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 September 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 every Interactive Data File required to be submitted 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 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 October 29, 2018:
Common Stock, par value $0.008 per share
 
46,329,586
(Class)
 
(Number of Shares)





Booking Holdings Inc.
Form 10-Q
 
For the Three Months Ended September 30, 2018
 
PART I - FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements
 
 
Consolidated Balance Sheets (unaudited) at September 30, 2018 and December 31, 2017
Consolidated Statements of Operations (unaudited) For the Three and Nine Months Ended September 30, 2018 and 2017
Consolidated Statements of Comprehensive Income (unaudited) For the Three and Nine Months Ended September 30, 2018 and 2017
Consolidated Statements of Changes in Stockholders' Equity (unaudited) For the Three and Nine Months Ended September 30, 2018 and 2017
Consolidated Statements of Cash Flows (unaudited) For the Nine Months Ended September 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)
 
 
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
2,973,096

 
$
2,541,604

Short-term investments in marketable securities
 
4,158,076

 
4,859,873

Accounts receivable, net of allowance for doubtful accounts of $55,683 and $39,282, respectively
 
1,719,059

 
1,217,801

Prepaid expenses and other current assets
 
617,616

 
415,527

Total current assets
 
9,467,847

 
9,034,805

Property and equipment, net
 
642,861

 
480,081

Intangible assets, net
 
2,117,275

 
2,176,823

Goodwill
 
2,845,129

 
2,737,671

Long-term investments
 
9,114,218

 
10,872,527

Other assets
 
183,146

 
149,356

Total assets
 
$
24,370,476

 
$
25,451,263

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
1,174,599

 
$
667,523

Accrued expenses and other current liabilities
 
1,654,370

 
1,138,980

Deferred merchant bookings
 
1,101,255

 
980,455

Convertible debt
 

 
710,910

Total current liabilities
 
3,930,224

 
3,497,868

Deferred income taxes
 
491,160

 
481,139

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

 
1,250,846

Other long-term liabilities
 
148,699

 
148,061

Long-term debt
 
8,703,901

 
8,809,788

  Total liabilities
 
14,418,666

 
14,187,702

 
 
 
 
 
Commitments and Contingencies (See Note 12)
 


 


Convertible debt
 

 
2,963

 
 
 
 
 
Stockholders' equity:
 
 

 
 

Common stock, $0.008 par value; authorized 1,000,000,000 shares, 62,938,503 and 62,689,097 shares issued, respectively
 
489

 
487

Treasury stock, 16,311,836 and 14,216,819 shares, respectively
 
(12,879,305
)
 
(8,698,829
)
Additional paid-in capital
 
5,343,776

 
5,783,089

Retained earnings
 
17,720,656

 
13,938,869

Accumulated other comprehensive income (loss)
 
(233,806
)
 
236,982

  Total stockholders' equity
 
9,951,810

 
11,260,598

Total liabilities and stockholders' equity
 
$
24,370,476

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Agency revenues
 
$
3,540,874

 
$
3,523,706

 
$
8,220,506

 
$
7,641,390

Merchant revenues
 
1,049,661

 
684,289

 
2,285,992

 
1,624,467

Advertising and other revenues
 
258,555

 
226,034

 
807,887

 
612,132

Total revenues
 
4,849,090

 
4,434,029

 
11,314,385

 
9,877,989

Cost of revenues
 
 
 
54,181

 
 
 
202,007

Gross profit
 


 
4,379,848

 


 
9,675,982

Operating expenses:
 
 
 
 
 
 

 
 

Performance marketing
 
1,314,055

 
1,231,074

 
3,562,155

 
3,364,589

Brand marketing
 
160,126

 
125,877

 
385,262

 
337,016

Sales and other expenses
 
242,974

 
151,024

 
612,367

 
382,538

Personnel, including stock-based compensation of $70,090, $66,421, $216,035 and $192,248, respectively
 
536,735

 
483,438

 
1,557,872

 
1,220,176

General and administrative
 
183,228

 
142,823

 
504,120

 
422,252

Information technology
 
57,742

 
47,901

 
177,133

 
132,677

Depreciation and amortization
 
107,641

 
95,910

 
317,397

 
265,212

Total operating expenses
 
2,602,501

 
2,278,047

 
7,116,306

 
6,124,460

Operating income
 
2,246,589

 
2,101,801

 
4,198,079

 
3,551,522

Other (expense) income:
 
