Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q 
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2018
OR
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from to
Commission File Number 1-36691
Booking Holdings Inc.
(Exact name of Registrant as specified in its charter) 
Delaware
06-1528493
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
800 Connecticut Avenue
Norwalk, Connecticut 06854
(address of principal executive offices)
(203) 299-8000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed, since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.   Yes ý No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act (Check one): 
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes o No ý
Number of shares of Common Stock outstanding at August 1, 2018:
Common Stock, par value $0.008 per share
 
47,472,026
(Class)
 
(Number of Shares)





Booking Holdings Inc.
Form 10-Q
 
For the Three Months Ended June 30, 2018
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at June 30, 2018 and December 31, 2017
Consolidated Statements of Operations (unaudited) For the Three and Six Months Ended June 30, 2018 and 2017
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Six Months Ended June 30, 2018 and 2017
Consolidated Statement of Changes in Stockholders' Equity (unaudited) For the Six Months Ended June 30, 2018
Consolidated Statements of Cash Flows (unaudited) For the Six Months Ended June 30, 2018 and 2017
Notes to Unaudited Consolidated Financial Statements
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 
Item 4. Controls and Procedures
 
 
PART II - OTHER INFORMATION
 
 
 
Item 1. Legal Proceedings
 
 
Item 1A. Risk Factors
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 6. Exhibits
 
 
SIGNATURES

2



PART I — FINANCIAL INFORMATION
Item 1.  Financial Statements

Booking Holdings Inc.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
3,186,665

 
$
2,541,604

Short-term investments in marketable securities
 
4,145,753

 
4,859,873

Accounts receivable, net of allowance for doubtful accounts of $47,258 and $39,282, respectively
 
1,715,055

 
1,217,801

Prepaid expenses and other current assets
 
985,901

 
415,527

Total current assets
 
10,033,374

 
9,034,805

Property and equipment, net
 
613,462

 
480,081

Intangible assets, net
 
2,162,766

 
2,176,823

Goodwill
 
2,850,396

 
2,737,671

Long-term investments
 
9,444,908

 
10,872,527

Other assets
 
191,347

 
149,356

Total assets
 
$
25,296,253

 
$
25,451,263

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
1,053,509

 
$
667,523

Accrued expenses and other current liabilities
 
1,418,603

 
1,138,980

Deferred merchant bookings
 
1,802,182

 
980,455

Convertible debt
 
948,190

 
710,910

Total current liabilities
 
5,222,484

 
3,497,868

Deferred income taxes
 
502,581

 
481,139

Long-term U.S. transition tax liability
 
1,144,682

 
1,250,846

Other long-term liabilities
 
143,651

 
148,061

Long-term debt
 
7,764,580

 
8,809,788

  Total liabilities
 
14,777,978

 
14,187,702

 
 
 
 
 
Commitments and Contingencies (See Note 12)
 
 
 
 
Convertible debt
 
45,643

 
2,963

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 62,926,877 and 62,689,097 shares issued, respectively
 
489

 
487

Treasury stock, 15,162,512 and 14,216,819 shares, respectively
 
(10,630,361
)
 
(8,698,829
)
Additional paid-in capital
 
5,225,709

 
5,783,089

Retained earnings
 
15,953,078

 
13,938,869

Accumulated other comprehensive income (loss)
 
(76,283
)
 
236,982

  Total stockholders' equity
 
10,472,632

 
11,260,598

Total liabilities and stockholders' equity
 
$
25,296,253

 
$
25,451,263


See Notes to Unaudited Consolidated Financial Statements.

3



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Agency revenues
 
$
2,566,293

 
$
2,332,371

 
$
4,679,632

 
$
4,117,684

Merchant revenues
 
709,864

 
498,133

 
1,236,331

 
940,178

Advertising and other revenues
 
260,937

 
194,052

 
549,332

 
386,098

Total revenues
 
3,537,094

 
3,024,556

 
6,465,295

 
5,443,960

Cost of revenues
 
 
 
67,425

 
 
 
147,826

Gross profit
 


 
2,957,131

 


 
5,296,134

Operating expenses:
 
 
 
 
 
 

 
 

Performance marketing
 
1,141,893

 
1,151,343

 
2,248,100

 
2,133,515

Brand marketing
 
123,734

 
130,321

 
225,136

 
211,139

Sales and other expenses
 
203,593

 
121,915

 
369,393

 
231,514

Personnel, including stock-based compensation of $74,540, $66,879, $145,945 and $125,827, respectively
 
522,250

 
385,708

 
1,021,137

 
736,738

General and administrative
 
158,753

 
143,882

 
320,892

 
279,429

Information technology
 
58,950

 
44,831

 
119,391

 
84,776

Depreciation and amortization
 
106,666

 
85,872

 
209,756

 
169,302

Total operating expenses
 
2,315,839

 
2,063,872

 
4,513,805

 
3,846,413

Operating income
 
1,221,255

 
893,259

 
1,951,490

 
1,449,721

Other (expense) income:
 
 
 
 
 
 

 
 

Interest income
 
45,690

 
36,821

 
92,569

 
68,813

Interest expense
 
(64,837
)
 
(60,942
)
 
(135,072
)
 
(116,659
)
Net unrealized gains on marketable equity securities
 
21,849

 

 
76,363

 

Foreign currency transactions and other
 
(15,046
)
 
(6,021
)
 
(23,102
)
 
(11,148
)
Total other (expense) income
 
(12,344
)
 
(30,142
)
 
10,758

 
(58,994
)
Earnings before income taxes
 
1,208,911

 
863,117

 
1,962,248

 
1,390,727

Income tax expense
 
231,539

 
142,908

 
377,666

 
214,895

Net income
 
$
977,372

 
$
720,209

 
$
1,584,582

 
$
1,175,832

Net income applicable to common stockholders per basic common share
 
$
20.34

 
$
14.66

 
$
32.87

 
$
23.92

Weighted-average number of basic common shares outstanding
 
48,055

 
49,131

 
48,202

 
49,161

Net income applicable to common stockholders per diluted common share
 
$
20.13

 
$
14.39

 
$
32.42

 
$
23.49

Weighted-average number of diluted common shares outstanding
 
48,550

 
50,056

 
48,877

 
50,049



See Notes to Unaudited Consolidated Financial Statements.


4



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
977,372

 
$
720,209

 
$
1,584,582

 
$
1,175,832

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax charge of $36,381, tax benefit of $100,608, tax charge of $20,358 and tax benefit of $120,341, respectively (1)
 
(127,862
)
 
139,883

 
(66,986
)
 
175,688

Reclassification of net unrealized gains on marketable equity securities to retained earnings, net of tax charge of $57,597 (2)
 

 

 
(241,088
)
 

Net unrealized (losses) gains on marketable securities, net of tax charge of $430 and $8,076, tax benefit of $998 and tax charge of $15,931, respectively (3)
 
(4,827
)
 
186,977

 
(5,191
)
 
532,911

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
844,683

 
$
1,047,069

 
$
1,271,317

 
$
1,884,431


(1) Foreign currency translation adjustments result from currency fluctuations on the translation of the Company's international non-U.S. Dollar denominated net assets. Foreign currency translation adjustments were unfavorable for the three and six months ended June 30, 2018 compared to the three and six months ended June 30, 2017 because the U.S. Dollar strengthened against certain currencies in which the Company's net assets are denominated.

