Notes to Unaudited Consolidated Financial Statements
1.
BASIS OF PRESENTATION
Management of The Priceline Group Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2016
.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiaries is generally the respective local currency. Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date. Income statement amounts are translated at the average exchange rates for the period. Translation gains and losses are included as a component of "
Accumulated other comprehensive income (loss)
" in the accompanying Unaudited Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
Reclassifications: Due to the adoption of new accounting updates in the fourth quarter of 2016 related to the presentation of restricted cash and the first quarter of 2017 related to stock-based compensation, certain amounts in the Unaudited Consolidated Statement of Cash Flows for the three months ended March 31, 2016 have been reclassified to conform to the current year presentation.
Restricted Cash: The following table reconciles cash, cash equivalents and restricted cash reported in the Unaudited Consolidated Balance Sheets to the total amount shown in the Unaudited Consolidated Statements of Cash Flows:
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|
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|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
As included in the Unaudited Consolidated Balance Sheets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,434,020
|
|
|
$
|
2,081,075
|
|
Restricted cash included in prepaid expenses and other current assets
|
|
928
|
|
|
932
|
|
Total cash, cash equivalents and restricted cash as shown in the Unaudited Consolidated
Statements of Cash Flows
|
|
$
|
2,434,948
|
|
|
$
|
2,082,007
|
|
Recent Accounting Pronouncements Adopted
Definition of a Business
In January 2017, the Financial Accounting Standards Board ("FASB") issued a new accounting update to clarify the definition of a business and provide additional guidance to assist entities with evaluating whether transactions should be accounted for as asset acquisitions (or disposals) or business combinations (or disposals of a business). Under this update, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this criterion is met, the transaction should be accounted for as an asset acquisition as opposed to a business combination. This distinction is important because the accounting for an asset acquisition may differ significantly from the accounting for a business combination. This update eliminates the requirement to evaluate whether a market participant could replace missing elements (e.g., inputs or processes), narrows the definition of outputs and requires that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs.
For public business entities, this update is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods, and is required to be applied prospectively. The Company early adopted this update in the first quarter of 2017 and the adoption did not have an impact to the Unaudited Consolidated Financial Statements.
Intra-entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued new accounting guidance on income tax accounting associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
For public business entities, this update is effective for annual reporting periods beginning after December 15, 2017. Entities are required to apply this accounting update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company early adopted this update in the first quarter of 2017. The adoption resulted in a cumulative net charge to retained earnings of
$4.2 million
, a reduction in deferred tax liabilities of
$5.7 million
and reductions in current and long-term assets of
$3.3 million
and
$6.6 million
, respectively, as of January 1, 2017.
Share-based Compensation
In March 2016, the FASB issued new accounting guidance to improve the accounting for certain aspects of share-based payment transactions as part of its simplification initiative. The key provisions of this accounting update are: (1) recognizing current excess tax benefits in the income statement in the period the benefits are deducted on the income tax return as opposed to an adjustment to additional paid-in capital in the period the benefits are realized by reducing a current income tax liability, (2) allowing an entity-wide election to account for forfeitures related to service conditions as they occur instead of estimating the total number of awards that will be forfeited because the requisite service period will not be rendered, (3) allowing the net settlement of an equity award for employee statutory tax withholding purposes to not exceed the maximum statutory tax rate by relevant tax jurisdiction instead of withholding taxes for each employee based on a minimum statutory withholding tax rate, and (4) requiring the presentation of excess tax benefits as operating cash flows and cash payments for employee statutory tax withholding related to vested stock awards as financing cash flows in the consolidated statements of cash flows. Under this new accounting standard, all previously unrecognized equity deductions are recognized as a deferred tax asset, net of any valuation allowance, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption of this standard.
The Company adopted this accounting update in the first quarter of 2017 and recorded a deferred tax asset of
$301.4 million
related to previously unrecognized U.S. equity tax deductions, with an offsetting cumulative-effect adjustment to retained earnings as of January 1, 2017. The Company elected to account for forfeitures related to service conditions as they occur; as a result, there was a cumulative net charge to retained earnings of
$6.9 million
(forfeiture expenses adjustment after taxes) and the recognition of a deferred tax asset of
$2.1 million
, with an offsetting credit to additional paid-in capital of
$9.0 million
. In addition, the Company elected to change the presentation of excess tax benefits in the Unaudited Consolidated Statement of Cash Flows for periods prior to January 1, 2017 to reflect these excess tax benefits in operating cash flows instead of financing cash flows, resulting in a reclassification of
$18.1 million
for the three months ended
March 31, 2016
. "Payments for repurchase of common stock" in the Unaudited Consolidated Statements of Cash Flows includes withholding taxes paid on vested stock awards (see Note 8).
Other Recent Accounting Pronouncements
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued a new accounting update to shorten the premium amortization period of purchased callable debt securities with non-contingent call features that are callable at fixed prices and on preset dates from their contractual maturity to the earliest call date. For public business entities, this new accounting update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Entities are required to apply this accounting update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new update.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued a new accounting update to simplify the test for goodwill impairment by eliminating Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill, which requires a hypothetical purchase price allocation, with the carrying amount of that reporting unit’s goodwill. Under this update, an entity would perform its quantitative annual, or interim, goodwill impairment test using the current Step 1 test and recognize an impairment charge for the excess of the carrying value of a reporting unit over its fair value.
For public business entities, this update is effective for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests occurring after January 1, 2017. The accounting update will be applied prospectively. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new update.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued new accounting guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable and available-for-sale debt securities. For financial assets measured at amortized cost, this new guidance requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. For available-for-sale debt securities, this new guidance made several targeted amendments to the existing other-than-temporary impairment model, including (1) requiring disclosure of the allowance for credit losses, (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities, (3) limiting impairment to the difference between the amortized cost basis and fair value and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists.
This update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to apply this accounting update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.
Leases
In February 2016, the FASB issued a new accounting standard intended to improve the financial reporting of lease transactions. The new accounting standard requires lessees to recognize an asset and a liability on the balance sheet for the right and obligation created by entering into a lease transaction for all leases with the exception of short-term leases. The new standard retains the dual-model concept by requiring entities to determine if a lease is an operating or financing lease and the current "bright line" percentages could be used as guidance in applying the new standard. The lessor accounting model remains largely unchanged. The new standard significantly expands qualitative and quantitative disclosures for lessees.
The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is allowed. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new standard.
Recognition and Measurement of Financial Instruments
In January 2016, the FASB issued a new accounting update which amends the guidance on the recognition and measurement of financial instruments. The update requires (1) an entity to measure equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income rather than accumulated other comprehensive income (loss), (2) allows an entity to elect to measure those equity investments that do not have a readily determinable fair value at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, (3) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and (4) clarifies that an entity should evaluate the need for a valuation allowance
on a deferred tax asset related to available-for-sale securities in combination with the entity’s evaluation of their other deferred tax assets.
This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption, although allowed in certain circumstances, is not applicable to the Company. An entity would apply this update by a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. After the adoption of this new accounting guidance, in the first quarter of 2018, the Company will record in net income fair value changes in its investments in Ctrip equity securities, which could vary significantly quarter to quarter (see Note 4 for the carrying values and fair values of these equity investments). In addition, the Company intends to continue to use the cost method of accounting for equity investments without a readily determinable fair value.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that was designed to create greater comparability for financial statement users across industries and jurisdictions. The core principle of this standard is that an "entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." The new standard also requires enhanced disclosures on the nature, amount, timing and uncertainty of revenue from contracts with customers. Since May 2014, the FASB has issued several amendments to this standard, including additional guidance, and deferred the effective date for public business entities to annual and interim periods beginning after December 15, 2017.
The Company will adopt this new standard in the first quarter of 2018 and expects to apply the modified retrospective transition approach, which means that revenues for 2016 and 2017 will be reported on a historical basis and revenues for 2018 will be reported on the new basis and disclosed on the historical basis. The revenue standard will change the timing of revenue recognition for travel reservation services. For example, revenue for accommodation reservation services will be recognized at check-in rather than check-out. The Company does not currently expect material impacts to its annual gross profit or net income due to this timing change, although the effects on quarterly gross profit and net income may be more significant. In addition, the adoption of the revenue standard will change the presentation of
Name Your Own Price
®
revenue from "gross" to "net" reporting, which will decrease revenue and cost of revenue equally, but have no impact on gross profit or net income.
2.
STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately
$58.9 million
and
$66.0 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
Stock-based compensation is recognized in the financial statements based upon fair value. Fair value is recognized as expense on a straight-line basis over the employee's requisite service period. The fair value of performance share units and restricted stock units is determined based on the number of units granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition dates.
Restricted Stock Units and Performance Share Units
The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the
three
months ended
March 31, 2017
:
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|
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|
|
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Share-Based Awards
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Unvested at December 31, 2016
|
|
515,606
|
|
|
|
$
|
1,287.88
|
|
|
Granted
|
|
155,095
|
|
|
|
$
|
1,735.10
|
|
|
Vested
|
|
(112,791
|
)
|
|
|
$
|
1,325.40
|
|
|
Performance Share Units Adjustment
|
|
(445
|
)
|
|
|
$
|
1,291.76
|
|
|
Forfeited
|
|
(7,103
|
)
|
|
|
$
|
1,301.58
|
|
|
Unvested at March 31, 2017
|
|
550,362
|
|
|
|
$
|
1,406.29
|
|
|
As of
March 31, 2017
, there was
$534.7 million
of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of
2.3
years.
During the
three
months ended
March 31, 2017
, the Company made broad-based grants of
81,202
restricted stock units that generally vest after
three
years, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of
$140.9 million
based on a weighted-average grant date fair value per share of
$1,735.10
.
In addition, during the
three
months ended
March 31, 2017
, the Company granted
73,893
performance share units to executives and certain other employees. The performance share units had a total grant date fair value of
$128.2 million
based upon a weighted-average grant date fair value per share of
$1,735.10
. The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units generally must continue their service through the requisite service period in order to receive any shares. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which ends
December 31, 2019
, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances. As of
March 31, 2017
, the estimated number of probable shares to be issued is a total of
73,893
shares, net of performance share units forfeited and vested since the grant date. If the maximum performance thresholds are met at the end of the performance period, a maximum number of
147,786
total shares could be issued. If the minimum performance thresholds are not met,
60,636
shares would be issued at the end of the performance period.
2016
Performance Share Units
During the year ended
December 31, 2016
, the Company granted
85,735
performance share units with a grant date fair value of
$111.7 million
, based on a weighted-average grant date fair value per share of
$1,302.25
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends
December 31, 2018
.
At
March 31, 2017
, there were
75,421
unvested 2016 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of
March 31, 2017
, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of
117,795
shares. If the maximum thresholds are met at the end of the performance period, a maximum of
170,125
total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
45,779
shares would be issued at the end of the performance period.
2015
Performance Share Units
During the year ended
December 31, 2015
, the Company granted
107,623
performance share units with a grant date fair value of
$133.2 million
, based on a weighted-average grant date fair value per share of
$1,237.53
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends
December 31, 2017
.
At
March 31, 2017
, there were
74,914
unvested 2015 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of
March 31, 2017
, the number of shares estimated to be issued
pursuant to these performance share units at the end of the performance period is a total of
128,379
shares. If the maximum thresholds are met at the end of the performance period, a maximum of
185,316
total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
43,832
shares would be issued at the end of the performance period.
Stock Options
All outstanding employee stock options were assumed in acquisitions. The following table summarizes the activity for stock options during the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
Number of Shares
|
|
Weighted-Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in thousands)
|
|
Weighted-Average Remaining Contractual Term
(in years)
|
Balance, December 31, 2016
|
|
48,983
|
|
|
|
$
|
372.07
|
|
|
|
$
|
53,587
|
|
|
4.4
|
Exercised
|
|
(3,992
|
)
|
|
|
$
|
368.68
|
|
|
|
|
|
|
Forfeited
|
|
(610
|
)
|
|
|
$
|
894.15
|
|
|
|
|
|
|
Balance, March 31, 2017
|
|
44,381
|
|
|
|
$
|
365.20
|
|
|
|
$
|
62,789
|
|
|
4.2
|
Vested and exercisable as of March 31, 2017
|
|
43,125
|
|
|
|
$
|
354.23
|
|
|
|
$
|
61,485
|
|
|
4.1
|
Vested and exercisable as of March 31, 2017 and expected to vest thereafter, net of estimated forfeitures
|
|
44,381
|
|
|
|
$
|
365.20
|
|
|
|
$
|
62,789
|
|
|
4.2
|
The aggregate intrinsic value of employee stock options that were exercised during the
three
months ended
March 31, 2017
and
2016
was
$5.4 million
and
$12.7 million
, respectively. During the
three
months ended
March 31, 2017
and
2016
, stock options vested for
539
and
5,367
shares of common stock with an acquisition-date fair value of
$0.3 million
and
$3.5 million
, respectively.
For the
three
months ended
March 31, 2017
and
2016
, the Company recorded stock-based compensation expense related to employee stock options of
$0.3 million
and
$2.9 million
, respectively. As of
March 31, 2017
, there was
$0.7 million
of total future compensation costs related to unvested employee stock options to be recognized over a weighted-average period of
0.7
years.
3.
NET INCOME PER SHARE
The Company computes basic net income per share by dividing net income applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
Common equivalent shares related to stock options, restricted stock units and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2017
|
|
2016
|
Weighted-average number of basic common shares outstanding
|
|
49,192
|
|
|
49,630
|
|
Weighted-average dilutive stock options, restricted stock units and performance share units
|
|
227
|
|
|
275
|
|
Assumed conversion of Convertible Senior Notes
|
|
606
|
|
|
224
|
|
Weighted-average number of diluted common and common equivalent shares outstanding
|
|
50,025
|
|
|
50,129
|
|
Anti-dilutive potential common shares
|
|
2,256
|
|
|
2,665
|
|
Anti-dilutive potential common shares for the
three
months ended
March 31, 2017
include approximately
1.7 million
shares that could be issued under the Company's outstanding convertible notes. Under the treasury stock method, the convertible notes will generally have an anti-dilutive impact on net income per share if the conversion prices for the convertible notes exceed the Company's average stock price.
4.
INVESTMENTS
Short-term and Long-term Investments in Available-for-sale Securities
The following table summarizes, by major security type, the Company's investments as of
March 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
517,398
|
|
|
$
|
1,254
|
|
|
$
|
(187
|
)
|
|
$
|
518,465
|
|
U.S. government securities
|
|
580,630
|
|
|
17
|
|
|
(427
|
)
|
|
580,220
|
|
Corporate debt securities
|
|
1,831,179
|
|
|
1,482
|
|
|
(1,166
|
)
|
|
1,831,495
|
|
Commercial paper
|
|
5,978
|
|
|
—
|
|
|
—
|
|
|
5,978
|
|
Total short-term investments
|
|
$
|
2,935,185
|
|
|
$
|
2,753
|
|
|
$
|
(1,780
|
)
|
|
$
|
2,936,158
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
450,445
|
|
|
$
|
1,894
|
|
|
$
|
(788
|
)
|
|
$
|
451,551
|
|
U.S. government securities
|
|
828,777
|
|
|
286
|
|
|
(6,744
|
)
|
|
822,319
|
|
Corporate debt securities
|
|
6,387,523
|
|
|
10,334
|
|
|
(37,658
|
)
|
|
6,360,199
|
|
U.S. government agency securities
|
|
4,971
|
|
|
—
|
|
|
(25
|
)
|
|
4,946
|
|
Ctrip convertible debt securities
|
|
1,275,000
|
|
|
171,425
|
|
|
(8,050
|
)
|
|
1,438,375
|
|
Ctrip equity securities
|
|
655,311
|
|
|
407,929
|
|
|
—
|
|
|
1,063,240
|
|
Total long-term investments
|
|
$
|
9,602,027
|
|
|
$
|
591,868
|
|
|
$
|
(53,265
|
)
|
|
$
|
10,140,630
|
|
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. As of
March 31, 2017
, the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately
2.0
years with an average credit quality of A+/A1/A+.
The Company invests in international government securities with high credit quality. As of
March 31, 2017
, investments in international government securities principally included debt securities issued by the governments of the Netherlands, Belgium, France, Germany and Austria.
On May 26, 2015 and August 7, 2014, the Company invested
$250 million
and
$500 million
, respectively, in
five
-year senior convertible notes issued at par by Ctrip. On December 11, 2015, the Company invested
$500 million
in a Ctrip
ten
-year
senior convertible note issued at par value, which included a put option allowing the Company to require a prepayment in cash from Ctrip at the end of the sixth year of the note. On September 12, 2016, the Company invested
$25 million
in a Ctrip
six
-year senior convertible note issued at par value, which included a put option allowing the Company to require prepayment in cash from Ctrip at the end of the third year of the note. The conversion feature associated with this September 2016 Ctrip convertible note met the definition of an embedded derivative (see Note
5
). As of
March 31, 2017
, the Company had also invested
$655.3 million
of its international cash in Ctrip American Depositary Shares ("ADSs"). The convertible debt and equity securities of Ctrip have been marked-to-market in accordance with the accounting guidance for available-for-sale securities.
In connection with the Company's investments in Ctrip's convertible notes, Ctrip granted the Company the right to appoint an observer to its board of directors and permission to acquire its shares (through the acquisition of Ctrip ADSs in the open market) so that combined with ADSs issuable upon conversion of the August 2014, May 2015 and September 2016 convertible notes, the Company could hold up to an aggregate of approximately
15%
of Ctrip's outstanding equity. As of
March 31, 2017
, the Company did not have significant influence over Ctrip.
The following table summarizes, by major security type, the Company's investments as of
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
249,552
|
|
|
$
|
221
|
|
|
$
|
(89
|
)
|
|
$
|
249,684
|
|
U.S. government securities
|
|
456,971
|
|
|
57
|
|
|
(140
|
)
|
|
456,888
|
|
Corporate debt securities
|
|
1,510,119
|
|
|
1,119
|
|
|
(928
|
)
|
|
1,510,310
|
|
Commercial paper
|
|
1,998
|
|
|
—
|
|
|
—
|
|
|
1,998
|
|
Total short-term investments
|
|
$
|
2,218,640
|
|
|
$
|
1,397
|
|
|
$
|
(1,157
|
)
|
|
$
|
2,218,880
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
655,857
|
|
|
$
|
4,110
|
|
|
$
|
(623
|
)
|
|
$
|
659,344
|
|
U.S. government securities
|
|
773,718
|
|
|
337
|
|
|
(7,463
|
)
|
|
766,592
|
|
Corporate debt securities
|
|
6,042,271
|
|
|
9,973
|
|
|
(50,455
|
)
|
|
6,001,789
|
|
U.S. government agency securities
|
|
4,979
|
|
|
—
|
|
|
(27
|
)
|
|
4,952
|
|
Ctrip convertible debt securities
|
|
1,275,000
|
|
|
65,800
|
|
|
(47,712
|
)
|
|
1,293,088
|
|
Ctrip equity securities
|
|
655,311
|
|
|
213,233
|
|
|
(3,242
|
)
|
|
865,302
|
|
Total long-term investments
|
|
$
|
9,407,136
|
|
|
$
|
293,453
|
|
|
$
|
(109,522
|
)
|
|
$
|
9,591,067
|
|
The Company has classified its investments as available-for-sale securities. These securities are carried at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of taxes, reflected as a part of "
Accumulated other comprehensive income (loss)
" in the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term investment is based upon the maturity of the debt securities.
The Company recognized net realized gains of
$0.2 million
for the
three
months ended
March 31, 2017
compared to net realized losses of
$2.9 million
for the
three
months ended
March 31, 2016
, related to investments. As of
March 31, 2017
, the Company does not consider any of its investments to be other-than-temporarily impaired.
Cost-method Investments
The Company held investments in equity securities of private companies, companies typically at an early stage of development, of approximately
$7.6 million
at both
March 31, 2017
and
December 31, 2016
. The investments are accounted for under the cost method and included in "Other assets" in the Company's Unaudited Consolidated Balance Sheets. There have been no identified events or changes in circumstances to indicate a potential impairment with the Company's cost-method investments as of
March 31, 2017
.
In March 2016, the Company recognized an impairment of approximately
$50 million
, which was not tax deductible, related to its investment in Hotel Urbano.
5.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value as of
March 31, 2017
are classified in the tables below in the categories described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
1,249,091
|
|
|
$
|
—
|
|
|
$
|
1,249,091
|
|
International government securities
|
|
—
|
|
|
35,052
|
|
|
35,052
|
|
U.S. government securities
|
|
—
|
|
|
159,956
|
|
|
159,956
|
|
Corporate debt securities
|
|
—
|
|
|
10,243
|
|
|
10,243
|
|
Time deposits
|
|
4,724
|
|
|
—
|
|
|
4,724
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
518,465
|
|
|
518,465
|
|
U.S. government securities
|
|
—
|
|
|
580,220
|
|
|
580,220
|
|
Corporate debt securities
|
|
—
|
|
|
1,831,495
|
|
|
1,831,495
|
|
Commercial paper
|
|
—
|
|
|
5,978
|
|
|
5,978
|
|
Long-term investments:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
451,551
|
|
|
451,551
|
|
U.S. government securities
|
|
—
|
|
|
822,319
|
|
|
822,319
|
|
Corporate debt securities
|
|
—
|
|
|
6,360,199
|
|
|
6,360,199
|
|
U.S. government agency securities
|
|
—
|
|
|
4,946
|
|
|
4,946
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,438,375
|
|
|
1,438,375
|
|
Ctrip equity securities
|
|
1,063,240
|
|
|
—
|
|
|
1,063,240
|
|
Derivatives:
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
—
|
|
|
558
|
|
|
558
|
|
Total assets at fair value
|
|
$
|
2,317,055
|
|
|
$
|
12,219,357
|
|
|
$
|
14,536,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
593
|
|
|
$
|
593
|
|
Financial assets and liabilities carried at fair value as of
December 31, 2016
are classified in the tables below in the categories described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
977,468
|
|
|
$
|
—
|
|
|
$
|
977,468
|
|
International government securities
|
|
—
|
|
|
30,266
|
|
|
30,266
|
|
U.S. government securities
|
|
—
|
|
|
176,140
|
|
|
176,140
|
|
Corporate debt securities
|
|
—
|
|
|
9,273
|
|
|
9,273
|
|
Commercial paper
|
|
—
|
|
|
1,998
|
|
|
1,998
|
|
Time deposits
|
|
49,160
|
|
|
—
|
|
|
49,160
|
|
Short-term investments:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
249,684
|
|
|
249,684
|
|
U.S. government securities
|
|
—
|
|
|
456,888
|
|
|
456,888
|
|
Corporate debt securities
|
|
—
|
|
|
1,510,310
|
|
|
1,510,310
|
|
Commercial paper
|
|
—
|
|
|
1,998
|
|
|
1,998
|
|
Long-term investments:
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
659,344
|
|
|
659,344
|
|
U.S. government securities
|
|
—
|
|
|
766,592
|
|
|
766,592
|
|
Corporate debt securities
|
|
—
|
|
|
6,001,789
|
|
|
6,001,789
|
|
U.S. government agency securities
|
|
—
|
|
|
4,952
|
|
|
4,952
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,293,088
|
|
|
1,293,088
|
|
Ctrip equity securities
|
|
865,302
|
|
|
—
|
|
|
865,302
|
|
Derivatives:
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
—
|
|
|
756
|
|
|
756
|
|
Total assets at fair value
|
|
$
|
1,891,930
|
|
|
$
|
11,163,078
|
|
|
$
|
13,055,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
1,015
|
|
|
$
|
1,015
|
|
There are three levels of inputs to measure fair value. The definition of each input is described below:
|
|
Level
1
:
|
Quoted prices in active markets that are accessible by the Company at the measurement date for
|
identical assets and liabilities.
|
|
Level
2
:
|
Inputs that are observable, either directly or indirectly. Such prices may be based upon quoted
|
prices for identical or comparable securities in active markets or inputs not quoted on active
markets, but corroborated by market data.
|
|
Level
3
:
|
Unobservable inputs are used when little or no market data is available.
|
Investments in corporate debt securities, U.S. and international government securities, commercial paper, government agency securities and convertible debt securities are considered "Level
2
" valuations because the Company has access to quoted prices, but does not have visibility to the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.
The Company's derivative instruments are valued using pricing models. Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates. Derivatives are considered "Level
2
" fair value measurements. The Company's derivative instruments are typically short-term in nature.
As of
March 31, 2017
and
December 31, 2016
, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings are carried at cost which approximates their fair value because of the short-term nature of these items. At both
March 31, 2017
and
December 31, 2016
, the Company held investments in equity securities of private companies of
$7.6 million
and these investments are accounted for under the cost method of accounting (see Note
4
). See Note
4
for information on the carrying value of available-for-sale investments, Note
7
for the estimated fair value of the Company's outstanding Senior Notes and Note
11
for the Company's contingent liabilities associated with business acquisitions.
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company limits these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value. Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur. Changes in the fair value of derivatives designated as net investment hedges are recorded as currency translation adjustments to offset a portion of the currency translation adjustment from Euro-denominated net assets held by certain subsidiaries and are recognized in the Unaudited Consolidated Balance Sheets in "
Accumulated other comprehensive income (loss)
."
Derivatives Not Designated as Hedging Instruments
— The Company is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risk from short-term foreign exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. As of
March 31, 2017
and
December 31, 2016
, there were
no
outstanding derivative contracts related to foreign currency translation risk. Foreign exchange losses of
$1.1 million
and
$3.6 million
for the
three
months ended
March 31, 2017
and
2016
, respectively, are recorded related to these derivatives in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Foreign exchange derivatives outstanding as of
March 31, 2017
associated with foreign currency transaction risks resulted in a net liability of
$0.1 million
, with a liability in the amount of
$0.6 million
recorded in "Accrued expenses and other current liabilities" and an asset in the amount of
$0.5 million
recorded in "Prepaid expenses and other current assets" in the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of
December 31, 2016
associated with foreign exchange transactions resulted in a net liability of
$0.3 million
, with a liability in the amount of
$1.0 million
recorded in "Accrued expenses and other current liabilities" and an asset in the amount of
$0.7 million
recorded in "Prepaid expenses and other current assets" in the Unaudited Consolidated Balance Sheet. Derivatives associated with these transaction risks resulted in foreign exchange gains of
$6.8 million
and
$12.4 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net losses of
$5.9 million
and
$4.4 million
for the
three
months ended
March 31, 2017
and
2016
, respectively. The net impacts related to these derivatives are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The settlement of derivative contracts not designated as hedging instruments resulted in net cash inflows of
$2.7 million
and
$22.3 million
for the
three
months ended
March 31, 2017
and
2016
, respectively, and are reported within "
Net cash provided by operating activities
" in the Unaudited Consolidated Statements of Cash Flows.
Embedded Derivative
— In September 2016, the Company invested
$25 million
in a Ctrip convertible note (see Note
4
). The Company determined that the conversion option for this note met the definition of an embedded derivative. At
March 31, 2017
and
December 31, 2016
, the embedded derivative had an estimated fair value of
$3.2 million
and
$1.8 million
, respectively, and is reported in the balance sheet with its host contract in long-term investments. The embedded derivative is bifurcated for measurement purposes only and the mark-to-market for the
three
months ended
March 31, 2017
was a
$1.4 million
gain, which is included in "Foreign currency transactions and other" in the Company's Unaudited Consolidated Statement of Operations.
6.
INTANGIBLE ASSETS AND GOODWILL
The Company's intangible assets at
March 31, 2017
and
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortization
Period
|
|
Weighted
Average
Useful Life
|
Supply and distribution agreements
|
$
|
812,361
|
|
|
$
|
(287,948
|
)
|
|
$
|
524,413
|
|
|
$
|
809,287
|
|
|
$
|
(270,813
|
)
|
|
$
|
538,474
|
|
|
3 - 20 years
|
|
16 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
112,451
|
|
|
(85,670
|
)
|
|
26,781
|
|
|
112,141
|
|
|
(80,549
|
)
|
|
31,592
|
|
|
1 - 5 years
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
1,623
|
|
|
(1,608
|
)
|
|
15
|
|
|
1,623
|
|
|
(1,598
|
)
|
|
25
|
|
|
15 years
|
|
15 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet domain names
|
40,047
|
|
|
(26,394
|
)
|
|
13,653
|
|
|
39,495
|
|
|
(25,089
|
)
|
|
14,406
|
|
|
2 - 20 years
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
1,667,686
|
|
|
(282,322
|
)
|
|
1,385,364
|
|
|
1,667,221
|
|
|
(261,412
|
)
|
|
1,405,809
|
|
|
4-20 years
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
21,900
|
|
|
(20,127
|
)
|
|
1,773
|
|
|
21,900
|
|
|
(18,321
|
)
|
|
3,579
|
|
|
3-4 years
|
|
3 years
|
Total intangible assets
|
$
|
2,656,068
|
|
|
$
|
(704,069
|
)
|
|
$
|
1,951,999
|
|
|
$
|
2,651,667
|
|
|
$
|
(657,782
|
)
|
|
$
|
1,993,885
|
|
|
|
|
|
Intangible assets are amortized on a straight-line basis. Intangible asset amortization expense was approximately
$43.0 million
and
$42.4 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
The amortization expense for intangible assets for the remainder of
2017
, the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands):
|
|
|
|
|
Remainder of 2017
|
$
|
119,143
|
|
2018
|
141,951
|
|
2019
|
130,759
|
|
2020
|
123,903
|
|
2021
|
119,095
|
|
2022
|
117,966
|
|
Thereafter
|
1,199,182
|
|
|
$
|
1,951,999
|
|
The change in goodwill for the
three
months ended
March 31, 2017
consists of the following (in thousands):
|
|
|
|
|
Balance at December 31, 2016
|
$
|
2,396,906
|
|
Currency translation adjustments
|
5,400
|
|
Balance at March 31, 2017
|
$
|
2,402,306
|
|
A substantial portion of the intangibles and goodwill relates to the acquisition of OpenTable in July 2014 and KAYAK in May 2013. There have been no events or changes in circumstances to indicate a potential impairment to goodwill or intangible assets as of
March 31, 2017
.
7.
DEBT
Short-term Borrowing
On March 31, 2016, the Company utilized a credit line in an amount of
$100.0 million
associated with the purchase of marketable debt securities. This borrowing was repaid on April 1, 2016.
Revolving Credit Facility
In June 2015, the Company entered into a
$2.0 billion
five
-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
.
The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility would be used for working capital and general corporate purposes, which could include acquisitions, share repurchases or debt repayments. There were
no
borrowings outstanding and approximately
$3.9 million
and
$3.8 million
of letters of credit issued under the facility as of
March 31, 2017
and
December 31, 2016
, respectively.
Outstanding Debt
Outstanding debt as of
March 31, 2017
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Short-term debt:
|
|
|
|
|
|
|
1.0% Convertible Senior Notes due March 2018
|
|
$
|
999,997
|
|
|
$
|
(25,459
|
)
|
|
$
|
974,538
|
|
Long-term debt:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000,000
|
|
|
$
|
(83,969
|
)
|
|
$
|
916,031
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(99,325
|
)
|
|
900,675
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,069,550
|
|
|
(7,133
|
)
|
|
1,062,417
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
802,163
|
|
|
(5,144
|
)
|
|
797,019
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,069,550
|
|
|
(12,577
|
)
|
|
1,056,973
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(3,618
|
)
|
|
496,382
|
|
3.6% Senior Notes due June 2026
|
|
1,000,000
|
|
|
(7,425
|
)
|
|
992,575
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,069,550
|
|
|
(5,520
|
)
|
|
1,064,030
|
|
Total long-term debt
|
|
$
|
7,510,813
|
|
|
$
|
(224,711
|
)
|
|
$
|
7,286,102
|
|
Outstanding debt as of
December 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Short-term debt:
|
|
|
|
|
|
|
1.0% Convertible Senior Notes due March 2018
|
|
$
|
1,000,000
|
|
|
$
|
(32,266
|
)
|
|
$
|
967,734
|
|
Long-term debt:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000,000
|
|
|
$
|
(90,251
|
)
|
|
$
|
909,749
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(104,592
|
)
|
|
895,408
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
791,063
|
|
|
(5,336
|
)
|
|
785,727
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,054,750
|
|
|
(12,861
|
)
|
|
1,041,889
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(3,727
|
)
|
|
496,273
|
|
3.6% Senior Notes due June 2026
|
|
1,000,000
|
|
|
(7,619
|
)
|
|
992,381
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,054,750
|
|
|
(5,655
|
)
|
|
1,049,095
|
|
Total long-term debt
|
|
$
|
6,400,563
|
|
|
$
|
(230,041
|
)
|
|
$
|
6,170,522
|
|
Based upon the closing price of the Company's common stock for the prescribed measurement periods during the
three
months ended
March 31, 2017
and
December 31, 2016
, the contingent conversion threshold on the 2018 Notes (as defined below) was exceeded. Therefore, the 2018 Notes were convertible at the option of the holders, and, accordingly, the Company reported the carrying value of the 2018 Notes as a current liability in the Company's Unaudited Consolidated Balance Sheet as of
March 31, 2017
and
December 31, 2016
. Since these notes are convertible at the option of the holders and the principal amount is required to be paid in cash, the Company reclassified the unamortized debt discount for the 2018 Notes in the amount of
$22.5 million
and
$28.5 million
before tax as of
March 31, 2017
and
December 31, 2016
, respectively, from additional paid-in-capital to convertible debt in the mezzanine section in the Company's Unaudited Consolidated Balance Sheet. The determination of whether or not the 2018 Notes are convertible is performed on a quarterly basis. Consequently, the 2018 Notes may or may not be convertible in future quarters.
The contingent conversion thresholds on the 2020 Notes (as defined below) and the 2021 Notes (as defined below) were not exceeded at
March 31, 2017
or
December 31, 2016
, and therefore these notes were reported as a non-current liability in the Unaudited Consolidated Balance Sheets.
Fair Value of Debt
As of
March 31, 2017
and
December 31, 2016
, the estimated fair value of the outstanding Senior Notes was approximately
$10.1 billion
and
$8.4 billion
, respectively, and was considered a "Level
2
" fair value measurement (see Note
5
). Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company's stock price at the end of the reporting period. A substantial portion of the market value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the Convertible Senior Notes.
Convertible Debt
If the note holders exercise their option to convert, the Company delivers cash to repay the principal amount of the notes and delivers shares of common stock or cash, at its option, to satisfy the conversion value in excess of the principal amount. In cases where holders decide to convert prior to the maturity date, the Company charges the proportionate amount of remaining debt issuance costs to interest expense.
Description of Senior Convertible Notes
In August 2014, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due September 15, 2021, with an interest rate of
0.9%
(the "2021 Notes"). The Company paid
$11.0 million
in debt issuance costs during the year ended December 31, 2014 related to this offering. The 2021 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$2,055.50
per share. The 2021 Notes are convertible, at the option of the holder, prior to September 15, 2021, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding
quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2021 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2021 Notes in an aggregate value ranging from
$0
to approximately
$375 million
depending upon the date of the transaction and the then current stock price of the Company. As of June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes. The 2021 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2021 Notes for cash in certain circumstances. Interest on the 2021 Notes is payable on March 15 and September 15 of each year.
In May 2013, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of
0.35%
(the "2020 Notes"). The 2020 Notes were issued with an initial discount of
$20.0 million
. The Company paid
$1.0 million
in debt issuance costs during the year ended December 31, 2013 related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$1,315.10
per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2020 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2020 Notes in an aggregate value ranging from
$0
to approximately
$397 million
depending upon the date of the transaction and the then current stock price of the Company. As of March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes. The 2020 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances. Interest on the 2020 Notes is payable on June 15 and December 15 of each year.
In March 2012, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due March 15, 2018, with an interest rate of
1.0%
(the "2018 Notes"). The Company paid
$20.9 million
in debt issuance costs during the year ended December 31, 2012 related to this offering. The 2018 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$944.61
per share. The 2018 Notes are convertible, at the option of the holder, prior to March 15, 2018, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2018 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2018 Notes in aggregate value ranging from
$0
to approximately
$344 million
depending upon the date of the transaction and the then current stock price of the Company. As of December 15, 2017, holders will have the right to convert all or any portion of the 2018 Notes. The 2018 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2018 Notes for cash in certain circumstances. Interest on the 2018 Notes is payable on March 15 and September 15 of each year.
Cash-settled convertible debt, such as the Company's Convertible Senior Notes, is separated into debt and equity components at issuance and each component is assigned a value. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The Company estimated the straight debt borrowing rates at debt origination to be
3.50%
for the 2018 Notes,
3.13%
for the 2020 Notes and
3.18%
for the 2021 Notes. The yield to maturity was estimated at an at-market coupon priced at par.
Debt discount after tax of
$82.5 million
(
$142.9 million
before tax) less financing costs associated with the equity component of convertible debt of
$1.6 million
after tax was recorded in additional paid-in capital related to the 2021 Notes at December 31, 2014. Debt discount after tax of
$92.4 million
(
$154.3 million
before tax) less financing costs associated with the equity component of convertible debt of
$0.1 million
after tax was recorded in additional paid-in capital related to the 2020 Notes at June 30, 2013. Debt discount after tax of
$80.9 million
(
$135.2 million
before tax) less financing costs associated with the equity component of convertible debt of
$2.8 million
after tax was recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012.
For the
three
months ended
March 31, 2017
and
2016
, the Company recognized interest expense of
$24.0 million
and
$23.4 million
, respectively, related to convertible notes, which was comprised of
$5.6 million
for each period related to the contractual coupon interest,
$17.2 million
and
$16.7 million
, respectively, related to the amortization of debt discount, and
$1.2 million
and
$1.1 million
, respectively, related to the amortization of debt issuance costs. For the
three
months ended
March 31, 2017
and
2016
, included in the amortization of debt discount mentioned above was
$0.7 million
of original issuance discount for each period related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity date for the respective debt. The weighted-average effective interest rates for the
three
months ended
March 31, 2017
and
2016
was
3.4%
and
3.5%
, respectively, related to convertible notes.
Other Long-term Debt
In March 2017, the Company issued Senior Notes due March 10, 2022, with an interest rate of
0.8%
(the "March 2022 Notes") for an aggregate principal amount of
1.0 billion
Euros. The March 2022 Notes were issued with an initial discount of
2.1 million
Euros. In addition, the Company paid
$4.0 million
in debt issuance costs during the three months ended March 31, 2017. Interest on the March 2022 Notes is payable annually on March 10, beginning March 10, 2018. Subject to certain limited exceptions, all payments of interest and principal for the March 2022 Notes will be made in Euros.
In May 2016, the Company issued Senior Notes due June 1, 2026, with an interest rate of
3.6%
(the "2026 Notes") for an aggregate principal amount of
$1.0 billion
. The 2026 Notes were issued with an initial discount of
$1.9 million
. In addition, the Company paid
$6.2 million
in debt issuance costs during the year ended December 31, 2016. Interest on the 2026 Notes is payable semi-annually on June 1 and December 1.
In November 2015, the Company issued Senior Notes due November 25, 2022, with an interest rate of
2.15%
(the "November 2022 Notes") for an aggregate principal amount of
750 million
Euros. The November 2022 Notes were issued with an initial discount of
2.2 million
Euros. In addition, the Company paid
$3.7 million
in debt issuance costs during the year ended December 31, 2015. Interest on the November 2022 Notes is payable annually on November 25. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the November 2022 Notes will be made in Euros.
In March 2015, the Company issued Senior Notes due March 15, 2025, with an interest rate of
3.65%
(the "2025 Notes") for an aggregate principal amount of
$500 million
. The 2025 Notes were issued with an initial discount of
$1.3 million
. In addition, the Company paid
$3.2 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2025 Notes is payable semi-annually on March 15 and September 15.
In March 2015, the Company issued Senior Notes due March 3, 2027, with an interest rate of
1.8%
(the "2027 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2027 Notes were issued with an initial discount of
0.3 million
Euros. In addition, the Company paid
$6.3 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2027 Notes is payable annually on March 3. Subject to certain limited exceptions, all payments of interest and principal for the 2027 Notes will be made in Euros.
In September 2014, the Company issued Senior Notes due September 23, 2024, with an interest rate of
2.375%
(the "2024 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2024 Notes were issued with an initial discount of
9.4 million
Euros. In addition, the Company paid
$6.5 million
in debt issuance costs during the year ended December 31, 2014. Interest on the 2024 Notes is payable annually on September 23. Subject to certain limited exceptions, all payments of interest and principal for the 2024 Notes will be made in Euros.
The aggregate principal value of the March 2022 Notes, November 2022 Notes, 2024 Notes and 2027 Notes and accrued interest thereon are designated as a hedge of the Company's net investment in certain Euro functional currency subsidiaries. The foreign currency transaction gains or losses on these liabilities are measured based upon changes in spot rates and are recorded in "
Accumulated other comprehensive income (loss)
" in the Unaudited Consolidated Balance Sheets. The Euro-denominated net assets of these subsidiaries are translated into U.S. Dollars at each balance sheet date, with effects of foreign currency changes also reported in "
Accumulated other comprehensive income (loss)
"in the Unaudited Consolidated Balance Sheets. Since the notional amount of the recorded Euro-denominated debt and related interest are not greater than the notional amount of the Company's net investment, the Company does not expect to incur any ineffectiveness on this hedge.
Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The Company estimated the effective interest rates at debt origination to be
0.84%
for the March 2022
Notes,
2.20%
for the November 2022 Notes,
2.48%
for the 2024 Notes,
3.68%
for the 2025 Notes,
3.62%
for the 2026 Notes and
1.80%
for the 2027 Notes.
For the
three
months ended
March 31, 2017
and
2016
, the Company recognized interest expense of
$30.6 million
and
$21.4 million
, respectively, related to other long-term debt, which was comprised of
$29.5 million
and
$20.5 million
, respectively, for the contractual coupon interest,
$0.4 million
for each period related to the amortization of debt discount and
$0.7 million
and
$0.5 million
, respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.
In March 2016, the Company received a
ten
-year loan from the State of Connecticut in the amount of
$2.5 million
with an interest rate of
1%
in connection with the construction of office space in Connecticut. In the first quarter of 2017,
$1.0 million
of the loan was forgiven as a result of meeting certain employment and salary conditions. The remaining balance of the loan will be forgiven in 2019 if certain employment and salary conditions are met. As of
March 31, 2017
and
December 31, 2016
, the loan in the amount of
$1.5 million
and
$2.5 million
, respectively, is reported in "
Other long-term liabilities
" in the Unaudited Consolidated Balance Sheet.
8.
TREASURY STOCK
In the first quarter of 2016, the Company's Board of Directors authorized a program to repurchase up to
$3.0 billion
of the Company's common stock. In the
three
months ended
March 31, 2017
, the Company repurchased
80,027
shares of its common stock in the open market for an aggregate cost of
$135.0 million
, which included stock repurchases in March 2017 of
5,600
shares for an aggregate cost of
$10.0 million
that were settled in April 2017.
In the first quarter of 2017, the Company's Board of Directors authorized a program to repurchase up to
$2.0 billion
of the Company's common stock, in addition to amounts previously authorized. As of
March 31, 2017
, the Company had a remaining authorization of
$4.0 billion
to purchase its common stock. The Company may make additional repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined at the Company's discretion.
The Board of Directors has given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation. The Company repurchased
44,888
shares and
90,401
shares at an aggregate cost of
$77.3 million
and
$117.2 million
in the
three
months ended
March 31, 2017
and
2016
, respectively, to satisfy employee withholding taxes related to stock-based compensation. For the three months ended
March 31, 2017
and
2016
, the Company remitted
$69.8 million
and
$99.5 million
of such employee withholding taxes, respectively, to the tax authorities, with the remainder remitted subsequently. The new accounting standard for stock-based compensation (see Note 1) requires us to report the cash remitted to the tax authorities as a financing activity in the Unaudited Statements of Cash Flows for all periods presented. Prior to the adoption of this standard, the Company reported the aggregate cost of the shares withheld for taxes as a financing activity and the associated unremitted withholding taxes as an operating activity on the cash flow statements.
As of
March 31, 2017
, there were
13,315,844
shares of the Company's common stock held in treasury.
9.
INCOME TAXES
Income tax expense consists of U.S. and international income taxes, determined using an estimate of the Company's annual effective tax rate, which is based upon the applicable tax rates and tax laws of the countries in which the income is generated. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, tax planning strategies, the carryforward periods available for tax reporting purposes, and other relevant factors.
The Company's effective tax rate for the
three
months ended
March 31, 2017
was
13.6%
compared to
18.7%
for the three months ended
March 31, 2016
. The 2017 effective tax rate differs from the U.S. federal statutory tax rate of
35%
, primarily as a result of lower international tax rates and current year excess tax benefits in an amount of
$9.9 million
recognized from the vesting of equity awards pursuant to the adoption of an accounting update effective January 2017 (see Note 1), partially offset by certain non-deductible expenses. The 2016 effective tax rate differs from the U.S. federal statutory tax rate of
35%
, primarily as a result of lower international tax rates, partially offset by the tax rate impact of a non-deductible impairment of a cost-method investment of approximately
$50 million
in the first quarter of 2016 (see Note 4).
The Company's effective tax rate was lower for the three months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily as a result of an increased proportion of the Company's income being taxed at lower international tax rates due to the growth of the Company's international businesses and current year excess tax benefits recognized from vesting of equity awards. In addition, the non-deductible impairment of a cost-method investment was recognized in the first quarter of 2016, which contributed to a higher effective tax rate compared to the three months ended March 31, 2017.
During the three months ended
March 31, 2017
and
2016
, a substantial majority of the Company's income was generated in the Netherlands. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of
5%
("Innovation Box Tax") rather than the Dutch statutory rate of
25%
. A portion of Booking.com's earnings during the
three
months ended
March 31, 2017
and
2016
qualifies for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods.
10.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below provides the balances for each classification of accumulated other comprehensive income (loss) as of
March 31, 2017
and
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Foreign currency translation adjustments, net of tax
(1)
|
|
$
|
(275,442
|
)
|
|
$
|
(311,247
|
)
|
Net unrealized gain on marketable securities, net of tax
(2)
|
|
522,497
|
|
|
176,563
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
247,055
|
|
|
$
|
(134,684
|
)
|
(1)
Foreign currency translation adjustments, net of tax, include net losses from fair value adjustments of
$35.0 million
after tax (
$52.6 million
before tax) associated with settled derivatives that previously had been designated as net investment hedges at both
March 31, 2017
and
December 31, 2016
.
Foreign currency translation adjustments, net of tax, include foreign currency transaction gains of
$149.9 million
after tax (
$258.0 million
before tax) and
$182.6 million
after tax (
$310.4 million
before tax) associated with the Company's March 2022 Notes, November 2022 Notes, 2024 Notes and 2027 Notes at
March 31, 2017
and
December 31, 2016
, respectively. The March 2022 Notes, November 2022 Notes, 2024 Notes and 2027 Notes are Euro-denominated debt and are designated as hedges of certain of the Company's Euro-denominated net assets (see Note
7
).
The remaining balance in foreign currency translation adjustments excludes income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States.
(2)
The unrealized gains before tax at
March 31, 2017
and
December 31, 2016
were
$539.7 million
and
$185.9 million
, respectively, of which unrealized gains of
$472.2 million
and
$148.5 million
, respectively, were exempt from tax in the Netherlands and unrealized gains of
$67.5 million
and
$37.4 million
, respectively, were taxable.
11.
COMMITMENTS AND CONTINGENCIES
Competition Reviews
The online travel industry has become the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. The Company is or has been involved in investigations predominantly related to whether Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, are anti-competitive because they require accommodation providers to provide Booking.com with room rates that are at least as low as those offered to other online travel companies ("OTCs") or through the accommodation provider's website. Some investigations relate to other issues such as reservation and cancellation clauses,
commission payments and pricing behavior. For instance, in September 2016 the Swiss Price Surveillance Office initiated a market observation exercise with respect to the market position and the level of commissions of Booking.com in Switzerland.
In Europe, investigations into Booking.com's price parity provisions were initiated in 2013 and 2014 by NCAs in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland. A number of other NCAs have also looked at these issues. On April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted "commitments" offered by Booking.com to resolve and close the investigations in France, Italy and Sweden. Under the commitments, Booking.com replaced its existing price parity agreements with accommodation providers with "narrow" price parity agreements. Under a "narrow" price parity agreement, subject to certain exceptions, an accommodation provider is still required to offer the same or better rates on Booking.com as it offers to a consumer directly online, but it is no longer required to offer the same or better rates on Booking.com as it offers to other OTCs. The commitments also allow an accommodation provider to, among other things, offer different terms and conditions (e.g., free WiFi) and availability to consumers that book with online travel companies that offer lower rates of commission or other benefits, offer lower rates to consumers that book through offline channels and continue to discount through, among other things, accommodation loyalty programs, as long as those rates are not published or marketed online. The commitments apply to accommodations in France, Italy and Sweden and were effective on July 1, 2015. The foregoing description is a summary only and is qualified in its entirety by reference to the commitments published by the NCAs on April 21, 2015.
On July 1, 2015, Booking.com voluntarily implemented the commitments given to the French, Italian and Swedish NCAs throughout the European Economic Area and Switzerland. Nearly all NCAs in the European Economic Area have now closed their investigations following Booking.com's implementation of the commitments in their jurisdictions. Booking.com has also recently agreed with the NCAs in Australia, New Zealand and Georgia to implement the "narrow" price parity clause in these countries. However, the Australian NCA indicated in February 2017 that it is reassessing "narrow" price parity clauses between online travel agencies and accommodation providers. The Turkish NCA recently imposed fines on Booking.com following an investigation into Booking.com's "wide" parity clauses. Booking.com is in ongoing discussions with various NCAs in other countries regarding their concerns. The Company is currently unable to predict the long-term impact the implementation of these commitments will have on Booking.com's business, on investigations by other countries, or on industry practice more generally.
On December 23, 2015, the German NCA issued a final decision prohibiting Booking.com's "narrow" price parity agreements with accommodations in Germany. The German NCA did not issue a fine, but has reserved its position regarding an order for disgorgement of profits. Booking.com is appealing the German NCA's decision. An Italian hotel association has appealed the Italian NCA's decision to accept the commitments by Booking.com.
A working group of
10
European NCAs (France, Germany, Belgium, Hungary, Ireland, Italy, the Netherlands, Czech Republic, the United Kingdom and Sweden) was established by the European Commission in December 2015 to monitor the effects of the narrow price parity clause in Europe. This working group (the "ECN Working Group") issued questionnaires during 2016 to online travel agencies, including Booking.com and Expedia, meta-search sites and hotels about the narrow price parity clause. On April 6, 2017, the ECN Working Group published the results of this monitoring exercise. The report indicates that the introduction of the narrow price parity clause generally improved conditions for competition. Although neither the European Commission nor any of the participating NCAs has opened a new investigation following the publication of the report, the ECN Working Group decided to keep the sector under review and re-assess the competitive situation in due course. Separately, the French NCA, which conducted its own review of the effects of the narrow price parity clause, issued a report on February 9, 2017 stating that it has not ruled out the possibility of issuing an opinion at its own initiative if a change in competition requires it, and that it would continue to contribute actively to the ECN Working Group process.
The Company is unable to predict how these appeals and the remaining investigations in other countries will ultimately be resolved, or whether further action in Europe will be taken as a result of the ECN Working Group's ongoing review. Possible outcomes include requiring Booking.com to amend or remove its rate parity clause from its contracts with accommodation providers in those jurisdictions and/or the imposition of fines. The Company is unable to predict the impact these possible outcomes might have on its business.
In August 2015, French legislation known as the "Macron Law" became effective. Among other things, the Macron Law makes price parity agreements illegal, including the "narrow" price parity agreements agreed to by the French NCA in April 2015. Legislation in Austria prohibiting "narrow" price parity agreements (including the narrow parity clause) became effective on December 31, 2016. Similar legislation was approved by the Italian Senate on May 3, 2017, and will return to the Italian Chamber of Deputies for final approval. A motion to prohibit the narrow price parity clause is currently being discussed in the Swiss Parliament. It is not yet clear how the Macron Law and the Austrian legislation or the proposed Italian and Swiss legislation may affect the Company's business in the long term in France, Austria, Italy and Switzerland, respectively.
Competition-related investigations, legislation or issues could also give rise to private litigation. For example, Booking.com is involved in private litigation in Sweden related to its "narrow" price parity provisions. We are unable to predict how this litigation will be resolved, or whether it will impact Booking.com's business in Sweden.
Litigation Related to Travel Transaction Taxes
The Company and certain third-party OTCs are currently involved in approximately
thirty
lawsuits, including certified and putative class actions, brought by or against U.S. states, cities and counties over issues involving the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.) related to the priceline.com business. Generally, the complaints allege, among other things, that the OTCs violated each jurisdiction's respective relevant travel transaction tax ordinance with respect to the charge and remittance of amounts to cover taxes under each law. The Company believes that the laws at issue generally do not apply to the services it provides, namely the facilitation of travel reservations, and, therefore, that it does not owe the taxes that are claimed to be owed. However, the Company has been involved in this type of litigation for many years, and state and local jurisdictions where these issues have not been resolved could assert that the Company is subject to travel transaction taxes and could seek to collect such taxes, retroactively and/or prospectively. From time to time, the Company has found it expedient to settle claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid. The Company may also settle current or future travel transaction tax claims.
On August 5, 2016, the tax appeal court of the State of Hawaii ruled that online travel companies, including the Company, owe General Excise Tax (GET) on the gross amounts collected from consumers on rental car reservations. The tax appeal court rejected the online travel companies' arguments that GET applies only to amounts retained by online travel companies and does not include amounts paid to rental car company suppliers. The online travel companies argued that GET should not apply to gross amounts charged to consumers for rental car reservations pursuant to the 2015 decision of the Hawaii Supreme Court in Travelocity.com, L.P., et al. v. Director of Taxation that GET applies to amounts retained by online travel companies for hotel reservations and not for gross amounts charged to consumers. The Company intends to appeal the tax appeal court decision to the Hawaii appellate courts. In order to appeal the decision, the Company must pay
$13 million
, which is the amount of the judgment entered on April 25, 2017.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries and also could result in substantial liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorneys’ fees and costs. An adverse outcome in one or more of these unresolved proceedings could have an adverse effect on the Company's results of operations or cash flows in any given operating period. However, the Company believes that even if the Company were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated, given results to date it would not have a material impact on its liquidity or financial condition.
As a result of the travel transaction tax litigation generally and other attempts by U.S. jurisdictions to levy similar taxes, the Company has established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately
$27 million
at both
March 31, 2017
and
December 31, 2016
. The Company's legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
Patent Infringement
On February 9, 2015, International Business Machines Corporation ("IBM") filed a complaint in the U.S. District Court for the District of Delaware against The Priceline Group Inc. and its subsidiaries KAYAK Software Corporation, OpenTable, Inc. and priceline.com LLC (the "Subject Companies"). In the complaint, IBM alleges that the Subject Companies have infringed and continue to willfully infringe certain IBM patents that IBM claims relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and seeks unspecified damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. The Subject Companies believe the claims to be without merit and are contesting them. The Subject Companies asked the court to dismiss the case due to lack of patentable subject matter in the asserted patents, and on March 30, 2016 that motion was denied without prejudice to refiling later in the case. Concurrently with the litigation, the Subject Companies filed two Inter Partes Review ("IPR") petitions and four Covered Business Method ("CBM") petitions for the patents-in-suit with the U.S. Patent and Trademark Office (the "PTAB"). The
PTAB denied one of the IPR petitions and granted one of the IPR petitions, and denied the four CBM petitions. Expert discovery has concluded and the parties have fully briefed and held oral argument on summary judgment motions. There is a mediation in the case scheduled for May 23, 2017 before the Magistrate Judge. Trial in the District Court is scheduled for August 2017. The Company does not believe a loss contingency is probable and reasonably estimable and therefore has not recorded a liability for this matter.
French Tax Matter
French tax authorities conducted an audit of Booking.com of the years 2003 through 2012. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments for approximately
356 million
Euros, the majority of which would represent penalties and interest. The Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company intends to contest the assessments. If the Company is unable to resolve the matter with the French authorities, it would expect to challenge the assessments in the French courts. In order to contest the assessments in court, the Company may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by it that it owes the taxes. At the end of 2016, French authorities announced their intention to also audit the tax years 2013 to 2015, which could result in additional assessments.
Turkish Matter
From time to time the Company has been subject to legal proceedings and claims regarding whether it is subject to local registration requirements, such as requirements to register as a travel agent. In March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court unexpectedly ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents. Although Booking.com is appealing the order and believes it to be without basis, this order has had, and is likely to continue to have, a negative impact on the Company's growth and results of operations.
Other
The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts are not material to the Company's consolidated balance sheets and provisions recorded have not been material to the Company's consolidated results of operations or cash flows. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.
Contingent Consideration for Business Acquisitions
As of
March 31, 2017
and
December 31, 2016
, the Company recognized a liability of approximately
$9 million
for each period for estimated contingent payments, which was considered a "Level 3" fair value measurement (see Note 5). The estimated acquisition-date contingent liability is based upon the probability-weighted average payments for specific performance factors from the acquisition date through the performance period which ends at March 31, 2019. The range of undiscounted outcomes for the estimated contingent payments is approximately
$0
to
$90 million
.
Building Construction
In September 2016, the Company signed a turnkey agreement to construct an office building in the Netherlands, which will be the future headquarters of the Booking.com business. The turnkey agreement provided for payments by Booking.com of approximately
270 million
Euros and consists of
two
components, land use rights and the building to be constructed. Upon signing this agreement, Booking.com paid approximately
48 million
Euros to the developer, which included approximately
43 million
Euros for the acquired land use rights and approximately
5 million
Euros for the building construction. The land use rights are included in "Other assets" and the building construction-in-progress is included in "Property and equipment, net" in the Unaudited Consolidated Balance Sheets at
March 31, 2017
and
December 31, 2016
. The land use rights asset and required future lease payments to the Municipality in Amsterdam of approximately
60 million
Euros are recognized as rent expense on a
straight-line basis over the remaining
49
-year term of the lease and are recorded in general and administrative expense in the statements of operations. Booking.com expects to pay approximately
34 million
Euros related to the building construction later in 2017, with the remainder of payments being paid periodically beginning in 2018 until the expected completion of the building in late 2020. The Company expects all future payments to be made from its international cash.
Acquisition of Momondo Group
On February 7, 2017, the Company signed a definitive agreement to acquire the Momondo Group, which operates the travel meta-search websites Momondo and Cheapflights. The Company will use approximately
$550 million
of its international cash to fund this acquisition. The transaction is expected to close later in the year, subject to regulatory approval.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled
"
Special Note Regarding Forward-Looking Statements
"
at the end of this Item 2. As discussed in more detail in the Section entitled
"
Special Note Regarding Forward-Looking Statements,
"
this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in
"
Risk Factors
"
and elsewhere in this Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.
We evaluate certain operating and financial measures on both an as reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Overview
Our mission is to help people experience the world. We seek to achieve our mission by providing consumers, travel service providers and restaurants with worldwide leadership in online reservation and related services. We operate six primary, independently managed brands:
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Booking.com - the world’s leading brand for booking online accommodation reservations, based on room nights booked.
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priceline.com - a leading hotel, rental car, airline ticket and vacation package reservation service in the United States.
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KAYAK - a leading meta-search service allowing consumers to easily search and compare travel itineraries and prices, including airline ticket, accommodation and rental car reservation information.
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agoda.com - a leading accommodation reservation service catering primarily to consumers in the Asia-Pacific region.
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Rentalcars.com - a leading worldwide rental car reservation service.
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OpenTable - a leading provider of restaurant reservation and information services to consumers and restaurant reservation management services to restaurants.
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We refer to our company and all of our subsidiaries and brands collectively as "The Priceline Group," the "Company," "we," "our" or "us."
Our business is driven primarily by international results, which consist of the results of Booking.com, agoda.com and Rentalcars.com and the international businesses of KAYAK and OpenTable (in each case regardless of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant). During the year ended
December 31, 2016
, our international business (the substantial majority of which is generated by Booking.com) represented approximately 88% of our consolidated gross profit. A significant majority of our gross profit is earned in connection with facilitating accommodation reservations.
We derive substantially all of our gross profit from the following sources:
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Commissions earned from facilitating reservations of accommodations, rental cars, cruises and other travel services on an agency basis;
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Transaction gross profit on a merchant basis and customer processing fees from our accommodation, rental car, airline ticket and vacation package reservation services;
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Advertising revenues primarily earned by KAYAK from sending referrals to OTCs and travel service providers, as well as from advertising placements on KAYAK's websites and mobile apps;
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Reservation revenues paid by restaurants for diners seated through OpenTable's online reservation services, subscription fees for restaurant reservation management services provided by OpenTable and other OpenTable revenues; and
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Damage excess waiver fees, travel insurance fees and global distribution system ("GDS") reservation booking fees, in each case related to certain of our travel services.
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Our priceline.com brand offers merchant
Name Your Own Price
®
opaque travel services, which are recorded in revenue on a "gross" basis and have associated cost of revenue. All of our other services are generally recorded in revenue on a "net" basis and have no significant associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our revenues between
Name Your Own Price
®
travel services and other services. Gross profit reflects the commission or net margin earned for all of our services. Consequently, gross profit is an important measure to evaluate growth in our business because, in contrast to our revenues, it is not affected by the different methods of recording revenue and cost of revenue between our
Name Your Own Price
®
travel reservation services and our other services.
Trends
Over the last several years we have experienced strong growth in our accommodation reservation services. We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices and the growth of travel overall, including in higher growth emerging markets such as Asia-Pacific and South America. We also believe this growth is the result of the continued innovation and execution by our teams around the world to add accommodations to our travel reservation services, increase and improve content, build distribution and improve the consumer experience on our websites and mobile apps, as well as consistently and effectively marketing our brands through performance and brand advertising efforts. These year-over-year growth rates have generally decelerated. Given the size of our accommodation reservation business, we expect that our year-over-year growth rates will generally continue to decelerate, though the rate of deceleration may fluctuate and there may be periods of acceleration from time to time. For the year ended
December 31, 2016
, our accommodation room night reservation growth was 29%, as compared to 25% in 2015, 28% in 2014, 37% in 2013 and 40% in 2012.
Our international business represents the substantial majority of our financial results, and we expect our operating results and other financial metrics to continue to be largely driven by international performance. The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, internet use and e-commerce activity of international consumers have trailed that of consumers in the United States. However, international consumers are increasingly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States. We expect that over the long term, international online travel growth rates will follow a similar trend to that experienced in the United States. In addition, the base of hotel properties in Europe and Asia is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the leading online accommodation reservation service provider in the world as measured by room nights booked. We believe that the opportunity to continue to grow our business exists for the markets in which we operate.
Our growth has primarily been generated by our worldwide accommodation reservation service brand, Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large and growing number of directly bookable properties through Booking.com. Booking.com included over
1,191,000
properties on its website as of
March 31, 2017
, which included over
613,000
vacation rental properties (updated property counts are available on the Booking.com website), and compares to over
887,000
properties (including over
409,000
vacation rental properties) as of
March 31, 2016
.
We intend to continue to invest in adding accommodations available for reservation on our websites, including hotels, bed and breakfasts, hostels and vacation rentals. Vacation rentals generally consist of, among others, properties categorized as single-unit and multi-unit villas, homes, apartments, "aparthotels" (which are apartments with a front desk and cleaning service) and chalets and are generally self-catered (i.e., include a kitchen), directly bookable properties. Many of the newer accommodations we add to our travel reservation services, especially in highly penetrated markets, may have fewer rooms or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts). Because a vacation rental is typically either a single home or unit or a small collection of independent units, vacation rental accommodations represent more limited booking opportunities than non-vacation rental properties, which generally have more units to rent per property. Our vacation rental accommodations in general may be subject to increased seasonality due to local tourism seasons, weather or other factors. Our vacation rental accommodation business may also experience lower profit margins due to certain additional costs related to offering these accommodations on our websites. As we increase our vacation rental accommodation business, these different characteristics could negatively impact our profit margins; and, to the extent these properties represent an increasing percentage of the properties added to our websites, we expect that our gross bookings growth rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of vacation rental properties increases, we expect that the number of reservations per property will likely continue to decrease. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.
As part of our strategy to increase the number and variety of accommodations available on Booking.com, Booking.com is increasingly processing transactions on a merchant basis where it facilitates payments on behalf of customers. This allows Booking.com to process transactions for properties that do not accept credit cards and to increase its ability to offer flexible transaction terms to consumers, such as the form and timing of payment. Although we will incur additional payment processing costs and chargebacks related to these transactions, which are recorded as sales and marketing expenses in our statement of operations and which will negatively impact our operating margins, we believe that adding these types of properties and service offerings will benefit our customers and our gross bookings, room night and earnings growth rates.
Concerns persist about the outlook for the global economy in general, including uncertainty in the European Union and China. Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, unemployment rates and weakening currencies and concerns over government responses such as higher taxes and reduced government spending, could impair consumer spending and adversely affect travel demand. Further, uncertainty regarding the future of the European Union following the United Kingdom’s vote to leave ("Brexit"), as well as concerns regarding certain E.U. members with sovereign debt default risks could also negatively affect consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates, increased cancellation rates and weaker trends in hotel average daily rates ("ADRs") across many regions of the world, particularly in those countries that appear to be most affected by economic uncertainties, which we believe are due at least in part to macro-economic conditions and concerns. For more detail, see Part II Item 1A Risk Factors - "
Declines or disruptions in the travel industry could adversely affect our business and financial performance."
These and other macro-economic uncertainties, such as sovereign default risk becoming more widespread, oil price volatility, geopolitical tensions and differing central bank monetary policies, have led to significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in currency exchange rates, stock markets and oil prices can also impact consumer travel behavior.
As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. Throughout 2015, the U.S. Dollar strengthened significantly year-over-year relative to substantially all currencies in which we transact, most notably the Euro, Brazilian Real, British Pound Sterling, Russian Ruble and Australian Dollar. In 2016, the U.S. Dollar continued to be stronger year-over-year relative to the British Pound Sterling, Russian Ruble and many other major currencies in which we transact. Since the "Brexit" referendum in the United Kingdom in June 2016, the U.S. Dollar has strengthened significantly against the British Pound Sterling. As a result of these currency exchange rate changes, our foreign currency denominated net assets, gross bookings, gross profit, operating expenses and net income have been negatively impacted as expressed in U.S. Dollars in 2016 and for the three months ended March 31, 2017, although to a much lesser extent than in 2015. For example, gross profit from our international operations grew
17.2%
for the three months ended
March 31, 2017
compared to the three months ended
March 31, 2016
, but, without the negative impact of changes in currency exchange rates, grew year-over-year on a constant-currency basis by approximately
19%
. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins are not significantly impacted by currency fluctuations. The aggregate principal value of our Euro-denominated long-term debt, and accrued interest thereon, provide a natural hedge against the impact of currency exchange rate fluctuations on the net assets of certain of our Euro functional currency subsidiaries (see Note 7 to the Unaudited Consolidated Financial Statements). For more information, see Part II Item 1A Risk Factors - "
We are exposed to fluctuations in currency exchange rates."
We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on the translation of our consolidated operating results into U.S. Dollars. However, such derivative instruments are short-term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings, revenues or gross profit (see Note
5
to the Unaudited Consolidated Financial Statements for additional information on our derivative contracts).
We compete globally with both online and traditional providers of travel and restaurant reservation and related services. The markets for the services we offer are intensely competitive and current and new competitors can launch new services at a relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have access to significantly greater and more diversified resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market, including by establishing a flight meta-search product ("Google Flights") and a hotel meta-search business ("Hotel Ads") that are growing rapidly, as well as its "Book on Google" reservation functionality. Our markets are also subject to rapidly changing conditions, including technological
developments, consumer behavior changes, regulatory changes and travel service provider consolidation. We expect these trends to continue. For example, we have experienced a significant shift of both direct and indirect business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. In addition, the gross profit earned on a mobile transaction may be less than a typical desktop transaction due to different consumer purchasing patterns. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay and are not made as far in advance. For more detail regarding the competitive trends and risks we face, see Part I Item 1 Business - "Competition," Part II Item 1A Risk Factors - "
Intense competition could reduce our market share and harm our financial performance.
" and "
Consumer adoption and use of mobile devices creates new challenges and may enable device companies such as Apple to compete directly with us.
" and "
We may not be able to keep up with rapid technological changes."
We have observed an increase in promotional pricing to closed user groups (such as loyalty program participants or consumers with registered accounts), including through mobile apps. For example, Marriott International, Hilton, Hyatt Hotels, InterContinental Hotel Group and Choice Hotels International have launched additional initiatives to encourage consumers to book accommodations directly through their websites, such as increased discounting and incentives.
In addition to providing retail travel reservation services, our priceline.com brand is a leading provider of discounted opaque travel reservation services in the United States through its
Express Deals
®
and
Name Your Own Price
®
offerings. These discounted services are referred to as "opaque" because certain elements of the reservation, including the name of the travel service provider, are not made known to the traveler until after the reservation is made. In general, we expect that over time our opaque services will continue to decrease in relative importance to our overall business due, we believe, to a variety of factors, including the growth rates of our retail businesses, competition, relative complexity, travel restrictions often required by the travel service provider, difficulty in offering these services on mobile devices, increased discounts available to consumers through closed user groups, and limited availability of discounted travel reservations from travel service providers, particularly during periods of high consumer demand.
We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Both our performance and brand advertising expenses have increased significantly in recent years, a trend we expect to continue. For the
three
months ended
March 31, 2017
and
2016
, our total performance advertising expense was approximately
$981 million
and
$780 million
, respectively, primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites. We also invested approximately
$73 million
and
$70 million
in brand advertising for the
three
months ended
March 31, 2017
and
2016
, respectively, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook) and online display advertising. We intend to continue a strategy of promoting brand awareness through both online and offline advertising efforts, including by expanding brand campaigns into additional markets. We have observed increased brand advertising by OTCs, meta-search services and travel service providers, particularly in North America and Europe, which may make our brand advertising efforts more expensive and less effective.
Performance advertising efficiency, expressed as performance advertising expense as a percentage of gross profit, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our websites or mobile apps for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs per click and reduce our performance advertising efficiency. We have also experienced increasing cancellation rates, which we expect to continue and which negatively affects our advertising efficiency and results of operations. Changes by Google in how it presents travel search results, including by placing its own offerings at or near the top of search results, or the manner in which it conducts the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites. We have observed a long-term trend of decreasing performance advertising returns on investment ("ROIs"), a trend we expect to continue, though the rate of decrease may fluctuate and there may be periods of stable or increasing ROIs from time to time. See Part II Item 1A Risk Factors
- "
We rely on performance and brand advertising channels to generate a significant amount of traffic to our websites and grow our business.
" and "
Our business could be negatively affected by changes in internet search engine algorithms and dynamics or traffic-generating arrangements.
"
The national competition authorities ("NCAs") of many governments have conducted or are conducting investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Some countries have adopted or proposed legislation that could also affect business practices within the online travel industry. For example, in August 2015, France adopted legislation known as the "Macron Law" making price parity agreements illegal, including those that had been approved by the French NCA, and similar legislation may be enacted in other countries. For more information on these investigations and their potential effects on our business, see Note
11
to our Unaudited
Consolidated Financial Statements and Part II Item 1A Risk Factors - "
As the size of our business grows, we may become increasingly subject to the scrutiny of anti-trust and competition regulators.
" In addition to the price parity investigations, from time to time NCAs, other governmental agencies, trade associations and private parties take legal actions, including commencing legal proceedings, that may affect our operations. For example, in March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court unexpectedly ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents. Although Booking.com is appealing the order and believes it to be without basis, this order has had, and is likely to continue to have, a negative impact on our growth and results of operations.
Seasonality
A meaningful amount of our gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, we generally do not recognize revenue from these bookings until the travel occurs, which can be in a quarter other than when the reservation is booked. In contrast, we expense the substantial majority of our advertising activities as the expense is incurred, which, in the case of performance advertising in particular, is typically in the quarter in which associated reservations are booked. As a result of this potential timing difference between when we record advertising expense and when we recognize associated revenue, we have historically experienced our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of accommodation checkouts for the year for our European and North American businesses. The first quarter of the year is typically our lowest level of profitability and may experience additional volatility in earnings growth rates due to these seasonal timing factors. For our Asia-Pacific business, we experience the highest levels of accommodation bookings in the third and fourth quarters of the year, and the highest levels of travel consumption in the fourth quarter. As the relative growth rates for these businesses fluctuate, the quarterly distribution of our operating results may vary.
We have experienced and expect to continue to experience an expansion of the booking window (the average time between the making of a travel reservation and the travel), which impacts the relationship between our gross bookings (recognized at the time of booking) and our revenue and gross profit (recognized at the time of checkout). If this trend continues, it may cause additional differences between our gross bookings growth rates and gross profit growth rates.
In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2017, our first quarter year-over-year growth rates in revenue, gross profit, operating income and operating margins were adversely impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. Conversely, our second quarter 2017 year-over-year growth rates in revenue, gross profit, operating income and operating margins will be positively impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. The timing of other holidays such as Chinese New Year, Carnival and Ramadan can also impact our quarterly year-over-year growth rates.
The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable advertising expense. In addition, gross profit growth is typically less impacted by decelerating gross bookings growth in the near term due to the benefit of revenue related to reservations booked in previous quarters. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable advertising expense. In addition, gross profit growth is typically less impacted by accelerating gross bookings growth in the near term as a portion of the revenue recognized from such gross bookings will occur in future quarters.
Other Factors
We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services. Factors beyond our control, such as worldwide recession, oil prices, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika, Influenza H1N1, avian bird flu, SARS and MERS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities or travel-related accidents, can disrupt travel or otherwise result in declines in travel demand. Because these events or concerns are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers, and therefore demand for our services, which can adversely affect our business and results of operations. See Part II Item 1A Risk Factors - "
Declines or disruptions in the travel industry could adversely affect our business and financial performance.
"
We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. We have
experienced pressure on operating margins as we prioritize initiatives that drive growth. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. Our goal is to grow gross profit and achieve healthy operating margins in an effort to maintain profitability. The uncertain and highly competitive environment in which we operate makes the prediction of future results of operations difficult, and accordingly, we may not be able to sustain gross profit growth and profitability.
Results of Operations
Three Months Ended
March 31, 2017
compared to the Three Months Ended
March 31, 2016
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked through our OTC brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands and therefore search queries through KAYAK and restaurant reservations through OpenTable do not contribute to our gross bookings.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the
three
months ended
March 31, 2017
and
2016
were as follows (numbers may not total due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Agency
|
|
$
|
18,140
|
|
|
$
|
14,534
|
|
|
24.8
|
%
|
Merchant
|
|
2,546
|
|
|
2,119
|
|
|
20.2
|
%
|
Total
|
|
$
|
20,687
|
|
|
$
|
16,653
|
|
|
24.2
|
%
|
Gross bookings increased by
24.2%
for the
three
months ended
March 31, 2017
compared to the three months ended
March 31, 2016
(growth on a constant-currency basis was approximately
27%
), principally due to growth of
27.4%
in accommodation room night reservations, approximately 1% growth on a constant-currency basis in ADRs and growth of
15.4%
in rental car day reservations, partially offset by the impact of foreign exchange rate fluctuations and a decrease in airline ticket reservations and airfares. We believe that unit growth rates and total gross bookings and gross profit growth on a constant-currency basis, each of which exclude the impact of foreign exchange rate fluctuations, are important measures to understand the fundamental performance of the business.
Agency gross bookings are derived from travel-related transactions where we do not facilitate payments for the travel services provided. Agency gross bookings increased by
24.8%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to growth in gross bookings from Booking.com agency retail accommodation room night reservations.
Merchant gross bookings are derived from services where we facilitate payments for the travel services provided. Merchant gross bookings increased by
20.2%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to growth in gross bookings from the merchant accommodation reservation services for agoda.com and Booking.com, the merchant rental car reservation service for Rentalcars.com and the merchant airline ticket and accommodation reservation services for priceline.com.
Accommodation room nights, rental car days and airline tickets reserved through our services for the
three
months ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Room Nights
|
|
173.9
|
|
136.5
|
|
27.4
|
%
|
Rental Car Days
|
|
18.6
|
|
16.2
|
|
15.4
|
%
|
Airline Tickets
|
|
1.8
|
|
1.8
|
|
(2.1
|
)%
|
Accommodation room night reservations increased by
27.4%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to strong execution by our brand teams to add accommodations to our travel reservation services, advertise our brands to consumers and provide a continuously improving experience for customers on our desktop and mobile platforms.
Rental car day reservations increased by
15.4%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due to an increase in rental car day reservations for Rentalcars.com and priceline.com.
Airline ticket reservations decreased by
2.1%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due to a decline in priceline.com's retail airline ticket reservations and the discontinuation on September 1, 2016 of priceline.com’s
Name Your Own Price
®
airline ticket reservation offering, partially offset by an increase in priceline.com's
Express Deals
®
airline ticket reservations.
Revenues
We classify our revenue into three categories:
|
|
•
|
Agency revenues are derived from travel-related transactions where we do not facilitate payments for the travel services provided. Agency revenues consist primarily of travel reservation commissions, as well as certain GDS reservation booking fees and travel insurance fees, and are reported at the net amounts received, without any associated cost of revenue. Substantially all of the revenue for Booking.com is agency revenue comprised of accommodation reservation commissions.
|
|
|
•
|
Merchant revenues are derived from services where we facilitate payments for the travel services provided. Merchant revenues include (1) transaction net revenues (i.e., the amount charged to a customer, less the amount charged to us by travel service providers) and travel reservation commissions in connection with (a) the accommodation reservations provided through our merchant retail accommodation reservation services at agoda.com, Booking.com and priceline.com and (b) the reservations provided through our merchant rental car service at Rentalcars.com and priceline.com’s
Express Deals
®
reservation services; (2) transaction revenues representing the price of
Name Your Own Price
®
reservations charged to a customer (with a corresponding travel service provider cost recorded in cost of revenues); (3) ancillary fees, including damage excess waiver and travel insurance fees and certain GDS reservation booking fees; and (4) customer processing fees charged in connection with (a) priceline.com's opaque reservation services and (b) the merchant retail accommodation reservation services at priceline.com and agoda.com.
|
|
|
•
|
Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees earned by OpenTable for restaurant reservation management services; (3) revenues earned by priceline.com for advertising on its websites; and (4) revenues generated by Booking.com's BookingSuite branded accommodation marketing and business analytics services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Agency Revenues
|
|
$
|
1,785,313
|
|
|
$
|
1,500,029
|
|
|
19.0
|
%
|
Merchant Revenues
|
|
442,045
|
|
|
470,032
|
|
|
(6.0
|
)%
|
Advertising and Other Revenues
|
|
192,046
|
|
|
178,058
|
|
|
7.9
|
%
|
Total Revenues
|
|
$
|
2,419,404
|
|
|
$
|
2,148,119
|
|
|
12.6
|
%
|
Agency Revenues
Agency revenues increased by
19.0%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily as a result of growth in agency accommodation room night reservations at Booking.com.
Merchant Revenues
Merchant revenues decreased by
6.0%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to decreases in revenues from priceline.com's
Name Your Own Price
®
reservation services, partially offset by increases in our merchant price-disclosed airline ticket, rental car and accommodation reservation services. On September 1, 2016, priceline.com's
Name Your Own Price
®
airline ticket reservation offering was discontinued. Our priceline.com
Name Your Own Price
®
reservation services, which declined year-over-year, are recorded "gross" in revenue with a corresponding travel service provider cost recorded in cost of revenues. Our other merchant revenues, which in total grew year-over-year, are recorded in revenue "net" of travel service provider costs. As a result, changes in
Name Your Own Price
®
reservation revenue disproportionately affect merchant revenues as compared to our other merchant revenues.
Advertising and Other Revenues
Advertising and other revenues during the
three
months ended
March 31, 2017
consisted primarily of advertising revenues, restaurant reservation revenues and subscription revenues for restaurant reservation management services. Advertising and other revenues increased by
7.9%
for the three months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to growth in our KAYAK business and increased diner reservation volumes at OpenTable.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Cost of Revenues
|
|
$
|
85,169
|
|
|
$
|
128,669
|
|
|
(33.8
|
)%
|
For the
three
months ended
March 31, 2017
, cost of revenues consisted primarily of: (1) the cost paid to travel service providers for priceline.com's
Name Your Own Price
®
and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by KAYAK and priceline.com to return travel itinerary information for consumer search queries. Cost of revenues decreased by
33.8%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to a decrease in priceline.com's
Name Your Own Price
®
reservation services.
Agency revenues have no cost of revenue.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Gross Profit
|
|
$
|
2,334,235
|
|
|
$
|
2,019,450
|
|
|
15.6
|
%
|
Gross Margin
|
|
96.5
|
%
|
|
94.0
|
%
|
|
|
Total gross profit increased by
15.6%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
(growth on a constant-currency basis was approximately
17%
), primarily as a result of the increased revenue discussed above. Total gross margin (gross profit as a percentage of total revenue) increased during the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, because our revenues are disproportionately affected by priceline.com's
Name Your Own Price
®
reservation services.
Name Your Own Price
®
reservation services are recorded "gross" in revenue with a corresponding travel service provider cost recorded in cost of revenues, and in the
three
months ended
March 31, 2017
, these revenues represented a smaller percentage of total revenues than in the three months ended
March 31, 2016
. Our price-disclosed reservation services, which are recorded in revenue "net" of travel service provider costs, have been growing and priceline.com's
Name Your Own Price
®
reservation services have been declining. As a result, we believe that gross profit is an important measure for evaluating growth in our business.
Gross profit as a percentage of gross bookings was
11.3%
for the
three
months ended
March 31, 2017
as compared to
12.1%
for the three months ended
March 31, 2016
. The decrease is due to the timing of booking versus travel, including the impact of Easter falling in the second quarter of 2017 instead of the first quarter, as it did in 2016, and an expansion of the
booking window (the average time between the making of a travel reservation and the travel). Other contributing factors to the variance are business mix impacts and the use of discounted closed user group rates.
Our international operations accounted for approximately
$2.0 billion
of our gross profit for the
three
months ended
March 31, 2017
, compared to $1.7 billion for the three months ended
March 31, 2016
. Gross profit attributable to our international operations increased by
17.2%
for the
three
months ended
March 31, 2017
compared to the three months ended
March 31, 2016
(growth on a constant-currency basis was approximately
19%
). Gross profit attributable to our U.S. businesses increased by
6.3%
for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due primarily to growth in gross profit for the U.S. businesses of KAYAK and OpenTable.
Our first quarter 2017 year-over-year growth rates in revenue, gross profit, operating income and operating margins were adversely impacted by Easter falling in the second quarter of 2017 instead of the first quarter, as it did in 2016, which will result in Easter-related checkouts, and therefore recognition of the related revenue and gross profit, generally falling in the second quarter of 2017.
Operating Expenses
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Performance Advertising
|
|
$
|
980,773
|
|
|
$
|
779,909
|
|
|
25.8
|
%
|
% of Total Gross Profit
|
|
42.0
|
%
|
|
38.6
|
%
|
|
|
Brand Advertising
|
|
$
|
73,012
|
|
|
$
|
69,845
|
|
|
4.5
|
%
|
% of Total Gross Profit
|
|
3.1
|
%
|
|
3.5
|
%
|
|
|
Performance advertising expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements. For the
three
months ended
March 31, 2017
, performance advertising expenses increased compared to the three months ended
March 31, 2016
, primarily to generate increased gross bookings and gross profit. Performance advertising as a percentage of gross profit for the
three
months ended
March 31, 2017
increased compared to the three months ended
March 31, 2016
due to timing of booking versus travel, including the impact of Easter falling in the second quarter instead of the first quarter, as it did in 2016, and an expansion in the booking window, as well as growth of paid traffic channels. We recognize the substantial majority of our performance advertising expenses as they are incurred, which is typically in the quarter in which the associated reservations are booked. In contrast, we generally do not recognize revenue from these reservations until the travel occurs, which can be in a quarter other than when the reservations are booked.
Brand advertising expenses are primarily related to our Booking.com, KAYAK, priceline.com, Rentalcars.com and agoda.com businesses and consist mainly of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising. For the
three
months ended
March 31, 2017
, brand advertising expenses increased
by
4.5%
compared to the three months ended
March 31, 2016
, primarily due to increased television and online video advertising, including associated production costs, at Booking.com and KAYAK, partially offset by decreased brand advertising at priceline.com and agoda.com due in part to timing of spend.
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Sales and Marketing
|
|
$
|
114,036
|
|
|
$
|
92,323
|
|
|
23.5
|
%
|
% of Total Gross Profit
|
|
4.9
|
%
|
|
4.6
|
%
|
|
|
Sales and marketing expenses consist primarily of: (1) credit card and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) provisions for customer chargebacks associated with merchant transactions; (4) customer relations costs; and (5) provisions for
bad debt, primarily related to agency accommodation commission receivables. For the
three
months ended
March 31, 2017
, sales and marketing expenses, which are substantially variable in nature, increased compared to the three months ended
March 31, 2016
due primarily to increased transaction volumes as well as higher provisions for customer chargebacks associated with merchant transactions and bad debt expense related to accommodation commission receivables.
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Personnel
|
|
$
|
351,030
|
|
|
$
|
308,351
|
|
|
13.8
|
%
|
% of Total Gross Profit
|
|
15.0
|
%
|
|
15.3
|
%
|
|
|
Personnel expenses consist of compensation to our personnel, including salaries, stock-based compensation, bonuses, payroll taxes, and employee health and other benefits. Personnel expenses increased during the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due primarily to increased headcount to support the growth of our businesses, partially offset by a reduction in stock-based compensation expense. Stock-based compensation for the three months ended
March 31, 2017
and
2016
was
$58.9 million
and
$66.0 million
, respectively, and was impacted by incremental expense in 2016 related to terminations in that period and performance factor adjustments in 2017 compared to 2016.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
General and Administrative
|
|
$
|
135,547
|
|
|
$
|
113,045
|
|
|
19.9
|
%
|
% of Total Gross Profit
|
|
5.8
|
%
|
|
5.6
|
%
|
|
|
|
General and administrative expenses consist primarily of: (1) personnel-related expenses such as travel, recruiting and training expenses; (2) occupancy and office expenses; and (3) fees for outside professionals, including litigation expenses. General and administrative expenses increased during the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due primarily to higher personnel-related, occupancy and office expenses associated with increased headcount to support the expansion of our international businesses and higher fees for outside professionals, including professional fees related to our pending acquisition of the Momondo Group.
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Information Technology
|
|
$
|
39,945
|
|
|
$
|
32,788
|
|
|
21.8
|
%
|
% of Total Gross Profit
|
|
1.7
|
%
|
|
1.6
|
%
|
|
|
|
Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expenses increased during the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, due primarily to growth in our worldwide operations.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Depreciation and Amortization
|
|
$
|
83,430
|
|
|
$
|
72,871
|
|
|
14.5
|
%
|
% of Total Gross Profit
|
|
3.6
|
%
|
|
3.6
|
%
|
|
|
|
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation of computer equipment; (3) depreciation of internally developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses increased during the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily as a result of increased depreciation expenses due to capital expenditures for additional data center capacity and office build-outs to support growth and geographic expansion, as well as increased capitalized software development costs.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Interest Income
|
|
$
|
31,992
|
|
|
$
|
20,347
|
|
|
57.2
|
%
|
Interest Expense
|
|
(55,717
|
)
|
|
(46,894
|
)
|
|
18.8
|
%
|
Foreign Currency Transactions and Other
|
|
(5,127
|
)
|
|
(12,928
|
)
|
|
(60.3
|
)%
|
Impairment of Cost-method Investment
|
|
—
|
|
|
(50,350
|
)
|
|
N/A
|
|
Total
|
|
$
|
(28,852
|
)
|
|
$
|
(89,825
|
)
|
|
(67.9
|
)%
|
For the
three
months ended
March 31, 2017
, interest income on cash and marketable securities increased, compared to the
three
months ended
March 31, 2016
, primarily due to an increase in the average invested balance and higher yields. Interest expense increased for the
three
months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily due to interest expense attributable to our Senior Notes issued in May 2016. See Note
7
to our Unaudited Consolidated Financial Statements.
"Foreign currency transactions and other" includes foreign exchange gains or losses on derivative contracts, foreign exchange transaction gains or losses, including costs related to foreign exchange transactions, net realized gains or losses on investments and other income or expense.
Derivative contracts that hedge our exposure to the impact of currency fluctuations on the translation of our international operating results into U.S. Dollars upon consolidation resulted in foreign exchange losses of
$1.1 million
and
$3.6 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
Foreign exchange transaction losses, including costs related to foreign exchange transactions, resulted in losses of
$6.5 million
and
$6.3 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
We recognized
$0.2 million
of net realized gains for the
three
months ended
March 31, 2017
, compared to
$2.9 million
of net realized losses for the three months ended
March 31, 2016
related to investments. In the three months ended
March 31, 2017
, we recognized
$1.0 million
of income associated with the forgiveness of a loan (see Note 7 to the Unaudited Consolidated Financial Statements) and a
$1.4 million
gain on an embedded derivative associated with an investment in a Ctrip convertible note (see Note 5 to the Unaudited Consolidated Financial Statements).
During the three months ended
March 31, 2016
, we recognized an impairment of approximately
$50 million
, which was not tax deductible, related to a cost-method investment (see Note 4 to the Unaudited Consolidated Financial Statements).
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2017
|
|
2016
|
|
Change
|
Income Tax Expense
|
|
$
|
71,987
|
|
|
$
|
86,069
|
|
|
(16.4
|
)%
|
Our effective tax rates for the
three
months ended
March 31, 2017
and
2016
were
13.6%
and
18.7%
, respectively. Our 2017 effective tax rate differs from the U.S. federal statutory tax rate of 35%, primarily as a result of lower international tax rates and current year excess tax benefits in an amount of
$9.9 million
recognized from vesting of equity awards pursuant to the adoption of an accounting update effective January 2017 (see Note 1 to the Unaudited Consolidated Financial Statements), partially offset by certain non-deductible expenses. Our 2016 effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily as a result of lower international tax rates, partially offset by the tax rate impact of a non-deductible impairment of a cost-method investment of approximately $50 million in the first quarter of 2016 (see Note 4 to the Unaudited Consolidated Financial Statements).
Our effective tax rate was lower for the three months ended
March 31, 2017
, compared to the three months ended
March 31, 2016
, primarily as a result of an increased proportion of our income being taxed at lower international tax rates due to the growth of our international businesses and current year excess tax benefits recognized from vesting of equity awards. In addition, the non-deductible impairment of a cost-method investment was recognized in the first quarter of 2016, which contributed to a higher effective tax rate compared to the three months ended March 31, 2017.
A portion of Booking.com's earnings during the three months ended
March 31, 2017
and
2016
qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit, whether due to a change in tax law or a determination by the Dutch government that Booking.com's activities are not "innovative" or for any other reason, would substantially increase our effective tax rate and adversely impact our results of operations. See Part II Item 1A Risk Factors - "
We may not be able to maintain our 'Innovation Box Tax' benefit.
"
Liquidity and Capital Resources
As of
March 31, 2017
, we had
$15.5 billion
in cash, cash equivalents, short-term investments and long-term investments. Approximately
$13.3 billion
is held by our international subsidiaries and is denominated primarily in U.S. Dollars and Euros and, to a lesser extent, British Pounds Sterling and other currencies. Cash equivalents, short-term investments and long-term investments are comprised of U.S. and international corporate bonds, U.S. and international government securities, high-grade commercial paper, U.S. government agency securities, convertible debt securities and American Depositary Shares ("ADSs") of Ctrip, money market funds and time deposits (see Note 5 to the Unaudited Consolidated Financial Statements).
We intend to indefinitely reinvest the unremitted earnings of our international subsidiaries outside of the United States. At December 31, 2016, we had approximately $13.0 billion cumulative unremitted international earnings. We estimated that the deferred tax liability we would record if such earnings were not indefinitely reinvested internationally was approximately $2.3 billion as of December 31, 2016. If we repatriate cash to the United States, we would utilize our net operating loss carryforwards and beyond that amount incur additional tax payments in the United States.
In March 2017, we issued Senior Notes due March 10, 2022, with an interest rate of
0.8%
(the "March 2022 Notes") for an aggregate principal amount of
1.0 billion
Euros. Interest on the March 2022 Notes is payable annually on March 10, beginning March 10, 2018. The net proceeds of these notes may be used for general corporate purposes, which may include share repurchases, repayment of debt and acquisitions. See Note 7 to the Unaudited Consolidated Financial Statements for further details on the March 2022 Notes.
In June 2015, we entered into a
$2.0 billion
five-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at our option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
. The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes, which could include acquisitions, share repurchases or debt repayments. As of March 31, 2017, there were no borrowings outstanding and approximately
$3.9 million
of letters of credit issued under the facility.
Our Convertible Senior Notes due March 15, 2018, with an interest rate of 1.0% (the "2018 Notes"), are convertible at the option of the holders as of
March 31, 2017
, and, accordingly, we reported the carrying value of the 2018 Notes as a current liability in our Unaudited Consolidated Balance Sheet as of
March 31, 2017
. We have received notices for conversion of $40.8 million aggregate principal amount of our 2018 Notes through May 8, 2017. If note holders exercise their option to convert, we would be required to repay the principal amount of the 2018 Notes in cash and may deliver shares of common stock or cash, at our option, to satisfy the conversion value in excess of the principal amount.
In September 2016, we signed a turnkey agreement to construct an office building in the Netherlands for the future headquarters of Booking.com for approximately
270 million
Euros. Upon signing the agreement, we paid approximately
48 million
Euros to the developer, principally related to acquired land use rights, and we expect to pay approximately
34 million
Euros related to building construction later in 2017, with the remainder of payments being paid periodically beginning in 2018 until the expected completion of the building in late 2020. We will also incur capital expenditures to fit out and furnish the office space. We expect all future payments to be made from international cash. See Note 11 to the Unaudited Consolidated Financial Statements.
In the first quarter of 2017, the Board of Directors authorized a program to repurchase up to
$2.0 billion
of our common stock, in addition to amounts previously authorized. During the three months ended
March 31, 2017
, we repurchased
124,915
shares of our common stock for an aggregate cost of
$212.3 million
. As of
March 31, 2017
, we had a remaining aggregate amount of
$4.0 billion
authorized by our Board of Directors to purchase our common stock. We may from time to time make additional repurchases of our common stock, depending on prevailing market conditions, alternate uses of capital and other factors. We expect to use cash on hand and cash generated by our operations in the United States to fund our share repurchases. We may also utilize our revolving credit facility or raise funds through the debt capital markets to fund share repurchases.
On February 7, 2017, we signed a definitive agreement to acquire the Momondo Group. We will use approximately $550 million of our international cash to fund this acquisition. The transaction is expected to close later in the year, subject to regulatory approval.
Our merchant transactions are structured such that we collect cash up front from consumers and then we pay most of our travel service providers at a subsequent date. We therefore tend to experience significant seasonal swings in accounts receivable, deferred merchant bookings and travel service provider payables depending on the level of our merchant transactions during the last few weeks of every quarter.
Net cash provided by operating activities for the
three
months ended
March 31, 2017
was
$380.6 million
, resulting from net income of
$455.6 million
and a favorable impact of
$151.3 million
for non-cash items, partially offset by net unfavorable changes in working capital and other assets and liabilities of
$226.3 million
. For the
three
months ended
March 31, 2017
, prepaid expenses and other current assets increased by
$443.6 million
, primarily related to prepayments of Netherlands income taxes of $500.1 million to earn prepayment discounts. For the
three
months ended
March 31, 2017
, accounts receivable increased
$78.4 million
, primarily related to increases in business volumes. For the three months ended
March 31, 2017
, accounts payable, accrued expenses and other current liabilities increased by
$305.8 million
, primarily related to increases in business volumes partially offset by a reduction in accrued compensation liabilities, as a result of the 2016 bonuses being paid in the first quarter of 2017. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, amortization of debt discount on our convertible notes and deferred income taxes.
Net cash provided by operating activities for the
three
months ended March 31, 2016 was
$344.8 million
, resulting from net income of
$374.4 million
and a favorable impact of
$207.3 million
for non-cash items, partially offset by net unfavorable changes in working capital and other assets and liabilities of
$236.9 million
. For the
three
months ended March 31, 2016, prepaid expenses and other current assets increased by $340.5 million, primarily related to prepayments of 2016 income taxes in the first quarter of $431.3 million to earn prepayment discounts, principally by Booking.com. For the
three
months ended March 31, 2016, accounts receivable increased $191.7 million, primarily related to increases in business volumes. For the three months ended March 31, 2016, accounts payable, accrued expenses and other current liabilities increased by $294.3 million, primarily related to increases in business volumes partially offset by a reduction in accrued compensation liabilities, as a result of the 2015 bonuses being paid in the first quarter of 2016. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, impairment of a cost-method investment, amortization of debt discount on our convertible notes, deferred income taxes and excess tax benefits on stock-based awards and other equity deductions.
Net cash used in investing activities was
$892.8 million
for the
three
months ended
March 31, 2017
. Investing activities for the
three
months ended
March 31, 2017
were principally affected by net purchases of investments of
$822.2 million
. Net cash provided by investing activities was $147.3 million for the three months ended March 31, 2016. Investing activities for the three months ended March 31, 2016 were principally affected by net proceeds from sales of investments of $201.3 million. Cash invested in the purchase of property and equipment was
$70.6 million
and
$53.3 million
in the
three
months ended
March 31, 2017
and
2016
, respectively.
Net cash provided by financing activities was
$843.4 million
for the
three
months ended
March 31, 2017
. Net cash provided by financing activities for the
three
months ended
March 31, 2017
primarily consisted of total proceeds of
$1.1 billion
from the issuance of Senior Notes and the proceeds from the exercise of employee stock options of
$1.5 million
, partially offset by payments for repurchase of common stock of
$209.8 million
. Net cash used in
financing activities was
$134.4 million
for the
three
months ended
March 31, 2016
. Net cash used in financing activities for the
three
months ended
March 31, 2016
primarily consisted of payments for repurchase of common stock of
$241.7 million
, partially offset by proceeds from short-term borrowing of
$100.0 million
, the proceeds from the exercise of employee stock options of
$4.8 million
and proceeds from the issuance of other long-term debt of
$2.5 million
.
Contingencies
French tax authorities conducted an audit of the years 2003 through 2012 to determine whether Booking.com is in compliance with its tax obligations in France. Booking.com received formal assessments in December 2015 in which the French tax authorities claim that Booking.com has a permanent establishment in France and seek to recover unpaid income taxes and value-added taxes of approximately
356 million
Euros, the majority of which would represent penalties and interest. We believe that Booking.com has been, and continues to be, in compliance with French tax law and we intend to contest the assessments. If we are unable to resolve the matter with the French authorities, we would expect to challenge the assessments in the French courts. In order to contest the assessments in court, we may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by us that we owe the
taxes. At the end of 2016, French authorities announced their intention to also audit the tax years 2013 to 2015, which could result in additional assessments. See Part II Item IA Risk Factors - "
We may have exposure to additional tax liabilities.
"
A number of U.S. jurisdictions have initiated lawsuits against online travel companies, including us, related to, among other things, the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.). In addition, a number of U.S. states, counties and municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of travel transaction taxes. For additional information, see Note 11 to our Unaudited Consolidated Financial Statements and Part II Item 1A Risk Factors
- "
Adverse application of U.S. state and local tax laws could have an adverse effect on our business and results of operations.
" in this Quarterly Report.
As a result of this litigation and other attempts by U.S. jurisdictions to levy similar taxes, we have established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately
$27 million
at both
March 31, 2017
and
December 31, 2016
. The accrual is based on our estimate of the probable cost of resolving these issues. Our legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made. If we were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated given results to date, because of our available cash we believe that it would not have a material impact on our liquidity.
Off-Balance Sheet Arrangements
As of
March 31, 2017
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above and the Risk Factors contained in Part II Item 1A hereof, contain forward-looking statements. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results could differ materially from those described in the forward-looking statements.
Expressions of future goals and expectations and similar expressions, including "may," "will," "should," "could," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended
December 31, 2016
, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.