 
 
 
 
 

 
 

Interest income
 
48,641

 
41,483

 
141,210

 
110,296

Interest expense
 
(68,170
)
 
(66,338
)
 
(203,242
)
 
(182,997
)
Net unrealized gains on marketable equity securities
 
30,858

 

 
107,221

 

Foreign currency transactions and other
 
(17,072
)
 
(10,101
)
 
(40,174
)
 
(21,249
)
Total other (expense) income
 
(5,743
)
 
(34,956
)
 
5,015

 
(93,950
)
Earnings before income taxes
 
2,240,846

 
2,066,845

 
4,203,094

 
3,457,572

Income tax expense
 
473,268

 
346,454

 
850,934

 
561,349

Net income
 
$
1,767,578

 
$
1,720,391

 
$
3,352,160

 
$
2,896,223

Net income applicable to common stockholders per basic common share
 
$
37.39

 
$
35.12

 
$
70.00

 
$
58.99

Weighted-average number of basic common shares outstanding
 
47,268

 
48,981

 
47,887

 
49,100

Net income applicable to common stockholders per diluted common share
 
$
37.02

 
$
34.43

 
$
69.07

 
$
57.85

Weighted-average number of diluted common shares outstanding
 
47,751

 
49,972

 
48,530

 
50,064



See Notes to Unaudited Consolidated Financial Statements.


4



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

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
1,767,578

 
$
1,720,391

 
$
3,352,160

 
$
2,896,223

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax charge of $161, tax benefit of $59,607, tax charge of $20,519 and tax benefit of $179,948, respectively (1)
 
(23,952
)
 
111,628

 
(90,938
)
 
287,316

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 charges of $349 and $8,618, tax benefit of $649 and tax charge of $24,549, respectively (3)
 
(133,571
)
 
(31,877
)
 
(138,762
)
 
501,034

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
1,610,055

 
$
1,800,142

 
$
2,881,372

 
$
3,684,573


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

During the three and nine months ended September 30, 2018, the Company recorded deferred tax benefits of $5.7 million and $16.2 million, respectively, related to 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 $5.9 million and $36.7 million for the three and nine months ended September 30, 2018, respectively, and tax benefits of $59.6 million and $179.9 million for the three and nine months ended September 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 before tax on marketable securities of $155.3 million and $138.5 million for the three and nine months ended September 30, 2018, respectively, were not subject to income tax in the Netherlands. Net unrealized gains before tax of $22.2 million and net unrealized losses before tax of $0.5 million for the three and nine months ended September 30, 2018, respectively, were taxable at a 25% tax rate in the Netherlands, resulting in a tax charge of $5.5 million and a tax benefit of $0.2 million, respectively. The Company also recorded a U.S. tax benefit of $5.0 million and $0.3 million for the three and nine months ended September 30, 2018, respectively, related to these investments, which represented the reversal of a previously recorded U.S. deferred tax liability. The remaining net unrealized losses on marketable securities and related tax benefits for three and nine months ended September 30, 2018 were associated with marketable debt securities held by a U.S. subsidiary.

Net unrealized losses before tax on marketable securities of $57.7 million for the three months ended September 30, 2017 and net unrealized gains before tax of $427.4 million for the nine months ended September 30, 2017 were not subject to income tax in the Netherlands. Net unrealized gains before tax of $34.5 million and $98.2 million for the three and nine months ended September 30, 2017, respectively, were taxable at a 25% tax rate in the Netherlands, resulting in tax charges of $8.7 million and $24.6 million, respectively.
See Notes to Unaudited Consolidated Financial Statements.

5



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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, June 30, 2018
 
62,927

 
$
489

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

 
$
15,953,078

 
$
(76,283
)
 
$
10,472,632

Net income
 

 

 

 

 

 
1,767,578

 

 
1,767,578

Foreign currency translation adjustments, net of tax charge of $161
 

 

 

 

 

 

 
(23,952
)
 
(23,952
)
Net unrealized losses on marketable securities, net of tax charge of $349
 

 

 

 

 

 

 
(133,571
)
 
(133,571
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
45,643

 

 

 
45,643

Exercise of stock options and vesting of restricted stock units and performance share units
 
12

 

 

 

 
300

 

 

 
300

Repurchase of common stock
 

 

 
(1,149
)
 
(2,248,944
)
 

 

 

