches (EBITDA multiples of comparable publicly-traded companies and precedent transactions). At September 30, 2018, OpenTable's estimated fair value was approximately
13%
higher than its carrying value, therefore there was no impairment to OpenTable's goodwill.
Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in the current forecast, including key assumptions regarding OpenTable's expected growth rates and operating margins as well as other key assumptions with respect to matters outside of our control, such as discount rates, currency exchange rates and market EBITDA comparables. If OpenTable does not achieve the results currently expected or if any of the assumptions underlying our estimate of the fair value of the OpenTable business prove to be incorrect, we may need to adjust our forecast for the OpenTable business and recognize a goodwill impairment, which could have a material adverse effect on our results of operations.
Results of Operations
Three and Nine Months Ended
September 30, 2018
compared to the Three and Nine Months Ended
September 30, 2017
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked through our OTC brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands and therefore search queries through KAYAK and restaurant reservations through OpenTable do not contribute to our gross bookings.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the
three
and
nine
months ended
September 30, 2018
and
2017
were as follows (numbers may not total due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Agency
|
|
$
|
19,024
|
|
|
$
|
18,594
|
|
|
2.3
|
%
|
|
$
|
58,689
|
|
|
$
|
54,681
|
|
|
7.3
|
%
|
Merchant
|
|
5,250
|
|
|
3,168
|
|
|
65.7
|
%
|
|
14,490
|
|
|
8,564
|
|
|
69.2
|
%
|
Total
|
|
$
|
24,274
|
|
|
$
|
21,762
|
|
|
11.5
|
%
|
|
$
|
73,179
|
|
|
$
|
63,245
|
|
|
15.7
|
%
|
Gross bookings increased by
11.5%
and
15.7%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
(growth on a constant-currency basis was approximately
14%
and
12%
, respectively), almost entirely due to growth of
13.4%
and
12.9%
, respectively, in accommodation room night reservations. Accommodation ADRs on a constant-currency basis were up approximately 1% and relatively unchanged for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
. For the
three
months ended
September 30, 2018
, foreign exchange rate fluctuations negatively impacted gross bookings growth in U.S. Dollars, but benefited gross bookings growth in U.S. Dollars for the
nine
months ended
September 30, 2018
. We believe that unit growth rates and growth in total gross bookings on a constant-currency basis, which excludes the impact of foreign exchange rate fluctuations, are important measures to understand the fundamental performance of the business.
Agency gross bookings are derived from travel-related transactions where we do not receive payments from travelers for the travel services provided. Agency gross bookings increased by
2.3%
and
7.3%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, almost entirely due to the growth in gross bookings from agency
accommodation room night reservations at Booking.com and agoda.
Merchant gross bookings are derived from services where we receive payments from travelers for the travel services provided. Merchant gross bookings increased by
65.7%
and
69.2%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, almost entirely due to growth in gross bookings from our merchant accommodation reservation services at Booking.com and agoda.
Accommodation room nights, rental car days and airline tickets reserved through our services for the
three
and
nine
months ended
September 30, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Room nights
|
|
201.3
|
|
177.5
|
|
13.4
|
%
|
|
588.7
|
|
521.6
|
|
12.9
|
%
|
Rental car days
|
|
19.0
|
|
19.0
|
|
(0.1
|
)%
|
|
58.6
|
|
58.3
|
|
0.5
|
%
|
Airline tickets
|
|
1.8
|
|
1.7
|
|
9.2
|
%
|
|
5.6
|
|
5.3
|
|
5.4
|
%
|
Accommodation room night reservations increased by
13.4%
and
12.9%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, primarily due to strong execution by our brand teams to add new properties to our accommodation reservation services, invest in performance and brand marketing and provide a continuously improving experience for customers, as well as the overall growth in the travel industry and the ongoing shift from offline to online for travel bookings. The increase for the three and nine months ended September 30, 2018, respectively, compared to the three and nine months ended September 30, 2017, was also positively impacted by a decrease in cancellation rates.
