Item 1A. Risk Factor
s
The risks described below and elsewhere in this annual report are not the only ones that relate to our businesses or our capitalization. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the events described below were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
Factors Relating to Our Corporate History and Structure
We are a holding company, and we could be unable in the future to obtain cash in amounts sufficient to service our financial obligations or meet our other commitments.
Our ability to meet our financial obligations and other contractual commitments, including to make debt service payments under the Margin Loan Agreements (as defined below) and any other credit facilities that we may obtain in the future, depends upon our ability to access cash. We are a holding company, and our sources of cash include our available cash balances, any dividends and interest we may receive from our investments and proceeds from any asset sales we may undertake in the future. We currently have no plans with respect to any asset sales. The ability of TripAdvisor to pay dividends or to make other payments or advances to us depends on its operating results and any statutory, regulatory or contractual restrictions to which it may be or may become subject.
We do not have access to the cash that TripAdvisor generates from its operating activities.
TripAdvisor generated $405 million, $238 million and $321 million of cash from its operations during the years ended December 31, 2018, 2017 and 2016, respectively. TripAdvisor uses the cash it generates from its operations to fund its investing activities and to service its debt and other financing obligations. We do not have access to the cash that TripAdvisor generates unless TripAdvisor declares a dividend on its capital stock payable in cash, repurchases any or all of its outstanding shares of capital stock for cash or otherwise distributes or makes payments to its stockholders, including us. Historically, TripAdvisor has not paid any dividends on its capital stock or, with limited exceptions, otherwise distributed cash to its stockholders and instead has used all of its available cash in the expansion of its business and to service its debt obligations. Covenants in TripAdvisor’s existing debt instruments also restrict the payment of dividends and cash distributions to stockholders. We expect that TripAdvisor will continue to apply its available cash to the expansion of its business.
Our company may have future capital needs and may not be able to obtain additional financing, or refinance our existing indebtedness, on acceptable terms.
We had outstanding borrowings of $220 million (the “Margin Loans”) at December 31, 2018, including paid in kind interest, under two margin loan agreements (the “Margin Loan Agreements”) entered into by our bankruptcy remote wholly-owned subsidiary (“TripSPV”) in connection with the TripCo Spin-Off. Borrowings under the Margin Loan Agreements are guaranteed solely by our company and secured by our ownership interest in TripAdvisor. The Margin Loans mature in June 2019, and if we decide to refinance the Margin Loans, we may not be able to do so on acceptable terms. In addition, we had outstanding borrowings of $267 million at December 31, 2018, including paid in kind interest, against a variable postpaid forward. All of our equity interests in TripAdvisor are and will be held through TripSPV. Because our primary asset consists of our equity interests in TripAdvisor and the Margin Loan Agreements prohibit, with limited exceptions, the incurrence of additional indebtedness by TripSPV, our company is very limited in its ability to incur additional financing, and our cash reserves and limited operating cash flow may be insufficient to satisfy our financial obligations. In addition, the Margin Loan Agreements provide that, among other triggering events, if at any time the closing price per share of TripAdvisor common stock falls below certain minimum values, a partial repayment of the Margin Loans to certain specified amounts will be due and payable with respect to each such circumstance, together with accrued and unpaid interest. If the company or TripSPV is unable to pay such amounts, the lenders may foreclose on the pledged stock of TripAdvisor that TripSPV holds and any other collateral that then secures TripSPV’s obligations under the Margin Loan
Agreements, which would materially adversely affect our asset composition and financial condition as well as our access to capital on a going forward basis.
In addition, the availability of capital for our company will be subject to prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, all of which are beyond the control of our company. In light of periodic uncertainty in the capital and credit markets, there can be no assurance that sufficient financing will be available on desirable terms, if at all, to fund investments, acquisitions, stock repurchases, dividends, debt refinancing or extraordinary actions or that counterparties in any such financings would honor their contractual commitments. If financing is not available when needed or is not available on favorable terms, our company may be unable to complete acquisitions, repurchase equity or otherwise take advantage of business opportunities, any of which could have a material adverse effect on the business, financial condition and results of operations of our company. If we raise additional funds through the issuance of equity securities, our stockholders may experience significant dilution.
Our company has significant indebtedness, which could adversely affect our business and financial condition.
As discussed above, in connection with the TripCo Spin-Off, we entered into the Margin Loan Agreements as the guarantor with TripSPV as the borrower, pursuant to which TripSPV had outstanding borrowings of $220 million at December 31, 2018, including paid in kind interest. In addition, we had outstanding borrowings of $267 million at December 31, 2018, including paid in kind interest, against a variable postpaid forward. As a result of this significant indebtedness, our company may:
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Experience increased vulnerability to general adverse economic and industry conditions;
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Be required to dedicate a substantial portion of its available cash to make payments on its indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, strategic acquisitions and investments and other general corporate purposes (and we further note that, in the case of our company, we have a limited amount of cash and do not have access to the cash of TripAdvisor as a result of the significant non-controlling interest in TripAdvisor);
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Be handicapped in its ability to optimally capitalize and manage the cash flow for its businesses;
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Be limited in its flexibility in planning for, or reacting to, changes in its businesses and the markets in which it operates;
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Possibly be placed at a competitive disadvantage compared to its competitors that have less debt;
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Be exposed to the risk of increased interest rates with respect to any variable rate portion of its indebtedness; and
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Be limited in its ability to borrow additional funds or to borrow funds at rates or on other terms that it finds acceptable.
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In addition, it is possible that we may need to incur additional indebtedness in the future in the ordinary course of business. However, there is no assurance that additional financing will be available to our company on terms favorable to us, if at all. If new debt is added to the current debt levels, the risks described above could intensify. In addition, TripSPV is prohibited from incurring additional indebtedness under the Margin Loan Agreements, and we expect our company to have limited capacity to incur indebtedness outside of TripSPV.
Although TripAdvisor has substantial cash flow from operations, we have limited sources of cash and liquidity. Our cash balance is expected to enable us to fund our parent level operating expenses and debt service obligations for the foreseeable future; however, we cannot assure you that we will not experience unexpected expenses or that we will have sufficient liquidity to fund our operations and service our direct debt obligations during the foreseeable future. For additional information about our company’s ability to potentially service our direct debt obligations, see “
We are a holding company, and we could be unable in the future to obtain cash in amounts sufficient to service our financial obligations or
meet our other commitments.”
and
“We do not have access to the cash that TripAdvisor generates from its operating activities.”
above.
The Margin Loan Agreements contain various covenants that will restrict the activities of TripSPV and could trigger an early repayment obligation.
As discussed above, in connection with the TripCo Spin-Off, we entered into the Margin Loan Agreements as the guarantor with TripSPV as the borrower, pursuant to which we had outstanding borrowings of $220 million, including paid in kind interest at December 31, 2018. The Margin Loan Agreements contain various covenants, including those that limit our ability to, among other things:
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Incur indebtedness by TripSPV;
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Enter into financing arrangements with respect to the stock of TripAdvisor; and
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Cause TripSPV to enter into unrelated businesses or otherwise conduct business other than owning common stock or other shares of TripAdvisor.
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In addition, as discussed above, the Margin Loan Agreements provide that, among other triggering events, if at any time the closing price per share of TripAdvisor common stock falls below certain minimum values, a partial repayment of the Margin Loans to certain specified amounts will be due and payable with respect to each such circumstance, together with accrued and unpaid interest, and if the company or TripSPV is unable to pay such amounts, the lenders may foreclose on the pledged stock of TripAdvisor that TripSPV holds and any other collateral that then secures TripSPV’s obligations under the Margin Loan Agreements, which would materially adversely affect our asset composition and financial condition.
Any failure to comply with the restrictions of the Margin Loan Agreements may result in an event of default under the agreements governing such facilities. Such default may allow the applicable creditors to accelerate the debt incurred thereunder. For additional information regarding the potential impact of the restrictions in these debt arrangements, see “
Our company may have future capital needs and may not be able to obtain additional financing on acceptable terms
.”
Our company has overlapping directors and officers with Qurate Retail, Liberty Media, Liberty Broadband Corporation and Liberty Expedia Holdings, Inc. and GCI Liberty, Inc., which may lead to conflicting interests.
As a result of the TripCo Spin-Off and other transactions between 2011 and 2018 that resulted in the separate corporate existence of Qurate Retail, Liberty Media, Liberty Broadband Corporation (“LBC”), Liberty Expedia Holdings, Inc. (“Expedia Holdings”) and GCI Liberty, Inc. (“GCI Liberty”), most of our executive officers also serve as executive officers of Qurate Retail, Liberty Media, LBC, Expedia Holdings and GCI Liberty and there are overlapping directors. Other than GCI Liberty’s current ownership of shares of LBC’s non-voting Series C common stock, none of the foregoing companies has any ownership interest in any of the others. Our executive officers and members of our company’s board of directors have fiduciary duties to our stockholders. Likewise, any such persons who serve in similar capacities at Qurate Retail, Liberty Media, LBC, Expedia Holdings, GCI Liberty or any other public company have fiduciary duties to that company’s stockholders. For example, there may be the potential for a conflict of interest when our company, Qurate Retail, Liberty Media, LBC, Expedia Holdings or GCI Liberty looks at acquisitions and other corporate opportunities that may be suitable for each of them. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to which they owe fiduciary duties. Moreover, many of our company’s directors and officers own Qurate Retail, Liberty Media, LBC, Expedia Holdings and/or GCI Liberty stock and equity awards. These ownership interests could create, or appear to create, potential conflicts of interest when the applicable individuals are faced with decisions that could have different implications for our company, Qurate Retail, Liberty Media, LBC, Expedia Holdings and GCI Liberty. Each of our company, LBC, Expedia Holdings and GCI Liberty has renounced its rights to certain business opportunities and their respective restated certificate of incorporation provides that no director or officer of the respective company will breach their fiduciary duty and therefore be liable to the respective company or its stockholders by reason of the fact that any such individual directs a corporate opportunity to another person or entity (including Qurate Retail, Liberty Media, LBC, Expedia Holdings, GCI Liberty and
TripCo, as the case may be) instead of the respective company, or
does not refer or communicate information regarding such corporate opportunity to the respective company, unless (x) such opportunity was expressly offered to such person solely in his or her capacity as a director or officer of the respective company or as a director or officer of any of the respective company’s subsidiaries, and (y) such opportunity relates to a line of business in which the respective company or any of its subsidiaries is then directly engaged. In addition, any potential conflict that qualifies as a “related party transaction” (as defined in Item 404 of Regulation S-K) is subject to review by an independent committee of the applicable issuer’s board of directors in accordance with its corporate governance guidelines. Any other potential conflicts that arise will be addressed on a case-by-case basis, keeping in mind the applicable fiduciary duties owed by the executive officers and directors of each issuer. From time to time, we may enter into transactions with Qurate Retail, Liberty Media, LBC, Expedia Holdings, GCI Liberty and/or their subsidiaries or other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to our company, Qurate Retail, Liberty Media, LBC, Expedia Holdings, GCI Liberty or any of their respective subsidiaries or affiliates as would be the case where there is no overlapping officer or director.