 
(2,248,944
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
72,152

 

 

 
72,152

Conversion of debt
 

 

 

 

 
(28
)
 

 

 
(28
)
Balance, September 30, 2018
 
62,939

 
$
489

 
(16,312
)
 
$
(12,879,305
)
 
$
5,343,776

 
$
17,720,656

 
$
(233,806
)
 
$
9,951,810

 
 
 
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
 

 

 

 

 

 
3,352,160

 

 
3,352,160

Foreign currency translation adjustments, net of tax charge of $20,519
 

 

 

 

 

 

 
(90,938
)
 
(90,938
)
Net unrealized losses on marketable securities, net of tax benefit of $649
 

 

 

 

 

 

 
(138,762
)
 
(138,762
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
2,963

 

 

 
2,963

Exercise of stock options and vesting of restricted stock units and performance share units
 
198

 
2

 

 

 
1,627

 

 

 
1,629

Repurchase of common stock
 

 

 
(2,095
)
 
(4,180,476
)
 

 

 

 
(4,180,476
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
218,834

 

 

 
218,834

Conversion of debt
 

 

 

 

 
(773,178
)
 

 

 
(773,178
)
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, September 30, 2018
 
62,939

 
$
489

 
(16,312
)
 
$
(12,879,305
)
 
$
5,343,776

 
$
17,720,656

 
$
(233,806
)
 
$
9,951,810



See Notes to Unaudited Consolidated Financial Statements.







6




Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017
(In thousands)

 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, June 30, 2017
 
62,560

 
$
486

 
(13,503
)
 
$
(7,411,392
)
 
$
5,633,659

 
$
12,793,001

 
$
573,915

 
$
11,589,669

Net income
 

 

 

 

 

 
1,720,391

 

 
1,720,391

Foreign currency translation adjustments, net of tax benefit of $59,607
 

 

 

 

 

 

 
111,628

 
111,628

Net unrealized losses on marketable securities, net of tax charge of $8,618
 

 

 

 

 

 

 
(31,877
)
 
(31,877
)
Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
5,676

 

 

 
5,676

Exercise of stock options and vesting of restricted stock units and performance share units
 
12

 

 

 

 
1,513

 

 

 
1,513

Repurchase of common stock
 

 

 
(320
)
 
(586,489
)
 

 

 

 
(586,489
)
Stock-based compensation and other stock-based payments
 

 

 

 

 
66,501

 

 

 
66,501

Conversion of debt
 
3

 

 

 

 
(18
)
 

 

 
(18
)
Balance, September 30, 2017
 
62,575

 
$
486

 
(13,823
)
 
$
(7,997,881
)
 
$
5,707,331

 
$
14,513,392

 
$
653,666

 
$
12,876,994


 
 
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Total
Balance, December 31, 2016
 
62,379

 
$
485

 
(13,191
)
 
$
(6,855,164
)
 
$
5,482,653

 
$
11,326,852

 
$
(134,684
)
 
$
9,820,142

Net income
 

 

 

 

 

 
2,896,223

 

 
2,896,223

Foreign currency translation adjustments, net of tax benefit of $179,948
 

 

 

 

 

 

 
287,316

 
287,316

Net unrealized gains on marketable securities, net of tax charge of $24,459
 

 

 

 

 

 

 
501,034

 
501,034

Reclassification adjustment for convertible debt in mezzanine
 

 

 

 

 
19,137

 

 

 
19,137

Exercise of stock options and vesting of restricted stock units and performance share units
 
150

 
1

 

 

 
4,302

 

 

 
4,303

Repurchase of common stock
 

 

 
(632
)
 
(1,142,717
)
 

 

 

 
(1,142,717
)
Stock-based compensation and other stock-based payments
 

 

 

 
 
 
192,548

 

 

 
192,548

Conversion of debt
 
46

 

 

 

 
(297
)
 

 

 
(297
)
Cumulative effect of adoption of accounting standard updates
 

 

 

 

 
8,988

 
290,317

 

 
299,305

Balance, September 30, 2017
 
62,575

 
$
486

 
(13,823
)
 
$
(7,997,881
)
 
$
5,707,331

 
$
14,513,392

 
$
653,666

 
$
12,876,994



See Notes to Unaudited Consolidated Financial Statements.