During the three and six months ended June 30, 2018, the Company recorded deferred tax benefits of $21.0 million and $10.5 million, respectively, related to foreign currency translation adjustments to its one-time deemed repatriation tax liability recorded at December 31, 2017 and current year foreign earnings subject to U.S. federal and state income tax, resulting from the introduction of the U.S. Tax Cuts and Jobs Act (the "Tax Act"). Prior to January 1, 2018, foreign currency translation adjustments excluded U.S. federal and state income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States.

Foreign currency translation adjustments also include tax charges of $57.3 million and $30.8 million for the three and six months ended June 30, 2018, respectively, and tax benefits of $100.6 million and $120.3 million for the three and six months ended June 30, 2017, respectively, associated with the Company's Euro-denominated debt, which is designated as a net investment hedge against the impact of currency fluctuations of the Company's Euro-denominated net assets (see Note 8). 

(2) Changes in the fair value of the Company's investment in Ctrip.com International Ltd. ("Ctrip") equity securities for periods beginning after December 31, 2017 are recognized in net income pursuant to the adoption of the accounting update on financial instruments in the first quarter of 2018 (see Note 1). Net unrealized gains, net of tax, on marketable equity securities at December 31, 2017 have been reclassified from accumulated other comprehensive income to retained earnings.

(3) Net unrealized (losses) gains on marketable securities for the three and six months ended June 30, 2018 include net unrealized losses of $4.3 million and $6.1 million before tax, respectively, of which net unrealized losses of $15.6 million and net unrealized gains of $16.8 million, respectively, were exempt from tax in the Netherlands. Net unrealized gains of $11.3 million and net unrealized losses of $22.9 million for the three and six months ended June 30, 2018, respectively, were taxable at a 25% tax rate in the Netherlands, resulting in a tax charge of $2.8 million and a tax benefit of $5.7 million, respectively. The Company also recorded a U.S. tax benefit of $2.4 million and a U.S. tax charge of $4.7 million for the three and six months ended June 30, 2018, respectively, related to these investments.

Net unrealized (losses) gains on marketable securities for the three and six months ended June 30, 2017 include net unrealized gains of $195.0 million and $548.8 million before tax, respectively, of which net unrealized gains of $161.4 million and $485.1 million, respectively, were exempt from tax in the Netherlands. Net unrealized gains of $33.6 million and $63.7 million for the three and six months ended June 30, 2017, respectively, were taxable at a 25% tax rate in the Netherlands, resulting in tax charges of $8.0 million and $15.9 million, respectively.

See Notes to Unaudited Consolidated Financial Statements.

5



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2018
(In thousands)
 
 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2017
 
62,689

 
$
487

 
(14,217
)
 
$
(8,698,829
)
 
$
5,783,089

 
$
13,938,869

 
$
236,982

 
$
11,260,598

Net income
 

 

 

 

 

 
1,584,582

 

 
1,584,582

Foreign currency translation adjustments, net of
tax charge of $20,358
 

 

 

 

 

 

 
(66,986
)
 
(66,986
)
Net unrealized losses on marketable securities, net
of tax benefit of $998
 

 

 

 

 

 

 
(5,191
)
 
(5,191
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
(42,680
)
 

 

 
(42,680
)
Exercise of stock options and vesting of restricted stock units and/or performance share units
 
186

 
2

 

 

 
1,327

 

 

 
1,329

Repurchase of common stock
 

 

 
(946
)
 
(1,931,532
)
 

 

 

 
(1,931,532
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
146,682

 

 

 
146,682

Conversion of debt
 

 

 

 

 
(773,150
)
 

 

 
(773,150
)
Common stock issued in an acquisition
 
52

 

 

 

 
110,441

 

 

 
110,441

Cumulative effect of adoption of accounting
standard updates
 

 

 

 

 

 
429,627

 
(241,088
)
 
188,539

Balance, June 30, 2018
 
62,927

 
$
489

 
(15,163
)
 
$
(10,630,361
)
 
$
5,225,709

 
$
15,953,078

 
$
(76,283
)
 
$
10,472,632

 

See Notes to Unaudited Consolidated Financial Statements.


6



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
1,584,582

 
$
1,175,832

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 

Depreciation
 
117,427

 
85,123

Amortization
 
92,329

 
84,179

Provision for uncollectible accounts
 
62,033

 
26,127

Deferred income tax benefit
 
(21,328
)
 
(40,939
)
Net unrealized gains on marketable equity securities
 
(76,363
)
 

Stock-based compensation expense and other stock-based payments
 
149,501

 
126,047

Amortization of debt issuance costs
 
3,793

 
4,509

Amortization of debt discount
 
27,371

 
35,386

Loss on early extinguishment of debt
 

 
1,027

Changes in assets and liabilities, net of effects of an acquisition:
 
 
 
 

Accounts receivable
 
(391,802
)
 
(333,545
)
Prepaid expenses and other current assets
 
(574,151
)
 
(438,641
)
Accounts payable, accrued expenses and other current liabilities
 
1,328,616

 
873,705

Other long-term assets and liabilities
 
(11,789
)
 
3,024

Net cash provided by operating activities
 
2,290,219

 
1,601,834

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 

Purchase of investments
 
(1,359,605
)
 
(2,869,903
)
Proceeds from sale of investments
 
3,497,179

 
1,480,236

Additions to property and equipment
 
(235,035
)
 
(147,269
)
Acquisitions and other investments, net of cash acquired
 
(139,386
)
 
(490
)
Net cash provided by (used in) investing activities
 
1,763,153

 
(1,537,426
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from short-term borrowing
 
3,033

 
4,599

Proceeds from the issuance of long-term debt
 

 
1,051,722

Payments for conversion of senior notes
 
(1,487,109
)
 
(83,473
)
Payment of debt
 
(348
)
 

Payments for repurchase of common stock
 
(1,905,280
)
 
(555,250
)
Proceeds from exercise of stock options
 
1,329

 
2,790

Net cash (used in) provided by financing activities
 
(3,388,375
)
 
420,388

Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents
 
(20,457
)
 
68,570

Net increase in cash, cash equivalents and restricted cash and cash equivalents
 
644,540

 
553,366

Cash, cash equivalents and restricted cash and cash equivalents, beginning of period
 
2,563,341

 
2,082,007

Cash, cash equivalents and restricted cash and cash equivalents, end of period
 
$
3,207,881

 
$
2,635,373

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
984,524

 
$
577,247

Cash paid during the period for interest
 
$
100,662

 
$
60,308

Non-cash financing activity for loan forgiveness
 
$

 
$
1,000

Non-cash operating and financing activity for an acquisition (see Note 7)
 
$
50,751

 
$

Non-cash investing and financing activity for an acquisition (see Note 7)
 
$
59,690

 
$

See Notes to Unaudited Consolidated Financial Statements.