Rental car day reservations decreased by
0.1%
for the
three
months ended September 30, 2018, compared to the
three
months ended September 30, 2017, due to a decrease in U.S. rental car day reservations, almost entirely offset by an increase in international rental car day reservations. Rental car day reservations increased by
0.5%
for the
nine
months ended
September 30, 2018
, compared to the
nine
months ended
September 30, 2017
, due to an increase in international rental car day reservations, almost entirely offset by a decrease in U.S. rental car day reservations. On March 26, 2018, priceline discontinued its
Name Your Own Price
®
rental car reservation service.
Airline ticket reservations increased by
9.2%
and
5.4%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, due to the benefits of priceline's investments in its flight platform and brand marketing.
Revenues
Online travel reservation services
Substantially all of our revenues are generated by providing online travel reservation services, which facilitate online travel purchases between travel service providers and travelers. For periods beginning after December 31, 2017, we recognize revenue for travel reservation services when the travel begins rather than when the travel is completed. For example, once the customer checks in to an accommodation, we record revenues, which are net of sales incentives and expected changes in reservations.
In addition, for periods beginning prior to January 1, 2018, revenues from
Name Your Own Price
®
transactions were presented on a gross basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard,
Name Your Own Price
®
revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, we no longer present "Cost of revenues" or "Gross profit" in our Consolidated Statements of Operations. For further information on the adoption of the current revenue standard, see Note
2
to the Unaudited Consolidated Financial Statements.
Revenues from online travel reservation services are classified into two categories:
|
|
•
|
Agency.
Agency revenues are derived from travel-related transactions where we do not receive payments from travelers for the travel reservation services provided. Agency revenues consist almost entirely of travel reservation commissions, as well as certain GDS reservation booking fees and certain travel insurance fees. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.
|
|
|
•
|
Merchant.
Merchant revenues are derived from services where we receive payments from travelers for the travel reservation services provided. Merchant revenues include (1) transaction net revenues (i.e., the amount charged to a customer, less the amount charged to us by travel service providers) and travel reservation commissions in connection with (a) the accommodation reservations provided through our merchant accommodation reservation
|
services at Booking.com, agoda and priceline and (b) the reservations provided through our merchant rental car service at Rentalcars.com; (2) ancillary fees, including travel insurance-related revenues, credit card processing rebates and certain GDS reservation booking fees and (3) customer processing fees charged in connection with the merchant accommodation reservation services at priceline and agoda.
Advertising and other revenues
Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees earned by OpenTable for restaurant reservation management services; (3) revenues earned by priceline for advertising on its websites; and (4) revenues generated by Booking.com's BookingSuite branded accommodation marketing and business analytics services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Agency revenues
|
|
$
|
3,540,874
|
|
|
$
|
3,523,706
|
|
|
0.5
|
%
|
|
$
|
8,220,506
|
|
|
$
|
7,641,390
|
|
|
7.6
|
%
|
Merchant revenues
|
|
1,049,661
|
|
|
684,289
|
|
|
|
|
|
2,285,992
|
|
|
1,624,467
|
|
|
|
|
Advertising and other revenues
|
|
258,555
|
|
|
226,034
|
|
|
14.4
|
%
|
|
807,887
|
|
|
612,132
|
|
|
32.0
|
%
|
Total revenues
|
|
$
|
4,849,090
|
|
|
4,434,029
|
|
|
|
|
$
|
11,314,385
|
|
|
9,877,989
|
|
|
|
Cost of revenues
|
|
|
|
54,181
|
|
|
|
|
|
|
|
202,007
|
|
|
|
|
Gross profit
|
|
|
|
$
|
4,379,848
|
|
|
|
|
|
|
$
|
9,675,982
|
|
|
|
|
Agency revenues increased by
0.5%
and
7.6%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, almost entirely due to growth in agency accommodation room night reservations at Booking.com and agoda.
Merchant revenues for the
three
and
nine
months ended
September 30, 2018
were
$1.0 billion
and
$2.3 billion
, respectively, compared to merchant revenues less cost of revenues of
$630.1 million
and
$1.4 billion
for the
three
and
nine
months ended
September 30, 2017
, respectively, resulting in an increase of
66.6%
and
60.7%
, respectively. Revenue from our merchant accommodation reservation services contributed approximately 91% of the year-over-year increase for both the
three
and
nine
months ended
September 30, 2018
. Booking.com has been expanding its merchant accommodation reservation services to provide greater payment options for both customers and travel service providers.