7



Booking Holdings Inc.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Nine Months Ended
September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
 
Net income
 
$
3,352,160

 
$
2,896,223

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

Depreciation
 
182,052

 
135,736

Amortization
 
135,345

 
129,476

Provision for uncollectible accounts
 
108,081

 
42,575

Deferred income tax benefit
 
(25,955
)
 
(25,655
)
Net unrealized gains on marketable equity securities
 
(107,221
)
 

Stock-based compensation expense and other stock-based payments
 
225,883

 
192,548

Amortization of debt issuance costs
 
5,477

 
6,827

Amortization of debt discount
 
39,699

 
52,909

Loss on early extinguishment of debt
 

 
1,093

Contingent consideration fair value adjustment
 
7,933

 

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

Accounts receivable
 
(450,071
)
 
(479,184
)
Prepaid expenses and other current assets
 
(200,665
)
 
(136,304
)
Accounts payable, accrued expenses and other current liabilities
 
1,004,748

 
640,960

Other long-term assets and liabilities
 
(23,278
)
 
31,221

Net cash provided by operating activities
 
4,254,188

 
3,488,425

 
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
 

Purchase of investments
 
(2,194,796
)
 
(5,338,444
)
Proceeds from sale of investments
 
4,495,994

 
2,471,883

Additions to property and equipment
 
(356,011
)
 
(223,692
)
Acquisitions and other investments, net of cash acquired
 
(139,386
)
 
(552,805
)
Net cash provided by (used in) investing activities
 
1,805,801

 
(3,643,058
)
 
 
 
 
 
FINANCING ACTIVITIES:
 
 
 
 
Proceeds from short-term borrowing
 
3,912

 

Proceeds from the issuance of long-term debt
 

 
2,044,952

Payments for conversion of senior notes
 
(1,487,187
)
 
(89,575
)
Payment of debt
 
(348
)
 
(15,118
)
Payments for repurchase of common stock
 
(4,110,304
)
 
(1,123,102
)
Proceeds from exercise of stock options
 
1,629

 
4,303

Net cash (used in) provided by financing activities
 
(5,592,298
)
 
821,460

Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents
 
(36,560
)
 
99,037

Net increase in cash, cash equivalents and restricted cash and cash equivalents
 
431,131

 
765,864

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
 
$
2,994,472

 
$
2,847,871

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 
 
 
Cash paid during the period for income taxes
 
$
1,044,312

 
$
601,248

Cash paid during the period for interest
 
$
155,056

 
$
110,745

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.

8



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, Rentalcars.com and OpenTable. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiaries is generally the respective local currency. Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date. Income statement amounts are translated at the average exchange rates for the period. Translation gains and losses are included as a component of "Accumulated other comprehensive income (loss)" in the accompanying Unaudited Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
 
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for any subsequent quarter or the full year.

Change in Presentation

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

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

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

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

Reclassification

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


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The change in presentation and the reclassification for the three and nine months ended September 30, 2017 had no impact on operating income or net income and are summarized below (in thousands):
Previously Reported
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
Cost of revenues
 
$
59,476

 
$
217,387

 
Performance advertising
 
1,224,345

 
3,352,707

 
Brand advertising
 
112,796

 
306,995

 
Sales and marketing
 
165,539

 
411,309

 
General and administrative
 
142,823

 
420,004

 
 
 
 
 
 
Current Presentation
 
Three Months Ended
September 30, 2017
 
Nine Months Ended
September 30, 2017
 
Cost of revenues
 
$
54,181

 
$
202,007

 
Performance marketing
 
1,231,074

 
3,364,589

 
Brand marketing
 
125,877

 
337,016

 
Sales and other expenses
 
151,024

 
382,538

 
General and administrative
 
142,823

 
422,252


Balance Sheet Reclassification

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

Restricted Cash and Cash Equivalents: Restricted cash and cash equivalents at September 30, 2018 and December 31, 2017 principally relates to the minimum cash requirement for Rentalcars.com's insurance business established in the fourth quarter of 2017. The following table reconciles cash, cash equivalents and restricted cash and cash equivalents reported in the Unaudited Consolidated Balance Sheets to the total amount shown in the Unaudited Consolidated Statements of Cash Flows (in thousands):
 
 
September 30,
2018
 
December 31,
2017
As included in the Unaudited Consolidated Balance Sheets:
 
 
 
 
Cash and cash equivalents
 
$
2,973,096

 
$
2,541,604

Restricted cash and cash equivalents included in prepaid expenses and other current assets
 
21,376

 
21,737

Total cash, cash equivalents and restricted cash and cash equivalents as shown in the Unaudited Consolidated Statements of Cash Flows
 
$
2,994,472

 
$
2,563,341


Recent Accounting Pronouncements Adopted

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the Financial Accounting Standards Board (“FASB”) issued a new accounting update to shorten the premium amortization period of purchased callable debt securities with non-contingent call features that are callable at fixed prices and on preset dates from their contractual maturity to the earliest call date. For public business entities, this update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the third quarter of 2018. The adoption of this update did not have an impact to the Unaudited Consolidated Financial Statements.
    