7



Booking Holdings Inc.
Notes to Unaudited Consolidated Financial Statements
 
1.                                      BASIS OF PRESENTATION
 
Management of Booking Holdings Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
 
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, priceline, KAYAK, agoda.com, Rentalcars.com and OpenTable. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiaries is generally the respective local currency. Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date. Income statement amounts are translated at the average exchange rates for the period. Translation gains and losses are included as a component of "Accumulated other comprehensive income (loss)" in the accompanying Unaudited Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
 
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for any subsequent quarter or the full year.

Change in Presentation

In the first quarter of 2018, the Company changed the presentation of "Performance advertising", "Brand advertising", and "Sales and marketing" to "Performance marketing", "Brand marketing" and "Sales and other expenses" in the Unaudited Consolidated Statements of Operations. The descriptions of these new lines are as follows:

"Performance marketing" expenses are marketing expenses generally measured by return on investment or an increase in bookings over a specified time period. These expenses consist primarily of the costs of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements, including certain incentive programs.

"Brand marketing" expenses are marketing expenses to build brand awareness over a specified time period. These expenses consist primarily of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing expenses such as public relations, trade shows and sponsorships.

"Sales and other expenses" are generally variable in nature and consist primarily of: (1) credit cards and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) provisions for customer chargebacks associated with merchant transactions; (4) customer relations costs; (5) provisions for bad debt, primarily related to agency accommodation commission receivables; and (6) insurance claim costs.

Reclassification

In conjunction with the adoption of the current revenue standard effective January 1, 2018, the Company reclassified certain expenses from "Cost of revenues" to "Sales and other expenses" or "General and administrative" expenses in its Unaudited Consolidated Statement of Operations for the three and six months ended June 30, 2017 to conform to the current period presentation.


8



The change in presentation and the reclassification for the three and six months ended June 30, 2017 had no impact on operating income or net income and are summarized below (in thousands):
Previously Reported
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
 
Cost of revenues
 
$
72,742

 
$
157,911

 
Performance advertising
 
1,147,589

 
2,128,362

 
Brand advertising
 
121,187

 
194,199

 
Sales and marketing
 
131,734

 
245,770

 
General and administrative
 
141,634

 
277,181

 
 
 
 
 
 
Current Presentation
 
Three Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2017
 
Cost of revenues
 
$
67,425

 
$
147,826

 
Performance marketing
 
1,151,343

 
2,133,515

 
Brand marketing
 
130,321

 
211,139

 
Sales and other expenses
 
121,915

 
231,514

 
General and administrative
 
143,882

 
279,429


Balance Sheet Reclassification

In the second quarter of 2018, the Company changed the presentation of "Long-term investments" to include investments in private companies, which were previously included in "Other assets" in the Unaudited Consolidated Balance Sheets.  Therefore, the Company reclassified $450.9 million for investments in private companies to conform its Consolidated Balance Sheet at December 31, 2017 to this current period presentation. See the section "Long-term Equity Investments without Readily Determinable Fair Value" within Note 5 for more detail.

Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents at June 30, 2018 and December 31, 2017 principally relates to the minimum cash requirement for Rentalcars.com's insurance business established in the fourth quarter of 2017. The following table reconciles cash, cash equivalents and restricted cash and cash equivalents reported in the Unaudited Consolidated Balance Sheets to the total amount shown in the Unaudited Consolidated Statements of Cash Flows (in thousands):
 
 
June 30,
2018
 
December 31,
2017
As included in the Unaudited Consolidated Balance Sheets:
 
 
 
 
Cash and cash equivalents
 
$
3,186,665

 
$
2,541,604

Restricted cash and cash equivalents included in prepaid expenses and other current assets
 
21,216

 
21,737

Total cash, cash equivalents and restricted cash and cash equivalents as shown in the Unaudited Consolidated Statements of Cash Flows
 
$
3,207,881

 
$
2,563,341


Recent Accounting Pronouncements Adopted

Improvements to Non-employee Share-Based Payment Accounting

In June 2018, the Financial Accounting Standards Board (“FASB”) issued a new accounting update which amends the guidance on share-based payments granted to non-employees for goods and services to align it with the guidance for share-based payments to employees. Under this new guidance, share-based awards to non-employees will be generally measured at fair value on the grant date of the awards and entities will need to assess the probability of satisfying performance conditions, if any are present, to determine expense to be recognized.
This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the second quarter of 2018 and applied this update as of January 1, 2018. The adoption of this update did not have a material impact to the Unaudited Consolidated Financial Statements.

9



Recognition and Measurement of Financial Instruments

In January 2016, the FASB issued a new accounting update which amends the guidance on the recognition and measurement of financial instruments. The update (1) requires an entity to measure equity investments (except those accounted for under the equity method or those that result in consolidation of the investee) at fair value with changes in fair value recognized in net income rather than accumulated other comprehensive income, (2) allows an entity to elect to measure those equity investments that do not have a readily determinable fair value at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer, (3) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, and (4) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s evaluation of their other deferred tax assets.

This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted this update in the first quarter of 2018. The Company recorded an increase of $241.1 million to retained earnings for the net unrealized gain, net of tax, related to its investment in Ctrip equity securities, with an offsetting adjustment to accumulated other comprehensive income as of January 1, 2018. Changes in fair value of the Company's investment in Ctrip equity securities subsequent to January 1, 2018 are recognized in net income (see Note 5). In addition, the Company elected to continue to use the cost method of accounting for equity investments without a readily determinable fair value.

Revenue from Contracts with Customers

In May 2014, the FASB issued a new accounting standard on the recognition of revenue from contracts with customers that was designed to create greater comparability for financial statement users across industries and jurisdictions. The core principle of this new standard is that an "entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This new standard also requires enhanced disclosures on the nature, amount, timing and uncertainty of revenue from contracts with customers. Since May 2014, the FASB has issued several amendments to this new standard, including additional guidance, and deferred the effective date for public business entities to annual and interim periods beginning after December 15, 2017.

The Company adopted this new standard on January 1, 2018. The Company recorded a net increase to its retained earnings of $188.5 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the new standard, with substantially all of the impact related to the Company’s travel reservation services. See Note 2 for more information on the effects of the adoption of this standard.

Other Recent Accounting Pronouncements

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued a new accounting update to shorten the premium amortization period of purchased callable debt securities with non-contingent call features that are callable at fixed prices and on preset dates from their contractual maturity to the earliest call date. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities are required to apply this update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The adoption of this update will not have a material impact to the Company's Consolidated Financial Statements as almost all of the Company's investments in callable debt securities include a make-whole provision, which is excluded from the scope of this update.

Simplifying the Test for Goodwill Impairment

In January 2017, the FASB issued a new accounting update to simplify the test for goodwill impairment by eliminating Step 2, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill, which requires a hypothetical purchase price allocation, with the carrying amount of that reporting unit's goodwill. Under this update, an entity would perform its quantitative annual or interim goodwill impairment test using the current Step 1 test and recognize an impairment charge for the excess of the carrying value of a reporting unit over its fair value.