Our inter-company agreements were negotiated while we were a subsidiary of Qurate Retail.
We entered into a number of inter-company agreements covering matters such as tax sharing and our responsibility for certain liabilities previously undertaken by Qurate Retail for certain of our businesses. In addition, we entered into a services agreement with Liberty Media pursuant to which it provides to us certain management, administrative, financial, treasury, accounting, tax, legal and other services, for which we pay Liberty Media a services fee. The terms of all of these agreements were established while we were a wholly owned subsidiary of Qurate Retail, and hence may not be the result of arms’ length negotiations. Although we believe that the negotiations with Liberty Media were at arms’ length, the persons negotiating on behalf of Liberty Media also serve as officers of Qurate Retail, as described above. We believe that the terms of these inter-company agreements are commercially reasonable and fair to all parties under the circumstances; however, conflicts could arise in the interpretation or any extension or renegotiation of the foregoing agreements.
Goodwill and other identifiable intangible assets, specifically trademarks, represent a significant portion of our total assets, and we may never realize the full value of our intangible assets.
As of December 31, 2018, we had intangible assets not subject to amortization, which consisted of goodwill and trademarks, of approximately $3,709 million, which represented approximately 71% of total assets as of December 31, 2018. These intangible assets were recorded in connection with our acquisition of a controlling interest in TripAdvisor in 2012. We perform our annual assessment of the recoverability of our goodwill and other non-amortizable intangible assets during the fourth quarter, or more frequently if events and circumstances indicate impairment may have occurred. Impairments may result from, among other things, deterioration in financial and operational performance, declines in stock price, increased attrition, adverse market conditions, adverse changes in applicable laws and/or regulations, deterioration of general macroeconomic conditions, fluctuations in foreign exchange rates, increased competitive markets in which TripAdvisor operates in, declining financial performance over a sustained period, changes in key personnel and/or strategy, and a variety of other factors.
Due to certain marketplace factors impacting TripAdvisor’s operating results, which led to a decline in TripAdvisor’s stock price, impairments of $527 million and $1,271 million were recorded during the year ended December 31, 2017 related to trademarks and goodwill, respectively, related to the hotel reporting unit.
TripCo will continue to monitor TripAdvisor’s financial performance, stock price and other events and circumstances that may negatively impact the estimated fair values to determine if an additional impairment assessment is necessary.
The amount of any quantified impairment must be expensed immediately as a charge to results of operations. Any impairment charge relating to goodwill or other intangible assets would have the effect of decreasing our earnings or increasing our losses in such period. At least annually, or as circumstances arise that may trigger an assessment, we will test our goodwill for impairment. There can be no assurance that our future evaluations of goodwill will not result in our recognition of impairment charges, which may have a material adverse effect on our financial statements and results of operations.
Factors Relating to TripAdvisor
If TripAdvisor is unable to continue to increase visitors to its websites and mobile apps and to cost-effectively convert these visitors into revenue-generating users, and to continue to engage its users, its revenue, financial results and business could be harmed.
TripAdvisor’s long term success depends on its continued ability to increase the overall number of visitors flowing through its platforms in a cost effective manner, to convert those visitors into consumers and to then to continue to engage those consumers throughout the travel planning, booking and trip-taking phases. TripAdvisor’s traffic and user engagement could be adversely affected by a number of factors, including but not limited to increased competition; inability to provide quality content, inventory or supply to its consumers; declines or inefficiencies in traffic acquisition; reduced awareness of TripAdvisor’s brands; and macroeconomic conditions. Certain of TripAdvisor’s competitors have advertising campaigns expressly designed to drive traffic directly to their websites, and these campaigns may negatively impact traffic to TripAdvisor’s site. TripAdvisor anticipates that traffic growth could decline over time, and potentially even decrease in certain periods, as its business matures and that its success will become increasingly dependent on TripAdvisor’s ability to increase levels of user engagement on its platform. There can be no assurances that TripAdvisor will continue to provide content and products in a manner that meets rapidly changing demand. Any failure to obtain and manage content and products in a cost-effective manner that will engage users, or any failure to provide content and products that are perceived as useful, reliable and trustworthy, could adversely affect user experiences and their repeat behavior, reduce traffic to its websites and negatively impact its business and financial performance.
TripAdvisor relies on Internet search engines and application marketplaces to drive traffic to its platform, certain providers of which offer products and services that compete directly with its products. If links to its websites and apps are not displayed prominently, traffic to TripAdvisor’s platform could decline and its business would be negatively affected.
TripAdvisor relies heavily on Internet search engines, such as Google, to generate a significant amount of traffic to its websites, principally through the purchase of travel-related keywords (what is also known as search engine marketing, or SEM) as well as through free, or organic, search (what is also known as search engine optimization, or SEO). The number of consumers TripAdvisor attracts from search engines to its platform is due in large part to how and where information from, and links to, TripAdvisor’s websites are displayed on search engine results pages. The display, including rankings, of search results can be affected by a number of factors, many of which are not in TripAdvisor’s control and may change frequently. Search engines frequently update and change the logic that determines the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to TripAdvisor’s websites can be negatively affected. In addition, a search engine could, for competitive or other purposes, alter its search algorithms or results causing TripAdvisor’s websites to place lower in search query results. If a major search engine changes its algorithms in a manner that negatively affects the search engine ranking of TripAdvisor’s websites or those of its partners, or if competitive dynamics impact the cost or effectiveness of SEO or SEM in a negative manner, TripAdvisor’s business and financial performance would be adversely affected. Furthermore, TripAdvisor’s failure to successfully manage its SEO and SEM strategies and/or other traffic acquisition strategies could result in a substantial decrease in traffic to its websites, as well as increased costs to the extent TripAdvisor replaces free traffic with paid traffic.
In some instances, search and metasearch companies and application marketplaces may change their displays or rankings in order to promote their own competing products or services or the products or services of one or more of TripAdvisor’s competitors. Google in particular is the most significant source of traffic to TripAdvisor’s website, accounting for a substantial portion of the visits to its websites and TripAdvisor’s success depends on its ability to maintain a prominent presence in search results for queries regarding local businesses on Google. Google frequently promotes its own competing products in its web search results, which has negatively impacted the search ranking of TripAdvisor’s website. Google’s promotion of its own competing products, or similar actions by Google in the future that have the effect of reducing TripAdvisor’s prominence or ranking on its search results, could have a substantial negative effect on its business and results of operations.
TripAdvisor also relies on application marketplaces, or app stores such as Apple’s App Store and Google’s Play, to drive downloads of its applications. In the future, Apple, Google or other marketplace operators may make changes to
their marketplaces that make access to TripAdvisor’s products more difficult. For example, Google has entered various aspects of the online travel market, including by establishing a flight metasearch product and a hotel metasearch product, as well as reservation functionality. TripAdvisor’s applications may receive unfavorable treatment compared to the promotion and placement of competing applications, such as the order in which they appear within marketplaces. Similarly, if problems arise in TripAdvisor’s relationships with providers of application marketplaces, traffic to its site and its user growth could be harmed.
TripAdvisor derives a substantial portion of its revenue from advertising and any significant reduction in spending by advertisers or redirections of advertising spend could harm its business.
TripAdvisor derives a substantial portion of its revenue from the sale of advertising, primarily through click-based advertising and, to a lesser extent, display-based and subscription-based advertising. TripAdvisor enters into advertising contracts with its advertising partners; however, the agreement terms are generally limited to legal matters, with campaign details and economics governed by insertion orders, and most of these contracts can be terminated by its partners at will or on short notice. TripAdvisor’s ability to grow advertising revenue with its existing or new advertising partners is dependent in large part on its ability to generate revenue for them relative to other alternatives. Advertisers will not continue to do business with TripAdvisor if their investment in such advertising does not generate sales leads, customers, bookings, or revenue and profit on a cost-effective basis. TripAdvisor’s ability to provide value to its advertising partners depends on a number of factors, including effectiveness of online advertising, competitiveness of its products, traffic quality, perception of its platform, availability and accuracy of analytics and measurement solutions to demonstrate its value, and macroeconomic conditions, whether in the advertising industry generally, among specific types of marketers or within particular geographies. TripAdvisor cannot guarantee that its current advertisers will fulfill their obligations under existing contracts, continue to advertise beyond the terms of existing contracts or enter into any additional contracts with it.
In addition, advertising revenue could be impacted by a number of other factors, including, but not limited to, the following:
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TripAdvisor’s inability to increase or maintain user engagement, including time spent on its platform;
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TripAdvisor’s inability to increase or maintain the quantity and quality of ads shown to consumers, including as a result of technical infrastructure constraints;
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The development of technologies that can block the display of TripAdvisor’s ads or block its ad measurement tools, particularly for advertising displayed on tablets and/or on mobile platforms;
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The effectiveness of TripAdvisor’s ad targeting or degree to which consumers opt out of certain types of ad targeting;
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Adverse government actions or legal developments relating to advertising, including legislative and regulatory developments and developments in litigation that limit TripAdvisor’s ability to deliver or target advertising, particularly in mobile devices; and
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The impact of macroeconomic conditions, whether in the advertising industry in general or among special types of marketers or within particular geographies.
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The occurrence of any of these or other factors could result in a reduction in demand for TripAdvisor’s ads, which may reduce the prices it receives for ads, or cause marketers to stop advertising with TripAdvisor altogether, either of which would negatively affect TripAdvisor’s revenue and financial results.
Click-based advertising revenue accounts for the majority of TripAdvisor’s advertising revenue. TripAdvisor’s CPC pricing for click-based advertising depends, in part, on competition between advertisers. If its large advertisers become less competitive with each other, merge with each other or with its competitors, focus more on per-click profit than on traffic volume, or are able to reduce CPCs, this could have an adverse impact on TripAdvisor’s click-based advertising revenue which would, in turn, have an adverse effect on its business, financial condition and results of operations.
TripAdvisor relies on a relatively small number of significant advertising partners and any reduction in spending by or loss of these partners could seriously harm its business.
TripAdvisor derives a substantial portion of its revenue from a relatively small number of advertising partners and relies significantly on these relationships. For example, for the year ended December 31, 2018, TripAdvisor’s two most significant advertising partners, Expedia and Booking Holdings, accounted for a combined 37% of total revenue. While TripAdvisor enters into master advertising contracts with its partners, as discussed above, most of these contracts can be terminated by its partners at will or on short notice. If any of its significant advertisers were to cease or significantly curtail advertising on TripAdvisor’s websites, TripAdvisor could experience a rapid decline in its revenue over a relatively short period of time which would have a material impact on its business.
TripAdvisor’s business depends on a strong brand and any failure to maintain, protect and enhance its brand could hurt its ability to retain and expand its base of consumers and partners, as well as increase the frequency with which consumers utilize its products and services.