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
    
In August 2018, the FASB issued a new accounting update to make targeted improvement to the disclosure requirement for fair value measurements as part of its disclosure framework project. This update eliminates, adds and modifies

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certain disclosure requirements primarily related to Level 3 fair value measurements. For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption allowed. The Company early adopted this new standard in the third quarter of 2018. The adoption of this update did not have an impact to the Unaudited Consolidated Financial Statements.

Improvements to Non-employee Share-Based Payment Accounting

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

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

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

Revenue from Contracts with Customers

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

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


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Other Recent Accounting Pronouncements

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

In August 2018, the FASB issued a new accounting update to address a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). For public business entities, this update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption allowed. The Company plans to adopt this update on January 1, 2019 and apply it on a prospective basis. The Company does not expect a material impact to the Unaudited Consolidated Financial Statements resulting from the adoption.

Simplifying the Test for Goodwill Impairment

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

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

Measurement of Credit Losses on Financial Instruments

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

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

Leases

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

The standard is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach applied to the earliest comparative period in the

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financial statements. In July 2018, the FASB approved a new transition method that would permit issuers to apply the standard as of January 1, 2019. Early adoption is permitted.

The Company will adopt this standard in the first quarter of 2019 and apply it as of January 1, 2019. The Company is in the process of implementing a software platform to facilitate compliance with the new accounting and disclosure requirements. The Company will elect to use its previous evaluations regarding if an arrangement contains a lease, if a lease is an operating or financing lease and what costs are capitalized as initial direct costs prior to adoption, as permitted under this standard.

The most significant change will be related to the recognition of right-of-use assets and lease liabilities in the Company's Consolidated Balance Sheet for real estate operating leases. The Company will elect to combine lease and non-lease components and to include leases which have an initial term of less than one year in the calculation of the lease liability and right-of-use assets for its real estate leases. The Company performed an assessment of its real estate leases, which comprises a substantial portion of its total operating leases, and estimates that the lease liability and corresponding right-of-use asset would be approximately $450 million to $550 million at January 1, 2019, based on outstanding leases, incremental borrowing rates and foreign exchange rates in effect as of September 30, 2018. This estimate could change significantly by the adoption date due to several factors, including changes in the Company’s real estate lease portfolio, changes in foreign exchange rates and/or changes in the interest rate environment. The Company is in the process of reviewing its remaining operating leases, including its data center leases. The Company does not expect a material impact to its Consolidated Statement of Operations and Statement of Cash Flows resulting from the adoption.

2.    REVENUE RECOGNITION

Adoption of ASC Topic 606, Revenues from Contracts with Customers

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

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

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

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

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


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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


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

Unaudited Consolidated Balance Sheets at September 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Accounts receivable, net
 
$
1,719,059

 
$
(93,439
)
 
$
1,625,620

Prepaid expenses and other current assets
 
617,616

 
18,563

 
636,179

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
1,174,599

 
$
(70,609
)
 
$
1,103,990

Accrued expenses and other current liabilities
 
1,654,370

 
(1,108
)
 
1,653,262

Deferred merchant bookings
 
1,101,255

 
88,594

 
1,189,849

 
 
 
 
 
 
 
Deferred income taxes
 
491,160

 
(95
)
 
491,065

 
 
 
 
 
 
 
Stockholders' equity:
 
 
 
 
 
 
Retained earnings
 
17,720,656

 
(94,781
)
 
17,625,875

Accumulated other comprehensive income (loss)
 
(233,806
)
 
3,123

 
(230,683
)


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Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
 
 
 
 
 
 
 
Agency revenues
 
$
3,540,874

 
$
55,148

 
$
3,596,022

Merchant revenues
 
1,049,661

 
48,712

 
1,098,373

Advertising and other revenues
 
258,555

 
(6
)
 