10



For public business entities, this update is effective for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests occurring after January 1, 2017. The update will be applied prospectively. The Company has not early adopted this update.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued a new accounting update on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable and available-for-sale debt securities. For financial assets measured at amortized cost, this update requires an entity to (1) estimate its lifetime expected credit losses upon recognition of the financial assets and establish an allowance to present the net amount expected to be collected, (2) recognize this allowance and changes in the allowance during subsequent periods through net income and (3) consider relevant information about past events, current conditions and reasonable and supportable forecasts in assessing the lifetime expected credit losses. For available-for-sale debt securities, this update made several targeted amendments to the existing other-than-temporary impairment model, including (1) requiring disclosure of the allowance for credit losses, (2) allowing reversals of the previously recognized credit losses until the entity has the intent to sell, is more-likely-than-not required to sell the securities or the maturity of the securities, (3) limiting impairment to the difference between the amortized cost basis and fair value and (4) not allowing entities to consider the length of time that fair value has been less than amortized cost as a factor in evaluating whether a credit loss exists.

This update is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Entities are required to apply this update on a modified retrospective basis with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this update and does not expect there to be a material impact.

Leases

In February 2016, the FASB issued a new accounting standard intended to improve the financial reporting of lease transactions. The new accounting standard requires lessees to recognize an asset and a liability on the balance sheet for the rights and obligations created by entering into a lease transaction. The new standard retains the dual-model concept by requiring entities to determine if a lease is an operating or financing lease. The lessor accounting model remains largely unchanged. The new standard expands qualitative and quantitative disclosures for lessees.

The standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach applied to the earliest comparative period in the financial statements. In July 2018, the FASB approved a new transition method that would permit issuers to apply the standard as of January 1, 2019. Early adoption is permitted.

The Company will adopt this standard in the first quarter of 2019 and apply it as of January 1, 2019. The Company is in the process of implementing a software platform to facilitate compliance with the new accounting and disclosure requirements. The most significant change will be related to the recognition of right-of-use assets and lease liabilities in the Company's balance sheet for real estate operating leases.

2.    REVENUE RECOGNITION

Adoption of ASC Topic 606, Revenues from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606, Revenue from Contracts with Customers, using a modified retrospective method applied to all contracts as of January 1, 2018. Therefore, for reporting periods beginning after December 31, 2017, the financial statements are prepared in accordance with the current revenue standard and the financial statements for all periods prior to January 1, 2018 are presented under the previous revenue standard.

For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. For example, revenues for accommodation reservation services, which were principally recognized at check-out under the previous revenue standard, are now recognized at check-in under the current revenue standard. The Company currently expects that this timing change will not have a significant impact to its annual revenues and net income, although the effects on quarterly revenues and net income are expected to be more significant.


11



In addition, revenues from priceline's Name Your Own Price® ("NYOP") transactions were previously presented on a gross basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard, NYOP revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, the Company no longer presents "Cost of revenues" or "Gross profit" in its Consolidated Statements of Operations. Total revenues reported in 2018 are comparable to gross profit reported in previous years.

Billing and cash collections remain unchanged and, therefore, "Net cash provided by operating activities" as presented in the Consolidated Statements of Cash Flows is not impacted.

The Company recorded a net increase to its retained earnings of $188.5 million, net of tax, as of January 1, 2018, due to the cumulative impact of adopting the current revenue standard, with substantially all of the impact related to the Company’s travel reservation services. In addition, since the Company is using the modified retrospective method of adopting the current revenue standard, the Company is required to disclose the financial impacts to its Consolidated Balance Sheets and Consolidated Statements of Operations for all 2018 reporting periods (refer to the disclosures below for this additional information).

The cumulative effects of the revenue accounting changes on the Company's Unaudited Consolidated Balance Sheet as of January 1, 2018 were as follows (in thousands):
 
 
Balance at December 31, 2017
 
Adjustments
 
Balance at January 1, 2018
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Accounts receivable, net
 
$
1,217,801

 
$
205,324

 
$
1,423,125

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
667,523

 
$
171,644

 
$
839,167

Accrued expenses and other current liabilities
 
1,138,980

 
44,374

 
1,183,354

Deferred merchant bookings
 
980,455

 
(201,647
)
 
778,808

 
 
 
 
 
 
 
Deferred income taxes
 
481,139

 
2,414

 
483,553

 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
Retained earnings
 
13,938,869

 
188,539

 
14,127,408




12



The following tables summarize the impacts of adopting the current revenue standard (in thousands, except per share data):

Unaudited Consolidated Balance Sheets at June 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Accounts receivable, net
 
$
1,715,055

 
$
(148,982
)
 
$
1,566,073

Prepaid expenses and other current assets
 
985,901

 
37,573

 
1,023,474

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
1,053,509

 
$
(110,170
)
 
$
943,339

Accrued expenses and other current liabilities
 
1,418,603

 
(8,883
)
 
1,409,720

Deferred merchant bookings
 
1,802,182

 
145,297

 
1,947,479

 
 
 
 
 
 
 
Deferred income taxes
 
502,581

 
(285
)
 
502,296

 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
Retained earnings
 
15,953,078

 
(139,366
)
 
15,813,712

Accumulated other comprehensive income (loss)
 
(76,283
)
 
1,998

 
(74,285
)

Unaudited Consolidated Statements of Operations for the Three Months Ended June 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
 
 
 
 
 
 
 
Agency revenues
 
$
2,566,293

 
$
(3,309
)
 
$
2,562,984

Merchant revenues
 
709,864

 
40,137

 
750,001

Advertising and other revenues
 
260,937

 
13

 
260,950

Cost of revenues
 
 
 
44,290

 
44,290

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Performance marketing
 
1,141,893

 
(1,390
)
 
1,140,503

Sales and other expenses
 
203,593

 
(205
)
 
203,388

General and administrative
 
158,753

 
233

 
158,986

Foreign currency transactions and other
 
(15,046
)
 
(1,066
)
 
(16,112
)
Income tax expense
 
231,539

 
(1,011
)
 
230,528

Net income
 
977,372

 
(6,142
)
 
971,230

Net income applicable to common stockholders per basic common share
 
20.34

 
(0.13
)
 
20.21

Net income applicable to common stockholders per diluted common share
 
20.13

 
(0.13
)
 
20.00



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Unaudited Consolidated Statements of Operations for the Six Months Ended June 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
 
 
 
 
 
 
 
Agency revenues
 
$
4,679,632

 
$
52,678

 
$
4,732,310

Merchant revenues
 
1,236,331

 
101,677

 
1,338,008

Advertising and other revenues
 
549,332

 
104

 
549,436

Cost of revenues
 
 
 
89,950

 
89,950

 
 
 
 

 
 
Operating expenses:
 
 
 

 
 
Performance marketing
 
2,248,100

 
1,004

 
2,249,104

Sales and other expenses
 
369,393

 

 
369,393

General and administrative
 
320,892

 
1,034

 
321,926

Foreign currency transactions and other
 
(23,102
)
 
789

 
(22,313
)
Income tax expense
 
377,666

 
14,087

 
391,753

Net income
 
1,584,582

 
49,173

(1) 
1,633,755

Net income applicable to common stockholders per basic common share
 
32.87

 
1.02

 
33.89

Net income applicable to common stockholders per diluted common share
 
32.42

 
1.01

 
33.43


(1) The current period adjustment represents the net income recorded directly to retained earnings on January 1, 2018 of $188.5 million that would have been recognized in the first quarter of 2018 under the previous revenue standard, partially offset by $139.4 million that would have been recognized in the third quarter of 2018 under the previous revenue standard.


Revenue Recognition

Online travel reservation services

For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. Substantially all of the Company's revenues are generated by providing online travel reservation services, which principally allows travelers to book travel reservations (e.g., accommodation, rental car and airline ticket reservations) with travel service providers (i.e., a hotel or other accommodation, rental car company or airline) through the Company’s websites and mobile apps. While the Company generally refers to a consumer that books travel reservation services on the Company's platforms as its customer, for accounting purposes, the Company's "customers" are the travel service providers and, in certain merchant transactions, the travelers. The Company's contracts with the travel service providers give them the ability to market their reservation availability without transferring responsibility to deliver the travel service to the Company; therefore, the Company's revenues are presented on a net basis in the Consolidated Statements of Operations. These contracts include payment terms and establish the consideration to which the Company is entitled, which includes either a commission or a margin on the travel transaction. Revenue is measured based on the expected consideration specified in the contract with the travel service provider, considering the effects of sales incentives, "no show" cancellations (where the traveler has not cancelled the reservation and does not arrive on the scheduled reservation date) and "late" cancellations (where the travel service provider accepts a cancellation after its cancellation cut-off date). Estimates for cancellations are based on historical experience.

Online travel reservation services are recorded at a point in time when the Company has completed its post-booking services and the travelers begin using the arranged travel services. These services are classified into two categories:

Agency revenues are derived from travel-related transactions where the Company does not receive payments from travelers for the travel reservation services provided. The Company invoices the travel service providers for its commissions in the month that travel is completed. Agency revenues consist almost entirely of travel reservation commissions, as well as certain global distribution fees ("GDS"), reservation booking fees and certain travel insurance fees.


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Merchant revenues are derived from services where the Company receives payments from travelers for the travel reservation services provided, generally at the time of booking. The Company records cash collected from travelers, which includes the amounts owed to the travel service providers and the Company’s commission or margin and fees, as deferred merchant bookings until the arranged travel service begins. Merchant revenues include net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) and travel reservation commissions in connection with our accommodation reservations and rental car services; ancillary fees, including damage excess waiver insurance and certain travel insurance fees and certain GDS reservation booking fees; and customer processing fees. Substantially all merchant revenues are for merchant services derived from transactions where travelers book accommodations reservations or rental car reservations from travel service providers.

Pursuant to the terms of the Company's merchant services, the travel service providers are permitted to bill the Company for the underlying cost of the services during a specified period of time. If the Company is not billed by the travel service providers within the specified period of time, the Company increases its revenue by the unbilled amounts.

Tax Recovery Charge, Occupancy Taxes and State and Local Taxes

For merchant transactions, the Company charges the traveler an amount intended to cover the taxes that the Company anticipates the travel service provider will remit to the local taxing authorities ("tax recovery charge").  Tax rate information for calculating the tax recovery charge is provided to the Company by the travel service providers.

In certain taxing jurisdictions, the Company is required by statute, regulation or court order to collect and remit certain local occupancy tax, general excise and/or sales tax (“transaction-related taxes”) imposed upon its margin and/or service fees. In other taxing jurisdictions, the Company is required to collect from the traveler and remit directly to the taxing jurisdiction transaction-related taxes imposed on the full amount of the transaction, which includes taxes on the margin, service fees and the underlying rate provided by the travel service provider. The rate information for calculating these taxes is provided to the Company directly from the taxing jurisdictions. The taxes collected from travelers are reported on a net basis in Revenues in the Unaudited Consolidated Statements of Operations.

Advertising and Other Revenues

Advertising and other revenues are primarily recognized by KAYAK and OpenTable and to a lesser extent by priceline for advertising placements on its website and Booking.com's BookingSuite branded accommodation marketing and business analytics services. KAYAK recognizes advertising revenue primarily by sending referrals to online travel companies ("OTCs") and travel service providers and from advertising placements on its websites and mobile apps. Revenue related to referrals is recognized when a customer clicks on a referral placement or upon completion of the travel. Revenue for advertising placements is recognized based upon when a customer clicks on an advertisement or when KAYAK displays an advertisement. OpenTable recognizes reservation fees when diners are seated through its online restaurant reservation service and subscription fees for restaurant management services on a straight-line basis over the contractual period in accordance with how the service is provided.

Loyalty Programs

The Company provides various loyalty programs, where participating travelers or diners are awarded loyalty incentives on current transactions that can be redeemed for future qualifying reservations booked with the travel service provider through the Company's websites or mobile apps or, in the case of OpenTable, at participating restaurants. The estimated fair value of the incentives that are expected to be redeemed is recognized as a reduction of revenues at the time the incentives are granted. In the first quarter of 2018, OpenTable introduced a three-year time-based expiration for points earned by diners, which resulted in a reduction of a portion of the loyalty liability of approximately $27 million. At June 30, 2018 and December 31, 2017, liabilities of $80.6 million and $104.7 million, respectively, for loyalty incentives were included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets.

The Company uses the portfolio approach to account for its loyalty points as the rewards programs share similar characteristics within each program in relation to the value provided to the traveler or diner and their breakage patterns. Using this portfolio approach is not expected to differ materially from applying the guidance to individual contracts.


15



Disaggregation of revenue

Geographic Information

The Company's international information consists of the results of Booking.com, Rentalcars.com (which began operating as part of Booking.com on January 1, 2018) and agoda.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 at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in thousands):

 
 
 
 
International
 
 
 
Total revenues for the Three Months Ended
June 30,
 
United States
 
The Netherlands
 
Other
 
Total
 
2018
 
$
423,267

(1) 
$
2,706,702

 
$
407,125

 
$
3,537,094

(1) 
2017
 
422,307

(2) 
2,278,255

 
323,994

 
3,024,556

(2) 

(1) Total revenues have been reduced for cost of revenues for NYOP transactions of $44.3 million in 2018.

(2) Total revenues have not been reduced for cost of revenues for NYOP transactions of $67.4 million in 2017.

 
 
 
 
International
 
 
 
Total revenues for the Six Months Ended
June 30,
 
United States
 
The Netherlands
 
Other
 
Total
 
2018
 
$
801,958

(1) 
$
4,829,426

 
$
833,911

 
$
6,465,295

(1) 
2017
 
821,492

(2) 
3,965,558

 
656,910

 
5,443,960

(2) 

(1) Total revenues have been reduced for cost of revenues for NYOP transactions of $90.0 million in 2018.

(2) Total revenues have not been reduced for the cost of revenues for NYOP transactions of $147.8 million in 2017.

Revenue by Type of Service

Approximately 86% of the Company's revenue for both the three and six months ended June 30, 2018, respectively, relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services or advertising and other revenues each represent less than 10% of the Company's total revenues.

Deferred Revenue

Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Unaudited Consolidated Balance Sheets and are comprised principally of amounts owed to the travel service providers as well as the Company's deferred revenue for its commission or margin and fees. At June 30, 2018 and December 31, 2017, deferred merchant bookings includes deferred revenue of $293.0 million and $151.2 million, respectively. The Company expects to complete its service obligation within one year of booking. In the six months ended June 30, 2018, the Company recognized revenue of $97.6 million and cancellations of $9.1 million related to the deferred revenue balance at December 31, 2017. In addition, the Company reduced the December 31, 2017 balance by $32.4 million for the impact of the adoption of the current revenue standard on January 1, 2018. The offsetting increase in the deferred revenue balance for the six months ended June 30, 2018 is principally driven by payments received from travelers, net of amounts payable to travel service providers, of $287.3 million for those online travel reservations in the current period.


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3.                                      STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $74.5 million and $66.9 million for the three months ended June 30, 2018 and 2017, respectively, and $145.9 million and $125.8 million for the six months ended June 30, 2018 and 2017, respectively.

Stock-based compensation expense is recognized in the financial statements based upon fair value. Fair value is recognized as an expense on a straight-line basis over the employee's requisite service period and forfeitures are accounted for when they occur. The fair value of performance share units and restricted stock units is determined based on the number of units granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation expense related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition dates.
 
Restricted Stock Units and Performance Share Units

The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the six months ended June 30, 2018
Share-Based Awards
 
Shares
 
Weighted-Average Grant Date Fair Value
Unvested at December 31, 2017
 
524,696

 
 
$
1,431.88

 
Granted
 
153,637

 
 
$
2,035.68

 
Vested
 
(184,648
)
 
 
$
1,277.74

 
Performance Shares Adjustment
 
12,676

 
 
$
1,587.94

 
Forfeited/Canceled
 
(21,685
)
 
 
$
1,649.68

 
Unvested at June 30, 2018
 
484,676

 
 
$
1,676.34

 
 
At June 30, 2018, there was $496.1 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 2.1 years.
 
During the six months ended June 30, 2018, the Company made broad-based grants of 103,916 restricted stock units that generally have a three-year vesting period, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of $211.6 million based on a weighted-average grant date fair value per share of $2,036.58.

In addition, during the six months ended June 30, 2018, the Company granted 49,721 performance share units to executives and certain other employees. The performance share units had a total grant date fair value of $101.1 million based on a weighted-average grant date fair value per share of $2,033.79. The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units generally must continue their service through the requisite service period in order to receive any shares. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which generally ends December 31, 2020, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.  At June 30, 2018, the estimated number of probable shares to be issued is a total of 49,475 shares, net of performance share units that were forfeited or vested since the grant date. If the maximum performance thresholds are met at the end of the performance period, a maximum number of 98,950 total shares could be issued.  If the minimum performance thresholds are not met, 38,165 shares would be issued at the end of the performance period.

2017 Performance Share Units

During the year ended December 31, 2017, the Company granted 73,893 performance share units with a grant date fair value of $128.2 million, based on a grant date fair value per share of $1,735.10. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2019, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.


17



At June 30, 2018, there were 64,769 unvested 2017 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At June 30, 2018, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 84,507 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 129,538 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 51,512 shares would be issued at the end of the performance period.
 
2016 Performance Share Units

During the year ended December 31, 2016, the Company granted 85,735 performance share units with a grant date fair value of $111.7 million, based on a weighted-average grant date fair value per share of $1,302.25. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2018.

At June 30, 2018, there were 66,270 unvested 2016 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At June 30, 2018, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 111,196 shares. If the maximum thresholds are met at the end of the performance period, a maximum of 148,953 total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 39,498 shares would be issued at the end of the performance period.

Stock Options

All outstanding employee stock options were assumed in acquisitions. The following table summarizes the activity for stock options during the six months ended June 30, 2018
Employee Stock Options
 
Number of Shares
 
Weighted-Average
Exercise Price
 
Aggregate
 Intrinsic Value (in thousands)
 
Weighted-Average Remaining Contractual Term
(in years)
Balance, December 31, 2017
 
30,675

 
 
$
401.61

 
 
$
40,986

 
3.9
Exercised
 
(2,770
)
 
 
$
480.63

 
 
 
 
 
Forfeited
 
(13
)
 
 
$
241.83

 
 
 
 
 
Balance, June 30, 2018
 
27,892

 
 
$
393.92

 
 
$
45,552

 
3.3
Vested and exercisable at June 30, 2018
 
27,819

 
 
$
402.22

 
 
$
45,492

 
3.3
Vested and exercisable at June 30, 2018 and expected to vest thereafter
 
27,892

 
 
$
393.92

 
 
$
45,552

 
3.3

The aggregate intrinsic value of employee stock options exercised during the six months ended June 30, 2018 and 2017 was $4.4 million and $16.8 million, respectively. During the six months ended June 30, 2018 and 2017, stock options vested for 98 and 954 shares, respectively.

4.                                      NET INCOME PER SHARE
 
The Company computes basic net income per share by dividing net income applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
 
Common equivalent shares related to stock options, restricted stock units, and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
 
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.

18



 
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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Weighted-average number of basic common shares outstanding
 
48,055

 
49,131

 
48,202

 
49,161

Weighted-average dilutive stock options, restricted stock units and performance share units
 
198

 
206

 
240

 
221

Assumed conversion of Convertible Senior Notes
 
297

 
719

 
435

 
667

Weighted-average number of diluted common and common equivalent shares outstanding
 
48,550

 
50,056

 
48,877

 
50,049

Anti-dilutive potential common shares
 
1,431

 
2,075

 
1,410

 
2,118

 
Anti-dilutive potential common shares for the three and six months ended June 30, 2018 include approximately 1.0 million shares that could be issued under the Company's outstanding convertible notes. Under the treasury stock method, the convertible notes will generally have an anti-dilutive impact on net income per share if the conversion prices for the convertible notes exceed the Company's average stock price.

5.                                      INVESTMENTS
 
Short-term and Long-term Investments in Marketable Securities

The Company has classified its investments in marketable debt securities as available-for-sale securities. These securities are reported at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of taxes, reflected as a part of "Accumulated other comprehensive income (loss)" in the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term investment is based upon the maturity of the debt securities. As of June 30, 2018, the Company does not consider any of its investments to be other-than-temporarily impaired.

The Company's investments in marketable equity securities are reported at estimated fair value in the Unaudited Consolidated Balance Sheets. Pursuant to the adoption of the accounting update on financial instruments (see Note 1), for periods beginning after December 31, 2017, changes in fair value of the equity securities are recognized in net income rather than accumulated other comprehensive income. Therefore, the Company reclassified net unrealized gains of $298.7 million ($241.1 million net of tax) as of January 1, 2018 from "Accumulated other comprehensive income (loss)" to "Retained earnings" in the Unaudited Consolidated Balance Sheet. For the three and six months ended June 30, 2018, the Company recognized $21.8 million and $76.4 million, respectively, in "Net unrealized gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.


19



The following table summarizes, by major security type, the Company's investments in marketable securities at June 30, 2018 (in thousands): 
 
 
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair
 Value
Short-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
409,205

 
$
18

 
$
(341
)
 
$
408,882

U.S. government securities
 
873,082

 
2

 
(3,875
)
 
869,209

Corporate debt securities
 
2,837,177

 
236

 
(13,466
)
 
2,823,947

U.S. government agency securities
 
4,926

 

 
(20
)
 
4,906

Commercial paper
 
37,808

 

 

 
37,808

Certificate of deposit
 
1,001

 

 

 
1,001

Total
 
$
4,163,199

 
$
256

 
$
(17,702
)
 
$
4,145,753

 
 
 
 
 
 
 
 
 
Long-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
805,579

 
$
3,903

 
$
(191
)
 
$
809,291

U.S. government securities
 
467,280

 
7

 
(10,947
)
 
456,340

Corporate debt securities
 
5,361,004

 
8,484

 
(67,317
)
 
5,302,171

Investments in Ctrip:
 
 
 
 
 
 
 
 
Convertible debt securities
 
1,275,000

 
125,538

 
(4,700
)
 
1,395,838

Equity securities
 
655,311

 
375,048

 

 
1,030,359

Total
 
$
8,564,174

 
$
512,980

 
$
(83,155
)
 
$
8,993,999

 
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. At June 30, 2018, the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately 1.4 years with an average credit quality of A+/A1/A+.

The Company invests in international government securities with high credit quality. At June 30, 2018, investments in international government securities principally included debt securities issued by the governments of the Netherlands, France, Austria, Germany, and Belgium. 


20



The following table summarizes, by major security type, the Company's investments in marketable securities at December 31, 2017 (in thousands):
 
 
Cost
 
Gross 
Unrealized 
Gains
 
Gross 
Unrealized
 Losses
 
Fair
 Value
Short-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
725,566

 
$
246

 
$
(436
)
 
$
725,376

U.S. government securities
 
996,112

 
5

 
(1,999
)
 
994,118

Corporate debt securities
 
3,067,703

 
449

 
(4,837
)
 
3,063,315

U.S. government agency securities
 
4,444

 

 
(30
)
 
4,414

Commercial paper
 
72,650

 

 

 
72,650

Total
 
$
4,866,475

 
$
700

 
$
(7,302
)
 
$
4,859,873

 
 
 
 
 
 
 
 
 
Long-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
607,000

 
$
1,588

 
$
(678
)
 
$
607,910

U.S. government securities
 
844,910

 
2

 
(10,636
)
 
834,276

Corporate debt securities
 
6,689,747

 
8,399

 
(41,722
)
 
6,656,424

U.S. government agency securities
 
500

 

 
(6
)
 
494

Investments in Ctrip:
 
 
 
 
 
 
 
 
Convertible debt securities
 
1,275,000

 
103,100

 
(9,600
)
 
1,368,500

Equity securities
 
655,311

 
299,697

 
(1,012
)
 
953,996

Total
 
$
10,072,468

 
$
412,786

 
$
(63,654
)
 
$
10,421,600

 
Investments in Ctrip

On May 26, 2015 and August 7, 2014, the Company invested $250 million and $500 million, respectively, in five-year senior convertible notes issued at par value by Ctrip. On December 11, 2015, the Company invested $500 million in a Ctrip ten-year senior convertible note issued at par value, which included a put option allowing the Company, at its option, to require a prepayment in cash from Ctrip at the end of the sixth year of the note. On September 12, 2016, the Company invested $25 million in a Ctrip six-year senior convertible note issued at par value, which included a put option allowing the Company, at its option, to require prepayment in cash from Ctrip at the end of the third year of the note. The Company determined that the economic characteristics and risks of the put option are clearly and closely related to the note, and therefore were not embedded derivatives.

The Company evaluated the conversion features for all Ctrip senior convertible notes and only the conversion feature associated with the September 2016 investment met the definition of an embedded derivative (see Note 6). The Company monitors the conversion features of these notes to determine whether they meet the definition of an embedded derivative during each reporting period. The Ctrip convertible notes have been marked-to-market in accordance with the accounting guidance for available-for-sale securities. At June 30, 2018, the Company had also invested $655.3 million in Ctrip American Depositary Shares ("ADSs").

In connection with the Company's investments in Ctrip's convertible notes, Ctrip granted the Company the right to appoint an observer to its board of directors and permission to acquire its shares (through the acquisition of Ctrip ADSs in the open market) so that combined with ADSs issuable upon conversion of the August 2014, May 2015 and September 2016 convertible notes, the Company could hold up to an aggregate of approximately 15% of Ctrip's outstanding equity plus any ADSs issuable upon the conversion of the December 2015 convertible notes. At June 30, 2018, the Company did not have significant influence over Ctrip.


21



Long-term Equity Investments without Readily Determinable Fair Value

The Company holds investments in equity securities of private companies, which are typically at an early stage of development, of $450.9 million at June 30, 2018 and December 31, 2017. In 2017, the Company invested $450 million in preferred shares of Meituan Dianping, the leading e-commerce platform for local services in China. These investments are measured at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer and are included in "Long-term investments" in the Company's Unaudited Consolidated Balance Sheets. There were no identified events or changes in circumstances to indicate a change in the carrying value of these investments at June 30, 2018.

In July 2018, the Company invested $500 million in preferred shares of Didi Chuxing, the leading mobile transportation and ride-hailing platform in China.