TripAdvisor believes that the strength of its brands (particularly the TripAdvisor brand) has contributed significantly to its success. TripAdvisor also believes that maintaining, protecting and enhancing its brands is critical to expanding its base of consumers, increasing the frequency with which consumers utilize its solutions and attracting advertisers and business partners. TripAdvisor’s ability to maintain and protect its brand depends, in part, on its ability to maintain consumer trust in its products and in the quality, integrity, reliability of usefulness of the user content and other information found on its platform. If consumers do not view TripAdvisor’s reviews to be useful and reliable, they may seek other sources to obtain the information they are looking for and may not return to TripAdvisor’s platform as often in the future, or at all. This would negatively impact TripAdvisor’s ability to attract and retain consumers and partners and the frequency with which they use its platform.
TripAdvisor dedicates significant resources to these goals, primarily through its computer algorithms and teams of moderators that are focused on identifying inappropriate, unreliable or deceptive content. TripAdvisor removes those types of content from its website and, in certain cases, takes legal action against individuals or businesses that it believes have engaged in deceptive practices.
Media, legislative or regulatory scrutiny of TripAdvisor’s decisions regarding user privacy, content, advertising, and other issues may adversely affect its reputation and brands. Negative publicity about TripAdvisor, including its content, technology, business practices or strategic plans, could diminish TripAdvisor’s reputation and confidence in TripAdvisor’s brand, thereby negatively affecting the use of its products. For example, certain media outlets have alleged that TripAdvisor has improperly filtered or screened reviews, that it has not properly verified reviews, or that TripAdvisor manipulates reviews, ranking and ratings in favor of its advertisers against non-advertisers. TripAdvisor expends significant resources to ensure the integrity of its reviews and to ensure that the most relevant reviews are available to its consumers; TripAdvisor does not establish rankings and ratings in favor of its advertisers. Nevertheless, TripAdvisor’s reputation and brand, the traffic to its platform and its business may suffer from negative publicity about TripAdvisor or if consumers otherwise perceive that its content is manipulated or biased. In addition, regulatory inquiries or investigations require management time and attention and could result in further negative publicity, regardless of their merits or ultimate outcomes.
In addition, unfavorable publicity regarding, for example, TripAdvisor’s practices relating to privacy and data protection, product changes, competitive pressures, litigation or regulatory activity, could adversely affect TripAdvisor’s reputation with its consumers and its partners. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of its user base and result in decreased revenue.
TripAdvisor continues to invest significant time and effort towards educating users about its brand and its product offerings and there can be no assurances that these efforts will be successful.
In an effort to enhance its brand, TripAdvisor invests significantly in brand marketing, including, but not limited to, television advertising. TripAdvisor expects these investments to continue, and potentially even increase, as a result of a variety of factors, including relatively high levels of advertising spending by competitors, the increasing costs of supporting multiple brands, expansion into new geographies, product positioning where TripAdvisor’s brands are less well
known and the continued emergence and relative traffic share growth of search engines as destination sites for travelers. TripAdvisor expects to continue its television advertising campaign and to adjust its marketing efforts and spend among the different marketing channels, in each case as TripAdvisor thinks appropriate based on the relative growth opportunity, the expected returns and the competitive environment in the different businesses in which TripAdvisor operates.
Such efforts may not maintain or enhance consumer awareness of TripAdvisor’s brands and, even if TripAdvisor is successful in its branding efforts, such efforts may not be cost-effective or as efficient as they have been historically. If TripAdvisor is unable to maintain or enhance consumer awareness of its brands or to generate demand in a cost-effective manner, it would have a material adverse effect on TripAdvisor’s business and financial performance. In addition, there are no assurances that these actions will have a positive impact on TripAdvisor’s marketing efficiencies or operating margins or when the financial benefit expected to result from these efforts will exceed the costs of such efforts. Furthermore, some of TripAdvisor’s current and potential competitors have access to significantly greater and more diverse resources than TripAdvisor does, and they may also be able to leverage other aspects of their businesses to enable them to compete more effectively with TripAdvisor.
Consumer use of platforms other than desktop computers creates new challenges. If TripAdvisor is unable to operate effectively on these platforms or its products for such devices are not compelling, its business may be adversely affected.
The number of people who access the Internet through devices other than desktop computers, including mobile phones, tablets, handheld computers, voice-assisted speakers, television set-top devices and automobiles, continues to increase. TripAdvisor anticipates that the rate of use of these devices will continue to grow and that usage through desktop computers may continue to decline. The functionality and user experience associated with these alternative devices, such as a smaller screen size or lack of a screen, may make the use of TripAdvisor’s platform through such devices more difficult than through a desktop computer. For example, mobile phone devices monetize at a significantly lower rate than desktops and advertising opportunities are more limited on these mobile devices. Additionally, consumer purchasing patterns differ on alternative devices. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay and are not made as far in advance. Mobile consumers may also be unwilling to download multiple apps from multiple companies providing similar services or contribute high quality content through such devices. As a result, the consumer experience with mobile apps and brand recognition are likely to become increasingly important. TripAdvisor expects that the ways in which consumers engage with its platform will continue to change over time as consumers increasingly engage via alternative devices. This may make it more difficult or more expensive to develop products that consumers find useful or provide them with the information they seek, and may also negatively affect TripAdvisor’s content if consumers do not continue to contribute high quality content through such devices.
In order to attract and retain engaged consumers, TripAdvisor must continue to extend its platform to drive adoption of and user engagement on other devices (in particular, its mobile platform) and the products and services TripAdvisor offers on such devices must be compelling. As new devices and platforms are continually being released, it is difficult to predict the problems TripAdvisor may encounter in adapting its products and services to them – and developing competitive new products and services - and TripAdvisor may need to devote significant resources to the creation, support and maintenance of such products. TripAdvisor’s success will also depend on the interoperability of its products with a range of technologies, systems, networks and standards or in creating, maintaining and developing relationships with key participants in related industries, some of which may be TripAdvisor’s competitors. For example, Google’s Android and Apple’s iPhone are the leading smartphones in the world. Therefore, TripAdvisor’s products need to synergistically function on their respective operating systems in order to create a positive user experience on a mobile device. However, Google could leverage its Android operating system to give its travel services a competitive advantage, either technically or with prominence on its Google Play app store or within its mobile search results. Similarly, Apple obtained a patent for “iTravel,” a mobile app that would allow a traveler to check in for a travel reservation. In addition, Apple’s iPhone operating system includes “Wallet,” a virtual wallet app that holds tickets, boarding passes, coupons and gift cards, and, along with iTravel, may be indicative of Apple’s intent to enter the travel reservations business in some capacity. Apple has substantial market share in the smartphone category and controls integration of offerings, including travel services, into its mobile operating system. Apple also has more experience producing and developing mobile apps and has access to greater resources than TripAdvisor does. Apple may use or expand iTravel, Wallet, Siri (Apple’s voice recognition “concierge” service), Apple Pay (Apple’s mobile payment system) or another mobile app or functionality as a means of entering the travel reservations marketplace. To the extent Google or Apple use their mobile operating systems,
app distribution channels or, in the case of Google, search services, to favor their own travel service offerings, there may be an adverse effect on TripAdvisor’s ability to complete in the mobile space. TripAdvisor may not be successful in developing products that operate effectively with these technologies, systems, networks and standards or in creating, maintaining and developing relationships with key participants in related industries. If TripAdvisor experiences difficulties or increased costs in integrating its products into alternative devices, or if manufacturers elect not to include its products in their devices, make changes that degrade the functionality of its products, give preferential treatment to competitive products or prevent TripAdvisor from delivering advertising, TripAdvisor’s user growth and operating results may be harmed. This risk may be exacerbated by the frequency with which consumers change or upgrade their devices. In the event consumers choose devices that do not already include or support TripAdvisor’s platform or do not install its products when they change or upgrade their devices, TripAdvisor’s traffic and user engagement may be harmed.
In addition, the market for advertising products on mobile and other devices is rapidly evolving. As new devices and platforms are released, consumers may begin consuming content in a manner that is more difficult to monetize. Similarly, as advertising products for mobile and other platforms develop, demand may increase for products that TripAdvisor does not offer or that may alienate its user base, which it must balance against its commitment to prioritizing the quality of user experience over short-term monetization. If TripAdvisor is not able to balance these competing considerations successfully to develop compelling advertising products, advertisers may stop or reduce their advertising with TripAdvisor and TripAdvisor may not be able to generate meaningful revenue from alternative devices despite the expected growth in their usage.
Declines or disruptions in the economy in general and the travel industry in particular could adversely affect TripAdvisor’s businesses and financial performance.
TripAdvisor’s businesses and financial performance are affected by the health of the global economy generally as well as the travel industry and leisure travel in particular. Sales of travel services tend to decline or grow more slowly during economic downturns and recessions when consumers engage in less discretionary spending, are concerned about unemployment or economic weakness, have reduced access to credit or experience other concerns that reduce their ability or willingness to travel. The global economy may be adversely impacted by unforeseen events beyond TripAdvisor’s control, including incidents of actual or threatened terrorism, regional hostilities or instability, unusual weather patterns, natural disasters, political instability and health concerns (including epidemics or pandemics), defaults on government debt, significant increases in fuel and energy costs, tax increases and other matters that could reduce discretionary spending, tightening of credit markets, and further declines in consumer confidence. Decreased travel spending could reduce the demand for TripAdvisor’s services and have a negative impact on its business and financial performance.
In addition, the uncertainty of macro-economic factors and their impact on consumer behavior, which may differ across regions, makes it more difficult to forecast industry and consumer trends and the timing and degree of their impact on TripAdvisor’s markets and business, which in turn could adversely affect TripAdvisor’s ability to effectively manage its business and its results of operations. For example, since the United Kingdom’s referendum to exit the European Union, known as Brexit, global markets and foreign exchange rates have experienced increased volatility, including a decline in the value of the British pound as compared to the U.S. Dollar. Upon leaving the European Union, among other things, the United Kingdom could lose access to the single European Union market and travel between the United Kingdom and European Union countries could be restricted. TripAdvisor could face new regulatory costs and challenges if the U.K. regulations diverge from those of the European Union. Since the terms of the United Kingdom’s exit from the European Union are uncertain, TripAdvisor is unable to predict the effect Brexit will have on its business and results of operations.
TripAdvisor operates in an increasingly competitive global environment and its failure to compete effectively could reduce its market share and harm its financial performance.
TripAdvisor competes in rapidly evolving and competitive markets. It faces competition for content, consumers, advertisers, online travel search and price comparison services, or what is known in the industry as metasearch, and online reservations. TripAdvisor competes globally with both online and offline, established and emerging, providers of travel, lodging, experiences and restaurant reservation and related services. The markets for the services TripAdvisor offers are intensely competitive, and current and new competitors can launch new services at a relatively low cost.
TripAdvisor also competes with different types of companies in the various markets and geographies where it operates, including large and small companies in the travel space as well as broader service providers. More specifically:
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TripAdvisor’s Hotel businesses face competition, and in some cases partner with, the following businesses: OTAs (including Expedia and Booking Holdings and many of their respective subsidiaries and operating companies); hotel metasearch providers (including trivago, a subsidiary of Expedia, Kayak and HotelsCombined, subsidiaries of Booking Holdings and Ctrip.com International, Ltd.); large online search, social media, and marketplace platform and companies (including Google, FaceBook, Microsoft’s Bing, Yahoo, Baidu, Alibaba, and Amazon); and traditional offline travel agencies, and global hotel chains seeking to promote direct bookings.
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TripAdvisor also faces competition from different companies in each of the Non-Hotel operating businesses. Experiences competes with online travel agencies, such as Airbnb, Booking Holdings and GetYourGuide; traditional travel agencies; online travel service providers; and wholesalers, among others. Restaurants competes with other online restaurant reservation services, such as SeatMe (owned by Yelp) and OpenTable (a subsidiary of Booking Holdings). Rentals competes with companies focused on alternative lodging, shared accommodations and online accommodation searches, including Airbnb, HomeAway (a subsidiary of Expedia) and booking.com (a subsidiary of Booking Holdings).
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There has been a proliferation of new channels through which providers can offer accommodations, experiences and restaurant reservations. Metasearch services may lower the cost for new companies to enter the market by providing a distribution channel without the cost of promoting the new entrant’s brand to drive consumers directly to its website. Some of TripAdvisor’s competitors and potential competitors offer a variety of online services, many of which are used by competitors more frequently than online travel services. In addition, in some cases, TripAdvisor’s 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. Many of TripAdvisor’s competitors (such as Google, Booking Holdings and Ctrip) have significantly greater financial, technical, marketing and other resources than TripAdvisor and have more expertise in developing online commerce and facilitating Internet traffic as well as large client bases. They also have the ability to leverage other aspects of their business to enable them to compete more effectively against TripAdvisor. For example, Google has entered various aspects of the online travel market, including by establishing a flight metasearch product ("Google Flights") and a hotel metasearch product ("Google Hotel Ads") that are growing rapidly, as well as its "Book on Google" reservation functionality and its Google Trips app.
In addition, Google and other large, established companies with substantial resources and expertise in developing online commerce and facilitating Internet traffic have launched travel or travel-related search, metasearch and/or reservation booking services and may create additional inroads into online travel. Google's travel metasearch services, Google Hotel Ads and Google Flights, are growing rapidly and have achieved significant market share in a relatively short time. In addition, many of TripAdvisor’s competitors, including online search companies, continue to expand their voice and artificial intelligence capabilities, which may provide them with a competitive advantage in travel. TripAdvisor cannot provide assurance that it will be able to compete successfully against its current, emerging and future competitors or on platforms that may emerge, or provide differentiated products and services to its traveler base.
TripAdvisor competes with certain companies that TripAdvisor also does business with, including some of its click-based travel partners. The consolidation of TripAdvisor’s competitors and travel partners, including Expedia (through its acquisitions of Orbitz, Travelocity, and HomeAway) and Booking Holdings (through its acquisitions of KAYAK and OpenTable), may affect TripAdvisor’s relative competitiveness and its travel partner relationships. Competition and consolidation could result in higher traffic acquisition costs, reduced margins on TripAdvisor’s advertising services, loss of market share, reduced customer traffic to its websites and reduced advertising by travel companies on its websites.
As the industry shifts towards online travel services and the technology supporting it continues to evolve, including platforms such as mobile phone and tablet computing devices, competition is likely to intensify. Competition in TripAdvisor’s industry may result in pricing pressure, loss of market share or decreased user engagement, any of which could adversely affect its business and financial performance.
TripAdvisor relies on information technology to operate its business and remain competitive, and any failure to adapt to technological developments or industry trends could harm its businesses.
TripAdvisor depends on the use of sophisticated information technologies and systems for website and mobile apps, supplier connectivity, communications, reservations, payment processing, procurement, customer service and fraud prevention. TripAdvisor’s future success depends on its ability to continuously improve and upgrade its systems and infrastructure to meet rapidly evolving consumer trends and demands while at the same time maintaining the reliability and integrity of its systems and infrastructure. TripAdvisor may not be able to maintain or replace its existing systems or introduce new technologies and systems as quickly as it would like or in a cost-effective manner. TripAdvisor may not be successful, or as successful as its competitors, in developing technologies and systems that operate effectively across multiple devices and platforms in a way that is appealing to its consumers. In addition, the emergence of alternative devices such as mobile phones and tablets and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms, will require new investment in technology. New developments in other areas could also make it easier for competitors to enter TripAdvisor’s markets due to lower up-front technology costs. Technology changes, including new devices, services and home assistants, such as Amazon’s Alexa Voice and Google Home, and developing technologies, such as machine learning and artificial intelligence, could negatively impact TripAdvisor’s business.
If TripAdvisor does not continue to innovate and provide products, services and features that are useful to users, it may not remain competitive, and its business and financial performance could suffer.
TripAdvisor’s success depends in part on continued innovation to provide products, features and services that make its platform compelling to users and engage its consumers. Its competitors are continually developing innovations in online travel-related services and features. As a result, TripAdvisor is continually working to improve its business model and consumer experience in order to engage its consumers and drive user traffic and conversion rates. TripAdvisor has invested, and expects to continue to invest, significant resources in developing and marketing these innovations. TripAdvisor can give no assurances that the changes it makes will yield the benefits it expects and will not have unintended or adverse impacts that TripAdvisor did not anticipate. If TripAdvisor is unable to continue offering innovative products and services and quality features that users want to use, existing consumers may become dissatisfied and use competitors’ offerings and it may be unable to attract additional consumers, which could adversely affect its business and financial performance.
TripAdvisor’s dedication to making the user experience its highest priority may cause it to prioritize rapid innovation and user experience over short-term financial results.
TripAdvisor strives to create the best experience for its users, providing them with the information, products and tools to enable them to plan, book and experience the perfect trip. TripAdvisor believes that in doing so it will increase its rates of conversion, revenue per hotel shopper and, ultimately, its financial performance over the long-term. TripAdvisor has taken actions in the past and may continue to make decisions in the future that have the effect of reducing its short-term revenue or profitability if it believes that the decisions benefit the overall user experience. For example, TripAdvisor may introduce new products or changes to existing products or the user experience that decrease rates of conversion but increases revenue per hotel shopper. In addition, TripAdvisor’s approach of putting users first may negatively impact its relationship with existing or prospective partners. These actions and practices could result in a loss of partners, which in turn could harm TripAdvisor’s results of operations. The short-term reductions in revenue or profitability could be more severe than TripAdvisor anticipates or these decisions may not produce the long-term benefits that TripAdvisor expects, in which case its user growth and engagement, its relationships with consumers and travel partners, and its business and results of operations could be harmed. In addition, if new or enhanced products fail to engage users or if TripAdvisor is unsuccessful in its effort to monetize these initiatives, TripAdvisor may fail to generate sufficient revenue, profit margin or other value to justify its investments, in which case TripAdvisor’s business and results of operations would be adversely affected.
TripAdvisor is dependent upon the quality of traffic in its network to provide value to TripAdvisor’s partners, and any failure in its quality control could have a material adverse effect on the value of its websites to its partners and adversely affect its revenue.
TripAdvisor uses technology and processes to monitor the quality of the Internet traffic that it delivers to its partners and has identified metrics to demonstrate the quality of that traffic. These metrics are used to not only identify the value of advertising on TripAdvisor’s website, but also to identify low quality clicks such as non-human processes, including robots, spiders or other software; the mechanical automation of clicking; and other types of invalid clicks or click fraud. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic, or traffic that online advertisers deem to be invalid, will be delivered to such online advertisers. As a result, TripAdvisor may be required to credit amounts owed to it by its partners. Furthermore, low-quality or invalid traffic may be detrimental to TripAdvisor’s relationships with partners, and could adversely affect its advertising pricing and revenue.
TripAdvisor relies on assumptions and estimates and data to calculate certain of its key metrics, and real or perceived inaccuracies in such metrics may harm TripAdvisor’s reputation and negatively affect its business.
TripAdvisor believes certain metrics are key to TripAdvisor’s business, including but not limited to unique visitors, hotel shoppers, and revenue per hotel shopper. As both the industry in which it operates and its business continue to evolve, so too might the metrics by which TripAdvisor evaluates its business. While the calculation of these metrics is based on what TripAdvisor believes to be reasonable estimates, TripAdvisor’s internal tools are not independently verified by a third party and have a number of limitations and, furthermore, its methodologies for tracking these metrics may change over time. For example, a single person may have multiple accounts or browse the Internet on multiple browsers or devices, some consumers may restrict TripAdvisor’s ability to accurately identify them across visits, some mobile apps automatically contact its servers for regular updates with no user action, and it is not always able to capture user information on all of its platforms. As such, the calculations of its unique visitors may not accurately reflect the number of people actually visiting its platforms. TripAdvisor continues to improve upon its tools and methodologies to capture data and believes that its current metrics are accurate; however, the improvement of its tools and methodologies could cause inconsistency between current data and previously reported data, which could confuse investors or lead to questions about the integrity of its data. Also, if the internal tools TripAdvisor uses to track these metrics under-count or over-count performance or contain algorithm or other technical errors, the data TripAdvisor reports may not be accurate. Accordingly, readers should not place undue reliance on these metrics.
TripAdvisor relies on the performance of highly skilled personnel and, if it is unable to retain or motivate key personnel, or hire, retain and motivate qualified personnel, TripAdvisor’s business would be harmed.
TripAdvisor’s future success is largely dependent on the talents and efforts of highly skilled individuals. In particular, the contributions of Stephen Kaufer, TripAdvisor’s co-founder, Chief Executive Officer and President, the contributions of key senior management and the contributions of software engineers and other technology professionals, are critical to its overall management and the success of its business. TripAdvisor cannot ensure that it will be able to retain the services of its existing key personnel, and the loss of one or more of its key personnel could seriously harm its business. TripAdvisor does not maintain any key person life insurance policies.
In addition, competition remains intense for well-qualified employees in certain aspects of TripAdvisor’s business, including software engineers, developers, product management and development personnel, and other technology professionals. TripAdvisor’s continued ability to compete effectively depends on its ability to attract new employees and to retain and motivate existing employees. As a global company, TripAdvisor aims to attract quality employees from all over the world, so any restrictions on travel for professional or personal purposes, may cause significant disruption to TripAdvisor’s businesses or negatively affect its ability to attract and retain employees on a global basis. If TripAdvisor does not succeed in attracting well-qualified employees or retaining or motivating existing employees, its business would be adversely affected.
Acquisitions, investments, significant commercial arrangements and/or new business strategies could disrupt TripAdvisor’s ongoing business and present new challenges and risks.
TripAdvisor’s success will depend, in part, on its ability to expand its product offerings in order to grow its business in response to changing technologies, user and partner demands and competitive pressures. As a result, TripAdvisor has acquired, invested in and/or entered into significant commercial arrangements with a number of new businesses in the past and its future growth may depend, in part, on future acquisitions, investments, commercial arrangements and/or changes in business strategies. Such endeavors may involve significant risks and uncertainties, including, but not limited to, the following:
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Expected and unexpected costs incurred in identifying and pursuing these endeavors, and performing due diligence on potential targets that may or may not be successful;
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Use of cash resources and incurrence of debt and contingent liabilities in funding these endeavors that may limit other potential uses of TripAdvisor’s cash, including product development, stock repurchases and/or dividend payments;
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Amortization expenses related to acquired intangible assets and other adverse accounting consequences;
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Diversion of TripAdvisor’s management’s attention or other resources from its existing business;
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Difficulties and expenses in integrating the operations, products, technology, privacy protection systems, information systems or personnel of the company, including the assimilation of corporate cultures;
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Difficulties in implementing and retaining uniform standards, controls, procedures, policies and information systems;
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The assumption of known and unknown debt and liabilities of the acquired company, including costs associated with litigation, cybersecurity risks, and other claims relating to the acquired company;
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Failure of any company which TripAdvisor has acquired, in which it has invested, or with which it has a commercial arrangement, to achieve anticipated revenue, earnings or cash flows or to retain key management or employees;
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Failure to generate adequate returns on acquisitions and investments;
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With respect to minority investments, limited management or operational control and reputational risk, which risk is heightened if the controlling person in such case has business interests, strategies or goals that are inconsistent with those of TripAdvisor;
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Entrance into markets in which TripAdvisor has no direct prior experience and increased complexity in its business;
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Impairment of goodwill or other intangible assets such as trademarks or other intellectual property arising from acquisitions; and
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Adverse market reaction to acquisitions.
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TripAdvisor has invested, and may in the future invest, in privately-held companies and these investments are currently accounted for using the measurement alternative for equity investments without a readily determinable fair value, which measures these investments at cost while subtracting any impairments, 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. Such investments are inherently risky in that such companies are typically at an early stage of development, may have no or limited revenue, may not be or may never become profitable, may not be able to secure additional funding or their technologies, services or products may not be successfully developed or introduced into the market. Further, TripAdvisor’s ability to liquidate any such investments is typically dependent upon some liquidity event, such as a public offering or acquisition, since no public market exists for such securities. Valuations of such privately-held companies are inherently complex and uncertain due to the lack of liquid market for the company’s securities. Moreover, TripAdvisor could lose
the full amount of any of its investments and any impairment of its investments could have a material adverse effect on its financial condition and results of operations.
TripAdvisor cannot assure you that these investments will be successful or that such endeavors will result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible or that TripAdvisor will achieve these benefits within a reasonable period of time.
If TripAdvisor fails to manage its growth effectively, its brand, results of operations and business could be harmed.
Over the years, TripAdvisor has experienced rapid growth in some areas of it business, including through acquisitions of other businesses and in new international markets. TripAdvisor continues to make substantial investments in its technology, product and sales and marketing organizations. This growth places substantial demands on TripAdvisor’s management and its operational infrastructure. In addition, as TripAdvisor’s business matures, it makes periodic changes and adjustments to its organization in response to various internal and external considerations, including market opportunities, the competitive landscape, new and enhanced products and acquisitions. These changes may result in a temporary lack of focus or productivity or otherwise impact TripAdvisor’s business.
To manage its growth, TripAdvisor may need to improve its operational, financial and management systems and processes which may require significant capital expenditures and allocation of valuable management and employee resources. As TripAdvisor continues to grow, it must effectively integrate, develop and motivate a large number of new employees, including employees in international markets, while maintaining the beneficial aspects of its company culture. If TripAdvisor does not manage the growth of its business and operations effectively, the quality of its platform and efficiency of its operations could suffer, which could harm its brand, results of operations and business.
The online short-term and vacation rental market is rapidly evolving and if TripAdvisor fails to predict the manner in which the market develops, its business and prospects may suffer.
TripAdvisor offers short-term and vacation rental services on its TripAdvisor-branded sites as well as through its dedicated Rentals websites. The short-term and vacation rental market has been, and continues to be, subject to regulatory development globally that affects the industry and the ability of companies like us to list these rental properties online. For example, some states and local jurisdictions, both domestically and internationally, have adopted, or are considering adopting, statutes or ordinances that prohibit property owners and managers from renting certain properties on a short-term basis or otherwise limit their ability to do so, and other states and local jurisdictions may introduce similar regulations. Some states and local jurisdictions also have fair housing or other laws that restrict whether and how properties may be rented, which they assert apply to vacation rentals. Many homeowners, condominium and neighborhood associations have adopted rules that prohibit or restrict short-term rentals. Many of the fundamental statutes and ordinances that impose taxes or other obligations on travel and lodging companies were established before the growth of the Internet and e-commerce, which creates a risk of these laws being used in ways not originally intended that could burden property owners and managers or otherwise harm TripAdvisor’s business. Operating in this dynamic regulatory environment requires significant management attention and financial resources. TripAdvisor cannot assure that its efforts will be successful, and that the investment and additional resources required to manage growth will produce the desired levels of revenue or profitability.
TripAdvisor is a global company that operates in many different jurisdictions and these operations expose TripAdvisor to additional risks, which risks increase as its business continues to expand.
TripAdvisor operates in a number of jurisdictions both inside and outside of the United States and continues to expand its operations both domestically and internationally. Many regions have different economic conditions, languages, currencies, consumer expectations, legislation, regulatory environments (including labor laws and customs), tax laws, levels of consumer acceptance and use of the Internet for commerce and levels of political stability. TripAdvisor is subject to associated risks typical of global businesses, including but not limited to, the following:
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Compliance with additional laws and regulations (including the Foreign Corrupt Practices Act, the U.K. Bribery Act and GDPR), data privacy requirements, labor and employment law, laws regarding advertisements and promotions and anti-competition regulations;
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Diminished ability to legally enforce contractual rights;
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Increased risk and limits on enforceability of intellectual property rights;
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Restrictions on repatriation of cash as well as restrictions on investments in operations in certain countries;
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Financial risk arising from transactions in multiple currencies, as well as foreign currency exchange restrictions;
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Difficulties in managing staff and operations due to distance, time zones, language and cultural differences;
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Uncertainty regarding liability for services, content and intellectual property rights, including uncertainty as a result of local laws and lack of precedent;
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Economic or political instability or laws and regulations involving economic or trade prohibitions or sanctions; and
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Threatened or actual acts of terrorism.
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TripAdvisor’s strategy includes continued expansion in existing international and new international markets. Many of these markets have different economic conditions, customers, languages, currencies, consumer expectations, levels of consumer acceptance and use of the Internet for commerce, legislation, regulatory environments, tax laws and levels of political stability, and TripAdvisor is subject to associated risks typical of international businesses. International markets have strong local competitors with established brands and travel service providers or relationships that may make expansion in certain markets difficult and costly and take more time than anticipated. In addition, compliance with legal, regulatory or tax requirements in multiple jurisdictions places demands on TripAdvisor’s time and resources, and it may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. In some markets, such as China, legal and other regulatory requirements may prohibit or limit participation by foreign businesses, such as by making foreign ownership or management of Internet or travel-related businesses illegal or difficult or may make direct participation in those markets uneconomic, which could make TripAdvisor’s entry or expansion in those markets difficult or impossible, require that TripAdvisor work with a local partner or result in higher operating costs. If TripAdvisor is unsuccessful in expanding in new and existing markets and effectively managing that expansion, its business and results of operations could be adversely affected. A number of countries are actively pursuing changes to their tax laws applicable to corporate multinationals, such as the recently enacted U.S. tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Foreign governments may enact tax laws that could result in further changes to global taxation and materially affect TripAdvisor’s financial position and results of operations.
The Tax Act resulted in significant changes to the U.S. corporate income tax system. The Tax Act requires complex computations to be performed that were not previously required under U.S. tax law, significant judgments to be made in the interpretation of the provisions of the Tax Act, and significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the Internal Revenue Service (“IRS”) and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from TripAdvisor’s interpretation.
Additionally, TripAdvisor continues to accumulate positive cash flows in foreign jurisdictions, which it considers indefinitely reinvested, although it will continue to evaluate the impact of the Tax Act on its capital deployment within and outside the U.S. The repatriation of such funds for use in the United States, including for corporate purposes such as acquisitions, stock repurchases or debt refinancings, may result in additional U.S. income tax expense and higher cost for such capital.
TripAdvisor is regularly subject to claims, lawsuits, government investigations, and other proceedings that may result in adverse outcomes.
TripAdvisor is regularly subject to claims, lawsuits, government investigations and other proceedings involving, among other matters, patent and intellectual property rights (including alleged infringement of third-party intellectual property rights), tax matters (including value-added, excise, transient, occupancy and accommodation taxes), regulatory compliance (including competition and consumer protection matters), defamation and free speech, labor and employment matters and commercial disputes.
Such claims, lawsuits, government investigations and proceedings are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, any of these types of legal proceedings could have an adverse impact on TripAdvisor because of legal costs, diversion of management resources, injunctions or damage awards and other factors. Determining reserves for TripAdvisor’s pending litigation or other legal proceedings is a complex, fact-intensive process that requires significant judgment. It is possible that a resolution of one or more such proceedings could result in substantial damages, fines or penalties that could adversely affect TripAdvisor’s business, consolidated financial position, results of operations, or cash flows in a particular period. These proceedings could also result in reputational harm, criminal sanctions, consent decrees, or orders preventing TripAdvisor from offering certain features, functionalities, products, or services, requiring a change in TripAdvisor’s business practices or other field action, or requiring development of non-infringing or otherwise altered products or technologies. Any of these consequences could adversely affect its business and results of operations.
A failure to comply with current laws, rules and regulations or changes to such laws, rules and regulations and other legal uncertainties may adversely affect TripAdvisor’s businesses or financial performance.
TripAdvisor’s business and financial performance could be adversely affected by unfavorable changes in, or interpretations of, existing laws, rules and regulations or the promulgation of new laws, rules and regulations applicable to TripAdvisor and its business, including those relating to Internet and online commerce, Internet advertising, consumer protection, data security and privacy, travel and rental licensing and listing requirements and tax. In some cases, these laws continue to evolve.
For example, there is, and likely will continue to be, an increasing number of laws and regulations pertaining to Internet and online commerce that may relate to liability for information retrieved from or transmitted over the Internet, online editorial and user-generated content, user privacy, data security, behavioral targeting and online advertising, taxation, liability for third-party activities and the quality of products and services. In addition, enforcement authorities continue to rely on their authority under existing consumer protection laws to take action against companies relating to data privacy and security practices. The growth and development of online commerce may prompt calls for more stringent consumer protection laws and more aggressive enforcement efforts, which may impose additional burdens on online businesses generally.
Further, Rentals has been and continues to be subject to regulatory developments that affect the rental industry and the ability of competitors like TripAdvisor to list those rentals online. For example, some states and local jurisdictions have fair housing or other laws governing whether and how properties may be rented, which they assert apply to rentals. In addition, many homeowners, condominium and neighborhood associations have adopted, or are considering adopting, ordinances or rules that prohibit or restrict property owners and managers from short-term rentals.
TripAdvisor also has been subject, and it will likely be subject in the future, to inquiries from time to time from regulatory bodies concerning compliance with consumer protection, competition, tax and travel industry-specific laws and regulations. The failure of its businesses to comply with these laws and regulations could result in fines and/or proceedings against TripAdvisor by governmental agencies and/or consumers, which if material, could adversely affect its business, financial condition and results of operations. Further, if such laws and regulations are not enforced equally against other competitors in a particular market, TripAdvisor’s compliance with such laws may put it at a competitive disadvantage vis-à-vis competitors who do not comply with such requirements.
The promulgation of new laws, rules and regulations, or the new interpretation of existing laws, rules and regulations, in each case that restrict or otherwise unfavorably impact the ability or manner in which TripAdvisor provides services could require it to change certain aspects of its business, operations and commercial relationships to ensure compliance, which could decrease demand for services, reduce revenue, increase costs and/or subject the company to additional liabilities. For example, the European Union adopted the GDPR, effective in May 2018, implementing enhanced data protection requirements and other jurisdictions are contemplating and may in the future adopt similar legislation. This legislation could increase the cost and complexity of delivering TripAdvisor’s services. Unfavorable changes could decrease demand for products and services, limit marketing methods and capabilities, impede development of new products, result in negative publicity, require significant management time, increase costs and/or subject TripAdvisor to additional liabilities. Violations of these laws and regulations could result in penalties and/or criminal sanctions against TripAdvisor, its officers or its employees and/or restrictions on the conduct of parts of its business in certain jurisdictions.
TripAdvisor cannot be sure that its intellectual property is protected from copying or use by others, including potential competitors.
TripAdvisor’s websites rely on content, brands and technology, much of which is proprietary. TripAdvisor protects its proprietary content, brands and technology by relying on a combination of trademarks, copyrights, trade secrets, patents and confidentiality agreements. Any misappropriation or violation of its rights could have a material adverse effect on TripAdvisor’s business. Even with these precautions, it may be possible for another party to copy or otherwise obtain and use TripAdvisor’s proprietary technology, content or brands without authorization or to develop similar technology, content or brands independently.
Effective intellectual property protection is expensive to develop and maintain, both in terms of initial and ongoing registration requirements and expenses and the costs of defending TripAdvisor’s rights. In addition, effective intellectual property protection may not be available in every jurisdiction in which its services are made available, and policing unauthorized use of its intellectual property is difficult and expensive. Therefore, in certain jurisdictions, TripAdvisor may be unable to protect its intellectual property adequately against unauthorized third-party copying or use, which could adversely affect its business or ability to compete. TripAdvisor cannot be sure that the steps it has taken will prevent misappropriation or infringement of its intellectual property. Furthermore, TripAdvisor may need to go to court or other tribunals or administrative bodies in order to enforce its intellectual property rights, to protect its trade secrets or to determine the validity and scope of the proprietary rights of others. These proceedings might result in substantial costs and diversion of resources and management attention. TripAdvisor’s failure to protect its intellectual property in a cost-effective or effective manner could have a material adverse effect on its business and ability to protect its technology, content and brands.
TripAdvisor currently licenses from third parties and incorporates the technologies and content into its websites. As TripAdvisor continues to introduce new services that incorporate new technologies and content, it may be required to license additional technology or content. TripAdvisor cannot be sure that such technology or content will be available on commercially reasonable terms, if at all.
TripAdvisor’s processing, storage and use of personal information and other data subjects it to additional laws and regulations and failure to comply with those laws and regulations could give rise to liabilities.
TripAdvisor collects, processes, stores and transmits data, including personal information, for its consumers. As a result, TripAdvisor is subject to a variety of laws in the United States and abroad regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other consumer data, the scope of which is changing; and subject to differing interpretations, and which may be inconsistent between countries or conflict with other rules. In addition, the security of data when engaging in electronic commerce is essential to maintaining consumer and travel service provider confidences in its services. The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. Congress and federal agencies, including the Federal Trade Commission and the Department of Commerce, are reviewing the need for greater regulation for the collection and use of information concerning consumer behavior on the Internet. Various U.S. courts also are considering the applicability of existing federal and state statutes,
including computer trespass and wiretapping laws, to the collection and exchange of information online. In addition, TripAdvisor is subject to the GDPR, the European Union’s new data protection legal framework that is intended to enhance the privacy and security of personal data, including credit card information. There are a number of proposals for data privacy laws pending or proposed in other jurisdictions, including at both federal and state levels of the United States. Implementing and complying with these laws and regulations may be more costly or take longer than TripAdvisor anticipates, or could otherwise affect its business operations.
TripAdvisor strives to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data protection. Any failure or perceived failure by TripAdvisor to comply with its privacy policies, privacy-related obligations to consumers or other third parties, or privacy-related legal obligations, may result in governmental enforcement actions, litigation or public statements that could harm TripAdvisor’s reputation and cause its users and partners to lose trust in it, which could have an adverse effect on TripAdvisor’s business, brand, market share and results of operations. For example, GDPR imposes a strict data protection compliance regime with severe penalties of up to the greater of 4% of worldwide annual turnover and/or €20 million
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TripAdvisor is subject to risks associated with processing credit card and other payment transactions and failure to manage those risks may subject it to fines, penalties and additional costs and could have a negative impact on its business.
TripAdvisor accepts payments from consumers and partners using a variety of methods, including credit card, debit card, direct debit from a customer’s bank account, and invoicing. For existing and future payment options TripAdvisor offers to its customers, TripAdvisor may become subject to additional regulations and compliance requirements (including obligations to implement enhanced authentication processes). These regulations and/or requirements could result in significant costs and reduce the ease of use of its payment products, and yet may still be susceptible to fraudulent activity. In addition, TripAdvisor may be held liable for accepting fraudulent credit cards on its websites as well as other payment disputes with its customers. For certain payment methods, including credit and debit cards, TripAdvisor pays interchange and other fees, which may increase over time and raise its operating costs and lower profitability. TripAdvisor relies on third parties to provide certain payment methods and payment processing services, including the processing of credit cards and debit cards. In each case, TripAdvisor’s business could be disrupted, if these companies become unwilling or unable to provide these services to TripAdvisor. TripAdvisor is also subject to payment card association operating rules, including data security rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for TripAdvisor to comply. If TripAdvisor fails to comply with these rules or requirements, or if its data security systems are breached or compromised, it may be liable for card issuing banks’ costs, subject to fines and higher transaction fees, and/or lose its ability to accept credit and debit card payments, process electronic funds transfers, or facilitate other types of online payments.
TripAdvisor is also subject to a number of other laws and regulations relating to payments, money laundering, international money transfers, privacy and information security, and electronic fund transfers. If TripAdvisor is found to be in violation of applicable laws or regulations, it could be subject to additional requirements and civil and criminal penalties, or forced to cease providing certain services.
System security issues, data protection breaches, cyberattacks and system outage issues could disrupt TripAdvisor’s operations or services provided to its consumers, and any such disruption could damage its reputation and adversely affect its business, financial results and stock price.
TripAdvisor’s reputation and ability to attract, retain and service its consumers and travel partners is dependent upon the reliable performance and security of its computer systems and those of third parties it utilizes in its operations. Significant security issues, data breaches, cyberattacks and outages, interruptions or delays, in TripAdvisor’s systems or third party systems upon which it relies, could impair TripAdvisor’s ability to display content or process transactions and significantly harm its business. Breaches of TripAdvisor’s security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about TripAdvisor, its consumers or its travel partners could expose TripAdvisor, its consumers and its travel partners to a risk of loss or misuse of this information, damage TripAdvisor’s brand and reputation or otherwise harm its business and financial performance and result in government enforcement actions and litigation and potential liability for TripAdvisor.
Computer programmers and hackers also may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack TripAdvisor’s products or otherwise exploit any security vulnerabilities of its products, or attempt to fraudulently induce TripAdvisor’s employees, consumers, or others to disclose passwords or other sensitive information or unwittingly provide access to its systems or data. In addition, sophisticated hardware and operating system software and applications that TripAdvisor produces or procures from third parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the system. TripAdvisor may need to expend significant resources to protect against security breaches or to investigate and address problems caused by cyber or other security problems.
TripAdvisor may be unable to proactively address these techniques or to implement adequate preventive measures and its efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede TripAdvisor’s sales, manufacturing, distribution or other critical functions. Failure to adequately protect against attacks or intrusions, whether for its own systems or systems of vendors, could expose TripAdvisor to security breaches that could have an adverse impact on TripAdvisor’s financial performance. The costs of enhancing infrastructure to attain improved stability and redundancy may be time consuming and expensive and may require resources and expertise that are difficult to obtain. In addition, to the extent that TripAdvisor experiences a data breach, remediation may be costly and TripAdvisor may not have adequate insurance to cover such costs.
Much of TripAdvisor’s business is conducted with third party marketing affiliates or, to a lesser degree, through business partners powering its instant booking feature. A security breach at such third party could be perceived by consumers as a security breach of TripAdvisor’s systems and could result in negative publicity or damage its reputation, expose it to risk of loss or litigation and possible liability and subject TripAdvisor to regulatory penalties and sanctions. In addition, such incidents may also result in a decline in TripAdvisor’s active user base or engagement levels. Finally, failure of such third parties to comply with applicable disclosure requirements could expose TripAdvisor to liability.
TripAdvisor has acquired a number of companies over the years and may continue to do so in the future. As a result of these acquisitions, TripAdvisor may increase the volume of personal data that it collects, stores, processes and transmits. While TripAdvisor makes significant efforts to address any information technology security issues and personal data protection issues with respect to its acquisitions, TripAdvisor may still inherit such risks when it integrates the acquired businesses.
Media coverage of data breaches has escalated, in part because of the increased number of enforcement actions, investigations and lawsuits. Security breaches could result in negative publicity, damage to reputation, exposure to risk of loss or litigation and possible liability due to regulatory penalties and sanctions. As this focus and attention on privacy and data protection increases, TripAdvisor also risks exposure to potential liabilities and costs resulting from the compliance with, or any failure to comply with applicable legal requirements, conflicts among these legal requirements or differences in approaches to privacy and security. Security breaches could also cause travelers and potential consumers to lose confidence in TripAdvisor’s security, which would have a negative effect on the value of its brand.
“Cookie” laws could negatively impact the way TripAdvisor does business.
A "cookie" is a text file that is stored on a user's web browser by a website. Cookies are common tools used by thousands of websites, including TripAdvisor’s, to, among other things, store or gather information (e.g., remember log-on details so a user does not have to re-enter them when revisiting a website), market to consumers and enhance the user experience on a website. Cookies are valuable tools for websites like TripAdvisor’s to improve the customer experience and increase conversion on their websites. Many countries have adopted regulations governing the use of "cookies" by websites servicing consumers, especially in the European Union. To the extent any such regulations require "opt-in" consent before certain cookies can be placed on a user's web browser, TripAdvisor’s ability to serve certain customers in the manner it currently does, including with respect to retargeting of advertising, might be adversely affected and its ability to continue to improve and optimize performance on TripAdvisor’s websites might be impaired, either of which could negatively affect a consumer's experience using its services and its business, market share and results of operations.
TripAdvisor may have future capital needs and may not be able to obtain additional financing on acceptable terms.
TripAdvisor is currently party to a credit agreement with respect to a $1.2 billion revolving credit facility maturing in May 2022 ( “2015 Credit Facility”). This agreement includes restrictive covenants that may impact the way TripAdvisor manages its business and may limit its ability to secure significant additional financing in the future on favorable terms. TripAdvisor’s ability to secure additional financing and satisfy its financial obligations outstanding from time to time will depend upon its future operating performance, which is subject to then prevailing general economic and credit market conditions, including interest rate levels and the availability of credit generally, and financial, business and other factors, many of which are beyond its control. There can be no assurance that sufficient financing will be available or desirable, or even any, terms to fund investments, acquisitions, stock repurchases, dividends, debt refinancing or extraordinary actions or that counterparties in any such financings would honor their contractual commitments.
TripAdvisor has indebtedness which could adversely affect its business and financial condition.
At December 31, 2018, TripAdvisor had no outstanding long-term debt; however, TripAdvisor continues to have existing credit facilities from which it can borrow significant amounts. As such, TripAdvisor is still subject to risks relating to its indebtedness that include:
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Increasing its vulnerability to general adverse economic and industry conditions;
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Requiring TripAdvisor to dedicate a portion of its cash flow from operations to principal and interest payments on its indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions and investments and other general corporate purposes;
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Making it more difficult for TripAdvisor to optimally capitalize and manage the cash flow for its businesses;
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Limiting TripAdvisor’s flexibility in planning for, or reacting to, changes in its businesses and the markets in which it operates;
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Possibly placing TripAdvisor at a competitive disadvantage compared to its competitors that have less debt;
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Limiting TripAdvisor’s ability to borrow additional funds or to borrow funds at rates or on other terms that it finds acceptable; and
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Exposing TripAdvisor to the risk of increased interest rates because its outstanding debt is expected to be subject to variable rates of interest.
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In addition, it is possible that TripAdvisor may need to incur additional indebtedness in the future in the ordinary course of business. The terms of the 2015 Credit Facility allow TripAdvisor to incur additional debt subject to certain limitations; however, there is no assurance that additional financing will be available to TripAdvisor on terms favorable to it, if at all. In addition, if new debt is added to the then existing debt levels, the risks described above could intensify.
TripAdvisor’s 2015 Credit Facility provides for various provisions that limit its discretion in the operation of its business and require TripAdvisor to meet financial maintenance tests and other covenants and the failure to comply with their covenants could have a material adverse effect on TripAdvisor.
TripAdvisor is party to a credit agreement providing for the 2015 Credit Facility. The agreements that govern the 2015 Credit Facility contain various covenants, including those that limit TripAdvisor’s ability to, among other things:
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Pay dividends on, redeem or repurchase its capital stock;
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Enter into certain asset sale transactions, including partial or full spin-off transactions;
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Enter into secured financing arrangements;
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Enter into sale and leaseback transactions; and
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Enter into unrelated businesses.
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These covenants may limit TripAdvisor’s ability to optimally operate its business. In addition, the 2015 Credit Facility requires that TripAdvisor meet certain financial tests, including a leverage ratio test. Any failure to comply with the restrictions of the 2015 Credit Facility may result in an event of default under the agreements governing such facility. Such default may allow the creditors to accelerate the debt incurred thereunder. In addition, lenders may be able to terminate any commitments they had made to supply TripAdvisor with further funds (including periodic rollovers of existing borrowings).
TripAdvisor’s effective income tax rate is impacted by a number of factors that could have a material impact on its financial results and could increase the volatility of those results.
Due to the global nature of its business, TripAdvisor is subject to income taxes in the United States and other foreign jurisdictions. In the event TripAdvisor incurs net income in certain jurisdictions but incurs losses in other jurisdictions, it generally cannot offset the income from one jurisdiction with the loss from another. This lack of flexibility increases TripAdvisor’s effective income tax rate. Furthermore, significant judgment is required to calculate TripAdvisor’s worldwide provision for income taxes and depends on its ability to operate its business in a manner consistent with its corporate structure and intercompany arrangements. In the ordinary course of its business there are many transactions and calculations where the ultimate tax determination is uncertain.
TripAdvisor believes its tax estimates are reasonable. However, TripAdvisor is routinely under audit by federal, state and foreign taxing authorities. The taxing authorities of jurisdictions in which TripAdvisor operates may challenge its methodologies for valuing developed technology or intercompany arrangements, including its transfer pricing, or determine that the manner in which it operates its business does not achieve the intended tax consequences, which would increase TripAdvisor’s effective income tax rate and harm its financial position and results of operations. As TripAdvisor operates in numerous taxing jurisdictions, the application of tax laws can also be subject to diverging and sometimes conflicting interpretations by taxing authorities of these jurisdictions. It is not uncommon for taxing authorities of different countries to have conflicting views, for instance, with respect to, among other things, the manner in which the arm’s length standard is applied for transfer pricing purposes, or with respect to the valuation of intellectual property. For example, the Organization for Economic Cooperation and Development (the “OECD”) has recently recommended changes to numerous long-standing international tax principles. If countries amend their tax laws to adopt certain parts of the OECD guidelines, this may increase tax uncertainty and may adversely impact TripAdvisor’s tax liabilities. Any of these changes could affect TripAdvisor’s financial performance.
The final determination of audits could be materially different from TripAdvisor’s income tax provisions and accruals and could have a material effect on its financial position, results of operations, or cash flows in the period or periods for which that determination is made. Also, TripAdvisor’s future effective income tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in valuation of deferred tax assets or changes in tax laws or their interpretation. If TripAdvisor’s effective income tax rates were to increase, its results of operations and cash flows would be adversely affected.
The income tax effects of the accounting for share-based compensation may significantly impact TripAdvisor’s effective income tax rate. In periods in which TripAdvisor’s stock price is higher than the grant-date price of the share-based compensation awards vesting in that period, it will recognize excess tax benefits that will decrease its income tax rate. In periods in which TripAdvisor’s stock price is lower than the grant-date price of the share-based compensation awards vesting in that period, its effective income tax rate will increase.
Additionally, TripAdvisor continues to accumulate positive cash flows in foreign jurisdictions which it considers indefinitely reinvested, although it will continue to evaluate the impact of the Tax Act on its capital deployment within and outside the U.S. Any repatriation of funds currently held in foreign jurisdictions may result in withholding taxes and state taxes.
Application of U.S. state and local or international tax laws, changes in tax laws or tax rulings, or the examination of TripAdvisor’s tax positions, could materially affect its financial position and results of operations.
As an international business, TripAdvisor is subject to income taxes and non-income-based taxes in the United States and various other international jurisdictions Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. TripAdvisor’s existing corporate structure and intercompany arrangements have been implemented in a manner TripAdvisor believes is in compliance with current prevailing tax laws. However, due to economic and political conditions, tax rates and tax regimes in various jurisdictions may be subject to significant changes and the tax benefits that TripAdvisor intends to eventually derive could be undermined due to changing tax laws. Governments are increasingly focused on ways to increase tax revenue, which has contributed to an increase in audit activity, more aggressive positions taken by tax authorities and an increase in tax legislation. Any such additional taxes or other assessments may be in excess of TripAdvisor’s current tax provisions or may require TripAdvisor to modify its business practices in order to reduce its exposure to additional taxes going forward, any of which could have a material adverse effect on TripAdvisor’s business, results of operations and financial condition.
The Tax Act has resulted in significant changes to the U.S. corporate income tax system. The Tax Act requires complex computations to be performed that were not previously required in U.S. tax law, significant judgments to be made in interpretation of the provisions of the Tax Act, significant estimates in calculations and the preparation and analysis of information not previously relevant or regularly produced. The tax law changes by the Tax Act are broad and complex and there are still uncertainties about how the 2017 Tax Act will be interpreted at both the U.S. federal and state levels. The U.S. Treasury Department, the IRS and other standard-setting bodies could interpret or issue guidance on how provisions of the Tax Act will be applied or otherwise administered that is different from TripAdvisor’s interpretation. This could materially change the taxes that TripAdvisor recorded in 2017 and 2018, and the expected future impact of the 2017 Tax Act on its business.
On January 28, 2016, the European Commission unveiled a new package of proposals aimed at providing a framework for fairer taxation and to provide a coordinated European Union response to combating corporate tax avoidance. Following agreement among the European Union member states on the final content of the package, the European Council formally adopted an Anti-Tax Avoidance Directive in July 2016, which was further amended in February 2017. The Directive is aimed at preventing aggressive tax planning, increasing tax transparency and creating a fairer tax environment for all businesses in the European Union. The OECD is working towards a consensus-based solution to the challenges of the digitalization of the economy by 2020. In addition, on March 21, 2018, the European Commission released two draft directives on the Taxation of the Digital Economy. One directive aims at a more comprehensive solution whereby EU states would be able to levy corporate income tax on companies that have digital presence in those states regardless of whether they have a physical presence in those states. The second directive provides for an interim solution whereby EU States are to apply a 3% revenue based Digital Services Tax, which if enacted, would be effective beginning in 2020. In the interim, certain EU States (Austria, France, Italy, Spain, Belgium and the United Kingdom) have proposed legislation to implement a Digital Services Tax that, if enacted, would impose a tax on revenue earned by larger companies from users of digital services located in these respective EU States as early as 2019. Any changes to international tax laws, including new definitions of permanent establishment could affect the tax treatment of TripAdvisor’s foreign earnings and adversely impact its effective income tax rate. Further, changes to tax laws and additional reporting requirements could increase the complexity, burden and cost of compliance. Due to the large and expanding scale of TripAdvisor’s international business activities, any changes in U.S. or international taxation of its activities or the combined effect of tax laws in multiple jurisdictions may increase TripAdvisor’s worldwide effective income tax rate, increase the complexity and costs associated with tax compliance (especially if changes are implemented or interpreted inconsistently across tax jurisdictions) and adversely affect TripAdvisor’s cash flows and results of operations.
In addition, the taxing authorities in the United States and other jurisdictions where TripAdvisor does business regularly examine its income and other tax returns as well as the tax returns of Expedia, TripAdvisor’s former parent. The ultimate outcome of these examinations (including the IRS audit described below) cannot be predicted with certainty. Should the IRS or other taxing authorities assess additional taxes as a result of examinations, TripAdvisor may be required to record charges to its operations, which could harm its operating results and financial condition.
In July 2015, the United States Tax Court issued an opinion favorable to Altera Corporation, accepting Altera’s position of excluding stock-based compensation from its intercompany cost-sharing arrangement. The IRS subsequently appealed the Court decision on February 19, 2016. On July 24, 2018, the IRS won an appeals court case at the Ninth Circuit, however, on August 7, 2018, the Ninth Circuit withdrew its decision regarding Altera and the case was reheard.
While TripAdvisor has recorded an income tax benefit based on the Court’s 2015 opinion, it may be required to reverse the income tax benefit if an unfavorable opinion is issued by the Court when the case is reheard.
Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of TripAdvisor’s sites and its financial results.
Due to the global nature of the internet, it is possible that various states or foreign countries might attempt to levy additional or new sales, income or other taxes relating to TripAdvisor’s activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised international, federal, state or local tax regulations or court decisions may subject TripAdvisor or its customers to additional sales, occupancy, income and other taxes. For example, Congress is considering various approaches to legislation that would require companies engaged in e-commerce to collect sales tax on Internet revenue and a growing number of U.S. states and certain foreign jurisdictions have adopted or are considering proposals to impose obligations on remote sellers and online marketplaces to collect taxes on their behalf. Additionally, the U.S. Supreme Court’s ruling in South Dakota v. Wayfair Inc., which a Court reversed longstanding precedent that remote sellers are not required to collect state and local sales taxes, may have an adverse impact on TripAdvisor’s business. TripAdvisor cannot predict the effect of these and other attempts to impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, occupancy taxes, value added taxes (“VAT”) and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of selling products and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have a material adverse effect on TripAdvisor’s business, financial condition and operating results.
Taxing authorities may successfully assert that TripAdvisor should have collected or in the future should collect sales and use, occupancy, VAT or similar taxes, and TripAdvisor could be subject to liability with respect to past or future sales, which could adversely affect its operating results.
TripAdvisor does not collect and remit sales and use, occupancy, VAT or similar taxes in all jurisdictions in which it has sales, based on its belief that such taxes are not applicable or legally required. Several states and other taxing jurisdictions have presented or threatened TripAdvisor with assessments, alleging that TripAdvisor is required to collect and remit certain taxes there. While TripAdvisor does not believe that it is subject to such taxes and intends to vigorously defend its position in these cases, it cannot be sure of the outcome of its discussions and/or appeals with these states or cases that are pending in the courts. In the event of an adverse outcome, TripAdvisor could face assessments for additional time periods since the last assessments it received, plus any additional interest and penalties. TripAdvisor also expects additional jurisdictions may make similar assessments or pass similar new laws in the future, and any of the jurisdictions where TripAdvisor has sales may apply more rigorous enforcement efforts or take more aggressive positions in the future that could result in greater tax liability allegations. Such tax assessments, penalties and interest or future requirements may materially adversely affect TripAdvisor’s business, financial condition and operating results.
TripAdvisor continues to be subject to significant potential tax liabilities in connection with its spin-off from Expedia (the “Spin-Off”).
Under the tax sharing agreement between TripAdvisor and Expedia entered into in connection with the Spin-Off, TripAdvisor is generally required to indemnify Expedia for any taxes resulting from the Spin-Off (and any related interest, penalties, legal and professional fees, and all costs and damages associated with related stockholder litigation or controversies) to the extent such amounts resulted from (i) any act or failure to act by TripAdvisor described in the covenants in the tax sharing agreement, (ii) any acquisition of TripAdvisor’s equity securities or assets or those of a member of its group, or (iii) any failure of the representations with respect to TripAdvisor or any member of its group to be true or any breach by TripAdvisor or any member of its group of any covenant, in each case, which is contained in the separation documents or in the documents relating to the IRS private letter ruling and/or the opinion of counsel.
TripAdvisor continues to be responsible for potential tax liabilities in connection with consolidated income tax returns filed with Expedia prior to or in connection with the Spin-Off. By virtue of previously filed consolidated tax returns with Expedia, TripAdvisor is currently under IRS audit for the 2009, 2010, and short-period 2011 tax years. In connection with that audit, TripAdvisor received, in January 2017, notices of proposed adjustment from the IRS for the 2009 and 2010 tax years, which would result in an increase in TripAdvisor’s worldwide income tax expense. The proposed adjustments would result in an increase to TripAdvisor’s worldwide income tax expense in an estimated range totaling $10 million to $14 million for those specific years after consideration of competent authority relief, exclusive of interest and penalties. TripAdvisor is also subject to various ongoing state income tax audits. The outcome of these matters or any other audits could subject TripAdvisor to significant tax liabilities.
TripAdvisor is subject to fluctuation in foreign currency exchange risk.
TripAdvisor conducts a significant and growing portion of its business outside the United States, but reports its results in U.S. dollars. As a result, TripAdvisor faces exposure to movements in foreign currency exchange rates, particularly those related to the Euro, British pound and Australian dollar. These exposures include, but are not limited to re-measurement of gains and losses from changes in the value of foreign denominated assets and liabilities; translation gains and losses on foreign subsidiary financial results that are translated into U.S. dollars upon consolidation; and planning risk related to changes in exchange rates between the time
TripAdvisor prepares its annual and quarterly forecasts and when actual results occur. For example, Brexit caused significant volatility in currency exchange rates, especially between the U.S. dollar and the British pound. Continued uncertainty regarding Brexit may result in future exchange rate volatility. In addition, in the event that one or more European countries were to replace the Euro with another currency, TripAdvisor’s sales into such countries, or into Europe generally, would likely be adversely affected until stable exchange rates are established. Accordingly, fluctuations in foreign currency exchange rates, such as the strengthening of the U.S. dollar against the Euro or the British pound, could adversely affect TripAdvisor’s net revenue growth in future periods.
Depending on the size of the exposures and the relative movements of exchange rates, if TripAdvisor were to choose not to hedge or were to fail to hedge effectively its exposure, TripAdvisor could experience a material adverse effect on its financial statements and financial condition. As seen in some recent periods, in the event of severe volatility in exchange rates, the impact of these exposures can increase, and the impact on results of operations can be more pronounced. In addition, the current environment and the increasingly global nature of TripAdvisor’s business have made hedging these exposures more complex. TripAdvisor hedges certain short-term foreign currency exposures with the purchase of forward exchange contracts. These forward exchange contracts only help mitigate the impact of changes in foreign currency rates that occur during the term of the related contract period and carry risks of counter-party failure. There can be no assurance that its forward exchange contracts will have their intended effects.
Significant fluctuations in foreign currency exchange rates can affect consumer travel behavior. Volatility in foreign currency exchange rates and its impact on consumer behavior, which may differ across regions, makes it more difficult to forecast industry and consumer trends and the timing and degree of their impact on TripAdvisor’s markets and business, which in turn could adversely affect its ability to effectively manage its business and adversely affect its results of operations.
Future sales of shares of TripAdvisor’s or our common stock in the public market, or the perception that such sales may occur, may depress its or our stock price.
Sales of substantial amounts of TripAdvisor’s common stock in the public market, particularly sales by its directors, officers, employees and significant stockholders, or the perception that these sales might occur, could depress the market price of its common stock and hence our common stock and could impact our respective abilities to raise capital through the sale of additional equity securities. For example, sales of or hedging transactions, such as collars, in our shares by any of our directors or executive officers could cause a perception in the marketplace that our stock price (and hence TripAdvisor's stock price) has peaked or that adverse events or trends have occurred or may be occurring at our company or TripAdvisor. This perception could result notwithstanding any personal financial motivation for these insider transactions. In addition, we have the right to require TripAdvisor to file registration statements covering TripAdvisor shares we own or to include TripAdvisor shares in registration statements that it may file for itself or other stockholders. If we or some other TripAdvisor stockholder sells substantial amounts of TripAdvisor’s common stock in the public
market, or if there is a perception in the public market that we might sell shares of TripAdvisor common stock, the market price of TripAdvisor’s common stock could decrease significantly. A decline in the price of shares of TripAdvisor’s common stock or our common stock might impede its or our ability to raise capital through the issuance of additional shares of common stock or other equity securities.
Factors Relating to our Common Stock and the Securities Market
Our stock price may be disproportionately affected by the results of operations of TripAdvisor and developments in its business.
The fair value of our investment in TripAdvisor, on an as-converted basis, was approximately $1.7 billion as of December 31, 2018, which represents a significant portion of our total market value. Since the TripCo Spin-Off in 2014, our share price has had a tendency to move in tandem with the share price of TripAdvisor's common stock. As a result, our stock price may be disproportionately affected by the results of operations of TripAdvisor and developments in its business.
It may be difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders.
Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that a stockholder may consider favorable. These provisions include the following:
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authorizing a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share, a Series A that entitles the holders to one vote per share and a Series C that, except as otherwise required by applicable law, entitles the holders to no voting rights;
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authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
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classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;
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limiting who may call special meetings of stockholders;
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prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders;
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establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
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requiring stockholder approval by holders of at least 80% of our voting power or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets or an amendment to our certificate of incorporation; and
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the existence of authorized and unissued stock which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of its management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
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In addition, Gregory B. Maffei, our Chairman, President and Chief Executive Officer, beneficially owns shares representing the power to direct approximately 33% of the aggregate voting power in our company, due to his beneficial ownership of approximately 96% of the outstanding shares of our Series B common stock as of January 31, 2019.
Holders of a single series of our common stock may not have any remedies if an action by our directors has an adverse effect on only that series of our common stock.
Principles of Delaware law and the provisions of our certificate of incorporation may protect decisions of our board of directors that have a disparate impact upon holders of any single series of our common stock. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, including the
holders of all series of our common stock. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all common stockholders regardless of class or series and does not have separate or additional duties to any group of stockholders. As a result, in some circumstances, our directors may be required to make a decision that is viewed as adverse to the holders of one series of our common stock. Under the principles of Delaware law and the business judgment rule, holders may not be able to successfully challenge decisions that they believe have a disparate impact upon the holders of one series of our stock if our board of directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of all of our stockholders.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
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In connection with the TripCo Spin-Off, a wholly owned subsidiary of Liberty Media entered into a facilities sharing agreement with TripCo, pursuant to which TripCo shares office facilities with Liberty Media and related amenities at Liberty Media’s corporate headquarters located at 12300 Liberty Boulevard, Englewood, Colorado.
TripAdvisor did not legally own any real estate as of December 31, 2018. TripAdvisor currently leases approximately 280,000 square feet for its corporate headquarters in Needham, Massachusetts, pursuant to a lease with an expiration date of December 2030, with an option to extend the lease term for two consecutive terms of five years each. TripAdvisor also leases an aggregate of approximately 450,000 square feet of office space at approximately 40 other locations across North America, Europe and Asia Pacific, primarily for its sales offices, subsidiary headquarters and international management teams, pursuant to lease agreements, with the latest expiring in June 2027. TripAdvisor believes that its current facilities are adequate for its current operations and that additional leased space can be obtained on reasonable terms if needed.
Item 3. Legal Proceeding
s
In the ordinary course of its business, our subsidiary TripAdvisor and its subsidiaries are party to legal proceedings and claims arising out of their operations. These matters may relate to claims involving alleged infringement of third-party intellectual property rights, defamation, taxes, regulatory compliance and other claims. We do not believe there are any material pending legal proceedings or claims to which we or our subsidiaries are party or of which any of our property is the subject. There may be claims or actions pending or threatened against us or our subsidiaries of which we are currently not aware and the ultimate disposition of which could have a material adverse effect on us.
Item 4. Mine Safety Disclosure
s
Not applicable.