258,549

Cost of revenues
 
 
 
44,936

 
44,936

 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
Performance marketing
 
1,314,055

 
3,250

 
1,317,305

Sales and other expenses
 
242,974

 
206

 
243,180

General and administrative
 
183,228

 
86

 
183,314

Foreign currency transactions and other
 
(17,072
)
 
951

 
(16,121
)
Income tax expense
 
473,268

 
11,742

 
485,010

Net income
 
1,767,578

 
44,585

 
1,812,163

Net income applicable to common stockholders per basic common share
 
37.39

 
0.95

 
38.34

Net income applicable to common stockholders per diluted common share
 
37.02

 
0.93

 
37.95


Unaudited Consolidated Statements of Operations for the Nine Months Ended September 30, 2018:
 
 
As reported (current revenue standard)
 
Current period adjustments
 
As adjusted (previous revenue standard)
 
 
 
 
 
 
 
Agency revenues
 
$
8,220,506

 
$
107,826

 
$
8,328,332

Merchant revenues
 
2,285,992

 
150,389

 
2,436,381

Advertising and other revenues
 
807,887

 
98

 
807,985

Cost of revenues
 
 
 
134,886

 
134,886

 
 
 
 

 
 
Operating expenses:
 
 
 

 
 
Performance marketing
 
3,562,155

 
4,254

 
3,566,409

Sales and other expenses
 
612,367

 
206

 
612,573

General and administrative
 
504,120

 
1,120

 
505,240

Foreign currency transactions and other
 
(40,174
)
 
1,740

 
(38,434
)
Income tax expense
 
850,934

 
25,829

 
876,763

Net income
 
3,352,160

 
93,758

(1) 
3,445,918

Net income applicable to common stockholders per basic common share
 
70.00

 
1.96

 
71.96

Net income applicable to common stockholders per diluted common share
 
69.07

 
1.94

 
71.01


(1) The current period adjustment represents the net income recorded directly to retained earnings on January 1, 2018 of $188.5 million that would have been recognized in the first quarter of 2018 under the previous revenue standard, partially offset by $94.8 million that would have been recognized in the fourth quarter of 2018 under the previous revenue standard.

Revenue Recognition

Online travel reservation services

For periods beginning after December 31, 2017, the Company recognizes revenue for travel reservation services when the travel begins rather than when the travel is completed. Substantially all of the Company's revenues are generated by

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

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

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

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

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

Tax Recovery Charge, Occupancy Taxes and State and Local Taxes

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

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

Advertising and Other Revenues

Advertising and other revenues are primarily recognized by KAYAK and OpenTable and to a lesser extent by priceline for advertising placements on their websites and by Booking.com for its BookingSuite branded accommodation marketing and business analytics services. KAYAK recognizes advertising revenue primarily by sending referrals to online travel companies ("OTCs") and travel service providers and from advertising placements on its websites and mobile apps. Revenue related to

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referrals is recognized when a customer clicks on a referral placement or upon completion of the travel. Revenue for advertising placements is recognized based upon when a customer clicks on an advertisement or when KAYAK displays an advertisement. OpenTable recognizes reservation fees when diners are seated through its online restaurant reservation service and subscription fees for restaurant management services on a straight-line basis over the contractual period in accordance with how the service is provided.

Loyalty Programs

The Company provides various loyalty programs, where participating travelers or diners are awarded loyalty incentives on current transactions that can be redeemed for future qualifying reservations booked with the travel service provider through the Company's websites or mobile apps or, in the case of OpenTable, at participating restaurants. The estimated fair value of the incentives that are expected to be redeemed is recognized as a reduction of revenues at the time the incentives are granted. In the first quarter of 2018, OpenTable introduced a three-year time-based expiration for points earned by diners, which resulted in a reduction of a portion of the loyalty liability of approximately $27 million. At September 30, 2018 and December 31, 2017, liabilities of $80.0 million and $104.7 million, respectively, for loyalty incentives were included in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheets.