Advertising and other revenues increased by
14.4%
for the
three
months ended
September 30, 2018
compared to the
three
months ended
September 30, 2017
, primarily due to (1) growth in our KAYAK business including approximately $42 million in revenue related to the Momondo Group for the
three
months ended
September 30, 2018
, compared to approximately $33 million in revenue related to the Momondo Group since its acquisition in July 2017 for the
three
months ended
September 30, 2017
; and (2) increased diner reservation volumes at OpenTable. Advertising and other revenues increased by
32.0%
for the
nine
months ended
September 30, 2018
, compared to the
nine
months ended
September 30, 2017
, primarily due to (1) the inclusion of approximately $128 million in revenue related to the Momondo Group for the nine months ended September 30, 2018, compared to approximately $33 million in revenue related to the Momondo Group since its acquisition in July 2017 for the nine months ended September 30, 2017; (2) other growth in our KAYAK business; (3) increased diner reservation volumes at OpenTable; and (4) a benefit from the reversal of approximately $27 million related to OpenTable's loyalty program liability in the first quarter of 2018, which resulted from the introduction of a three-year time-based expiration for points earned by diners.
Total revenues of
$4.8 billion
and
$11.3 billion
for the
three
and
nine
months ended
September 30, 2018
, respectively, as compared to gross profit of
$4.4 billion
and
$9.7 billion
for the
three
and
nine
months ended
September 30, 2017
, respectively, increased by
10.7%
and
16.9%
, respectively (growth on a constant-currency basis was approximately
13%
and
15%
, respectively). Revenue from our accommodation reservation services contributed approximately
85%
and
83%
of the year-over-year increase for the
three
and
nine
months ended
September 30, 2018
, respectively.
Total revenues for the
three
and
nine
months ended
September 30, 2018
under the current revenue standard, where revenue is recognized when the travel begins (at "check-in"), were approximately
1.2%
and
1.1%
lower than total revenues for
the
three
and
nine
months ended
September 30, 2018
, respectively, if reported under the previous revenue standard, where revenue was recognized when travel was completed (at "check-out") (see Note
2
to our Unaudited Consolidated Financial Statements). The unfavorable impact of
1.2%
and
1.1%
on total revenues for the three and
nine
months ended
September 30, 2018
, respectively, resulted in an unfavorable impact on the growth rates of approximately one percentage point when comparing total revenues for both the three and nine months ended September 30, 2018 to gross profit for both the three and nine months ended September 30, 2017.
Total revenues as a percentage of gross bookings was
20.0%
and
15.5%
for the
three
and nine months ended
September 30, 2018
, respectively, as compared to gross profit as a percentage of gross bookings of
20.1%
and
15.3%
for the
three
and nine months ended
September 30, 2017
, respectively.
Our international operations accounted for approximately
$4.4 billion
and
$10.1 billion
of our total revenues for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to
$4.0 billion
and
$8.6 billion
of our gross profit for the
three
and
nine
months ended
September 30, 2017
, respectively. Total revenues in 2018 compared to gross profit in 2017 attributable to our international operations increased by
11.0%
and
17.5%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
(growth on a constant-currency basis was approximately
14%
and
15%
, respectively). Total revenues in 2018 compared to gross profit in 2017 attributable to our U.S. businesses increased by
7.7%
and
12.5%
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to the
three
and
nine
months ended
September 30, 2017
, due to growth in all of our U.S. businesses. In addition, the adjustment to reverse a portion of OpenTable's loyalty program liability had a favorable impact on total revenues attributable to our U.S. businesses for the
nine
months ended
September 30, 2018
of approximately
$27 million
.
Operating Expenses
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Performance marketing
|
|
$
|
1,314,055
|
|
|
$
|
1,231,074
|
|
|
6.7
|
%
|
|
$
|
3,562,155
|
|
|
$
|
3,364,589
|
|
|
5.9
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
27.1
|
%
|
|
28.1
|
%
|
|
|
|
31.5
|
%
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand marketing
|
|
$
|
160,126
|
|
|
$
|
125,877
|
|
|
27.2
|
%
|
|
$
|
385,262
|
|
|
$
|
337,016
|
|
|
14.3
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
3.3
|
%
|
|
2.9
|
%
|
|
|
|
3.4
|
%
|
|
3.5
|
%
|
|
|
We rely on performance marketing channels to generate a significant amount of traffic to our websites. Performance marketing expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based marketing and incentives. For the
three
and
nine
months ended
September 30, 2018
, performance marketing expenses increased compared to the
three
and
nine
months ended
September 30, 2017
, to generate increased gross bookings and revenue. We adjust our performance marketing spend based on our growth and profitability objectives and the expected performance of our performance marketing channels. Performance marketing as a percentage of total revenues for the
three
and
nine
months ended
September 30, 2018
decreased compared to the
three
and
nine
months ended
September 30, 2017
due to increased performance marketing ROIs and changes in the share of traffic by channel. We recognize the substantial majority of our performance marketing expenses as they are incurred, which is typically in the quarter in which the associated reservations are booked. In contrast, we generally do not recognize revenue from these reservations until the travel is completed or, for periods beginning after December 31, 2017, until the travel begins, which can be in a quarter other than when the reservations are booked. In addition, we may from time to time, as we did over the past five quarters, pursue a strategy of improving our performance marketing ROIs, which could negatively impact growth and positively impact performance marketing efficiency and profitability.
Brand marketing expenses consist primarily of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing spend such as public relations, trade shows and sponsorships. For the
three
and
nine
months ended
September 30, 2018
, brand marketing expenses increased
by
27.2%
and
14.3%
compared to the
three
and
nine
months ended
September 30, 2017
, respectively, primarily due to increased
brand marketing expenses at Booking.com in order to increase brand awareness and grow the number of customers that come directly to the Booking.com website and mobile app.
We have changed the presentation of advertising expenses and sales and marketing expenses in the Consolidated Statements of Operations (see Note
1
to the Unaudited Consolidated Financial Statements).
Sales and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Sales and other expenses
|
|
$
|
242,974
|
|
|
$
|
151,024
|
|
|
60.9
|
%
|
|
$
|
612,367
|
|
|
$
|
382,538
|
|
|
60.1
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
5.0
|
%
|
|
3.4
|
%
|
|
|
|
|
5.4
|
%
|
|
4.0
|
%
|
|
|
Sales and other expenses consist primarily of: (1) credit card and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) provisions for customer chargebacks associated with merchant transactions; (4) provisions for bad debt, primarily related to agency accommodation commission receivables; and (5) customer relations costs. For the
three
and
nine
months ended
September 30, 2018
, sales and other expenses, which are substantially variable in nature, increased compared to the
three
and
nine
months ended
September 30, 2017
due primarily to increased transaction volumes (primarily, increased merchant transaction volumes at Booking.com), higher bad debt expense related to accommodation commission receivables and higher customer chargebacks.
We have changed the presentation of advertising expenses and sales and marketing expenses in the Consolidated Statements of Operations (see Note
1
to the Unaudited Consolidated Financial Statements).
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Personnel
|
|
$
|
536,735
|
|
|
$
|
483,438
|
|
|
11.0
|
%
|
|
$
|
1,557,872
|
|
|
$
|
1,220,176
|
|
|
27.7
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
11.1
|
%
|
|
11.0
|
%
|
|
|
|
|
13.8
|
%
|
|
12.6
|
%
|
|
|
Personnel expenses consist of compensation to our personnel, including salaries, bonuses, stock-based compensation, payroll taxes, and employee health and other benefits. Personnel expenses increased during the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, primarily due to increases in aggregate salaries of approximately $39 million and $185 million for the
three
and
nine
months ended
September 30, 2018
, respectively, primarily related to headcount growth to support our businesses. Stock-based compensation was
$70.1 million
and
$216.0 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, compared to
$66.4 million
and
$192.2 million
for the
three
and
nine
months ended
September 30, 2017
, respectively. Headcount increased, primarily at Booking.com, in the areas of information technology to support various business initiatives, such as alternative accommodations, marketing, payments and in-destination experiences, and customer service to support transaction growth.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
General and administrative
|
|
$
|
183,228
|
|
|
$
|
142,823
|
|
|
28.3
|
%
|
|
$
|
504,120
|
|
|
$
|
422,252
|
|
|
19.4
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
3.8
|
%
|
|
3.3
|
%
|
|
|
|
|
4.5
|
%
|
|
4.4
|
%
|
|
|
|
General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) personnel-related expenses such as travel, relocation, recruiting and training expenses; and (3) fees for outside professionals, including litigation expenses. General and administrative expenses increased during the
three
and
nine
months ended
September 30, 2018
compared to the
three
and
nine
months ended
September 30, 2017
, primarily due to an accrual for travel transaction taxes of approximately
$29 million
related to prior periods recognized in the third quarter of 2018 (see Note 12 to our Unaudited Consolidated Financial Statements), higher occupancy and office expenses associated with increased headcount to support the expansion of our international businesses, as well as the fair value adjustment to the contingent liability related to an acquisition of $7.9 million recognized in the third quarter of 2018. These increases were partially offset by a reversal of previously accrued travel transaction taxes of $6.1 million (including estimated interest and penalties) recorded in the third quarter of 2018 based on a favorable ruling in the State of California.
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Information technology
|
|
$
|
57,742
|
|
|
$
|
47,901
|
|
|
20.5
|
%
|
|
$
|
177,133
|
|
|
$
|
132,677
|
|
|
33.5
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
1.2
|
%
|
|
1.1
|
%
|
|
|
|
1.6
|
%
|
|
1.4
|
%
|
|
|
|
Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expenses increased during the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, due primarily to increased software fees and data center and cloud costs.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Depreciation and amortization
|
|
$
|
107,641
|
|
|
$
|
95,910
|
|
|
12.2
|
%
|
|
$
|
317,397
|
|
|
$
|
265,212
|
|
|
19.7
|
%
|
% of Total revenues in 2018 / % of Gross profit in 2017
|
|
2.2
|
%
|
|
2.2
|
%
|
|
|
|
|
2.8
|
%
|
|
2.7
|
%
|
|
|
|
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation of computer equipment; (3) depreciation of internally developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses increased during the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, primarily as a result of increased depreciation expenses due to capital expenditures for additional data center capacity and office build-outs to support growth and geographic expansion and increased capitalized software development costs.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Interest income
|
|
$
|
48,641
|
|
|
$
|
41,483
|
|
|
17.3
|
%
|
|
$
|
141,210
|
|
|
$
|
110,296
|
|
|
28.0
|
%
|
Interest expense
|
|
(68,170
|
)
|
|
(66,338
|
)
|
|
2.8
|
%
|
|
(203,242
|
)
|
|
(182,997
|
)
|
|
11.1
|
%
|
Net unrealized gains on marketable equity securities
|
|
30,858
|
|
|
—
|
|
|
N/A
|
|
|
107,221
|
|
|
—
|
|
|
N/A
|
|
Foreign currency transactions and other
|
|
(17,072
|
)
|
|
(10,101
|
)
|
|
69.0
|
%
|
|
(40,174
|
)
|
|
(21,249
|
)
|
|
89.1
|
%
|
Total
|
|
$
|
(5,743
|
)
|
|
$
|
(34,956
|
)
|
|
(83.6
|
)%
|
|
$
|
5,015
|
|
|
$
|
(93,950
|
)
|
|
(105.3
|
)%
|
For the
three
and
nine
months ended
September 30, 2018
, interest income increased, compared to the
three
and
nine
months ended
September 30, 2017
, primarily due to the growing impact of our multi-currency notional cash pooling structure launched in 2017, which enables the Company to aggregate and invest daily operating cash in money market funds. In addition, for the nine months ended
September 30, 2018
, the increase in interest income, compared to the
nine
months ended
September 30, 2017
, was also due to higher yields in cash equivalents and marketable securities. Interest expense increased for the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, primarily attributable to our borrowings under our multi-currency notional cash pooling structure and our Senior Notes issued in August 2017, partially offset by the maturity of our 1.0% Convertible Senior Notes in March 2018 (see Note
8
to our Unaudited Consolidated Financial Statements).
Net unrealized gains on marketable equity securities for the
three
and
nine
months ended
September 30, 2018
are related to our equity investments in Ctrip.com International Ltd. ("Ctrip") and Meituan Dianping. Our investment in Meituan Dianping became classified as marketable equity securities as a result of its initial public offering in September 2018. Pursuant to the adoption of the accounting update on financial instruments in the first quarter of 2018, changes in fair value of marketable equity securities are recognized in net income for periods beginning after December 31, 2017, rather than accumulated other comprehensive income. See Note
1
and Note 5 to our Unaudited Consolidated Financial Statements for further information.
Foreign currency transactions and other includes foreign currency gains or losses on derivative contracts, foreign currency transaction gains or losses, including costs related to foreign currency transactions, net realized gains or losses on investments and other income or expense. Foreign currency transaction losses, including costs related to foreign currency transactions, resulted in foreign currency losses of
$16.4 million
and
$36.8 million
for the
three
and
nine
months ended
September 30, 2018
, respectively, and foreign currency losses of
$8.4 million
and
$21.4 million
for the
three
and
nine
months ended
September 30, 2017
, respectively.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in thousands)
|
|
|
|
Nine Months Ended
September 30,
(in thousands)
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
2018
|
|
2017
|
|
Change
|
Income tax expense
|
|
$
|
473,268
|
|
|
$
|
346,454
|
|
|
36.6
|
%
|
|
$
|
850,934
|
|
|
$
|
561,349
|
|
|
51.6
|
%
|
% of Earnings before income taxes
|
|
21.1
|
%
|
|
16.8
|
%
|
|
|
|
20.2
|
%
|
|
16.2
|
%
|
|
|
Our 2018 effective tax rates differ from the 2018 U.S. federal statutory tax rate of
21%
, primarily due to the benefit of the Netherlands Innovation Box Tax and current year excess tax benefits recognized from the vesting of equity awards, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with our current year international earnings, resulting from the introduction of the Tax Act, as well as certain nondeductible expenses. Our 2017 effective tax rates differ from the 2017 U.S. federal statutory tax rate of
35%
, primarily as a result of lower international tax rates and current year excess tax benefits recognized from the vesting of equity awards, partially offset by certain nondeductible expenses.
Our effective tax rates were higher for the
three
and
nine
months ended
September 30, 2018
, compared to the
three
and
nine
months ended
September 30, 2017
, primarily as a result of U.S. federal and state tax associated with our current year international earnings, resulting from the introduction of the Tax Act, and the increase in the Netherlands Innovation Box Tax rate from
5%
to
7%
as disclosed below.
A portion of Booking.com's earnings during the
three
and
nine
months ended
September 30, 2018
and
2017
qualified for Innovation Box Tax treatment under Dutch tax law, which had a significant beneficial impact on the Company's effective tax rate for those periods. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit, whether due to a change in tax law or a determination by the Dutch government that Booking.com's activities are not "innovative" or for any other reason, would substantially increase our effective tax rate and adversely impact our results of operations. During December 2017, legislation was enacted in the Netherlands that increased the Innovation Box Tax rate from
5%
to
7%
, effective for tax years beginning after December 31, 2017. See Part II Item 1A Risk Factors - "
We may not be able to maintain our 'Innovation Box Tax' benefit.
"
Liquidity and Capital Resources
At
September 30, 2018
, we had
$16.2 billion
in cash, cash equivalents and short-term and long-term investments in marketable securities. Approximately
$11.0 billion
is held by our international subsidiaries and is denominated primarily in U.S. Dollars and Euros and, to a lesser extent, British Pounds Sterling and other currencies. Cash equivalents and short-term and long-term investments in marketable securities are comprised of U.S. and international corporate bonds, U.S. and international government securities, high-grade commercial paper, U.S. government agency securities, convertible debt securities and American Depositary Shares ("ADSs") of Ctrip, Meituan Dianping equity securities, money market funds, certificates of deposit and time deposits (see Note
6
to the Unaudited Consolidated Financial Statements).
As a result of the Tax Act (see Note
10
to our Unaudited Consolidated Financial Statements), we recorded a provisional transition tax liability of approximately
$1.3 billion
during the year ended December 31, 2017, inclusive of U.S. federal and state income taxes and international withholding taxes, net of the benefit of utilizing approximately
$204 million
of U.S. federal net operating loss carryforwards and approximately
$46 million
of other U.S. tax credit carryforwards. The majority of this liability is U.S. federal income tax and will be paid over eight years. At
September 30, 2018
, the remaining liability of $1.2 billion includes $1.1 billion in "Long-term U.S. transition tax liability" and approximately
$93 million
in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet. In accordance with the Tax Act, generally future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes.
In April 2018, we paid $139.4 million, net of cash acquired, and issued shares of our common stock in an amount of
$110.4 million
in connection with an acquisition of a local activities and experiences booking software provider. In July 2018, we invested $500 million in preferred shares of Didi Chuxing, the leading mobile transportation and ride-hailing platform in China. In October 2018, we invested $200 million in preferred shares of Grab, the leading on-demand transportation and mobile service platform in Southeast Asia.
In July 2018, we signed a definitive agreement to acquire a hotel meta-search company and will pay approximately $140 million in cash in connection with this acquisition. The transaction is expected to close later this year, subject to regulatory approval and other closing conditions.
In June 2015, we entered into a
$2.0 billion
five-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at our option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
. The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. At
September 30, 2018
, there were no borrowings outstanding and approximately
$4.7 million
of letters of credit issued under the facility.
For the three months ended March 31, 2018, in connection with the maturity of the remaining outstanding 2018 Notes, we paid
$714.3 million
to satisfy the aggregate principal amount due and paid an additional
$773.2 million
in satisfaction of the conversion value in excess of the principal amount.
In the first quarter of 2018, the Board of Directors authorized a program to repurchase up to
$8.0 billion
of our common stock, in addition to amounts previously authorized. During the
nine
months ended
September 30, 2018
, we repurchased
2,095,017
shares of our common stock for an aggregate cost of
$4.2 billion
. At
September 30, 2018
, we had a remaining aggregate amount of
$6.4 billion
authorized by our Board of Directors to repurchase our common stock. We may from time to time make additional repurchases of our common stock, depending on prevailing market conditions, alternate uses of capital and other factors.
In September 2016, we signed a turnkey agreement for approximately
270 million
Euros to construct an office building for Booking.com’s headquarters in the Netherlands. Upon signing this agreement, we paid approximately
48 million
Euros to the developer, which included approximately
43 million
Euros for the acquired land-use rights and approximately
5 million
Euros for the building construction. The remaining
222 million
Euro obligation related to the turnkey agreement principally relates to the building construction cost. During the nine months ended September 30, 2018, we paid
61 million
Euros (approximately
$74 million
) related to our obligation under the turnkey agreement and have a
161 million
Euro
obligation remaining as of September 30, 2018, which will be paid periodically until early 2021 when we anticipate construction will be complete. In addition to the turnkey agreement, we are obligated to pay approximately
78 million
Euros over the term of the acquired land lease, which expires in 2065. We will also make additional capital expenditures to fit out and furnish the office space. See Note
12
to the Unaudited Consolidated Financial Statements.
Cash Flow Analysis
Net cash provided by operating activities for the
nine
months ended
September 30, 2018
was
$4.3 billion
, resulting from net income of
$3.4 billion
, a favorable impact of
$571.3 million
for non-cash items and a favorable impact of
$330.7 million
for changes in working capital and other assets and liabilities. For the
nine
months ended
September 30, 2018
, prepaid expenses and other current assets increased by
$200.7 million
, primarily related to an increase in prepayments to travel service providers of approximately
$106 million
and the remaining balance of prepayments, principally by Booking.com, of Netherlands income taxes of approximately
$62 million
to earn prepayment discounts. For the
nine
months ended
September 30, 2018
, accounts receivable increased by
$450.1 million
and accounts payable, accrued expenses and other current liabilities increased by
$1.0 billion
, primarily related to seasonality and increases in business volumes. Due to the typical seasonality of our business, our gross bookings and revenues are generally higher in the third quarter of the year than in the fourth quarter of the year which typically results in higher accounts receivable, deferred merchant bookings, accounts payable and accrued expenses at September 30 compared to December 31. Non-cash items were principally associated with stock-based compensation expense, depreciation, the provision for uncollectible accounts, amortization and net unrealized gains on marketable equity securities.
Net cash provided by operating activities for the
nine
months ended
September 30, 2017
was
$3.5 billion
, resulting from net income of
$2.9 billion
and a favorable impact of
$535.5 million
for non-cash items and favorable changes in working capital and other assets and liabilities of
$56.7 million
. For the
nine
months ended
September 30, 2017
, prepaid expenses and other current assets increased by
$136.3 million
, primarily related to an increase in prepayments to travel service providers of approximately $46 million and the remaining balance of prepayments, principally by Booking.com, of Netherlands income taxes of approximately
$39 million
to earn prepayment discounts. For the
nine
months ended
September 30, 2017
, accounts receivable increased by
$479.2 million
and accounts payable, accrued expenses and other current liabilities increased by
$641.0 million
, primarily related to seasonality and increases in business volumes. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, and amortization of debt discount on our convertible notes.
Net cash provided by investing activities was
$1.8 billion
for the
nine
months ended
September 30, 2018
, principally resulting from net sales of investments of
$2.3 billion
, partially offset by acquisitions and other investments, net of cash acquired, of
$139.4 million
. Net cash used in investing activities was
$3.6 billion
for the
nine
months ended
September 30, 2017
, principally resulting from net purchases of investments of
$2.9 billion
and acquisitions and other investments, net of cash acquired, of $552.8 million. Cash invested in the purchase of property and equipment was
$356.0 million
and
$223.7 million
in the
nine
months ended
September 30, 2018
and
2017
, respectively. Cash invested in the purchase of property and equipment for the nine months ended September 30, 2018 includes payments of approximately $72 million related to the turnkey agreement for constructing Booking.com's future headquarters during the nine months ended September 30, 2018.
Net cash used in financing activities was
$5.6 billion
for the
nine
months ended
September 30, 2018
, which primarily consisted of payments for the repurchase of common stock of
$4.1 billion
and payments for the conversion of Senior Notes of
$1.5 billion
. Net cash provided by financing activities was
$821.5 million
for the
nine
months ended
September 30, 2017
, which primarily consisted of total proceeds of
$2.0 billion
from the issuance of Senior Notes, partially offset by payments for repurchase of common stock of
$1.1 billion
, payments related to the conversion of Senior Notes of $89.6 million and payment of debt of $15.1 million assumed in the acquisition of the Momondo Group.
.
Contingencies
French tax authorities conducted an audit of the years 2003 through 2012 to determine whether Booking.com is in compliance with its tax obligations in France. Booking.com received formal assessments in December 2015 in which the French tax authorities claim that Booking.com has a permanent establishment in France and seek to recover unpaid income taxes and value-added taxes of approximately
356 million
Euros, the majority of which would represent penalties and interest. We believe that Booking.com has been, and continues to be, in compliance with French tax law and we are contesting the assessments. Our objection to the assessment was denied by the French tax authorities. If we are unable to resolve the matter with the French tax authorities, we would expect to challenge the assessments in the French courts. In order to contest the assessments in court, we may be required to pay, upfront, the full amount or a significant part of any such assessments, though such payment would not constitute an admission by us that we owe the taxes. Alternatively, any resolution or settlement of the matter with the French tax authorities may also require a payment as part of such resolution or settlement. In each case, any such payment would not necessarily constitute an admission by us that we owe the taxes. French tax authorities have begun a similar audit of the tax years 2013 through 2015, which could result in additional assessments. See Part II Item 1A Risk Factors - "
We may have exposure to additional tax liabilities.
"
Off-Balance Sheet Arrangements
At
September 30, 2018
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above and the Risk Factors contained in Part II Item 1A hereof, contain forward-looking statements. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results could differ materially from those described in the forward-looking statements.
Expressions of future goals and expectations and similar expressions, including "may," "will," "should," "could," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended
December 31, 2017
, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.