Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
Management of Booking Holdings Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable. In the third quarter of 2019, the Company reorganized its operating segments from six to four operating segments by combining Booking.com with Rentalcars.com and KAYAK with OpenTable, reflecting changes to the management structure. Considering the similarity in economic characteristics, other qualitative factors and the objectives and principles of ASC 280, Segment Reporting, the operating segments continue to be aggregated into one reportable segment. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's subsidiaries is generally the respective local currency. For international operations, 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 monthly average exchange rates applicable for the period. Translation gains and losses are included as a component of "Accumulated other comprehensive loss" in the accompanying Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for any subsequent quarter or the full year.
Unaudited Consolidated Statements of Comprehensive Income
Subsequent to the issuance of the Company’s unaudited interim consolidated financial statements for the three and nine months ended September 30, 2018, the Company identified an error in the previously issued Unaudited Consolidated Statements of Comprehensive Income associated with the Company’s adoption of a new accounting update during the first quarter of 2018. This new accounting update amended the guidance on the recognition and measurement of financial instruments. The effect of adopting this new accounting update resulted in an increase of $241 million to the Company’s retained earnings for the net unrealized gain, net of tax, related to marketable equity securities, with an offsetting adjustment to accumulated other comprehensive income as of January 1, 2018. However, in the Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018, six months ended June 30, 2018 and nine months ended September 30, 2018, the Company incorrectly presented the $241 million as a component of other comprehensive income (referred to as "Reclassification of net unrealized gains on marketable equity securities to retained earnings, net of tax charge"). Accordingly, the Company corrected the foregoing presentation error in the accompanying Unaudited Consolidated Statement of Comprehensive Income for the nine months ended September 30, 2018 in this Form 10-Q. As a result of this correction, total comprehensive income in the Company’s previously reported Unaudited Consolidated Statement of Comprehensive Income increased from $2.9 billion to $3.1 billion for the nine months ended September 30, 2018. The correction of this error had no effect on the Company’s previously reported Consolidated Balance Sheets, Unaudited Consolidated Statements of Operations, Unaudited Consolidated Statements of Changes in Stockholders’ Equity and Unaudited Consolidated Statements of Cash Flows. The effect of adopting this new accounting update has been presented correctly in the audited Consolidated Statement of Comprehensive Income included in the Consolidated Financial Statements in the Form 10-K for the year ended December 31, 2018. The Company presented the correction in the Unaudited Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018 included in the Form 10-Q for the first quarter of 2019 and for the six months ended June 30, 2018 included in the Form 10-Q for the second quarter of 2019.
Reclassifications — Certain amounts from prior periods have been reclassified to conform to the current year presentation.
Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents at September 30, 2019 and December 31, 2018 principally relates to the minimum cash requirement for Rentalcars.com's insurance business. The following table reconciles cash and cash equivalents and restricted cash and cash equivalents reported in the Consolidated Balance Sheets to the total amount shown in the Unaudited Consolidated Statements of Cash Flows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(Unaudited)
|
|
|
As included in the Consolidated Balance Sheets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,466
|
|
|
$
|
2,624
|
|
Restricted cash and cash equivalents included in prepaid expenses and other current assets
|
|
19
|
|
|
21
|
|
Total cash and cash equivalents and restricted cash and cash equivalents as shown in the Unaudited Consolidated Statements of Cash Flows
|
|
$
|
6,485
|
|
|
$
|
2,645
|
|
Recent Accounting Pronouncements Adopted
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
In August 2018, the Financial Accounting Standards Board ("FASB") issued a new accounting update to address a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also added certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The Company utilizes various third-party computer systems and third-party service providers, including global distribution systems serving the accommodation, rental car and airline industries. The Company uses both internally-developed systems and third-party systems to operate its services, including transaction processing, order management and financial systems. The Company adopted this update on January 1, 2019 and applied it on a prospective basis. The adoption of this update did not have a material impact to the Unaudited Consolidated Financial Statements.
Leases
In February 2016, the FASB issued a new accounting standard which requires lessees to recognize an asset and a liability on the balance sheet for the rights and obligations created by entering into lease transactions. The new standard retains the dual-model concept by requiring entities to determine if a lease is an operating or financing lease. The new standard also expands qualitative and quantitative disclosures for lessees.
The Company adopted this new standard on January 1, 2019 on a modified retrospective basis and has elected not to restate comparative periods. The Company elected other options, which allow the Company to use its previous evaluations regarding if an arrangement contains a lease, if a lease is an operating or financing lease and what costs are capitalized as initial direct costs prior to adoption. The Company also elected to combine lease and non-lease components.
Upon the adoption of the new lease standard, on January 1, 2019, the Company recognized operating lease assets of $646 million and total operating lease liabilities of $646 million (including a current liability of $152 million) in the consolidated balance sheet and reclassified certain balances related to existing leases. There was no impact to retained earnings at adoption. See Note 7 for more information on leases.
Other Recent Accounting Pronouncements
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. Step 2 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.
The Company plans to adopt this update in the first quarter of 2020. The update will be applied prospectively.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued a new accounting update on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. For financial assets measured at amortized cost, this update requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. For available-for-sale debt securities, this update made several targeted amendments to the existing other-than-temporary impairment model, including (1) requiring disclosure of the allowance for credit losses, (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities, (3) limiting impairment to the difference between the amortized cost basis and fair value and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists.
The Company plans to adopt this update in the first quarter of 2020. Entities are required to apply this update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. In preparation for the adoption, the Company is currently evaluating the impact to its Consolidated Financial Statements and establishing the related processes and internal controls. The Company does not expect the adoption to have a material impact to its Consolidated Financial Statements.
2. REVENUE RECOGNITION
Disaggregation of revenue
Geographic Information
The Company's international information consists of the results of Booking.com, agoda and Rentalcars.com and the results of the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using the Company's services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com (which is domiciled in the Netherlands) at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in millions):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
United States
|
|
The Netherlands
|
|
Other
|
|
Total
|
Total revenues for the three months ended September 30,
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
421
|
|
|
$
|
4,057
|
|
|
$
|
562
|
|
|
$
|
5,040
|
|
2018
|
|
441
|
|
|
3,889
|
|
|
519
|
|
|
4,849
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the nine months ended September 30,
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
1,204
|
|
|
$
|
9,016
|
|
|
$
|
1,507
|
|
|
$
|
11,727
|
|
2018
|
|
1,243
|
|
|
8,718
|
|
|
1,353
|
|
|
11,314
|
|
Revenue by Type of Service
Approximately 88% of the Company's revenue for both the three months ended September 30, 2019 and 2018 and 87% for both the nine months ended September 30, 2019 and 2018 relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services and advertising and other revenues each represent less than 10% of the Company's total revenues.
Deferred Revenue
Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Consolidated Balance Sheets and are comprised principally of amounts estimated to be payable to the travel service providers as well as the Company's deferred revenue for its commission or margin and fees. At September 30, 2019 and December 31, 2018, deferred merchant bookings includes deferred revenue of $218 million and $149 million, respectively. The Company expects to complete its service obligation within one year from the reservation date. In the nine months ended September 30, 2019, the Company recognized revenue of $133 million and cancellations of $15 million related to the deferred revenue balance at December 31, 2018. The offsetting increase of $217 million in the deferred revenue balance for the nine months ended September 30, 2019 is principally driven by payments received from travelers, net of estimated amounts payable to travel service providers, in the period for those online travel reservations that the Company receives cash payments in advance of completing its expected service obligations.
Loyalty and Other Incentive Programs
The Company provides loyalty programs, where participating consumers are awarded loyalty points on current transactions that can be redeemed in the future. At September 30, 2019 and December 31, 2018, liabilities of $79 million and $73 million, respectively, for loyalty program incentives were included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. The Company’s largest loyalty program is at OpenTable, where points can be redeemed for qualifying reservations at participating restaurants, third-party gift cards and accommodation reservations booked through some of the Company’s other platforms. The estimated fair value of the loyalty points that are expected to be redeemed is recognized as a reduction of revenue at the time the incentives are granted. In addition, at September 30, 2019 and December 31, 2018, liabilities of $25 million and $61 million, respectively, for other incentive programs, such as referral bonuses, credits and discounts, were included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. In the first quarter of 2018, OpenTable introduced a three-year time-based expiration for points earned by diners, which reduced its loyalty program liability by $27 million. In the third quarter of 2019, the Company recorded a decrease of $37 million to the liability for loyalty and other incentive programs, based on changes to estimates of the amounts expected to be redeemed, with a corresponding increase to revenue.
3. STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was $79 million and $70 million for the three months ended September 30, 2019 and 2018, respectively, and $232 million and $216 million for the nine months ended September 30, 2019 and 2018, respectively.
Stock-based compensation expense is recognized in the consolidated financial statements based upon fair value. Fair value is recognized as an expense on a straight-line basis over the employee's requisite service period and forfeitures are accounted for when they occur. The fair value on the grant date 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. Stock-based compensation expense related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition dates.
Restricted Stock Units and Performance Share Units
The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the nine months ended September 30, 2019:
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|
|
|
|
|
|
|
|
|
|
Share-Based Awards
|
|
Shares
|
|
Weighted-average Grant Date Fair Value
|
Unvested at December 31, 2018
|
|
511,562
|
|
|
|
$
|
1,713
|
|
|
Granted
|
|
214,225
|
|
|
|
$
|
1,729
|
|
|
Vested
|
|
(206,561
|
)
|
|
|
$
|
1,462
|
|
|
Performance shares adjustment
|
|
1,266
|
|
|
|
$
|
1,682
|
|
|
Forfeited/Canceled
|
|
(36,335
|
)
|
|
|
$
|
1,797
|
|
|
Unvested at September 30, 2019
|
|
484,157
|
|
|
|
$
|
1,820
|
|
|
At September 30, 2019, there was $495 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 1.9 years.
During the nine months ended September 30, 2019, the Company made broad-based grants of 152,313 restricted stock units that generally vest over a three-year period, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of $264 million based on a weighted-average grant-date fair value per share of $1,734.
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 expense related to performance share units reflects the estimated probable outcome at the end of the performance period.
2019 Performance Share Units
During the nine months ended September 30, 2019, the Company granted 61,912 performance share units to executives and certain other employees. The performance share units had a total grant-date fair value of $106 million based on a weighted-average grant-date fair value per share of $1,716. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period which generally ends December 31, 2021, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances. At September 30, 2019, the estimated number of probable shares to be issued was a total of 61,037 shares, net of performance share units that were forfeited or vested since the grant date, including 47,619 shares that are not subject to the achievement of minimum performance thresholds. If the maximum performance thresholds are met at the end of the performance period, a maximum number of 122,074 total shares could be issued pursuant to these performance share units.
2018 Performance Share Units
During the year ended December 31, 2018, the Company granted 49,721 performance share units with a grant-date fair value of $101 million, based on a weighted-average grant-date fair value per share of $2,034. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2020, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.
At September 30, 2019, there were 41,211 unvested 2018 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At September 30, 2019, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period was a total of 77,810 shares, including 29,901 shares that are not subject to the achievement of minimum performance thresholds. If the maximum performance thresholds are met at the end of the performance period, a maximum of 82,422 shares could be issued pursuant to these performance share units.
2017 Performance Share Units
During the year ended December 31, 2017, the Company granted 73,893 performance share units with a grant-date fair value of $128 million, based on a weighted-average grant-date fair value per share of $1,735. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2019, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.
At September 30, 2019, there were 51,523 unvested 2017 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At September 30, 2019, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period was a total of 80,459 shares, including 40,860 shares that are not subject to the achievement of minimum performance thresholds. If the maximum thresholds are met at the end of the performance period, a maximum of 103,046 shares could be issued pursuant to these performance share units.
Stock Options
All outstanding employee stock options were assumed in acquisitions. The following table summarizes the activity for stock options during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Options
|
|
Number of Shares
|
|
Weighted-average
Exercise Price
|
|
Aggregate
Intrinsic Value (in millions)
|
|
Weighted-average Remaining Contractual Term
(in years)
|
Balance, December 31, 2018
|
|
27,263
|
|
|
|
$
|
387
|
|
|
|
$
|
36
|
|
|
2.8
|
Exercised
|
|
(2,536
|
)
|
|
|
$
|
397
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
24,727
|
|
|
|
$
|
386
|
|
|
|
$
|
39
|
|
|
2.0
|
Vested and exercisable at September 30, 2019
|
|
24,727
|
|
|
|
$
|
386
|
|
|
|
$
|
39
|
|
|
2.0
|
The aggregate intrinsic value of employee stock options exercised during the nine months ended September 30, 2019 and 2018 was $4 million and $5 million, respectively.
4. NET INCOME PER SHARE
The Company computes basic net income per share by dividing net income applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
Common equivalent shares related to stock options, restricted stock units and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted-average number of basic common shares outstanding
|
|
42,389
|
|
|
47,268
|
|
|
43,540
|
|
|
47,887
|
|
Weighted-average dilutive stock options, restricted stock units and performance share units
|
|
198
|
|
|
230
|
|
|
191
|
|
|
270
|
|
Assumed conversion of convertible senior notes
|
|
244
|
|
|
253
|
|
|
216
|
|
|
373
|
|
Weighted-average number of diluted common and common equivalent shares outstanding
|
|
42,831
|
|
|
47,751
|
|
|
43,947
|
|
|
48,530
|
|
Anti-dilutive potential common shares
|
|
1,264
|
|
|
1,428
|
|
|
1,299
|
|
|
1,366
|
|
Anti-dilutive potential common shares for both the three and nine months ended September 30, 2019 includes approximately 1 million shares that could be issued under the Company's outstanding convertible notes. Under the treasury stock method, the convertible notes will generally have an anti-dilutive impact on net income per share if the conversion prices for the convertible notes exceed the Company's average stock price.
5. INVESTMENTS
Short-term and Long-term Investments in Marketable Securities
The Company has classified its investments in marketable debt securities as available-for-sale securities. These securities are reported at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of tax, reflected as a part of "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. Classification as short-term or long-term investments is based upon the maturities of the debt securities and the Company's expectations regarding the timing of sales and redemptions. Investments of a strategic nature that have been made for the purpose of affiliation or potential business advantage or in connection with a commercial relationship are included in "Long-term investments" in the Consolidated Balance Sheets. As of September 30, 2019, the Company does not consider any of its investments to be other-than-temporarily impaired.
The Company's investments in marketable equity securities, which are included in "Long-term investments" in the Consolidated Balance Sheets, are reported at estimated fair value with changes in fair value of these equity securities recognized in "Net unrealized (losses) gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.
The following table summarizes, by major security type, the Company's investments in marketable securities at September 30, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
108
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
108
|
|
U.S. government securities
|
|
154
|
|
|
—
|
|
|
(1
|
)
|
|
153
|
|
Corporate debt securities
|
|
704
|
|
|
—
|
|
|
(1
|
)
|
|
703
|
|
Time deposits and certificates of deposit
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Total
|
|
$
|
975
|
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
973
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
U.S. government securities
|
|
178
|
|
|
—
|
|
|
—
|
|
|
178
|
|
Corporate debt securities
|
|
1,166
|
|
|
3
|
|
|
(3
|
)
|
|
1,166
|
|
Trip.com Group convertible debt securities
|
|
775
|
|
|
—
|
|
|
(34
|
)
|
|
741
|
|
Marketable equity securities
|
|
1,105
|
|
|
389
|
|
|
(39
|
)
|
|
1,455
|
|
Total
|
|
$
|
3,252
|
|
|
$
|
392
|
|
|
$
|
(76
|
)
|
|
$
|
3,568
|
|
The following table summarizes, by major security type, the Company's investments in marketable securities at December 31, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
314
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
314
|
|
U.S. government securities
|
|
658
|
|
|
—
|
|
|
(2
|
)
|
|
656
|
|
Corporate debt securities
|
|
2,693
|
|
|
—
|
|
|
(12
|
)
|
|
2,681
|
|
U.S. government agency securities
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Commercial paper
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Time deposits and certificates of deposit
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total
|
|
$
|
3,674
|
|
|
$
|
—
|
|
|
$
|
(14
|
)
|
|
$
|
3,660
|
|
|
|
|
|
|
|
|
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
$
|
797
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
800
|
|
U.S. government securities
|
|
299
|
|
|
—
|
|
|
(6
|
)
|
|
293
|
|
Corporate debt securities
|
|
4,445
|
|
|
4
|
|
|
(48
|
)
|
|
4,401
|
|
Trip.com Group convertible debt securities
|
|
1,275
|
|
|
—
|
|
|
(98
|
)
|
|
1,177
|
|
Marketable equity securities
|
|
1,105
|
|
|
3
|
|
|
(72
|
)
|
|
1,036
|
|
Total
|
|
$
|
7,921
|
|
|
$
|
10
|
|
|
$
|
(224
|
)
|
|
$
|
7,707
|
|
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. At September 30, 2019, the weighted-average life of the Company’s investments in marketable debt securities, excluding its investment in Trip.com Group convertible debt securities, was approximately 1.2 years with an average credit quality of A+/A1/A+.
The Company invests in international government securities with high credit quality. At September 30, 2019, investments in international government securities principally included debt securities issued by the governments of Germany, France, Finland, Austria and Canada.
Investments in Trip.com Group
At September 30, 2019, the Company had invested $775 million in senior convertible notes issued at par value by Trip.com Group with maturity dates ranging from May 2020 to December 2025. The strategic investments in Trip.com Group, including $250 million of convertible notes due May 2020, were classified as "Long-term investments" in the Consolidated Balance Sheet at September 30, 2019. In August 2019, the Company's August 2014 investment of $500 million in Trip.com Group's convertible notes was repaid on maturity. The Trip.com Group convertible notes have been marked-to-market in accordance with the accounting guidance for available-for-sale securities, with the aggregate unrealized gains and losses, net of tax, reflected as a part of "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. The Company has also invested $655 million in Trip.com Group American Depositary Shares ("ADSs"), which had a fair value of $633 million and $585 million at September 30, 2019 and December 31, 2018, respectively. "Net unrealized (losses) gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations includes a net unrealized loss of $165 million and a net unrealized gain of $48 million for the three and nine months ended September 30, 2019, respectively, and net unrealized losses of $226 million and $150 million for the three and nine months ended September 30, 2018, respectively, related to Trip.com Group ADSs.
Certain Trip.com Group convertible notes include a put option allowing the Company, at its option, to require a prepayment in cash from Trip.com Group at certain points of time. The Company determined that the economic characteristics and risks of the put options are clearly and closely related to the notes, and therefore did not meet the requirement for separate accounting as embedded derivatives. The Company monitors the conversion features of these notes to determine whether they meet the definition of an embedded derivative during each reporting period. The conversion feature associated with the $25 million convertible notes issued in 2016 meets the definition of an embedded derivative that requires separate accounting. The
embedded derivative is bifurcated for fair value measurement purposes only and is reported in the Consolidated Balance Sheets with its host contract in "Long-term investments." The mark-to-market adjustments of the embedded derivative are included in "Foreign currency transactions and other" in the Company's Unaudited Consolidated Statements of Operations.
Investment in Meituan Dianping
In October 2017, the Company invested $450 million in preferred shares of Meituan Dianping, the leading e-commerce platform for local services in China. The investment has been classified as a marketable equity security since Meituan Dianping's initial public offering in September 2018. The investment had a fair value of $822 million and $451 million at September 30, 2019 and December 31, 2018, respectively. "Net unrealized (losses) gains on marketable equity securities" in the Unaudited Consolidated Statement of Operations includes unrealized gains of $116 million and $371 million, respectively, for the three and nine months ended September 30, 2019, and an unrealized gain of $257 million for both the three and nine months ended September 30, 2018 related to this investment.
Long-term Investments without Readily Determinable Fair Value
The Company held investments in equity securities of private companies, which are typically at an early stage of development, of $501 million at both September 30, 2019 and December 31, 2018, principally related to the Company's investment of $500 million in July 2018 in preferred shares of Didi Chuxing, the leading mobile transportation and ride-hailing platform in China. These investments are measured at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer and are included in "Long-term investments" in the Company's Consolidated Balance Sheets. The Company determined that no adjustments were required to the carrying value of these investments at September 30, 2019.
Other Long-term Investments
The Company held investments in preferred shares of private companies of $250 million and $200 million at September 30, 2019 and December 31, 2018, respectively. These investments are classified as debt securities for accounting purposes and categorized as available-for-sale. The preferred shares are convertible to ordinary shares at the Company’s option and are mandatorily convertible upon an initial public offering. The preferred shares also contain a redemption feature that can be exercised by the Company after certain points of time. These features have been evaluated as embedded derivatives, however, they do not meet the requirements to be accounted for separately. The investments are reported at estimated fair value in "Long-term investments" in the Company's Consolidated Balance Sheets, with the aggregate unrealized gains and losses, net of tax, reflected as a part of "Accumulated other comprehensive loss" in the Consolidated Balance Sheets.
6. FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value at September 30, 2019 are classified in the categories described in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and restricted cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
5,885
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,885
|
|
Corporate debt securities
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Time deposits and certificates of deposit
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
108
|
|
|
—
|
|
|
108
|
|
U.S. government securities
|
|
—
|
|
|
153
|
|
|
—
|
|
|
153
|
|
Corporate debt securities
|
|
—
|
|
|
703
|
|
|
—
|
|
|
703
|
|
Time deposits and certificates of deposit
|
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
U.S. government securities
|
|
—
|
|
|
178
|
|
|
—
|
|
|
178
|
|
Corporate debt securities
|
|
—
|
|
|
1,166
|
|
|
—
|
|
|
1,166
|
|
Trip.com Group convertible debt securities
|
|
—
|
|
|
741
|
|
|
—
|
|
|
741
|
|
Marketable equity securities
|
|
1,455
|
|
|
—
|
|
|
—
|
|
|
1,455
|
|
Other long-term investments
|
|
—
|
|
|
—
|
|
|
250
|
|
|
250
|
|
Total assets at fair value
|
|
$
|
7,355
|
|
|
$
|
3,084
|
|
|
$
|
250
|
|
|
$
|
10,689
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Financial assets carried at fair value at December 31, 2018 are classified in the categories described in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Cash and restricted cash equivalents:
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
2,061
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,061
|
|
International government securities
|
|
—
|
|
|
21
|
|
|
—
|
|
|
21
|
|
U.S. government securities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Commercial paper
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Time deposits and certificates of deposit
|
|
25
|
|
|
—
|
|
|
—
|
|
|
25
|
|
Short-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
314
|
|
|
—
|
|
|
314
|
|
U.S. government securities
|
|
—
|
|
|
656
|
|
|
—
|
|
|
656
|
|
Corporate debt securities
|
|
—
|
|
|
2,681
|
|
|
—
|
|
|
2,681
|
|
U.S. government agency securities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Commercial paper
|
|
—
|
|
|
7
|
|
|
—
|
|
|
7
|
|
Time deposits and certificates of deposit
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Long-term investments in marketable securities:
|
|
|
|
|
|
|
|
|
International government securities
|
|
—
|
|
|
800
|
|
|
—
|
|
|
800
|
|
U.S. government securities
|
|
—
|
|
|
293
|
|
|
—
|
|
|
293
|
|
Corporate debt securities
|
|
—
|
|
|
4,401
|
|
|
—
|
|
|
4,401
|
|
Trip.com Group convertible debt securities
|
|
—
|
|
|
1,177
|
|
|
—
|
|
|
1,177
|
|
Marketable equity securities
|
|
1,036
|
|
|
—
|
|
|
—
|
|
|
1,036
|
|
Other long-term investment
|
|
—
|
|
|
—
|
|
|
200
|
|
|
200
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
Foreign currency exchange derivatives
|
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
Total assets at fair value
|
|
$
|
3,123
|
|
|
$
|
10,358
|
|
|
$
|
200
|
|
|
$
|
13,681
|
|
The table above does not include contingent consideration related to a business acquisition (see Note 13).
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 certain convertible debt securities are considered "Level 2" valuations because the Company has access to quoted prices, but does not have visibility into the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace. See Note 5 for information related to the carrying value of the Company's investments in marketable securities.
Other long-term investments reported at an aggregate fair value of $250 million and $200 million at September 30, 2019 and December 31, 2018, respectively, were considered a "Level 3" valuation and measured using management's estimates that incorporate current market participant expectations of future cash flows considered alongside recent financing transactions of the investee and other relevant information. See Note 5 for further information related to these investments.
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 foreign currency exchange rates. Derivatives are considered "Level 2" fair value measurements. The Company's derivative instruments are typically short-term in nature.
At September 30, 2019 and December 31, 2018, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings, are carried at cost which approximates their fair value because of the short-term nature of these items. See Note 9 for the estimated fair value of the Company's outstanding Senior Notes and Note 5 for information related to an embedded derivative associated with the $25 million Trip.com Group convertible notes issued in 2016.
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company mitigates these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the 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.
Derivatives Not Designated as Hedging Instruments — The Company is exposed to adverse movements in foreign currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risks from short-term foreign currency exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. At September 30, 2019 and December 31, 2018, there were no outstanding derivative contracts related to foreign currency translation risks.
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in foreign currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Derivative assets are included in "Prepaid expenses and other current assets" and derivative liabilities are included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets. Derivatives associated with these transaction risks resulted in foreign currency losses of $29 million and $34 million for the three and nine months ended September 30, 2019, respectively, and foreign currency losses of $8 million and $38 million for the three and nine months ended September 30, 2018, respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in foreign currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net losses of
$11 million and $32 million for the three and nine months ended September 30, 2019, respectively, and net losses of $15 million and $32 million for the three and nine months ended September 30, 2018, respectively. The net impacts related to these derivatives are reported in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The settlement of derivative contracts not designated as hedging instruments resulted in net cash outflows of $11 million and $36 million for the nine months ended September 30, 2019 and 2018, respectively, which are reported within "Net cash provided by operating activities" in the Unaudited Consolidated Statements of Cash Flows.
7. LEASES
Adoption of ASC Topic 842, Leases
On January 1, 2019, the Company adopted ASC 842, Leases, using a modified retrospective method applied to all contracts as of January 1, 2019. Therefore, for reporting periods beginning after December 31, 2018, the financial statements are prepared in accordance with the current lease standard and the financial statements for all periods prior to January 1, 2019 are presented under the previous lease standard ("ASC 840").
The Company determines if an arrangement is a lease, or contains a lease, when a contract is signed. The Company determines if a lease is an operating or financing lease and records a lease asset and a lease liability upon lease commencement, which is the date when the underlying asset is made available for use by the lessor. The Company has operating leases for office space, data centers and one land lease for Booking.com's headquarters (see Note 13). The Company had no financing leases as of September 30, 2019. For office space, data centers and land, the Company has elected to combine the fixed payments to lease the asset and any fixed non-lease payments (such as maintenance or utility charges) when calculating the lease asset and lease liability.
The Company recognizes lease expense on a straight-line basis over the lease term. Certain of the Company's lease agreements include rent payments which are adjusted periodically for inflation. Any change in payments due to changes in inflation rates are recognized as variable lease expense as they are incurred. Variable lease expense also includes costs for property taxes, insurance and services provided by the lessor which are charged based on usage or performance.
Most leases have one or more options to renew, with renewal terms that can initially extend the lease term for various periods up to 9 years. The exercise of renewal options for office space and data centers is at the Company’s discretion and are included if they are reasonably certain to be exercised. The land lease for Booking.com's headquarters has an initial term which expires in 2065, at which time the lease payments will be adjusted based on the value of the land on the reassessment date. The Company considered the initial term of the land lease to be its expected period of use. As of September 30, 2019, the Company’s weighted-average remaining lease term for all leases was approximately 8.0 years.
When the rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate as its discount rate to determine the present value of its lease payments. The incremental borrowing rates approximate the rate the Company would pay to borrow in the currency of the lease payments on a collateralized basis for the weighted-average life of the lease. As of September 30, 2019, the Company’s weighted-average discount rate was approximately 2.1%.
The Company recognized the following related to leases in its Consolidated Balance Sheet at September 30, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
Classification in Consolidated Balance Sheet
|
|
September 30, 2019
|
Operating lease assets
|
|
Operating lease assets
|
|
$
|
610
|
|
Lease Liabilities:
|
|
|
|
|
Current operating lease liabilities
|
|
Accrued expenses and other current liabilities
|
|
$
|
151
|
|
Non-current operating lease liabilities
|
|
Operating lease liabilities
|
|
466
|
|
Total operating lease liabilities
|
|
|
|
$
|
617
|
|
As of September 30, 2019, the operating lease liabilities will mature over the following periods (in millions):
|
|
|
|
|
Remainder of 2019
|
$
|
35
|
|
2020
|
166
|
|
2021
|
135
|
|
2022
|
88
|
|
2023
|
59
|
|
2024
|
42
|
|
Thereafter
|
160
|
|
Total remaining lease payments
|
$
|
685
|
|
Less: Imputed interest
|
(68
|
)
|
Total operating lease liabilities
|
$
|
617
|
|
As of September 30, 2019, the Company has entered into leases that have not yet commenced with future lease payments of approximately $32 million which are not reflected in the table above. These leases will commence by 2021 with lease terms of up to 7 years and will be recognized upon lease commencement. In addition, the Company signed an agreement for a future lease in the city of Manchester in the United Kingdom for the headquarters of Rentalcars.com (see Note 13).
At December 31, 2018, minimum lease payments for operating leases having an initial term in excess of one year under ASC 840 were as follows (in millions):
|
|
|
|
|
2019
|
$
|
164
|
|
2020
|
142
|
|
2021
|
110
|
|
2022
|
66
|
|
2023
|
52
|
|
Thereafter
|
190
|
|
Total minimum lease payments
|
$
|
724
|
|
The Company recognized the following related to operating leases in its Unaudited Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification in Unaudited Consolidated Statement of Operations
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Lease expense
|
|
General and administrative and Information technology
|
|
$
|
46
|
|
|
$
|
137
|
|
Variable lease expense
|
|
General and administrative and Information technology
|
|
14
|
|
|
42
|
|
Less: Sublease income
|
|
General and administrative
|
|
—
|
|
|
(1
|
)
|
Total lease expense, net of sublease income
|
|
|
|
$
|
60
|
|
|
$
|
178
|
|
Supplemental cash flow information related to operating leases are as follows (in millions):
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
137
|
|
Operating lease assets obtained in exchange for operating lease liabilities
|
|
116
|
|
"Operating lease amortization" presented in the operating activities section of the Unaudited Consolidated Statement of Cash Flows reflects the portion of the operating lease expense that amortized the operating lease asset.
8. INTANGIBLE ASSETS AND GOODWILL
The Company's intangible assets at September 30, 2019 and December 31, 2018 consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Amortization
Period
|
Supply and distribution agreements
|
$
|
1,083
|
|
|
$
|
(446
|
)
|
|
$
|
637
|
|
|
$
|
1,099
|
|
|
$
|
(408
|
)
|
|
$
|
691
|
|
|
3 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
174
|
|
|
(131
|
)
|
|
43
|
|
|
173
|
|
|
(121
|
)
|
|
52
|
|
|
1 - 7 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet domain names
|
39
|
|
|
(30
|
)
|
|
9
|
|
|
41
|
|
|
(30
|
)
|
|
11
|
|
|
5 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
1,804
|
|
|
(508
|
)
|
|
1,296
|
|
|
1,810
|
|
|
(439
|
)
|
|
1,371
|
|
|
4 - 20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
3
|
|
|
(3
|
)
|
|
—
|
|
|
Up to 15 years
|
Total intangible assets
|
$
|
3,102
|
|
|
$
|
(1,117
|
)
|
|
$
|
1,985
|
|
|
$
|
3,126
|
|
|
$
|
(1,001
|
)
|
|
$
|
2,125
|
|
|
|
Intangible assets are amortized on a straight-line basis. Amortization expense was $43 million and $132 million for the three and nine months ended September 30, 2019, respectively, and $43 million and $135 million for the three and nine months ended September 30, 2018, respectively.
Annual Goodwill Impairment Test
A substantial portion of the Company's intangible assets and goodwill relates to the acquisitions of OpenTable and KAYAK. As of September 30, 2019, the Company performed its annual goodwill impairment testing and concluded that there was no impairment of goodwill. In addition, at September 30, 2019, the Company did not identify any impairment indicators for the Company's other long-lived assets.
Acquisitions
In November 2018, the Company paid $134 million, net of cash acquired, to complete the acquisition of HotelsCombined, a hotel meta-search company. In April 2018, the Company paid $139 million, net of cash acquired, and issued shares of the Company's common stock in the amount of $110 million in connection with the acquisition of FareHarbor, a leading provider of business-to-business activities distribution services. In respect of the shares issued, as presented in the supplemental disclosure in the Unaudited Consolidated Statement of Cash Flows, $59 million relates to purchase price consideration and $51 million relates to shares restricted for trading purposes until certain conditions are met.
The Company's Unaudited Consolidated Financial Statements include the accounts of these businesses starting at the respective acquisition dates. Revenues and earnings of these businesses from the respective acquisition dates and pro forma results of operations have not been presented separately as such financial information is not material to the Company's results of operations.
9. DEBT
Short-term Borrowing
On December 31, 2018, the Company had a bank overdraft of $25 million, which was repaid in January 2019. The bank overdraft is reported in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet at December 31, 2018.
Revolving Credit Facility
In August 2019, 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) London Inter-bank Offered Rate ("LIBOR") (but no less than 0%) for the interest period in effect for such borrowing plus an applicable margin ranging from 0.875% to 1.50%; or (ii) for U.S. Dollar-denominated loans only, the sum of (x) the greatest of (a) JPMorgan Chase Bank, N.A.'s prime lending rate, (b) the federal funds rate plus 0.50% and (c) LIBOR (but no less than 0%) for an interest period of one month plus 1.00%, plus (y) an applicable margin ranging from 0% to 0.50%. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.07% to 0.20%.
The revolving credit facility provides for the issuance of up to $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. Other than swingline loans, which are available only in U.S. Dollars, borrowings and letters of credit 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, including acquisitions, share repurchases and debt repayments. At September 30, 2019, there were no borrowings outstanding and $5 million of letters of credit were issued under this revolving credit facility.
Upon entering into this new revolving credit facility, the Company terminated its $2.0 billion five-year revolving credit facility entered into in June 2015. At December 31, 2018, there were no borrowings outstanding and $5 million of letters of credit were issued under the prior revolving credit facility. During the first half of 2019, the Company made several short-term borrowings under the prior revolving credit facility totaling $400 million with a weighted-average interest rate of 3.5%, all of which were repaid prior to June 30, 2019.
Outstanding Debt
Outstanding debt at September 30, 2019 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Current liabilities:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000
|
|
|
$
|
(18
|
)
|
|
$
|
982
|
|
Long-term debt:
|
|
|
|
|
|
|
0.9% Convertible Senior Notes due September 2021
|
|
$
|
1,000
|
|
|
$
|
(44
|
)
|
|
$
|
956
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,090
|
|
|
(4
|
)
|
|
1,086
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
818
|
|
|
(3
|
)
|
|
815
|
|
2.75% Senior Notes due March 2023
|
|
500
|
|
|
(2
|
)
|
|
498
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,090
|
|
|
(8
|
)
|
|
1,082
|
|
3.65% Senior Notes due March 2025
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
3.6% Senior Notes due June 2026
|
|
1,000
|
|
|
(5
|
)
|
|
995
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,090
|
|
|
(4
|
)
|
|
1,086
|
|
3.55% Senior Notes due March 2028
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
Total long-term debt
|
|
$
|
7,588
|
|
|
$
|
(76
|
)
|
|
$
|
7,512
|
|
Outstanding debt at December 31, 2018 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Long-term debt:
|
|
|
|
|
|
|
0.35% Convertible Senior Notes due June 2020
|
|
$
|
1,000
|
|
|
$
|
(39
|
)
|
|
$
|
961
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000
|
|
|
(61
|
)
|
|
939
|
|
0.8% (€1 Billion) Senior Notes due March 2022
|
|
1,143
|
|
|
(5
|
)
|
|
1,138
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
858
|
|
|
(4
|
)
|
|
854
|
|
2.75% Senior Notes due March 2023
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,143
|
|
|
(10
|
)
|
|
1,133
|
|
3.65% Senior Notes due March 2025
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
3.6% Senior Notes due June 2026
|
|
1,000
|
|
|
(6
|
)
|
|
994
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,143
|
|
|
(4
|
)
|
|
1,139
|
|
3.55% Senior Notes due March 2028
|
|
500
|
|
|
(3
|
)
|
|
497
|
|
Total long-term debt
|
|
$
|
8,787
|
|
|
$
|
(138
|
)
|
|
$
|
8,649
|
|
Based on the closing price of the Company's common stock for the prescribed measurement periods for the three months ended September 30, 2019 and December 31, 2018, the contingent conversion thresholds on the 2020 Notes (as defined below) and 2021 Notes (as defined below) were not exceeded, and therefore, these notes were not convertible at the option of the holder.
Fair Value of Debt
At September 30, 2019 and December 31, 2018, the estimated fair value of the outstanding Senior Notes was approximately $9.7 billion and $9.3 billion, respectively, and was considered a "Level 2" fair value measurement (see Note 6). Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company's stock price at the end of the reporting period. A substantial portion of the fair value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the Convertible Senior Notes.
Convertible Senior Notes
If the note holders exercise their option to convert, the Company delivers cash to repay the principal amount of the notes and delivers shares of common stock or cash, at its option, to satisfy the conversion value in excess of the principal amount. If the Company's convertible debt is redeemed or converted prior to maturity, a gain or loss on extinguishment is recognized. The gain or loss is the difference between the fair value of the debt component immediately prior to extinguishment and its carrying value. To estimate the fair value of the debt at the conversion date, the Company estimates the straight debt borrowing rate, considering the credit rating and straight debt of comparable corporate issuers.
Description of Convertible Senior 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 million in debt issuance costs during the year ended December 31, 2014 related to this offering. The 2021 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of $2,055.50 per share. The 2021 Notes are convertible, at the option of the holder, prior to September 15, 2021, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2021 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2021 Notes in an aggregate value ranging from $0 to $375 million depending upon the date of the transaction and the then current stock price of the Company. At June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes, regardless of the Company's stock price. The 2021 Notes may not be redeemed by the Company prior to maturity. The
holders may require the Company to repurchase the 2021 Notes for cash in certain circumstances. Interest on the 2021 Notes is payable on March 15 and September 15 of each year.
In May 2013, the Company issued in a private placement $1.0 billion aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of 0.35% (the "2020 Notes"). The 2020 Notes were issued with an initial discount of $20 million. The Company paid $1 million in debt issuance costs during the year ended December 31, 2013 related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of $1,315.10 per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than 150% of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2020 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2020 Notes in an aggregate value ranging from $0 to $397 million depending upon the date of the transaction and the then current stock price of the Company. At March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes, regardless of the Company's stock price. The 2020 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances. Interest on the 2020 Notes is payable on June 15 and December 15 of each year.
In March 2012, the Company issued in a private placement $1.0 billion aggregate principal amount of Convertible Senior Notes due March 15, 2018, with an interest rate of 1.0% (the "2018 Notes"). The 2018 Notes were convertible, subject to certain conditions, into the Company's common stock at a conversion price of $944.61 per share. In March 2018, in connection with the maturity of the remaining outstanding 2018 Notes, the Company paid $714 million to satisfy the aggregate principal amount due and paid an additional $773 million in satisfaction of the conversion value in excess of the principal amount.
Cash-settled convertible debt, such as the Company's Convertible Senior Notes, is separated into debt and equity components at issuance and each component is assigned a value. The value assigned to the debt component is the estimated fair value, at the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. Debt discount is amortized using the effective interest rate method over the period from the origination date through the stated maturity date. The Company estimated the straight debt borrowing rates at debt origination to be 3.18% for the 2021 Notes, 3.13% for the 2020 Notes and 3.50% for the 2018 Notes. The yield to maturity was estimated at an at-market coupon priced at par.
Debt discount after tax of $83 million ($143 million before tax) related to the 2021 Notes, $92 million ($154 million before tax) related to the 2020 Notes and $81 million ($135 million before tax) related to the 2018 Notes less financing costs associated with the equity component of the respective convertible notes was recorded in additional paid-in capital in the balance sheet at debt origination.
For the three months ended September 30, 2019 and 2018, the Company recognized interest expense of $16 million and $15 million, respectively, related to convertible notes, which is almost entirely comprised of the amortization of debt discount of $12 million and the contractual coupon interest of $3 million for each period. For the three months ended September 30, 2018, included in the amortization of debt discount mentioned above is $1 million of original issuance discount related to the 2020 Notes. The remaining interest expense relates to the amortization of debt issuance costs. The weighted-average effective interest rates for both the three months ended September 30, 2019 and 2018 were 3.2%.
For the nine months ended September 30, 2019 and 2018, the Company recognized interest expense of $47 million and $50 million, respectively, related to convertible notes, which is almost entirely comprised of the amortization of debt discount of $36 million and $38 million, respectively, and the contractual coupon interest of $9 million and $11 million, respectively. For the nine months ended September 30, 2019 and 2018, included in the amortization of debt discount mentioned above is $2 million of original issuance discount related to the 2020 Notes for each period. The remaining interest expense relates 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 date for the respective debt. The weighted-average effective interest rates for both the nine months ended September 30, 2019 and 2018 were 3.2%.
Other Long-term Debt
Other long-term debt had a total carrying value of $6.6 billion and $6.7 billion at September 30, 2019 and December 31, 2018, respectively. 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 Senior Notes maturing in March 2022 (the "March 2022 Notes"), 2.20% for the Senior Notes maturing in November 2022 (the "November 2022 Notes"), 2.78% for the Senior Notes maturing in March 2023, 2.48% for the Senior Notes maturing in September 2024 (the "September 2024 Notes"), 3.68% for the Senior Notes maturing in March 2025, 3.62% for the Senior Notes maturing in June 2026, 1.80% for the Senior Notes maturing in March 2027 (the "March 2027 Notes") and 3.56% for the Senior Notes maturing in March 2028.
For both the three months ended September 30, 2019 and 2018, the Company recognized interest expense of $42 million related to other long-term debt, which is almost entirely comprised of contractual coupon interest of $40 million. The remaining interest expense relates to the amortization of debt discount and debt issuance costs.
For the nine months ended September 30, 2019 and 2018, the Company recognized interest expense of $125 million and $128 million, respectively, related to other long-term debt, which is almost entirely comprised of $120 million and $123 million, respectively, related to the contractual coupon interest. The remaining interest expense relates to the amortization of debt discount and debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.
The aggregate principal value of the Euro-denominated March 2022 Notes, November 2022 Notes, September 2024 Notes and March 2027 Notes (collectively "Euro-denominated debt") and accrued interest thereon had historically been designated as a hedge of the Company's net investment in a Euro functional currency subsidiary. The Company dedesignated certain portions of this hedge in the second and third quarters of 2019. For the nine months ended September 30, 2019, the carrying value of the portion of Euro-denominated debt, including accrued interest, designated as a net investment hedge, ranged from $2.4 billion to $4.3 billion. The foreign currency transaction gains or losses on these Euro-denominated liabilities are measured based upon changes in spot rates. The foreign currency transaction gains or losses on the Euro-denominated debt that is designated as a hedging instrument are recorded in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. The net assets of this subsidiary are translated into U.S. Dollars at each balance sheet date, with the effects of foreign currency changes also reported in "Accumulated other comprehensive loss" in the Consolidated Balance Sheets. The foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
10. TREASURY STOCK
At December 31, 2018, the Company had a total remaining authorization of $4.5 billion to repurchase its common stock related to a program authorized by the Company's Board of Directors in 2018 for $8.0 billion. In the second quarter of 2019, the Company's Board of Directors authorized an additional program to repurchase up to $15.0 billion of the Company's common stock. At September 30, 2019, the Company had a total remaining authorization of $12.9 billion to repurchase its common stock. The Company has continued to make repurchases of its common stock in the fourth quarter of 2019 and may continue to make repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any repurchase of common stock and the amount of common stock repurchased will be determined at the Company's discretion. Additionally, the Board of Directors has given the Company the general authorization to repurchase shares of its common stock withheld to satisfy employee withholding tax obligations related to stock-based compensation.
The following table summarizes the Company's stock repurchase activities during the three and nine months ended September 30, 2019 and 2018, respectively (in millions, except for shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
Authorized stock repurchase programs
|
|
694,158
|
|
|
$
|
1,341
|
|
|
1,145,120
|
|
|
$
|
2,241
|
|
|
3,675,967
|
|
|
$
|
6,666
|
|
|
2,019,106
|
|
|
$
|
4,026
|
|
General authorization for shares withheld on stock award vesting
|
|
4,616
|
|
|
9
|
|
|
4,204
|
|
|
9
|
|
|
84,035
|
|
|
146
|
|
|
75,911
|
|
|
155
|
|
Total
|
|
698,774
|
|
|
$
|
1,350
|
|
|
1,149,324
|
|
|
$
|
2,250
|
|
|
3,760,002
|
|
|
$
|
6,812
|
|
|
2,095,017
|
|
|
$
|
4,181
|
|
Stock repurchases of $40 million in September 2019 were settled in October 2019. Stock repurchases of $74 million in December 2018 were settled in January 2019.
For the nine months ended September 30, 2019 and 2018, the Company remitted employee withholding taxes of $140 million and $154 million, respectively, to the tax authorities, which is different from the aggregate cost of the shares withheld for taxes for each period due to the timing in remitting the taxes. The cash remitted to the tax authorities is included in financing activities in the Unaudited Consolidated Statements of Cash Flows.
At September 30, 2019, there were 21,077,128 shares of the Company's common stock held in treasury.
11. 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 rates for the three and nine months ended September 30, 2019 were 17.5% and 18.6%, respectively, compared to 21.1% and 20.2% for the three and nine months ended September 30, 2018, respectively. The Company's 2019 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax (discussed below), partially offset by the effect of higher international tax rates. The Company's 2018 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax, U.S. state tax rate changes that resulted in a net decrease to deferred tax liabilities associated with acquired intangible assets and excess tax benefits recognized from the vesting of equity awards, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with the Company's international earnings resulting from the enactment of the U.S. Tax Cuts and Jobs Act (the "Tax Act").
The Company's effective tax rates were lower for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily as a result of lower U.S. federal and state tax associated with the Company’s current year international earnings resulting from the enactment of the Tax Act and discrete tax benefits associated with U.S. federal tax credits.
During the three and nine months ended September 30, 2019 and 2018, a substantial majority of the Company's income was reported in the Netherlands, where Booking.com is based. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 7% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. A portion of Booking.com's earnings during the three and nine months ended September 30, 2019 and 2018 qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rates for those periods.
During the three months ended September 30, 2019, the Company recorded a deferred tax asset of $377 million, which is included in "Other assets" in the Consolidated Balance Sheet, and a deferred tax liability of $361 million related to an internal restructuring.
12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The table below provides the balances for each classification of accumulated other comprehensive loss at September 30, 2019 and December 31, 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
Foreign currency translation adjustments, net of tax (1)
|
|
$
|
(192
|
)
|
|
$
|
(129
|
)
|
Net unrealized losses on debt securities, net of tax (2)
|
|
(73
|
)
|
|
(187
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(265
|
)
|
|
$
|
(316
|
)
|
(1) Foreign currency translation adjustments, net of tax, at September 30, 2019 and December 31, 2018, includes accumulated net losses from fair value adjustments of $35 million after tax ($53 million before tax) associated with previously settled derivatives that were designated as net investment hedges.
Foreign currency translation adjustments, net of tax, includes foreign currency transaction gains of $86 million ($126 million before tax) and foreign currency transaction losses of $26 million ($20 million before tax) at September 30, 2019 and December 31, 2018, respectively, associated with the Company's Euro-denominated debt that is designated as a hedge against the impact of currency fluctuations on the net assets of a Euro functional currency subsidiary (see Note 9).
The remaining balance in foreign currency translation adjustments relates to the cumulative impacts of currency fluctuations on the Company's non-U.S. Dollar functional currency subsidiaries' net assets. At September 30, 2019 and December 31, 2018, the Company had deferred tax benefits of $64 million and $41 million, respectively, related to foreign currency translation adjustments to its one-time deemed repatriation tax liability recorded at December 31, 2017 and foreign earnings for periods after December 31, 2017 that are subject to U.S. federal and state income tax, resulting from the enactment of the Tax Act.
(2) Net unrealized losses on debt securities, net of tax, includes cumulative tax charges of $38 million and $30 million at September 30, 2019 and December 31, 2018, respectively.
13. COMMITMENTS AND CONTINGENCIES
Competition and Consumer Protection Reviews
At times, online platforms, including online travel platforms, have been the subject of investigations or inquiries by various national competition authorities ("NCAs") or other governmental authorities regarding competition law matters, consumer protection issues or other areas of concern. The Company is or has been involved in many such investigations. For example, the Company has been and continues to be involved in investigations related to whether Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, are anti-competitive because they require accommodation providers to provide Booking.com with room rates, conditions or availability that are at least as favorable as those offered to other online travel companies ("OTCs") or through the accommodation provider's website. To resolve and close certain of the investigations, the Company has from time to time made commitments to the investigating authorities regarding future business practices or activities. For example, Booking.com has made commitments to several NCAs, including agreeing to narrow the scope of its parity clauses, in order to resolve parity-related investigations. In addition, in September 2017, the Swiss Price Surveillance Office opened an investigation into the level of commissions of Booking.com in Switzerland and the investigation is ongoing. Some authorities are reviewing the online hotel booking sector more generally through market inquiries and the Company cannot predict the outcome of such inquiries or any resulting impact on its business, results of operations, cash flows or financial condition.
NCAs or other governmental authorities are continuing to review the activities of online platforms, including through the use of consumer protection powers. In October 2017, the United Kingdom's NCA (the Competition and Markets Authority, or CMA) launched a consumer protection law investigation into the clarity, accuracy and presentation of information on hotel booking sites with a specific focus on the display of search results (e.g., ranking), claims regarding discounts, methods of "pressure selling" (such as allegedly creating false impressions regarding room availability) and failure to disclose hidden charges. In connection with this investigation, Booking.com, agoda and KAYAK, along with a number of other OTCs, voluntarily agreed to certain commitments with the CMA addressing its concerns in resolution of this investigation, which took effect on September 1, 2019. Among other things, the commitments provided to the CMA include showing prices inclusive of all mandatory taxes and charges, providing information about the effect of money earned on search result rankings on or before the search results page and making certain adjustments to how discounts and statements concerning popularity or availability are shown to consumers. The CMA has stated that it expects all participants in the online travel market to adhere to the same standards, regardless of whether they formally signed the commitments. The commitments conclude the CMA's investigation without finding an infringement or an admission of wrongdoing of the OTCs involved. The Company is unable to predict what, if any, effect the commitments made to the CMA will have on its business, industry practices or online commerce more generally.
The Company is unable to predict how any current or future investigations or litigation may be resolved or the long-term impact of any such resolution on its business. For example, competition and consumer-law related investigations, legislation or issues have and could in the future result in private litigation. More immediate results could include, among other things, the imposition of fines, commitments to change certain business practices or reputational damage, any of which could harm the Company's business, results of operations, brands or competitive position.
Tax Matters
French tax authorities conducted an audit of Booking.com for 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 and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to those tax years for approximately 356 million Euros, the majority of which would represent penalties and interest. The Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company is contesting the assessments. The Company has not recorded a liability in connection with these assessments. In December 2018, the French tax authorities issued a formal demand for payment of the amounts assessed. As a result, in January 2019, the Company paid the assessments of approximately 356 million Euros ($403 million) in order to preserve its right to contest the assessments in court. The payment, which is included in "Other assets" in the Consolidated Balance Sheet at September 30, 2019, does not constitute an admission that the Company owes the taxes and will be refunded (with interest) to the Company to the extent the Company prevails. If the Company is unable to resolve the matter with the French tax authorities, the Company plans to challenge the assessments in the French courts. The French tax authorities have begun a similar audit of the tax years 2013 through 2015 and recently extended the audit to include the years 2016 through 2018, both of which could result in additional assessments.
Italian authorities are reviewing Booking.com's activities for the years 2011 through 2015. They are reviewing whether Booking.com has a permanent establishment in Italy and Booking.com's transfer pricing policies in Italy. The Company believes that Booking.com has been, and continues to be, in compliance with Italian tax law. The Company is cooperating with the investigation but intends to contest any allegation that Booking.com has a permanent establishment in Italy or that its transfer pricing policies are inappropriate. In December 2018, the Italian tax authorities issued an assessment on the Italian Booking.com subsidiary for approximately 48 million Euros ($52 million) for the 2013 tax year, asserting that its transfer pricing policies were inadequate. The Company has not recorded a liability in connection with this assessment. It is unclear what further actions, if any, the Italian authorities will take. Such actions could include closing the investigation, assessing Booking.com additional taxes, the imposition of interest, fines and penalties and/or bringing criminal charges.
In addition, Turkish tax authorities have asserted that Booking.com has a permanent establishment in Turkey and have issued tax assessments for the years 2012 through 2017 for approximately 544 million Turkish Lira ($96 million), including interest and penalties. The Company believes that Booking.com has been, and continues to be, in compliance with Turkish tax law, and the Company is contesting these assessments. The Company has not recorded a liability in connection with these assessments.
As a result of an internal review of tax policies and positions at one of the Company's smaller subsidiaries, the Company identified two issues related to the application of certain non-income-based tax laws to that subsidiary's business. In the third and fourth quarters of 2018, the Company accrued related travel transaction taxes totaling approximately $46 million, based on the Company's estimate of the probable travel transaction tax owed for the prior periods, including interest and
penalties, as applicable. At September 30, 2019, the Company had $65 million accrued related to these travel transaction taxes. The Company accrued $10 million in the third quarter of 2019. The related expenses are included in "General and administrative" expense in the Unaudited Consolidated Statement of Operations. The Company currently estimates that the reasonably possible loss related to these matters in excess of the amount accrued is approximately $25 million. The Company's internal review is ongoing, and, to the extent the Company determines that the probable taxes owed related to these matters exceed what has already been accrued or new issues are identified during this review, the Company may need to accrue additional amounts, which could adversely affect the Company’s business, results of operations, financial condition and cash flows.
During the second quarter 2019, the Company identified the nonpayment in prior periods of a wage-related tax under Netherlands' law on compensation paid to certain highly-compensated former employees in the year of their separation from employment with Booking.com. The Company has informed the Dutch tax authorities of the nonpayment and, to correct this immaterial error, has accrued a liability of $61 million (before tax) based on the Company's estimate of the probable tax owed for prior tax years, including interest (but not including any potential penalties, which cannot reasonably be estimated). This expense is recorded in "Personnel" expenses in the Unaudited Consolidated Statement of Operations for the nine months ended September 30, 2019.
In July 2019, France signed into law a 3% digital services tax which is retroactively applicable as of January 1, 2019. The Company accrued a liability of $29 million for this digital services tax for the first nine months of 2019. The expense is included in "General and administrative" expenses in the Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2019.
From time to time, the Company is involved in other tax-related audits, investigations or proceedings, which could relate to income taxes, value-added taxes, sales taxes, employment taxes, etc. For example, the Company is subject to legal proceedings in the United States related to travel transaction taxes (e.g., hotel occupancy taxes, sales taxes, etc.).
Any taxes or other assessments in excess of the Company's current tax provisions, whether in connection with the foregoing or otherwise (including the resolution of any tax proceedings), could have a material adverse effect on the Company's business, effective tax rate, results of operations and financial condition.
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. In March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents, which had a negative impact on the Company's growth and results of operations. In October 2019, the Turkish court issued judgment in favor of the Association of Turkish Travel Agencies, finding that Booking.com must meet certain registration requirements in order to offer Turkish hotels and accommodations to Turkish residents. If Booking.com does not successfully appeal this decision or meet the Turkish registration requirements, Booking.com will be unable to resume offering Turkish hotels and accommodations to Turkish residents, which would continue to negatively impact the Company's results of operations.
Other Matters
The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts are not material to the Company's balance sheets and provisions recorded have not been material to the Company's results of operations or cash flows.
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.
Liability associated with the Earnout Arrangement for Business Acquisition
At December 31, 2018, the Company's Consolidated Balance Sheet included a liability of $28 million for contingent consideration related to a business acquisition in 2015. The fair value of the liability, which had been considered a "Level 3" fair value measurement (see Note 6), was based upon probability-weighted average payments for specific performance factors
from the acquisition date through the performance period which ended on March 31, 2019. In the second quarter of 2019, the Company paid $37 million to settle this liability.
Building Construction
In September 2016, the Company signed a turnkey agreement to construct an office building for Booking.com’s headquarters in the Netherlands for 270 million Euros. Upon signing this agreement, the Company paid 43 million Euros for the acquired land-use rights, which was included in “Other assets” in the Consolidated Balance Sheets for periods prior to January 1, 2019. The land-use rights were reclassified from "Other assets" to "Operating lease assets" on January 1, 2019 as part of the adoption of ASC 842, Leases (see Note 1). In addition, since signing the turnkey agreement the Company has made several progress payments principally related to the construction of the building, which are included in "Property and equipment, net" in the Consolidated Balance Sheets. At September 30, 2019, the Company has a remaining obligation of 124 million Euros ($135 million) related to the building construction, which will be paid through 2021, when the Company anticipates construction will be complete.
In addition to the turnkey agreement, the Company has a remaining obligation at September 30, 2019 to pay 72 million Euros ($79 million) over the remaining term of the acquired land lease. The Company will also make additional capital expenditures to fit out and furnish the office space.
Other Contractual Obligation
In 2018, the Company signed an agreement for a lease related to approximately 222,000 square feet of office space in the city of Manchester in the United Kingdom for the headquarters of Rentalcars.com. The Company's obligation to execute the lease is conditional upon the lessor completing certain activities, which are expected to be completed in 2021. If these activities are completed, the lease will commence for a term of approximately 13 years and the Company will have a lease obligation of approximately 65 million British Pounds Sterling ($80 million), excluding lease incentives. The Company will also make capital expenditures to fit out and furnish the office space.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled "Special Note Regarding Forward-Looking Statements" at the end of this Item 2. As discussed in more detail in the Section entitled "Special Note Regarding Forward-Looking Statements," this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in "Risk Factors" and elsewhere in this Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Overview
Our mission is to help people experience the world. We aim to achieve our mission to help people experience the world through global leadership in online travel and restaurant reservation and related services by:
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providing consumers with the best choices and prices at any time, in any place, on any device;
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making it easy for people to find, book and experience their travel desires; and
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providing platforms, tools and insights to our business partners to help them be successful.
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We operate six primary 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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KAYAK - a leading online meta-search service allowing consumers to easily search and compare travel itineraries and prices, including airline ticket, accommodation and rental car reservation information, from hundreds of travel websites at once.
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priceline - a leading hotel, rental car, airline ticket and vacation package online reservation service in North America.
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agoda - a leading online accommodation reservation service catering primarily to consumers in the Asia-Pacific region.
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Rentalcars.com - a leading online worldwide rental car reservation service.
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OpenTable - a leading online provider of restaurant reservation and information services to consumers and restaurant reservation management and customer acquisition services to restaurants.
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Our results include FareHarbor and HotelsCombined since they were acquired in April 2018 and November 2018, respectively. We refer to our company and all of our subsidiaries and brands collectively as "Booking Holdings," the "Company," "we," "our" or "us."
Our business is driven primarily by international results, which consist of the results of Booking.com, agoda and Rentalcars.com and the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com (which is domiciled in the Netherlands) at a hotel in New York by a consumer in the United States is part of our international results. During the year ended December 31, 2018, our international business (the substantial majority of which is generated by Booking.com) represented approximately 89% of our consolidated revenues. A significant majority of our revenues, including a significant majority of our international revenues, is earned in connection with facilitating accommodation reservations. See Note 2 to the Unaudited Consolidated Financial Statements for more geographic information.
We derive substantially all of our revenues from the following sources:
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Commissions earned from facilitating reservations of accommodations, rental cars and other travel services on an agency basis;
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Travel reservation commissions and transaction net revenues, credit card processing rebates and customer processing fees, in each case in connection with our merchant transactions;
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Advertising revenues primarily earned by KAYAK from sending referrals to online travel companies ("OTCs") and travel service providers, as well as from advertising placements on KAYAK's platforms;
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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
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Ancillary revenues including travel insurance-related revenues and global distribution system ("GDS") reservation booking fees, in each case related to certain of our travel services.
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Trends
Over the last several years, we have experienced significant 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. We also believe this growth is the result of the continued innovation and execution by our teams around the world to increase the number and the variety of accommodations we offer our consumers, increase and improve content, build distribution and improve the consumer experience on our online platforms, as well as consistently and effectively marketing our brands through performance and brand marketing efforts. These year-over-year growth rates have generally decelerated. Given the size of our accommodation reservation business, we expect that our year-over-year growth rates will generally continue to decelerate, though the rate of deceleration may fluctuate and there may be periods of acceleration from time to time.
We are a global business, and online travel growth rates vary across the world depending on numerous factors, including local and regional economic conditions, individual disposable income, access to the internet and adoption of e-commerce. Online travel growth rates have generally slowed in markets such as North America and Europe where online activity is high and consumers have been engaging in e-commerce transactions for many years, while online travel growth rates remain relatively high in markets such as Asia-Pacific where incomes are rising more quickly and the increased availability and use of mobile devices has accelerated the growth of internet usage and travel e-commerce transactions. Over the long-term, we expect online travel growth rates to slow as markets continue to mature. However, we believe that the opportunity to continue to grow our business exists for the markets in which we operate, including in both mature and fast-growing markets. Further, we believe that this opportunity for growth exists because we believe we provide significant value to travel service providers, regardless of size or geography, due to our brands' global reach and online marketing expertise. For example, we believe that accommodation providers of all sizes, from large hotel chains to small, independent hotels and alternative accommodations such as homes and apartments, benefit from using our services, which enable them to reach a broader audience of potential customers.
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 number of properties through Booking.com. Booking.com included approximately 2,520,000 properties on its website at September 30, 2019, consisting of approximately 455,000 hotels, motels and resorts and approximately 2,065,000 homes, apartments and other unique places to stay, compared to approximately 2,065,000 properties (including approximately 430,000 hotels, motels and resorts and approximately 1,635,000 homes, apartments, and other unique places to stay) at September 30, 2018. Booking.com categorizes properties listed on its website as either (a) hotels, motels and resorts, which groups together more traditional accommodation types (including hostels and inns), or (b) homes, apartments and other unique places to stay, also referred to as alternative accommodations, which encompasses all other types of accommodations, including bed and breakfasts, villas, apart-hotels and beyond.
We intend to continue to improve the accommodation choices available for reservation on our platforms, such as hotels, motels, resorts, homes, apartments and other unique places to stay, however the growth rate of our accommodations may vary in part as a result of removing accommodations from our platforms from time to time. Many of the newer accommodations we add to our travel reservation services, especially in highly-penetrated markets, may have fewer rooms or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts). Because alternative accommodations are often either a single unit or a small collection of independent units, these properties generally represent more limited booking opportunities than hotels, motels and resorts, which generally have more units to rent per property. Further, alternative accommodations in general may be subject to increased seasonality due to local tourism seasons, weather or other factors or may not be available at peak times due to use by the property owners. We may also experience lower profit margins with respect to these properties due to certain additional costs, such as increased customer service costs, related to offering these accommodations on our platforms. As our alternative accommodation business has increased, these different characteristics have negatively impacted our profit margins and we expect this trend to continue. Further, to the extent these properties represent an increasing percentage of the properties added to our platforms, we expect that our room nights growth
rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of alternative accommodation properties increases, the number of reservations per property will likely continue to decrease. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.
As part of our strategy to provide more payment options to consumers and travel service providers, increase the number and variety of accommodations available on Booking.com and enable the growth of our in-destination activities businesses, Booking.com is increasingly processing transactions on a merchant basis, where it facilitates payments from travelers for the services provided. This allows Booking.com to process transactions for travel service providers and to increase its ability to offer secure and flexible transaction terms to consumers, such as the form and timing of payment. We believe that adding these types of service offerings will benefit consumers and travel service providers, as well as our gross bookings, room night and earnings growth rates. However, this results in additional expenses for personnel, payment processing, customer chargebacks (including those related to fraud) and other expenses related to these transactions, which are recorded in "Personnel" and "Sales and other expenses" in our Unaudited Statements of Operations, as well as associated incremental revenues in the form of credit card rebates, for example, which are recorded in "Merchant revenues." As this business continues to grow, we expect these expenses to continue to increase, which would negatively impact our operating margins despite increases in associated incremental revenues. Components of revenues and expenses related to our merchant business may be recognized in different periods. These timing factors could impact our operating margins as well as the relationship between our gross bookings and revenues in a particular period, especially as our merchant business increases as a percentage of our overall business.
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, constantly evolving and subject to rapid change, and current and new competitors can launch new services at relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have significantly more customers or users, consumer data and financial and other 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 and has grown rapidly in this area, including by offering a flight meta-search product (Google Flights), a hotel meta-search product (Google Hotel Ads), its "Book on Google" reservation functionality and integrating its hotel meta-search product into its Google Maps app, as well as Google Travel, a planning tool which aggregates its flight, hotel and packages products in one website. Our markets are also subject to rapidly changing conditions, including technological developments, consumer behavior changes, regulatory changes and travel service provider consolidation. We expect these trends to continue. For example, we have experienced a significant shift of both direct and indirect business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. In addition, the revenue earned on a mobile transaction may be less than a typical desktop transaction due to different consumer purchasing patterns. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay, have lower accommodation average daily rates ("ADRs") and are not made as far in advance. For more detail regarding the competitive trends and risks we face, see Part II Item 1A Risk Factors - "Intense competition could reduce our market share and harm our financial performance." and "Consumer adoption and use of mobile devices creates challenges and may enable device companies such as Google and Apple to compete directly with us." and "We may not be able to keep up with rapid technological or other market changes."
Although we believe that providing an extensive collection of properties, excellent customer service and an intuitive, easy-to-use consumer experience are important factors influencing a consumer's decision to make a reservation, for many consumers, particularly in certain markets, the price of the travel service is the primary factor determining whether a consumer will book a reservation. As a result, it is increasingly important to offer travel services, such as accommodation reservations, at competitive prices, whether through discounts, coupons, closed-user group rates or loyalty programs, or otherwise. These initiatives have resulted and in the future may result in lower ADRs and lower revenue as a percentage of gross bookings. Discounting and couponing coupled with a high degree of consumer shopping behavior is particularly common in Asian markets. In some cases, our competitors are willing to make little or no profit on a transaction, or offer travel services at a loss, in order to gain market share.
We have observed a trend of declining constant-currency accommodation ADRs, which we expect to continue, though the rate of decline may fluctuate and there may be periods of stable or increasing ADRs. We believe the trend of declining ADRs is partially driven by the negative impact of the changing geographical mix of our business (e.g., lower ADR regions like Asia-Pacific are generally growing faster than higher ADR regions like Western Europe) as well as pricing pressures within local markets that we observe from time to time that may be the result of competitive conditions, weakening economic
conditions or changes in travel patterns. These declining ADR trends have resulted in and may continue to result in our gross bookings growing at a lower rate of growth than our accommodation room nights.
We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Historically our performance marketing expenses have increased significantly, however, more recently, we have experienced more moderate growth rates, a trend we expect to continue. Our performance marketing expense is 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. More recently, growth of some of these channels has slowed. Performance marketing expenses were $3.5 billion and $3.6 billion for the nine months ended September 30, 2019 and September 30, 2018, respectively. We also invested $462 million and $385 million in brand marketing for the nine months ended September 30, 2019 and 2018, respectively, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook), online display advertising and other brand marketing. We intend to continue a strategy of promoting brand awareness through both online and offline marketing efforts, including by expanding brand campaigns into additional markets, which we expect will increase our brand marketing expenses over time. We have observed increased brand marketing by other OTCs, meta-search services and travel service providers, which may make our brand marketing efforts more expensive and less effective.
Performance marketing efficiency, expressed as performance marketing expense as a percentage of total revenues, 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 currency exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our platforms for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs per click and reduce our performance marketing efficiency. Changes by Google in how it presents travel search results, including by placing its own offerings at or near the top of search results, or the manner in which it conducts the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites. Similarly, changes by our other search and meta-search partners in how they present travel search results or the manner in which they conduct the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites.
We have observed a long-term trend of decreasing performance marketing returns on investment ("ROIs"), a trend we expect to continue, though the rate of decrease may fluctuate and there may be periods of stable or increasing ROIs from time to time. In addition, we may from time to time, as we did beginning in the third quarter of 2017 through the fourth quarter of 2018, pursue a strategy of improving our performance marketing ROIs, which could negatively impact growth and positively impact performance marketing efficiency and profitability. When evaluating our performance marketing spend, we consider several factors for each channel, such as the customer experience on the advertising platform, the incrementality of the traffic we receive and the anticipated repeat rate from a particular platform, as well as other factors. The amount of business we obtain through each performance marketing channel is impacted by numerous factors, including bidding decisions by us and our competitors (including decisions to optimize performance marketing ROIs) and the marketing efforts and success of those channels to attract consumers and generate demand. See Part II Item 1A Risk Factors - "We rely on performance and brand marketing channels to generate a significant amount of traffic to our platforms and grow our business." and "Our business could be negatively affected by changes in online search and meta-search algorithms and dynamics or traffic-generating arrangements."
In recent years, we experienced significant increases in our cancellation rates, which negatively affected our marketing efficiency and results of operations. Beginning in the third quarter of 2018, our cancellation rates have decreased, which has benefited our marketing efficiency and results of operations. We believe that many factors influence cancellation rates, and it is uncertain whether future cancellation rates will continue to decrease, stabilize or return to their prior trend of generally increasing over time.
Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, high or rising unemployment rates, inflation and weakening currencies, and concerns over government responses such as higher taxes or tariffs and reduced government spending, could impair consumer spending and adversely affect travel demand. Further, political uncertainty, conditions or events, such as the United Kingdom's decision to leave the European Union ("Brexit"), including uncertainty or delays in the implementation of Brexit and other political concerns can also negatively affect consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates, increased cancellation rates and weaker trends in ADRs across many regions of the world, particularly in those countries that appear to be most affected by economic and political uncertainties, which we believe are due at least in part to these macro-economic conditions and concerns. For more detail, see Part II Item 1A Risk Factors - "Declines or disruptions in the travel industry could adversely affect our business and financial performance."
These and other macro-economic uncertainties, such as geopolitical tensions and differing central bank monetary policies, have led to significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in foreign currency exchange rates, stock markets and oil prices can also impact consumer travel behavior.
As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to movements in foreign currency exchange rates as the financial results and the financial condition of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. As a result, both the absolute amounts of and percentage changes in our foreign-currency-denominated net assets, gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are affected by foreign currency exchange rate changes. Our foreign-currency-denominated gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are lower for the three and nine months ended September 30, 2019 than they would have been had foreign currency exchange rates remained where they were in the corresponding periods in 2018. For example, total revenues from our international businesses increased by 4.3% and 4.2% for the three and nine months ended September 30, 2019 as compared to the three and nine months ended September 30, 2018, respectively, but, without the impact of changes in foreign currency exchange rates, grew year-over-year on a constant-currency basis by approximately 8% and 9%, respectively. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. Historically, the aggregate principal value of our Euro-denominated debt and accrued interest thereon had provided a hedge against the impact of foreign currency exchange rate fluctuations on the net assets of one of our Euro functional currency subsidiaries. We have recognized foreign currency transaction gains or losses since we dedesignated certain portions of this hedge in the second and third quarters of 2019. The foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations (see Note 6 to our Unaudited Consolidated Financial Statements). For more information, see Part II Item 1A Risk Factors - "We are exposed to fluctuations in foreign currency exchange rates."
We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on the translation of our consolidated operating results into U.S. Dollars. However, such derivative instruments are short-term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings or revenues (see Note 6 to our Unaudited Consolidated Financial Statements for additional information on our derivative contracts).
Many national governments have conducted or are conducting investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Some countries have adopted or proposed legislation that could also affect business practices within the online travel industry. For example, France and Italy, among others, have adopted legislation making all price parity agreements illegal and similar legislation is under consideration in other countries. Also, a number of governments are investigating or conducting information-gathering exercises with respect to compliance by OTCs with consumer protection laws, including practices related to the display of search results and search ranking algorithms, claims regarding discounts, disclosure of charges and availability, and similar messaging. For more information on these investigations and their potential effects on our business, see Note 13 to our Unaudited Consolidated Financial Statements and Part II Item 1A Risk Factors - "Our business is subject to various competition, anti-trust, consumer protection and online commerce laws, rules and regulations around the world, and as the size of our business grows, scrutiny of our business by legislators and regulators in these areas may intensify." In addition to the price parity and consumer protection investigations, from time to time national competition authorities, other governmental agencies, trade associations and private parties take legal actions, including commencing legal proceedings, that may affect our operations. In general, increased regulatory focus on online businesses, including online travel businesses like ours, could result in increased compliance costs or otherwise adversely affect our business.
Seasonality
The majority of our gross bookings are generated in the first half of the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, we generally recognize revenue from these bookings when the travel begins (at "check-in"), which can be in a quarter other than when the reservation is booked. In contrast, we expense the substantial majority of our marketing activities as the expense is incurred, which, in the case of performance marketing in particular, is typically in the quarter in which associated reservations are booked. As a result of this potential timing difference between when we record marketing expense and when we recognize associated revenue, we experience our highest levels of profitability in the third quarter of the year, which is when we experience the highest levels of accommodation check-ins for the year for our European and North American businesses. The first quarter of the year is typically our lowest level of profitability
and may experience additional volatility in earnings growth rates due to these seasonal timing factors. For our Asia-Pacific business, we experience the highest levels of accommodation bookings in the third and fourth quarters of the year, and the highest levels of accommodation check-ins in the fourth quarter. As the relative growth rates for our businesses fluctuate, the quarterly distribution of our operating results may vary.
For several years, we experienced an expansion of the booking window (the average time between the making of a travel reservation and the travel), which impacts the relationship between our gross bookings (recognized at the time of booking) and our revenues (recognized at the time of check-in). However, we saw a contraction of the booking window throughout 2018 and in the nine months ended September 30, 2019. Future changes in the length of the booking window will affect the degree to which our gross bookings and revenues occur in the same period and, as a result, whether our gross bookings growth rates and revenue growth rates converge or diverge.
In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2019, Easter fell on April 21 and Easter-related travel began in the second quarter, when the associated revenue was recognized. By comparison, in 2018, Easter was on April 1 and a meaningful amount of Easter-related travel began in the week leading up to the holiday with the associated revenue being recognized in the first quarter of 2018. As a result of the shift in Easter timing relative to 2018, our first quarter 2019 year-over-year growth rates in revenue, operating income and operating margins were negatively impacted and our second quarter 2019 year-over-year growth rates were positively impacted. The timing of other holidays such as Ramadan can also impact our quarterly year-over-year growth rates.
The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable marketing expense. In addition, revenue growth is typically less impacted by decelerating gross bookings growth in the near term due to the benefit of revenue related to reservations booked in previous quarters, but any such deceleration would negatively impact revenue growth in subsequent periods. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable marketing expense. In addition, revenue growth is typically less impacted by accelerating gross bookings growth in the near term, but any such acceleration would positively impact revenue growth in subsequent periods as a portion of the revenue recognized from such gross bookings will occur in future quarters.
Other Factors
We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services. Factors beyond our control, such as oil prices, stock market volatility, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, fires, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika and MERS, political instability, changes in economic conditions, wars and regional hostilities, imposition of taxes, tariffs or surcharges by regulatory authorities, changes in trade policies or trade disputes, changes in immigration policies or travel-related accidents, can disrupt travel, limit the ability or willingness of travelers to visit certain locations or otherwise result in declines in travel demand. Because these events or concerns, and the full impact of their effects, are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers, and therefore demand for our services, which can adversely affect our business and results of operations. See Part II Item 1A Risk Factors - "Declines or disruptions in the travel industry could adversely affect our business and financial performance."
We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. We have experienced pressure on operating margins as we prioritize initiatives that drive growth. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, acquisitions. In addition, we are increasing collaboration among our brands to expand our product offerings with the aim of providing our customers the convenience of a frictionless travel experience. As the overall size of our business has grown, the competitive pressure to innovate will encompass a wider range of services and technologies, including services and technologies that may be outside of our historical core business, and our ability to keep pace may slow. Potential competitors, such as emerging start-ups, may be able to innovate and focus on developing a particularly new product or service faster than we can or may foresee consumer need for new services or technologies before us. Some of our larger competitors or potential competitors have more resources or more established or diversified relationships with consumers than we do, and they could use these advantages in ways that could affect our competitive position, including by making acquisitions, entering or investing in travel reservation businesses, investing in research and development, and competing aggressively for highly-skilled employees. For example, because consumers often utilize other online services more frequently than online travel services, a competitor or potential competitor that has established other, more frequent online interactions with consumers may be able to
more easily or cost-effectively acquire customers for its online travel services than we can. Our goal is to grow revenue and achieve healthy operating margins in an effort to maintain profitability. The uncertain and highly competitive environment in which we operate makes the prediction of future results of operations difficult, and accordingly, we may not be able to sustain revenue growth and profitability.
Critical Accounting Policies and Estimates for Valuation of Goodwill and Other Long-Lived Assets
A substantial portion of our intangibles and goodwill relates to the acquisitions of OpenTable and KAYAK. As of September 30, 2019, we performed our annual goodwill impairment testing and concluded that there was no impairment of goodwill. The fair values of our reporting units substantially exceeded their respective carrying values as of September 30, 2019. In addition, at September 30, 2019, we did not identify any impairment indicators for our other long-lived assets.
Results of Operations
Three and Nine Months Ended September 30, 2019 compared to the Three and Nine Months Ended September 30, 2018
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked through our OTC brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands, and therefore, search queries through KAYAK and restaurant reservations through OpenTable do not contribute to our gross bookings.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the three and nine months ended September 30, 2019 and 2018 were as follows (numbers may not total due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Agency
|
|
$
|
18,118
|
|
|
$
|
19,024
|
|
|
(4.8
|
)%
|
|
$
|
56,433
|
|
|
$
|
58,689
|
|
|
(3.8
|
)%
|
Merchant
|
|
7,163
|
|
|
5,250
|
|
|
36.5
|
%
|
|
19,297
|
|
|
14,490
|
|
|
33.2
|
%
|
Total
|
|
$
|
25,281
|
|
|
$
|
24,274
|
|
|
4.1
|
%
|
|
$
|
75,730
|
|
|
$
|
73,179
|
|
|
3.5
|
%
|
Gross bookings increased by 4.1% and 3.5% for the three and nine months ended September 30, 2019, respectively, compared to the three and nine months ended September 30, 2018 (growth on a constant-currency basis was approximately 7% and 8%, respectively), primarily due to growth of 11.0% in accommodation room night reservations for both the three and nine months ended September 30, 2019, partially offset by a decrease in accommodation ADRs on a constant-currency basis of approximately 3% and 2% for the three and nine months ended September 30, 2019, respectively, as well as the negative impact of foreign currency exchange rate fluctuations. We believe that unit growth rates and growth in total gross bookings on a constant-currency basis, which excludes the impact of foreign currency 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 from travelers for the travel services provided. Agency gross bookings decreased by 4.8% and 3.8% for the three and nine months ended September 30, 2019, respectively, compared to the three and nine months ended September 30, 2018, almost entirely due to a decrease in gross bookings from agency accommodation room night reservations at Booking.com, partially resulting from the growth of its merchant accommodation reservation services, as well as the aforementioned negative impact of foreign currency exchange rate fluctuations.
Merchant gross bookings are derived from services where we facilitate payments from travelers for the travel services provided. Merchant gross bookings increased by 36.5% and 33.2% for the three and nine months ended September 30, 2019, respectively, compared to the three and nine months ended September 30, 2018, almost entirely due to growth in gross bookings from our merchant accommodation reservation services at Booking.com and agoda, partially offset by the aforementioned negative impact of foreign currency exchange rate fluctuations. Booking.com has been expanding its merchant accommodation reservation services to, among other reasons, provide more payment options to consumers and travel service providers, increase the number and variety of accommodations available on Booking.com and enable the growth of its in-destination activities businesses.
Accommodation room nights, rental car days and airline tickets reserved through our services for the three and nine months ended September 30, 2019 and 2018 were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Room nights
|
|
223
|
|
201
|
|
11.0
|
%
|
|
654
|
|
589
|
|
11.0
|
%
|
Rental car days
|
|
21
|
|
19
|
|
8.5
|
%
|
|
60
|
|
59
|
|
2.8
|
%
|
Airline tickets
|
|
2
|
|
2
|
|
(2.5
|
)%
|
|
6
|
|
6
|
|
1.5
|
%
|
Accommodation room night reservations increased by 11.0% for both the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily due to our investments in improving the accommodation choices we offer our consumers, marketing and providing a continuously improving consumer experience, as well as the overall growth in the travel industry and the ongoing shift from offline to online for travel bookings. The increases for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, were also positively impacted by a decrease in cancellation rates.
Rental car day reservations increased by 8.5% for the three months ended September 30, 2019 compared to the three months ended September 30, 2018, due primarily to an increase in international rental car day reservations. Rental car day reservations increased by 2.8% for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, due primarily to an increase in international rental car day reservations, partially offset by a decrease in U.S. rental car day reservations primarily as a result of rental car supply constraints.
Airline ticket reservations decreased by 2.5% for the three months ended September 30, 2019, compared to the three months ended September 30, 2018, due to a decrease in airline ticket reservations at priceline. Airline ticket reservations increased by 1.5% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, due to the growth of priceline's vacation packages product.
Revenues
Online travel reservation services
Substantially all of our revenues are generated by providing online travel reservation services, which facilitate online travel purchases between travel service providers and travelers.
Revenues from online travel reservation services are classified into two categories:
|
|
•
|
Agency. Agency revenues are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided. Agency revenues consist almost entirely of travel reservation commissions, as well as certain GDS reservation booking fees and certain travel insurance fees. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.
|
|
|
•
|
Merchant. Merchant revenues are derived from travel-related transactions where we facilitate payments from travelers for the services provided, generally at the time of booking. Merchant revenues include (1) travel reservation commissions and transaction net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) in connection with our merchant reservation services; (2) credit card processing rebates and customer processing fees; and (3) ancillary fees, including travel insurance-related revenues and certain GDS reservation booking fees. Substantially all merchant revenues are for merchant services derived from transactions where travelers book accommodation reservations or rental car reservations from travel service providers.
|
Advertising and other revenues
Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's platforms; and (2) revenues earned by OpenTable for (a) restaurant reservation services (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees for restaurant management services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Agency revenues
|
|
$
|
3,435
|
|
|
$
|
3,541
|
|
|
(3.0
|
)%
|
|
$
|
7,991
|
|
|
$
|
8,221
|
|
|
(2.8
|
)%
|
Merchant revenues
|
|
1,313
|
|
|
1,050
|
|
|
25.1
|
%
|
|
2,875
|
|
|
2,286
|
|
|
25.8
|
%
|
Advertising and other revenues
|
|
292
|
|
|
258
|
|
|
12.4
|
%
|
|
861
|
|
|
807
|
|
|
6.5
|
%
|
Total revenues
|
|
$
|
5,040
|
|
|
$
|
4,849
|
|
|
3.9
|
%
|
|
$
|
11,727
|
|
|
$
|
11,314
|
|
|
3.6
|
%
|
Total revenues for the three and nine months ended September 30, 2019, as compared to the three and nine months ended September 30, 2018, respectively, increased by 3.9% and 3.6% (growth on a constant-currency basis was approximately 7% and 8%, respectively). Substantially all of the year-over-year increase for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, was related to revenues from our accommodation reservation services as well as a $37 million reduction in the liabilities for loyalty and other incentive programs in the third quarter of 2019, partially offset by the negative impact of foreign currency exchange rate fluctuations.
Agency revenues decreased by 3.0% and 2.8% for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018, almost entirely due to decreased gross bookings from agency accommodation room night reservations at Booking.com, partially resulting from the growth of its merchant accommodation reservation services.
Merchant revenues for the three and nine months ended September 30, 2019, as compared to the three and nine months ended September 30, 2018, respectively, increased by 25.1% and 25.8% primarily due to the increases in merchant accommodation reservation services. Booking.com has been expanding its merchant accommodation reservation services to, among other reasons, provide more payment options to consumers and travel service providers, improve the accommodation choices available on Booking.com and enable the growth of our in-destination activities businesses.
Advertising and other revenues increased by 12.4% and 6.5% for the three and nine months ended September 30, 2019, respectively, compared to the three and nine months ended September 30, 2018, primarily due to the inclusion of approximately $20 million and $52 million in revenue related to HotelsCombined, which was acquired in November 2018, in the three and nine months ended September 30, 2019, respectively. The increase in advertising and other revenues for the nine months ended September 30, 2019, as compared to the nine months ended September 30, 2018, was negatively impacted by an increase in revenues in 2018 resulting from the reduction of $27 million in OpenTable's loyalty program liability in the first quarter of 2018, partially offset by the reduction of $11 million in OpenTable's loyalty program liability in the third quarter of 2019.
Total revenues as a percentage of gross bookings was 19.9% and 15.5% for the three and nine months ended September 30, 2019, respectively, as compared to 20.0% and 15.5% for the three and nine months ended September 30, 2018, respectively.
Our international businesses accounted for $4.6 billion and $10.6 billion of our total revenues for the three and nine months ended September 30, 2019, respectively, which increased by 4.3% and 4.2%, respectively, compared to the three and nine months ended September 30, 2018 (growth on a constant-currency basis was approximately 8% and 9%, respectively). Total revenues attributable to our U.S. businesses were flat for the three months ended September 30, 2019, compared to the three months ended September 30, 2018. Total revenues attributable to our U.S. businesses decreased by 0.9% for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, due primarily to the reduction of $27 million in OpenTable's loyalty program liability in the first quarter of 2018, partially offset by the reduction of $11 million in OpenTable's loyalty program liability in the third quarter of 2019.
Operating Expenses
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Performance marketing
|
|
$
|
1,291
|
|
|
$
|
1,314
|
|
|
(1.8
|
)%
|
|
$
|
3,513
|
|
|
$
|
3,562
|
|
|
(1.4
|
)%
|
% of Total revenues
|
|
25.6
|
%
|
|
27.1
|
%
|
|
|
|
30.0
|
%
|
|
31.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand marketing
|
|
$
|
124
|
|
|
$
|
160
|
|
|
(22.4
|
)%
|
|
$
|
462
|
|
|
$
|
385
|
|
|
19.9
|
%
|
% of Total revenues
|
|
2.5
|
%
|
|
3.3
|
%
|
|
|
|
3.9
|
%
|
|
3.4
|
%
|
|
|
We rely on performance marketing channels to generate a significant amount of traffic to our websites. Performance marketing expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based marketing and incentives. For the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, performance marketing expense growth rate was reduced by foreign currency exchange rate fluctuations and slowing growth in performance marketing channels. We adjust our performance marketing spend based on our growth and profitability objectives and the expected performance of our performance marketing channels. Performance marketing expense as a percentage of total revenues decreased for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, due to changes in the share of traffic by channel, primarily related to an increase in the share of direct traffic, and the timing of booking versus travel. We recognize the substantial majority of our performance marketing expenses as they are incurred, which is typically in the quarter in which the associated reservations are booked. In contrast, we generally do not recognize revenue from these reservations until the travel begins, which can be in a quarter other than when the reservations are booked.
Brand marketing expenses consist primarily of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing spend such as public relations, sponsorships and trade shows. For the three months ended September 30, 2019, brand marketing expenses decreased by 22.4%, compared to the three months ended September 30, 2018, primarily due to a reduction of brand marketing expense at Booking.com. For the nine months ended September 30, 2019, brand marketing expenses increased by 19.9%, compared to the nine months ended September 30, 2018, primarily due to increased brand marketing expenses at Booking.com in the first half of 2019 in order to increase brand awareness and grow the number of customers that come directly to the Booking.com platforms.
Sales and Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Sales and other expenses
|
|
$
|
276
|
|
|
$
|
243
|
|
|
13.4
|
%
|
|
$
|
739
|
|
|
$
|
612
|
|
|
20.7
|
%
|
% of Total revenues
|
|
5.5
|
%
|
|
5.0
|
%
|
|
|
|
|
6.3
|
%
|
|
5.4
|
%
|
|
|
Sales and other expenses consist primarily of: (1) credit card and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) customer chargeback provisions and fraud prevention expenses associated with merchant transactions; (4) customer relations costs; and (5) provisions for bad debt, primarily related to agency accommodation commission receivables. For the three and nine months ended September 30, 2019, sales and other expenses, which are substantially variable in nature, increased compared to the three and nine months ended September 30, 2018, due primarily to increases in our merchant transaction volumes, partially offset by lower chargeback expense.
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Personnel
|
|
$
|
566
|
|
|
$
|
537
|
|
|
5.4
|
%
|
|
$
|
1,686
|
|
|
$
|
1,558
|
|
|
8.2
|
%
|
% of Total revenues
|
|
11.2
|
%
|
|
11.1
|
%
|
|
|
|
|
14.4
|
%
|
|
13.8
|
%
|
|
|
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 and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily due to increases in aggregate salaries of $36 million and $93 million, respectively, related to headcount growth to support our businesses, partially offset by lower bonus expenses. Personnel expenses increased during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, also due to an accrual of $61 million recorded in 2019 to correct an immaterial error related to the nonpayment in prior periods of a wage-related tax under Netherlands' law on compensation paid to certain highly-compensated former employees in the year of their separation from employment with Booking.com. Stock-based compensation expense was $79 million and $232 million for the three and nine months ended September 30, 2019, respectively, compared to $70 million and $216 million for the three and nine months ended September 30, 2018, respectively. Headcount increased, primarily in the areas of customer service and information technology to support transaction growth and various business initiatives, such as alternative accommodations, marketing, payments and in-destination experiences.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
General and administrative
|
|
$
|
225
|
|
|
$
|
183
|
|
|
23.4
|
%
|
|
$
|
596
|
|
|
$
|
505
|
|
|
18.4
|
%
|
% of Total revenues
|
|
4.5
|
%
|
|
3.8
|
%
|
|
|
|
|
5.1
|
%
|
|
4.5
|
%
|
|
|
|
General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) personnel-related expenses such as travel, relocation, recruiting and training expenses; and (3) fees for outside professionals, including litigation expenses. General and administrative expenses increased during the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, due to increased professional fees, higher occupancy and office expenses and personnel-related expenses associated with increased headcount and outside consultants to support the expansion of our international businesses. The increase in general and administrative expenses for the three and nine months ended September 30, 2019, primarily due to an accrual for the French digital services tax related to the first nine months of 2019 of $29 million and an accrual for travel transaction taxes related to prior periods of $10 million recognized in the third quarter of 2019, which was partially offset by an accrual for travel transaction taxes of $29 million related to prior periods recognized in the third quarter of 2018 (see Note 13 to the Unaudited Consolidated Financial Statements).
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Information technology
|
|
$
|
71
|
|
|
$
|
58
|
|
|
22.2
|
%
|
|
$
|
206
|
|
|
$
|
177
|
|
|
16.2
|
%
|
% of Total revenues
|
|
1.4
|
%
|
|
1.2
|
%
|
|
|
|
1.8
|
%
|
|
1.6
|
%
|
|
|
|
Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data center and cloud costs; (3) payments to outside consultants; and (4) data communications and other expenses associated with operating our services. Information technology expenses increased during the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, due primarily to increased data center and cloud costs, as well as increased software license fees.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Depreciation and amortization
|
|
$
|
117
|
|
|
$
|
107
|
|
|
8.6
|
%
|
|
$
|
352
|
|
|
$
|
317
|
|
|
10.9
|
%
|
% of Total revenues
|
|
2.3
|
%
|
|
2.2
|
%
|
|
|
|
|
3.0
|
%
|
|
2.8
|
%
|
|
|
|
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation of computer equipment; (3) depreciation of internally developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses increased during the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily as a result of increases of $5 million and $18 million, respectively, in data center equipment depreciation expenses and $4 million and $14 million, respectively, of internally developed software depreciation expenses due to higher capital expenditures and capitalized software development costs to support growth and geographic expansion.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Interest income
|
|
$
|
44
|
|
|
$
|
48
|
|
|
(10.4
|
)%
|
|
$
|
113
|
|
|
$
|
141
|
|
|
(20.0
|
)%
|
Interest expense
|
|
(70
|
)
|
|
(68
|
)
|
|
2.6
|
%
|
|
(204
|
)
|
|
(203
|
)
|
|
0.3
|
%
|
Net unrealized (losses) gains on marketable equity securities
|
|
(49
|
)
|
|
31
|
|
|
(256.0
|
)%
|
|
419
|
|
|
107
|
|
|
291.2
|
%
|
Foreign currency transactions and other
|
|
68
|
|
|
(18
|
)
|
|
(499.4
|
)%
|
|
37
|
|
|
(40
|
)
|
|
(191.7
|
)%
|
Total
|
|
$
|
(7
|
)
|
|
$
|
(7
|
)
|
|
9.3
|
%
|
|
$
|
365
|
|
|
$
|
5
|
|
|
7183.3
|
%
|
Interest income decreased for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily due to lower average invested balances of marketable securities and lower yields as well as increased usage of investments classified as cash equivalents.
Net unrealized (losses) gains on marketable equity securities for the three and nine months ended September 30, 2019 and 2018 were related to our equity investments in Trip.com Group and Meituan Dianping (see Note 5 to our Unaudited Consolidated Financial Statements).
Foreign currency transactions and other includes foreign currency gains and losses on derivative contracts, foreign currency transaction gains and losses, including costs related to foreign currency transactions, net realized gains and losses on investments and other income or expense. Foreign currency transactions and other includes foreign currency gains of $60 million and $17 million for the three and nine months ended September 30, 2019, respectively, and foreign currency losses of $17 million and $37 million for the three and nine months ended September 30, 2018, respectively. Foreign currency transaction gains for the three and nine months ended September 30, 2019 includes gains of $72 million and $54 million, respectively, related to the portion of our Euro-denominated debt that was not designated as a net investment hedge in the second and third quarters of 2019. In addition, foreign currency transactions and other includes a net realized gain of $11 million for the nine months ended September 30, 2019 and a net realized loss of $1 million for the nine months ended September 30, 2018 from sales of investments in debt securities.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
(in millions)
|
|
|
|
Nine Months Ended
September 30,
(in millions)
|
|
|
|
|
2019
|
|
2018
|
|
Change
|
|
2019
|
|
2018
|
|
Change
|
Income tax expense
|
|
$
|
413
|
|
|
$
|
473
|
|
|
(12.8
|
)%
|
|
$
|
844
|
|
|
$
|
851
|
|
|
(0.8
|
)%
|
% of Earnings before income taxes
|
|
17.5
|
%
|
|
21.1
|
%
|
|
|
|
18.6
|
%
|
|
20.2
|
%
|
|
|
Our 2019 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax (discussed below), partially offset by the effect of higher international tax rates. Our 2018 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax, U.S. state tax rate changes that resulted in a net decrease to deferred tax liabilities associated with acquired intangible assets and excess tax benefits recognized from the vesting of equity awards, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with our international earnings resulting from the enactment of the U.S. Tax Cuts and Jobs Act (the "Tax Act").
Our effective tax rates were lower for the three and nine months ended September 30, 2019, compared to the three and nine months ended September 30, 2018, primarily as a result of lower U.S. federal and state tax associated with our current year international earnings resulting from the enactment of the Tax Act and discrete tax benefits associated with U.S. federal tax credits.
A portion of Booking.com's earnings during the three and nine months ended September 30, 2019 and 2018 qualified for Innovation Box Tax treatment under Dutch tax law, which had a significant beneficial impact on our effective tax rates for those periods. In September 2019, the Dutch government released its 2020 Tax Plan, which if approved would increase the Innovation Box Tax rate from 7% to 9% and decrease the statutory corporate income tax rate from 25% to 21.7%, beginning in 2021. 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 and cash flows. See Part II Item 1A Risk Factors - "We may not be able to maintain our 'Innovation Box Tax' benefit."
Liquidity and Capital Resources
At September 30, 2019, we had $11.8 billion in cash, cash equivalents and short-term and long-term investments, of which approximately $3.8 billion is held by our international subsidiaries and is denominated primarily in U.S. Dollars, Euros and, to a lesser extent, British Pounds Sterling and other currencies. Cash equivalents and short-term and long-term investments are comprised of U.S. and international corporate bonds, U.S. and international government securities, money market funds, time deposits and certificates of deposit, convertible debt securities and American Depositary Shares ("ADSs") of Trip.com Group, Meituan Dianping equity securities and our investments in private companies. In August 2019, $500 million of Trip.com Group convertible notes were repaid on maturity. See Notes 5 and 6 to the Unaudited Consolidated Financial Statements for further information.
At September 30, 2019, we had a remaining transition tax liability of $1.1 billion as a result of the Tax Act, which included $1.0 billion reported as "Long-term U.S. transition tax liability" and $93 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next seven years. In accordance with the Tax Act, generally, future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes, which have been accrued by us.
In August 2019, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. The revolving credit facility provides for the issuance of up to $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. The proceeds of loans made under the facility will be used for working capital and general corporate purposes, including acquisitions, share repurchases and debt repayments. At September 30, 2019, there were no borrowings outstanding and $5 million of letters of credit were issued under the facility. Upon entering into the new revolving credit facility in August 2019, we terminated the $2.0 billion five-year revolving credit facility entered into in June 2015. We made several short-term borrowings under this prior revolving credit facility in the first half of 2019 totaling $400 million, all of which were repaid prior to June 30, 2019. See Note 9 to the Unaudited Consolidated Financial Statements for further information.
Our Convertible Senior Notes due June 2020 (the “2020 Notes”) are reported as current liabilities in the Consolidated Balance Sheet at September 30, 2019. The holders will have the right to convert all or any portion of the 2020 Notes at March 15, 2020 regardless of our stock price (see Note 9 to the Unaudited Consolidated Financial Statements).
During the nine months ended September 30, 2019, we repurchased 3,760,002 shares of our common stock for an aggregate cost of $6.8 billion. At September 30, 2019, we had a remaining aggregate amount of $12.9 billion authorized by our Board of Directors to repurchase our common stock. We have continued to make repurchases of our common stock in the fourth quarter of 2019 and may continue to make additional repurchases of our common stock from time to time, depending on prevailing market conditions, alternate uses of capital and other factors.
In September 2016, we signed a turnkey agreement to construct an office building for Booking.com’s headquarters in the Netherlands for 270 million Euros. Upon signing this agreement, we paid 43 million Euros for the acquired land-use rights. In addition, since signing the turnkey agreement we have made several progress payments principally related to the construction of the building. At September 30, 2019, we have a remaining obligation of 124 million Euros ($135 million) related to the building construction, which will be paid through 2021, when we anticipate construction will be complete. In addition to the turnkey agreement, we have a remaining obligation at September 30, 2019 to pay 72 million Euros ($79 million) over the remaining term of the acquired land lease. We will also make additional capital expenditures to fit out and furnish the office space.
See Note 13 to the Unaudited Consolidated Financial Statements for further information related to our commitments and contingencies.
Cash Flow Analysis
Net cash provided by operating activities decreased by $466 million for the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018, primarily due to the payment of $403 million in 2019 to French tax authorities to preserve our right in order to contest certain tax assessments in court (see Note 13 to our Unaudited Consolidated Financial Statements).
Net cash provided by operating activities for the nine months ended September 30, 2019 was $3.8 billion, resulting from net income of $3.7 billion and a favorable impact from adjustments for non-cash items of $450 million, partially offset by
an unfavorable net change in working capital and other long-term assets and liabilities of $356 million. Non-cash items were principally associated with net unrealized gains on marketable equity securities, depreciation and amortization, stock-based compensation expense and operating lease amortization. For the nine months ended September 30, 2019, prepaid expenses and other current assets increased by $247 million primarily related to the prepayments of Netherlands income taxes, net of utilization during the period, of $142 million to earn prepayment discounts and an increase in prepayments to suppliers of $67 million. For the nine months ended September 30, 2019, accounts receivable increased by $442 million primarily related to increases in business volumes. For the nine months ended September 30, 2019, accounts payable, accrued expenses and other current liabilities increased by $794 million primarily related to growth in Booking.com's merchant transactions and increases in business volumes. Due to the typical seasonality of our business, our gross bookings and revenues are generally higher in the third quarter of the year than in the fourth quarter of the year which typically results in higher accounts receivable, deferred merchant bookings, accounts payable and accrued expenses at September 30 compared to December 31. Net change in other long-term assets and liabilities of $461 million was primarily due to the increase in other long-term assets related to the payment of $403 million to French tax authorities in order to preserve our right to contest the assessments in court (see Note 13 to our Unaudited Consolidated Financial Statements).
Net cash provided by operating activities for the nine months ended September 30, 2018 was $4.3 billion, resulting from net income of $3.4 billion, a favorable impact from adjustments for non-cash items of $571 million and net favorable changes in working capital and other assets and liabilities of $331 million. Non-cash items were principally associated with depreciation and amortization, stock-based compensation expense, the provision for uncollectible accounts and net unrealized gains on marketable equity securities. For the nine months ended September 30, 2018, prepaid expenses and other current assets increased by $201 million, primarily related to an increase in prepayments to travel service providers of $106 million and the prepayments of Netherlands income taxes, net of utilization during the period, of $62 million to earn prepayment discounts. For the nine months ended September 30, 2018, accounts receivable increased by $450 million and accounts payable, accrued expenses and other current liabilities increased by $1.0 billion, primarily related to seasonality and increases in business volumes.
Net cash provided by investing activities for the nine months ended September 30, 2019 was $7.0 billion, principally resulting from the proceeds from sales and maturities of investments of $7.9 billion, net of purchases of $0.7 billion. Net cash provided by investing activities for the nine months ended September 30, 2018 was $1.8 billion, principally resulting from the proceeds from sales and maturities of investments of $4.5 billion, net of purchases of $2.2 billion, partially offset by acquisitions and other investments, net of cash acquired, of $139 million. Cash invested in the purchase of property and equipment was $281 million and $356 million in the nine months ended September 30, 2019 and 2018, respectively. Cash invested in the purchase of property and equipment for the nine months ended September 30, 2019 and 2018, respectively, included payments of $35 million and $72 million related to the turnkey agreement for constructing Booking.com's future headquarters.
Net cash used in financing activities was $6.9 billion for the nine months ended September 30, 2019, almost entirely resulting from payments for the repurchase of common stock of $6.8 billion. Net cash used in financing activities was $5.6 billion for the nine months ended September 30, 2018, which primarily consisted of payments for the repurchase of common stock of $4.1 billion and payments for the conversion of Senior Notes of $1.5 billion.
Contingencies
French tax authorities conducted an audit of Booking.com for 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 and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to those tax years for approximately 356 million Euros, the majority of which would represent penalties and interest. We believe that Booking.com has been, and continues to be, in compliance with French tax law and we are contesting the assessments. In December 2018, the French tax authorities issued a formal demand for payment of the amounts assessed. In January 2019, we paid the assessments of approximately 356 million Euros ($403 million) in order to preserve our right to contest the assessments in court. The payment, which is included in "Other assets" in the Consolidated Balance Sheet at September 30, 2019, does not constitute an admission that we owe the taxes and will be refunded (with interest) to us to the extent we prevail. If we are unable to resolve the matter with the French tax authorities, we plan to challenge the assessments in the French courts. The French tax authorities have begun a similar audit of the tax years 2013 through 2015 and recently extended the audit to include the years 2016 through 2018, both of which could result in additional assessments. See Part II Item 1A Risk Factors - "We may have exposure to additional tax liabilities."
Off-Balance Sheet Arrangements
At September 30, 2019, 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, 2018, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.