Disaggregation of revenue

Geographic Information

The Company's international information consists of the results of Booking.com, Rentalcars.com and agoda and the results of the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using the Company's services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com at a hotel in New York by a consumer in the United States is part of the Company's international results. The Company's geographic information is as follows (in thousands):
 
 
 
 
International
 
 
 
Total revenues for the Three Months Ended
September 30,
 
United States
 
The Netherlands
 
Other
 
Total
 
2018
 
$
441,470

(1) 
$
3,888,255

 
$
519,365

 
$
4,849,090

(1) 
2017
 
429,587

(2) 
3,533,906

 
470,536

 
4,434,029

(2) 

(1) Total revenues have been reduced for cost of revenues for Name Your Own Price® transactions of $44.9 million in 2018.
(2) Total revenues have not been reduced for cost of revenues for Name Your Own Price® transactions of $54.2 million in 2017.

 
 
 
 
International
 
 
 
Total revenues for the Nine Months Ended
September 30,
 
United States
 
The Netherlands
 
Other
 
Total
 
2018
 
$
1,243,428

(1) 
$
8,717,681

 
$
1,353,276

 
$
11,314,385

(1) 
2017
 
1,251,079

(2) 
7,499,464

 
1,127,446

 
9,877,989

(2) 

(1) Total revenues have been reduced for cost of revenues for Name Your Own Price® transactions of $134.9 million in 2018.
(2) Total revenues have not been reduced for cost of revenues for Name Your Own Price® transactions of $202.0 million in 2017.

Revenue by Type of Service

Approximately 88% and 87% of the Company's revenue for the three and nine months ended September 30, 2018, respectively, relates to online accommodation reservation services. Revenue from all other sources of online travel reservation services or advertising and other revenues each represent less than 10% of the Company's total revenues.

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Deferred Revenue

Cash payments received from travelers in advance of the Company completing its service obligations are included in "Deferred merchant bookings" in the Company's Unaudited Consolidated Balance Sheets and are comprised principally of amounts owed to the travel service providers as well as the Company's deferred revenue for its commission or margin and fees. At September 30, 2018 and December 31, 2017, deferred merchant bookings includes deferred revenue of $176.8 million and $151.2 million, respectively. The Company expects to complete its service obligation within one year of booking. In the nine months ended September 30, 2018, the Company recognized revenue of $107.3 million and cancellations of $10.3 million related to the deferred revenue balance at December 31, 2017. In addition, the Company reduced the December 31, 2017 balance by $32.4 million for the impact of the adoption of the current revenue standard on January 1, 2018. The offsetting increase in the deferred revenue balance for the nine months ended September 30, 2018 is principally driven by payments received from travelers, net of amounts payable to travel service providers, of $185.5 million for those online travel reservations in the current period.

3.                                      STOCK-BASED EMPLOYEE COMPENSATION
 
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately $70.1 million and $66.4 million for the three months ended September 30, 2018 and 2017, respectively, and $216.0 million and $192.2 million for the nine months ended September 30, 2018 and 2017, respectively.

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

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

 
 
$
1,431.88

 
Granted
 
156,896

 
 
$
2,032.81

 
Vested
 
(194,461
)
 
 
$
1,288.07

 
Performance Shares Adjustment
 
15,338

 
 
$
1,657.61

 
Forfeited/Canceled
 
(33,396
)
 
 
$
1,690.38

 
Unvested at September 30, 2018
 
469,073

 
 
$
1,681.48

 
 
At September 30, 2018, there was $418.8 million of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of 1.9 years.
 
During the nine months ended September 30, 2018, the Company made broad-based grants of 107,175 restricted stock units that generally have a three-year vesting period, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of $217.8 million based on a weighted-average grant date fair value per share of $2,032.36.

In addition, during the nine months ended September 30, 2018, the Company granted 49,721 performance share units to executives and certain other employees. The performance share units had a total grant date fair value of $101.1 million based on a weighted-average grant date fair value per share of $2,033.79. The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units generally must continue their service through the requisite service period in order to receive any shares. Stock-based compensation related to performance share

18



units reflects the estimated probable outcome at the end of the performance period. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which generally ends December 31, 2020, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances.  At September 30, 2018, the estimated number of probable shares to be issued is a total of 47,575 shares, net of performance share units that were forfeited or vested since the grant date. If the maximum performance thresholds are met at the end of the performance period, a maximum number of 95,150 total shares could be issued.  If the minimum performance thresholds are not met, 36,265 shares would be issued at the end of the performance period.

2017 Performance Share Units

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

At September 30, 2018, there were 63,265 unvested 2017 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At September 30, 2018, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 86,630 shares. If the maximum performance thresholds are met at the end of the performance period, a maximum of 125,622 shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 49,554 shares would be issued at the end of the performance period.
 