6.                                      FAIR VALUE MEASUREMENTS
 
Financial assets and liabilities carried at fair value at June 30, 2018 are classified in the categories described in the tables below (in thousands):
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 

 
 

 
 

Cash and restricted cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
2,673,212

 
$

 
$
2,673,212

U.S. government securities
 

 
9,973

 
9,973

Corporate debt securities
 

 
5,268

 
5,268

Commercial paper
 

 
28,490

 
28,490

U.S. government agency securities
 

 
1,000

 
1,000

Time deposits
 
7,983

 

 
7,983

Short-term investments in marketable securities:
 
 

 
 

 
 

International government securities
 

 
408,882

 
408,882

U.S. government securities
 

 
869,209

 
869,209

Corporate debt securities
 

 
2,823,947

 
2,823,947

U.S. government agency securities
 

 
4,906

 
4,906

Commercial paper
 

 
37,808

 
37,808

Certificate of deposit
 
1,001

 

 
1,001

Long-term investments in marketable securities:
 
 
 
 
 
 
International government securities
 

 
809,291

 
809,291

U.S. government securities
 

 
456,340

 
456,340

Corporate debt securities
 

 
5,302,171

 
5,302,171

Ctrip convertible debt securities
 

 
1,395,838

 
1,395,838

Ctrip equity securities
 
1,030,359

 

 
1,030,359

Derivatives:
 
 
 
 
 
 
Currency exchange derivatives
 

 
318

 
318

Total assets at fair value
 
$
3,712,555

 
$
12,153,441

 
$
15,865,996

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Currency exchange derivatives
 
$

 
$
2,036

 
$
2,036

 



22



Financial assets and liabilities carried at fair value at December 31, 2017 are classified in the categories described in the tables below (in thousands):
 
 
Level 1
 
Level 2
 
Total
ASSETS:
 
 
 
 
 
 
Cash and restricted cash equivalents:
 
 
 
 
 
 
Money market funds
 
$
1,895,272

 
$

 
$
1,895,272

U.S. government securities
 

 
22,265

 
22,265

Corporate debt securities
 

 
6,674

 
6,674

Commercial paper
 

 
96,321

 
96,321

Time deposits
 
17,896

 

 
17,896

Short-term investments in marketable securities:
 
 
 
 
 
 
International government securities
 

 
725,376

 
725,376

U.S. government securities
 

 
994,118

 
994,118

Corporate debt securities
 

 
3,063,315

 
3,063,315

U.S. government agency securities
 

 
4,414

 
4,414

Commercial paper
 

 
72,650

 
72,650

Long-term investments in marketable securities:
 
 
 
 
 
 
International government securities
 

 
607,910

 
607,910

U.S. government securities
 

 
834,276

 
834,276

Corporate debt securities
 

 
6,656,424

 
6,656,424

U.S. government agency securities
 

 
494

 
494

Ctrip convertible debt securities
 

 
1,368,500

 
1,368,500

Ctrip equity securities
 
953,996

 

 
953,996

Derivatives:
 
 
 
 
 
 
Currency exchange derivatives
 

 
1,767

 
1,767

Total assets at fair value
 
$
2,867,164

 
$
14,454,504

 
$
17,321,668

 
 
 
Level 1
 
Level 2
 
Total
LIABILITIES:
 
 

 
 

 
 

Currency exchange derivatives
 
$

 
$
127

 
$
127

 
There are three levels of inputs to measure fair value.  The definition of each input is described below:
 
Level 1:
Quoted prices in active markets that are accessible by the Company at the measurement date for
identical assets and liabilities.

Level 2:
Inputs that are observable, either directly or indirectly.  Such prices may be based upon quoted
prices for identical or comparable securities in active markets or inputs not quoted on active
markets, but corroborated by market data.

Level 3:
Unobservable inputs are used when little or no market data is available.

Investments in corporate debt securities, U.S. and international government securities, commercial paper, government agency securities and convertible debt securities are considered "Level 2" valuations because the Company has access to quoted prices, but does not have visibility into the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.
 
The Company's derivative instruments are valued using pricing models. Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates. Derivatives are considered "Level 2" fair value measurements. The Company's derivative instruments are typically short-term in nature.
 

23



At June 30, 2018 and December 31, 2017, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings, are carried at cost which approximates their fair value because of the short-term nature of these items. At June 30, 2018 and December 31, 2017, the Company held investments in equity securities of private companies of $450.9 million and these investments are accounted for under the cost method of accounting (see Note 5). See Note 5 for information on the carrying value of the Company's investments in marketable securities, Note 8 for the estimated fair value of the Company's outstanding Senior Notes and Note 12 for the Company's contingent liabilities associated with business acquisitions.
 
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company mitigates these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value. Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur. Changes in the fair value of derivatives designated as net investment hedges were recorded as foreign currency translation adjustments to offset a portion of the foreign currency translation adjustment from Euro-denominated net assets held by certain subsidiaries and were recognized in the Unaudited Consolidated Balance Sheets in "Accumulated other comprehensive income (loss)."
 
Derivatives Not Designated as Hedging Instruments — The Company is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risks from short-term currency exchange rate fluctuations for the Euro, British Pound Sterling and certain other currencies versus the U.S. Dollar. At June 30, 2018 and December 31, 2017, there were no outstanding derivative contracts related to foreign currency translation risks. 

The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Derivative assets are included in "Prepaid expenses and other current assets" and derivative liabilities are included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets. Derivatives associated with these transaction risks resulted in foreign currency losses of $50.2 million and $29.6 million for the three and six months ended June 30, 2018, respectively, compared to foreign currency gains of $20.8 million and $27.6 million for the three and six months ended June 30, 2017, respectively. These mark-to-market adjustments on the derivative contracts, offset by the effect of changes in currency exchange rates on transactions denominated in currencies other than the functional currency, resulted in net losses of $11.8 million and $17.2 million for the three and six months ended June 30, 2018, respectively, and net losses of $5.1 million and $11.0 million for the three and six months ended June 30, 2017, respectively. The net impacts related to these derivatives are reported in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.

The settlement of derivative contracts not designated as hedging instruments resulted in net cash outflows of $30.2 million and net cash inflows of $23.1 million for the six months ended June 30, 2018 and 2017, respectively, and are reported within "Net cash provided by operating activities" in the Unaudited Consolidated Statements of Cash Flows.
 
Embedded Derivative — In September 2016, the Company invested $25 million in a Ctrip convertible note (see Note 5). The Company determined that the conversion option for this note met the definition of an embedded derivative. At June 30, 2018 and December 31, 2017, the embedded derivative had an estimated fair value of $1.7 million and $1.8 million, respectively, and is reported in the Unaudited Consolidated Balance Sheets with its host contract in "Long-term investments." The embedded derivative is bifurcated for measurement purposes only. The mark-to-market adjustments are included in "Foreign currency transactions and other" in the Company's Unaudited Consolidated Statements of Operations.


24



7.                                      INTANGIBLE ASSETS AND GOODWILL
 
The Company's intangible assets at June 30, 2018 and December 31, 2017 consisted of the following (in thousands): 
<
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
Gross 
Carrying 
Amount
 
Accumulated
Amortization
 
Net 
Carrying 
Amount
 
Gross 
Carrying 
Amount
 
Accumulated
Amortization
 
Net 
Carrying 
Amount
 
Amortization
Period
 
Weighted-
Average 
Useful Life
Supply and distribution agreements
$
1,084,719

 
$
(382,281
)
 
$
702,438

 
$
1,056,660

 
$
(355,000
)
 
$
701,660

 
3 - 20 years
 
16 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Technology
171,698

 
(114,680
)
 
57,018

 
137,288

 
(104,478
)
 
32,810

 
 1 - 7 years
 
5 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Patents
1,623

 
(1,623
)
 

 
1,623

 
(1,623
)
 

 
15 years
 
15 years
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Internet domain names
41,112

 
(29,330
)
 
11,782

 
42,265