2016 Performance Share Units

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

At September 30, 2018, there were 65,218 unvested 2016 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. At September 30, 2018, the number of shares estimated to be issued pursuant to these performance share units at the end of the performance period is a total of 105,037 shares. If the maximum thresholds are met at the end of the performance period, a maximum of 143,240 shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met, 39,418 shares would be issued at the end of the performance period.

Stock Options

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

 
 
$
401.61

 
 
$
40,986

 
3.9
Exercised
 
(3,300
)
 
 
$
493.87

 
 
 
 
 
Forfeited
 
(13
)
 
 
$
241.83

 
 
 
 
 
Balance, September 30, 2018
 
27,362

 
 
$
390.64

 
 
$
43,598

 
3.0
Vested and exercisable at September 30, 2018
 
27,289

 
 
$
399.10

 
 
$
43,541

 
3.0
Vested and exercisable at September 30, 2018 and expected to vest thereafter
 
27,362

 
 
$
390.64

 
 
$
43,598

 
3.0

The aggregate intrinsic value of employee stock options exercised during the nine months ended September 30, 2018 and 2017 was $5.1 million and $21.4 million, respectively. During the nine months ended September 30, 2018 and 2017, stock options vested for 98 and 1,246 shares, respectively.


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4.                                      NET INCOME PER SHARE
 
The Company computes basic net income per share by dividing net income applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
 
Common equivalent shares related to stock options, restricted stock units, and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
 
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
 
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Weighted-average number of basic common shares outstanding
 
47,268

 
48,981

 
47,887

 
49,100

Weighted-average dilutive stock options, restricted stock units and performance share units
 
230

 
273

 
270

 
278

Assumed conversion of Convertible Senior Notes
 
253

 
718

 
373

 
686

Weighted-average number of diluted common and common equivalent shares outstanding
 
47,751

 
49,972

 
48,530

 
50,064

Anti-dilutive potential common shares
 
1,428

 
1,948

 
1,366

 
2,006

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

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

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

The Company's investments in marketable equity securities are reported at estimated fair value in the Unaudited Consolidated Balance Sheets. Pursuant to the adoption of the accounting update on financial instruments (see Note 1), for periods beginning after December 31, 2017, changes in fair value of these equity securities are recognized in net income rather than accumulated other comprehensive income. Therefore, the Company reclassified net unrealized gains of $298.7 million ($241.1 million net of tax) as of January 1, 2018 from "Accumulated other comprehensive income (loss)" to "Retained earnings" in the Unaudited Consolidated Balance Sheet. For the three and nine months ended September 30, 2018, the Company recognized $30.9 million and $107.2 million, respectively, in "Net unrealized gains on marketable equity securities" in the Unaudited Consolidated Statements of Operations.


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The following table summarizes, by major security type, the Company's investments in marketable securities at September 30, 2018 (in thousands): 
 
 
Cost
 
Gross
Unrealized Gains
 
Gross
Unrealized Losses
 
Fair
 Value
Short-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
389,789

 
$
6

 
$
(523
)
 
$
389,272

U.S. government securities
 
809,241

 

 
(3,856
)
 
805,385

Corporate debt securities
 
2,952,065

 
426

 
(11,561
)
 
2,940,930

U.S. government agency securities
 
4,916

 

 
(7
)
 
4,909

Commercial paper
 
17,080

 

 

 
17,080

Certificate of deposit
 
500

 

 

 
500

Total
 
$
4,173,591

 
$
432

 
$
(15,947
)
 
$
4,158,076

 
 
 
 
 
 
 
 
 
Long-term investments in marketable securities:
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
International government securities
 
$
790,653

 
$
1,205

 
$
(986
)
 
$
790,872

U.S. government securities
 
370,987

 

 
(10,053
)
 
360,934

Corporate debt securities
 
4,747,084

 
4,817

 
(59,563
)
 
4,692,338

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

 
21,500

 
(38,668
)
 
1,257,832

Equity securities
 
655,311

 
153,553

 
(4,781
)
 
804,083

Meituan Dianping equity securities
 
450,270

 
257,134

 

 
707,404

Total
 
$
8,289,305

 
$
438,209

 
$
(114,051
)
 
$
8,613,463

 
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. At September 30, 2018, the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately 1.2 years with an average credit quality of A+/A1/A+.

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


21



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: