Notes to Unaudited Consolidated Financial Statements
1.
BASIS OF PRESENTATION
Management of The Priceline Group Inc. (the "Company") is responsible for the Unaudited Consolidated Financial Statements included in this document. The Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include all normal and recurring adjustments that management of the Company considers necessary for a fair presentation of its financial position and operating results. The Company prepared the Unaudited Consolidated Financial Statements following the requirements of the Securities and Exchange Commission for interim reporting. As permitted under those rules, the Company condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. These statements should be read in combination with the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended
December 31, 2015
.
The Unaudited Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries, including its primary brands of Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. All inter-company accounts and transactions have been eliminated in consolidation. The functional currency of the Company's foreign subsidiaries is generally the respective local currency. Assets and liabilities are translated into U.S. Dollars at the rate of exchange existing at the balance sheet date. Income statement amounts are translated at the average exchange rates for the period. Translation gains and losses are included as a component of "
Accumulated other comprehensive income
" in the accompanying Unaudited Consolidated Balance Sheets. Foreign currency transaction gains and losses are included in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
Revenues, expenses, assets and liabilities can vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.
Change in Presentation
In the first quarter of 2016, the Company changed the presentation of advertising expenses from “Advertising - Online” and “Advertising - Offline” to “Performance advertising” and “Brand advertising” in the Unaudited Consolidated Statements of Operations. As a result, brand advertising in online channels is now recorded in “Brand advertising” rather than “Advertising - Online”. For the three months ended March 31, 2015, this change in presentation, which had no impact on total advertising expenses, operating income or net income, amounted to
$9.7 million
. The Company believes its new presentation is helpful because it separates performance advertising that is typically managed on a return on investment basis from brand advertising that generally is spent to build brand awareness and managed to a targeted spending level. The descriptions of these new lines are as follows:
Performance advertising
-
Advertising expenses classified as performance advertising are generally managed by the Company by monitoring return on investment. These expenses primarily consist of: (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements. Performance advertising expense is recognized as incurred.
Brand advertising
- Advertising expenses classified as brand advertising are generally managed by the Company to a targeted spending level to drive brand awareness. This includes both online and offline activities such as online videos (for example, on YouTube and Facebook), television advertising, billboards and subway and bus advertisements. Brand advertising expense is generally recognized as incurred with the exception of advertising production costs, which are expensed the first time the advertisement is displayed or broadcast.
See Item 5 in this Quarterly Report for disclosure related to this change in presentation for the years ended December 31, 2015, 2014 and 2013.
Recent Accounting Pronouncements
In April 2016, the Financial Accounting Standards Board ("FASB") issued new guidance to improve the accounting for certain aspects of share-based payment transactions as part of its simplification initiative. The key provisions of this accounting update are: (1) recognizing current excess tax benefits in the income statement in the period the benefits are deducted on the income tax return as opposed to an adjustment to additional paid-in capital in the period the benefits are realized by reducing a current income tax liability; (2) allowing an entity-wide election to account for forfeitures related to
service conditions as occurred instead of estimating the total number of awards that will be forfeited because the requisite service period will not be rendered; (3) allowing the net settlement of an equity award for statutory tax withholding purposes to not exceed the maximum statutory tax rate by relevant tax jurisdiction instead of withholding taxes for each employee based on a minimum statutory withholding tax rate; and (4) requiring the presentation of excess tax benefits as operating cash flow and cash payments for employee withholding taxes related to vested stock awards as financing cash flow in the consolidated statement of cash flows. For public business entities, this update is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. Early adoption is permitted in any interim or annual period for which financial statements have not been issued but all of the guidance must be adopted in that same period. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.
In February 2016, the FASB issued a new accounting standard intended to improve the financial reporting of lease transactions. The new accounting standard requires lessees to recognize an asset and a liability on the balance sheet for the right and obligation created by entering into a lease transaction. However, the accounting update allows an entity to make an accounting policy election so that short-term leases are not recognized on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term. The new standard significantly expands qualitative and quantitative disclosures for lessees. The new standard retains the dual-model concept by requiring companies to determine if a lease is an operating or financing lease and the current "bright line" percentages could be used as guidance in applying the new standard. The lessor accounting model remains largely unchanged. The update is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is allowed. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.
In January 2016, the FASB issued a new accounting update which amends the guidance on the classification and measurement of financial instruments. Although the accounting update retains many current requirements, it significantly revises accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The accounting update also amends certain fair value disclosures of financial instruments and clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with the entity’s evaluation of their other deferred tax assets. The update requires entities to carry all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures and limited liability companies at fair value, with fair value changes recognized through net income. This requirement does not apply to investments that qualify for equity method accounting, investments that result in consolidation of the investee or investments in which the entity has elected the practicability exception to fair value measurement. Under current U.S. GAAP, the Company's available-for-sale investments in equity securities with readily identifiable market value are remeasured to fair value each reporting period with changes in fair value recognized in accumulated other comprehensive income (loss). However, under the new accounting literature, fair value adjustments will be recognized through net income and could vary significantly quarter to quarter. For the investments currently accounted for under the cost method, an entity can elect to measure its investments, which 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. The Company intends to continue to use the cost method of accounting for investments without a readily determinable fair value. Additionally, this accounting update will simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. In addition, this accounting update eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is currently required to be disclosed for financial instruments measured at amortized cost in the balance sheet. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption, although allowed in certain circumstances, is not applicable to the Company.
In May 2014, the FASB and the IASB issued a new accounting standard on the recognition of revenue from contracts with customers that is designed to create greater comparability for financial statement users across industries and jurisdictions. The core principle of the 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." Additionally, the new guidance specified the accounting for some costs to obtain or fulfill a contract with a customer. The new standard will also require enhanced disclosures. In March 2016, the FASB issued an amendment to this standard, which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction. The conclusion determines whether an entity reports revenue on a gross or net basis. The amendment focuses on who controls the good or service in an arrangement before it is transferred to a customer and further clarifies the unit of account and indicators of when an entity is the principal. In April 2016, the FASB further amended this standard by clarifying 1) how an entity should evaluate the nature of its promise in granting a license of IP, which will determine whether it recognizes revenue over time or at a point
in time, and 2) when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allowing entities to disregard items that are immaterial in the context of a contract. The accounting standard was initially effective for public entities for annual and interim periods beginning after December 15, 2016. In July 2015, the FASB agreed to defer the effective date of the new revenue standard to annual periods beginning after December 15, 2017 with early adoption permitted as of the original effective date. The Company is currently evaluating the impact to its Consolidated Financial Statements of adopting this new guidance.
2.
STOCK-BASED EMPLOYEE COMPENSATION
Stock-based compensation expense included in personnel expenses in the Unaudited Consolidated Statements of Operations was approximately
$66.0 million
and
$54.0 million
for the
three
months ended
March 31, 2016
and
2015
, respectively.
Stock-based compensation is recognized in the financial statements based upon fair value. Fair value is recognized as expense on a straight-line basis, net of estimated forfeitures, over the employee's requisite service period. The fair value of performance share units and restricted stock units is determined based on the number of units granted and the quoted price of the Company's common stock as of the grant date. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The fair value of employee stock options assumed in acquisitions was determined using the Black-Scholes model and the market value of the Company's common stock at the respective acquisition dates.
Restricted Stock Units and Performance Share Units
The following table summarizes the activity of restricted stock units and performance share units ("share-based awards") during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
Share-Based Awards
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
Unvested at December 31, 2015
|
|
637,257
|
|
|
|
$
|
1,070.10
|
|
|
Granted
|
|
164,695
|
|
|
|
$
|
1,303.06
|
|
|
Vested
|
|
(215,477
|
)
|
|
|
$
|
759.17
|
|
|
Performance Share Units Adjustment
|
|
4,848
|
|
|
|
$
|
1,273.56
|
|
|
Forfeited
|
|
(13,462
|
)
|
|
|
$
|
1,252.08
|
|
|
Unvested at March 31, 2016
|
|
577,861
|
|
|
|
$
|
1,256.20
|
|
|
As of
March 31, 2016
, there was
$461.9 million
of total future compensation cost related to unvested share-based awards to be recognized over a weighted-average period of
2.3
years.
During the
three
months ended
March 31, 2016
, the Company made broad-based grants of
80,952
restricted stock units that generally vest after
three
years, subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability. These share-based awards had a total grant date fair value of
$105.5 million
based on a weighted-average grant date fair value per share of
$1,303.04
.
In addition, during the
three
months ended
March 31, 2016
, the Company granted
83,743
performance share units to executives and certain other employees. The performance share units had a total grant date fair value of
$109.1 million
based upon a weighted-average grant date fair value per share of
$1,303.08
. The performance share units are payable in shares of the Company's common stock upon vesting. Subject to certain exceptions for terminations other than for "cause," for "good reason" or on account of death or disability, recipients of these performance share units generally must continue their service through the requisite service period in order to receive any shares. Stock-based compensation related to performance share units reflects the estimated probable outcome at the end of the performance period. The actual number of shares to be issued on the vesting date will be determined upon completion of the performance period, which ends December 31, 2018, assuming there is no accelerated vesting for, among other things, a termination of employment under certain circumstances. As of
March 31, 2016
, the estimated number of probable shares to be issued is a total of
83,647
shares, net of performance share units forfeited and vested since the grant date. If the maximum performance thresholds are met at the end of the performance period, a maximum number of
188,856
total shares could be issued. If the minimum performance thresholds are not met,
49,424
shares would be issued at the end of the performance period.
2015 Performance Share Units
During the year ended
December 31, 2015
, the Company granted
107,623
performance share units with a grant date fair value of
$133.2 million
, based on a weighted-average grant date fair value per share of
$1,237.53
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2017.
At
March 31, 2016
, there were
97,303
unvested 2015 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of
March 31, 2016
, 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
162,266
shares. If the maximum thresholds are met at the end of the performance period, a maximum of
234,793
total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
51,056
shares would be issued at the end of the performance period.
2014 Performance Share Units
During the year ended
December 31, 2014
, the Company granted
72,277
performance share units with a grant date fair value of
$96.1 million
, based on a weighted-average grant date fair value per share of
$1,329.11
. The actual number of shares to be issued will be determined upon completion of the performance period which generally ends December 31, 2016.
At
March 31, 2016
, there were
58,813
unvested 2014 performance share units outstanding, net of performance share units that were forfeited or vested since the grant date. As of
March 31, 2016
, 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
98,124
shares. If the maximum thresholds are met at the end of the performance period, a maximum of
118,390
total shares could be issued pursuant to these performance share units. If the minimum performance thresholds are not met,
38,620
shares would be issued at the end of the performance period.
Stock Options
The following table summarizes the activity for stock options during the
three
months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2015
|
|
89,104
|
|
|
|
$
|
383.03
|
|
|
|
$
|
79,474
|
|
|
5.4
|
Exercised
|
|
(13,960
|
)
|
|
|
$
|
342.61
|
|
|
|
|
|
|
Forfeited
|
|
(1,063
|
)
|
|
|
$
|
175.65
|
|
|
|
|
|
|
Balance, March 31, 2016
|
|
74,081
|
|
|
|
$
|
393.62
|
|
|
|
$
|
66,328
|
|
|
5.4
|
Vested and exercisable as of March 31, 2016
|
|
64,051
|
|
|
|
$
|
365.78
|
|
|
|
$
|
59,131
|
|
|
5.2
|
Vested and exercisable as of March 31, 2016 and expected to vest thereafter, net of estimated forfeitures
|
|
73,767
|
|
|
|
$
|
393.74
|
|
|
|
$
|
66,038
|
|
|
5.4
|
The aggregate intrinsic value of employee stock options assumed in acquisitions that were exercised during the
three
months ended
March 31, 2016
was
$12.7 million
compared to
$17.0 million
for the
three
months ended
March 31, 2015
. During the
three
months ended
March 31, 2016
, stock options assumed in acquisitions vested for
5,367
shares of common stock with an acquisition-date fair value of
$3.5 million
, compared to
11,170
shares of common stock vested for stock options assumed in acquisitions with an acquisition-date fair value of
$7.5 million
for the
three
months ended
March 31, 2015
.
For the
three
months ended
March 31, 2016
, the Company recorded stock-based compensation expense related to employee stock options of
$2.9 million
compared to
$7.4 million
for the
three
months ended
March 31, 2015
. As of
March 31, 2016
, there was
$5.8 million
of total future compensation costs related to unvested employee stock options to be recognized over a weighted-average period of
1.1
years.
3.
NET INCOME PER SHARE
The Company computes basic net income per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is based upon the weighted-average number of common and common equivalent shares outstanding during the period.
Common equivalent shares related to stock options, restricted stock units and performance share units are calculated using the treasury stock method. Performance share units are included in the weighted-average common equivalent shares based on the number of shares that would be issued if the end of the reporting period were the end of the performance period, if the result would be dilutive.
The Company's convertible notes have net share settlement features requiring the Company upon conversion to settle the principal amount of the debt for cash and the conversion premium for cash or shares of the Company's common stock, at the Company's option. The convertible notes are included in the calculation of diluted net income per share if their inclusion is dilutive under the treasury stock method.
A reconciliation of the weighted-average number of shares outstanding used in calculating diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
2016
|
|
2015
|
Weighted-average number of basic common shares outstanding
|
|
49,630
|
|
|
51,909
|
|
Weighted-average dilutive stock options, restricted stock units and performance share units
|
|
275
|
|
|
257
|
|
Assumed conversion of Convertible Senior Notes
|
|
224
|
|
|
240
|
|
Weighted-average number of diluted common and common equivalent shares outstanding
|
|
50,129
|
|
|
52,406
|
|
Anti-dilutive potential common shares
|
|
2,665
|
|
|
2,616
|
|
Anti-dilutive potential common shares for the
three
months ended
March 31, 2016
include approximately
2.1 million
shares that could be issued under the Company's outstanding convertible notes. Under the treasury stock method, the convertible notes will generally have an anti-dilutive impact on net income per share if the conversion prices for the convertible notes exceed the Company's average stock price.
4.
INVESTMENTS
Short-term and Long-term Investments in Available-for-Sale Securities
The following table summarizes, by major security type, the Company's investments as of
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Foreign government securities
|
|
$
|
426,758
|
|
|
$
|
25
|
|
|
$
|
(83
|
)
|
|
$
|
426,700
|
|
U.S. government securities
|
|
413,728
|
|
|
36
|
|
|
(16
|
)
|
|
413,748
|
|
Corporate debt securities
|
|
676,666
|
|
|
751
|
|
|
(208
|
)
|
|
677,209
|
|
Commercial paper
|
|
7,980
|
|
|
—
|
|
|
—
|
|
|
7,980
|
|
Total short-term investments
|
|
$
|
1,525,132
|
|
|
$
|
812
|
|
|
$
|
(307
|
)
|
|
$
|
1,525,637
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Foreign government securities
|
|
$
|
623,314
|
|
|
$
|
3,255
|
|
|
$
|
(6
|
)
|
|
$
|
626,563
|
|
U.S. government securities
|
|
483,480
|
|
|
3,644
|
|
|
(29
|
)
|
|
487,095
|
|
Corporate debt securities
|
|
4,145,586
|
|
|
31,770
|
|
|
(1,415
|
)
|
|
4,175,941
|
|
U.S. municipal securities
|
|
1,072
|
|
|
11
|
|
|
—
|
|
|
1,083
|
|
Ctrip convertible debt securities
|
|
1,250,000
|
|
|
145,525
|
|
|
(25,250
|
)
|
|
1,370,275
|
|
Ctrip equity securities
|
|
630,311
|
|
|
303,070
|
|
|
—
|
|
|
933,381
|
|
Total long-term investments
|
|
$
|
7,133,763
|
|
|
$
|
487,275
|
|
|
$
|
(26,700
|
)
|
|
$
|
7,594,338
|
|
The Company's investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. As of
March 31, 2016
, the weighted-average life of the Company’s fixed income investment portfolio, excluding the Company's investment in Ctrip convertible debt securities, was approximately
2.0
years with an average credit quality of A+/A1/A+.
The Company invests in foreign government securities with high credit quality. As of
March 31, 2016
, investments in foreign government securities principally included debt securities issued by the governments of Germany, the Netherlands, France, Belgium and Austria.
On May 26, 2015 and August 7, 2014, the Company invested
$250 million
and
$500 million
, respectively, in
five
-year senior convertible notes issued at par by Ctrip.com International Ltd. ("Ctrip"). On December 11, 2015, the Company invested
$500 million
in a Ctrip
ten
-year senior convertible note issued at par value, which included a put option allowing the Company to require a prepayment in cash from Ctrip at the end of the sixth year of the note. As of
March 31, 2016
, the Company had also invested
$630.3 million
of its international cash in Ctrip American Depositary Shares ("ADSs"). The convertible debt and equity securities of Ctrip have been marked-to-market in accordance with the accounting guidance for available-for-sale securities.
In connection with the Company's investments in Ctrip's convertible notes, Ctrip granted the Company the right to appoint an observer to its board of directors and permission to acquire its shares (through the acquisition of Ctrip ADSs in the open market) so that combined with ADSs issuable upon conversion of the August 2014 and May 2015 convertible notes, the Company could hold up to an aggregate of
15%
of Ctrip's outstanding equity. As of
March 31, 2016
, the Company did not have significant influence over Ctrip.
The following table summarizes, by major security type, the Company's investments as of
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Short-term investments:
|
|
|
|
|
|
|
|
|
Foreign government securities
|
|
$
|
395,404
|
|
|
$
|
497
|
|
|
$
|
(104
|
)
|
|
$
|
395,797
|
|
U.S. government securities
|
|
457,001
|
|
|
—
|
|
|
(507
|
)
|
|
456,494
|
|
Corporate debt securities
|
|
305,654
|
|
|
25
|
|
|
(419
|
)
|
|
305,260
|
|
Commercial paper
|
|
11,688
|
|
|
—
|
|
|
—
|
|
|
11,688
|
|
U.S. government agency securities
|
|
2,009
|
|
|
—
|
|
|
(2
|
)
|
|
2,007
|
|
Total short-term investments
|
|
$
|
1,171,756
|
|
|
$
|
522
|
|
|
$
|
(1,032
|
)
|
|
$
|
1,171,246
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
Foreign government securities
|
|
$
|
718,947
|
|
|
$
|
1,367
|
|
|
$
|
(683
|
)
|
|
$
|
719,631
|
|
U.S. government securities
|
|
580,155
|
|
|
277
|
|
|
(1,982
|
)
|
|
578,450
|
|
Corporate debt securities
|
|
4,294,282
|
|
|
1,273
|
|
|
(18,941
|
)
|
|
4,276,614
|
|
U.S. municipal securities
|
|
1,080
|
|
|
3
|
|
|
—
|
|
|
1,083
|
|
Ctrip convertible debt securities
|
|
1,250,000
|
|
|
158,600
|
|
|
(30,050
|
)
|
|
1,378,550
|
|
Ctrip equity securities
|
|
630,311
|
|
|
346,724
|
|
|
—
|
|
|
977,035
|
|
Total long-term investments
|
|
$
|
7,474,775
|
|
|
$
|
508,244
|
|
|
$
|
(51,656
|
)
|
|
$
|
7,931,363
|
|
The Company has classified its investments as available-for-sale securities. These securities are carried at estimated fair value with the aggregate unrealized gains and losses related to these investments, net of taxes, reflected as a part of "
Accumulated other comprehensive income
" in the Unaudited Consolidated Balance Sheets. Classification as short-term or long-term investment is based upon the maturity of the debt securities.
The Company recognized net realized losses of
$2.9 million
compared to net realized gains of
$1.8 million
related to investments for the
three
months ended
March 31, 2016
and
2015
, respectively.
Cost-method Investments
The Company held investments in equity securities of private companies, companies typically at an early stage of development, of approximately
$13.6 million
and
$62.3 million
as of
March 31, 2016
and
December 31, 2015
, respectively, of which
$10.0 million
is an investment in Hotel Urbano, an online travel company based in Brazil. The investments are accounted for under the cost method and reported in "Other assets" in the Company's Consolidated Balance Sheets. The Company evaluates its investments quarterly to determine if any indicators of other-than-temporary impairment exist.
In March 2016, the Company received an operating performance update from Hotel Urbano, which showed disappointing 2015 results, significantly reduced forecasts and the need for additional funding in the near term. This update combined with increased political turmoil, the declaration of a public health emergency related to the Zika virus and sustained poor macroeconomic conditions in Brazil in the first quarter of 2016 indicated a potential other-than-temporary impairment in the fair value of the Company’s investment. As a result, the Company analyzed all information available and based on the best estimate of the current fair value of this investment, recognized an impairment of approximately
$50 million
for the three months ended March 31, 2016.
5.
FAIR VALUE MEASUREMENTS
Financial assets and liabilities carried at fair value as of
March 31, 2016
are classified in the tables below in the categories described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
747,316
|
|
|
$
|
—
|
|
|
$
|
747,316
|
|
Foreign government securities
|
|
—
|
|
|
32,588
|
|
|
32,588
|
|
U.S. government securities
|
|
—
|
|
|
100,438
|
|
|
100,438
|
|
Commercial paper
|
|
—
|
|
|
12,334
|
|
|
12,334
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Foreign government securities
|
|
—
|
|
|
426,700
|
|
|
426,700
|
|
U.S. government securities
|
|
—
|
|
|
413,748
|
|
|
413,748
|
|
Corporate debt securities
|
|
—
|
|
|
677,209
|
|
|
677,209
|
|
Commercial paper
|
|
—
|
|
|
7,980
|
|
|
7,980
|
|
Foreign exchange derivatives
|
|
—
|
|
|
884
|
|
|
884
|
|
Long-term investments:
|
|
|
|
|
|
|
Foreign government securities
|
|
—
|
|
|
626,563
|
|
|
626,563
|
|
U.S. government securities
|
|
—
|
|
|
487,095
|
|
|
487,095
|
|
Corporate debt securities
|
|
—
|
|
|
4,175,941
|
|
|
4,175,941
|
|
U.S. municipal securities
|
|
—
|
|
|
1,083
|
|
|
1,083
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,370,275
|
|
|
1,370,275
|
|
Ctrip equity securities
|
|
933,381
|
|
|
—
|
|
|
933,381
|
|
Total assets at fair value
|
|
$
|
1,680,697
|
|
|
$
|
8,332,838
|
|
|
$
|
10,013,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives
|
|
$
|
—
|
|
|
$
|
704
|
|
|
$
|
704
|
|
Financial assets and liabilities carried at fair value as of
December 31, 2015
are classified in the tables below in the categories described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
ASSETS:
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
Money market funds
|
|
$
|
99,117
|
|
|
$
|
—
|
|
|
$
|
99,117
|
|
Foreign government securities
|
|
—
|
|
|
10,659
|
|
|
10,659
|
|
U.S. government securities
|
|
—
|
|
|
90,441
|
|
|
90,441
|
|
Corporate debt securities
|
|
—
|
|
|
1,855
|
|
|
1,855
|
|
Commercial paper
|
|
—
|
|
|
335,663
|
|
|
335,663
|
|
Short-term investments:
|
|
|
|
|
|
|
Foreign government securities
|
|
—
|
|
|
395,797
|
|
|
395,797
|
|
U.S. government securities
|
|
—
|
|
|
456,494
|
|
|
456,494
|
|
Corporate debt securities
|
|
—
|
|
|
305,260
|
|
|
305,260
|
|
Commercial paper
|
|
—
|
|
|
11,688
|
|
|
11,688
|
|
U.S. government agency securities
|
|
—
|
|
|
2,007
|
|
|
2,007
|
|
Foreign exchange derivatives
|
|
—
|
|
|
363
|
|
|
363
|
|
Long-term investments:
|
|
|
|
|
|
|
Foreign government securities
|
|
—
|
|
|
719,631
|
|
|
719,631
|
|
U.S. government securities
|
|
—
|
|
|
578,450
|
|
|
578,450
|
|
Corporate debt securities
|
|
—
|
|
|
4,276,614
|
|
|
4,276,614
|
|
U.S. municipal securities
|
|
—
|
|
|
1,083
|
|
|
1,083
|
|
Ctrip convertible debt securities
|
|
—
|
|
|
1,378,550
|
|
|
1,378,550
|
|
Ctrip equity securities
|
|
977,035
|
|
|
—
|
|
|
977,035
|
|
Total assets at fair value
|
|
$
|
1,076,152
|
|
|
$
|
8,564,555
|
|
|
$
|
9,640,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Total
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivatives
|
|
$
|
—
|
|
|
$
|
644
|
|
|
$
|
644
|
|
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 foreign government securities, commercial paper, government agency securities, convertible debt securities and municipal securities are considered "Level
2
" valuations because the Company has access to quoted prices, but does not have visibility to the volume and frequency of trading for all of these investments. For the Company's investments, a market approach is used for recurring fair value measurements and the valuation techniques use inputs that are observable, or can be corroborated by observable data, in an active marketplace.
The Company's derivative instruments are valued using pricing models. Pricing models take into account the contract terms as well as multiple inputs where applicable, such as interest rate yield curves, option volatility and currency rates. Derivatives are considered "Level
2
" fair value measurements. The Company's derivative instruments are typically short term in nature.
As of
March 31, 2016
and
December 31, 2015
, the Company's cash consisted of bank deposits. Other financial assets and liabilities, including restricted cash, accounts receivable, accounts payable, accrued expenses and deferred merchant bookings are carried at cost which approximates their fair value because of the short-term nature of these items. As of
March 31, 2016
, the Company held investments in equity securities of private companies of approximately
$13.6 million
and these investments are accounted for under the cost method of accounting (see Note
4
). See Note
4
for information on the carrying value of available-for-sale investments and Note
7
for the estimated fair value of the Company's outstanding Senior Notes. See Note
11
for the Company's contingent liabilities associated with business acquisitions.
In the normal course of business, the Company is exposed to the impact of foreign currency fluctuations. The Company limits these risks by following established risk management policies and procedures, including the use of derivatives. The Company does not use derivatives for trading or speculative purposes. All derivative instruments are recognized in the Unaudited Consolidated Balance Sheets at fair value. Gains and losses resulting from changes in the fair value of derivative instruments that are not designated as hedging instruments for accounting purposes are recognized in the Unaudited Consolidated Statements of Operations in the period that the changes occur. Changes in the fair value of derivatives designated as net investment hedges are recorded as currency translation adjustments to offset a portion of the currency translation adjustment from Euro-denominated net assets held by certain subsidiaries and are recognized in the Unaudited Consolidated Balance Sheets in "
Accumulated other comprehensive income
."
Derivatives Not Designated as Hedging Instruments
— The Company is exposed to adverse movements in currency exchange rates as the operating results of its international operations are translated from local currency into U.S. Dollars upon consolidation. The Company enters into average-rate derivative contracts to hedge translation risk from short-term foreign exchange fluctuations for the Euro and British Pound Sterling versus the U.S. Dollar. As of
March 31, 2016
and
December 31, 2015
, there were
no
outstanding derivative contracts related to foreign currency translation risk. Foreign exchange losses of
$3.6 million
for the
three
months ended
March 31, 2016
compared to foreign exchange gains of
$1.9 million
for the
three
months ended
March 31, 2015
are recorded related to these derivatives in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The Company also enters into foreign currency forward contracts to hedge its exposure to the impact of movements in currency exchange rates on its transactional balances denominated in currencies other than the functional currency. Foreign exchange derivatives outstanding as of
March 31, 2016
associated with foreign currency transaction risks resulted in a net asset of
$0.2 million
, with an asset in the amount of
$0.9 million
recorded in "Prepaid expenses and other current assets" and a liability in the amount of
$0.7 million
recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet. Foreign exchange derivatives outstanding as of
December 31, 2015
associated with foreign exchange transactions resulted in a net liability of
$0.3 million
, with a liability in the amount of
$0.7 million
recorded in "Accrued expenses and other current liabilities" in the Unaudited Consolidated Balance Sheet and an asset in the amount of
$0.4 million
recorded in "Prepaid expenses and other current assets." Derivatives associated with these transaction risks resulted in foreign exchange gains of
$12.4 million
for the
three
months ended
March 31, 2016
compared to foreign exchange losses of
$32.0 million
for the
three
months ended
March 31, 2015
. 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
$4.4 million
and
$6.1 million
for the
three
months ended
March 31, 2016
and
2015
, respectively. The net impacts related to these derivatives are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
The settlement of derivative contracts not designated as hedging instruments resulted in net cash inflows of
$22.3 million
for the
three
months ended
March 31, 2016
compared to net cash outflows of
$26.1 million
for the
three
months ended
March 31, 2015
and are reported within "
Net cash provided by operating activities
" in the Unaudited Consolidated Statements of Cash Flows.
Derivatives Designated as Hedging Instruments
— The Company had
no
foreign currency forward contracts designated as hedges of its net investment in a foreign subsidiary outstanding as of
March 31, 2016
or
December 31, 2015
. A net cash inflow of
$5.2 million
for the
three
months ended
March 31, 2015
related to foreign currency forward contracts designated as hedges of the Company's net investment in a foreign subsidiary is reported within "
Net cash provided by (used in) investing activities
" in the Unaudited Consolidated Statements of Cash Flows.
6.
INTANGIBLE ASSETS AND GOODWILL
The Company's intangible assets at
March 31, 2016
and
December 31, 2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
|
|
|
|
|
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
|
$
|
831,186
|
|
|
$
|
(246,536
|
)
|
|
$
|
584,650
|
|
|
$
|
824,932
|
|
|
$
|
(227,994
|
)
|
|
$
|
596,938
|
|
|
10 - 20 years
|
|
16 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology
|
113,523
|
|
|
(67,071
|
)
|
|
46,452
|
|
|
112,639
|
|
|
(61,404
|
)
|
|
51,235
|
|
|
1 - 5 years
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
1,623
|
|
|
(1,571
|
)
|
|
52
|
|
|
1,623
|
|
|
(1,562
|
)
|
|
61
|
|
|
15 years
|
|
15 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internet domain names
|
42,790
|
|
|
(23,305
|
)
|
|
19,485
|
|
|
40,352
|
|
|
(20,954
|
)
|
|
19,398
|
|
|
2 - 20 years
|
|
8 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names
|
1,671,599
|
|
|
(203,502
|
)
|
|
1,468,097
|
|
|
1,671,356
|
|
|
(183,101
|
)
|
|
1,488,255
|
|
|
4 - 20 years
|
|
20 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-compete agreements
|
22,900
|
|
|
(13,097
|
)
|
|
9,803
|
|
|
22,847
|
|
|
(11,201
|
)
|
|
11,646
|
|
|
3 - 4 years
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
135
|
|
|
(135
|
)
|
|
—
|
|
|
|
|
|
Total intangible assets
|
$
|
2,683,621
|
|
|
$
|
(555,082
|
)
|
|
$
|
2,128,539
|
|
|
$
|
2,673,884
|
|
|
$
|
(506,351
|
)
|
|
$
|
2,167,533
|
|
|
|
|
|
Intangible assets with determinable lives are amortized on a straight-line basis. Intangible asset amortization expense was approximately
$42.4 million
and
$43.3 million
for the
three
months ended
March 31, 2016
and
2015
, respectively.
The amortization expense for intangible assets for the remainder of
2016
, the annual expense for the next five years, and the expense thereafter is expected to be as follows (in thousands):
|
|
|
|
|
2016
|
$
|
126,914
|
|
2017
|
161,953
|
|
2018
|
143,113
|
|
2019
|
132,520
|
|
2020
|
125,005
|
|
2021
|
119,757
|
|
Thereafter
|
1,319,277
|
|
|
$
|
2,128,539
|
|
The change in goodwill for the
three
months ended
March 31, 2016
consists of the following (in thousands):
|
|
|
|
|
Balance at December 31, 2015
|
$
|
3,375,000
|
|
Currency translation adjustments
|
3,327
|
|
Balance at March 31, 2016
|
$
|
3,378,327
|
|
A substantial portion of the intangibles and goodwill relates to the acquisition of OpenTable in July 2014 and KAYAK in May 2013.
7.
DEBT
Short-term Borrowing
On
March 31, 2016
, the Company utilized a credit line in an amount of
$100.0 million
associated with the purchase of marketable debt securities. This borrowing was reported in "
Accrued expenses and other current liabilities
" in the Unaudited Consolidated Balance Sheet as of March 31, 2016 and was repaid on April 1, 2016.
Revolving Credit Facility
In June 2015, the Company entered into a
$2.0 billion
five
-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at the Company’s option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
.
The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes, which could include acquisitions or share repurchases. There were
no
borrowings outstanding and approximately
$2.5 million
of letters of credit issued under the facility as of both periods ended
March 31, 2016
and
December 31, 2015
.
Outstanding Long-term Debt
Outstanding long-term debt as of
March 31, 2016
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Long-term debt:
|
|
|
|
|
|
|
1.0% Convertible Senior Notes due March 2018
|
|
$
|
1,000,000
|
|
|
$
|
(52,347
|
)
|
|
$
|
947,653
|
|
0.35% Convertible Senior Notes due June 2020
|
|
1,000,000
|
|
|
(108,808
|
)
|
|
891,192
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(120,151
|
)
|
|
879,849
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,139,471
|
|
|
(14,718
|
)
|
|
1,124,753
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(4,052
|
)
|
|
495,948
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,139,471
|
|
|
(6,093
|
)
|
|
1,133,378
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
854,603
|
|
|
(6,174
|
)
|
|
848,429
|
|
Total long-term debt
|
|
$
|
6,633,545
|
|
|
$
|
(312,343
|
)
|
|
$
|
6,321,202
|
|
Outstanding long-term debt as of
December 31, 2015
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Outstanding
Principal
Amount
|
|
Unamortized Debt
Discount and Debt
Issuance Cost
|
|
Carrying
Value
|
Long-term debt:
|
|
|
|
|
|
|
1.0% Convertible Senior Notes due March 2018
|
|
$
|
1,000,000
|
|
|
$
|
(58,929
|
)
|
|
$
|
941,071
|
|
0.35% Convertible Senior Notes due June 2020
|
|
1,000,000
|
|
|
(114,898
|
)
|
|
885,102
|
|
0.9% Convertible Senior Notes due September 2021
|
|
1,000,000
|
|
|
(125,258
|
)
|
|
874,742
|
|
2.375% (€1 Billion) Senior Notes due September 2024
|
|
1,086,957
|
|
|
(14,688
|
)
|
|
1,072,269
|
|
3.65% Senior Notes due March 2025
|
|
500,000
|
|
|
(4,160
|
)
|
|
495,840
|
|
1.8% (€1 Billion) Senior Notes due March 2027
|
|
1,086,957
|
|
|
(6,200
|
)
|
|
1,080,757
|
|
2.15% (€750 Million) Senior Notes due November 2022
|
|
815,217
|
|
|
(6,555
|
)
|
|
808,662
|
|
Total long-term debt
|
|
$
|
6,489,131
|
|
|
$
|
(330,688
|
)
|
|
$
|
6,158,443
|
|
Based upon the closing price of the Company's common stock for the prescribed measurement periods during the
three
months ended
March 31, 2016
and
December 31, 2015
, the respective contingent conversion thresholds of the 2018 Notes (as defined below), the 2020 Notes (as defined below) and the 2021 Notes (as defined below) were not exceeded and therefore these notes are reported as non-current liabilities in the Unaudited Consolidated Balance Sheets.
Fair Value of Long-term Debt
As of
March 31, 2016
and
December 31, 2015
, the estimated market value of all outstanding Senior Notes was approximately
$7.3 billion
and
$7.0 billion
, respectively, and was considered a "Level
2
" fair value measurement (see Note
5
). Fair value was estimated based upon actual trades at the end of the reporting period or the most recent trade available as well as the Company's stock price at the end of the reporting period. A substantial portion of the market value of the Company's debt in excess of the outstanding principal amount relates to the conversion premium on the Convertible Senior Notes.
Convertible Debt
If the note holders exercise their option to convert, the Company delivers cash to repay the principal amount of the notes and delivers shares of common stock or cash, at its option, to satisfy the conversion value in excess of the principal amount. In cases where holders decide to convert prior to the maturity date, the Company charges the proportionate amount of remaining debt issuance costs to interest expense.
Description of Senior Convertible Notes
In August 2014, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due September 15, 2021, with an interest rate of
0.9%
(the "2021 Notes"). The Company paid
$11.0 million
in debt issuance costs during the year ended December 31, 2014 related to this offering. The 2021 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$2,055.50
per share. The 2021 Notes are convertible, at the option of the holder, prior to September 15, 2021, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2021 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2021 Notes in an aggregate value ranging from
$0
to approximately
$375 million
depending upon the date of the transaction and the then current stock price of the Company. As of June 15, 2021, holders will have the right to convert all or any portion of the 2021 Notes. The 2021 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2021 Notes for cash in certain circumstances. Interest on the 2021 Notes is payable on March 15 and September 15 of each year.
In May 2013, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due June 15, 2020, with an interest rate of
0.35%
(the "2020 Notes"). The 2020 Notes were issued with an initial discount of
$20.0 million
. The Company paid
$1.0 million
in debt issuance costs during the year ended December 31, 2013 related to this offering. The 2020 Notes are convertible, subject to certain conditions, into the Company's common stock at a
conversion price of approximately
$1,315.10
per share. The 2020 Notes are convertible, at the option of the holder, prior to June 15, 2020, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2020 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2020 Notes in an aggregate value ranging from
$0
to approximately
$397 million
depending upon the date of the transaction and the then current stock price of the Company. As of March 15, 2020, holders will have the right to convert all or any portion of the 2020 Notes. The 2020 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2020 Notes for cash in certain circumstances. Interest on the 2020 Notes is payable on June 15 and December 15 of each year.
In
March 2012
, the Company issued in a private placement
$1.0 billion
aggregate principal amount of Convertible Senior Notes due
March 15, 2018
, with an interest rate of
1.0%
(the "2018 Notes"). The Company paid
$20.9 million
in debt issuance costs during the year ended December 31, 2012 related to this offering. The 2018 Notes are convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$944.61
per share. The 2018 Notes are convertible, at the option of the holder, prior to March 15, 2018, upon the occurrence of specific events, including but not limited to a change in control, or if the closing sales price of the Company's common stock for at least
20
trading days in the period of
30
consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is more than
150%
of the conversion price in effect for the notes on the last trading day of the immediately preceding quarter. In the event that all or substantially all of the Company's common stock is acquired on or prior to the maturity of the 2018 Notes in a transaction in which the consideration paid to holders of the Company's common stock consists of all or substantially all cash, the Company would be required to make additional payments in the form of additional shares of common stock to the holders of the 2018 Notes in aggregate value ranging from
$0
to approximately
$344 million
depending upon the date of the transaction and the then current stock price of the Company. As of
December 15, 2017
, holders will have the right to convert all or any portion of the 2018 Notes. The 2018 Notes may not be redeemed by the Company prior to maturity. The holders may require the Company to repurchase the 2018 Notes for cash in certain circumstances. Interest on the 2018 Notes is payable on March 15 and September 15 of each year.
In
March 2010
, the Company issued in a private placement
$575.0 million
aggregate principal amount of Convertible Senior Notes due
March 15, 2015
, with an interest rate of
1.25%
(the "2015 Notes"). The Company paid
$13.3 million
in debt issuance costs associated with the 2015 Notes for the year ended December 31, 2010. The 2015 Notes were convertible, subject to certain conditions, into the Company's common stock at a conversion price of approximately
$303.06
per share. In March 2015, in connection with the maturity or conversion prior to maturity of the remaining outstanding
1.25%
Convertible Senior Notes, the Company paid
$37.5 million
to satisfy the aggregate principal amount due and paid an additional
$110.1 million
in satisfaction of the conversion value in excess of the principal amount, which was charged to additional paid-in capital.
Cash-settled convertible debt, such as the Company's Convertible Senior Notes, is separated into debt and equity components at issuance and each component is assigned a value. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, is recorded as a debt discount. Debt discount is amortized using the effective interest method over the period from the origination date through the stated maturity date. The Company estimated the straight debt borrowing rates at debt origination to be
3.18%
for the 2021 Notes,
3.13%
for the 2020 Notes and
3.50%
for the 2018 Notes. The yield to maturity was estimated at an at-market coupon priced at par.
Debt discount after tax of
$82.5 million
(
$142.9 million
before tax) less financing costs associated with the equity component of convertible debt of
$1.6 million
after tax were recorded in additional paid-in capital related to the 2021 Notes at December 31, 2014. Debt discount after tax of
$92.4 million
(
$154.3 million
before tax) less financing costs associated with the equity component of convertible debt of
$0.1 million
after tax were recorded in additional paid-in capital related to the 2020 Notes at June 30, 2013. Debt discount after tax of
$80.9 million
(
$135.2 million
before tax) less financing costs associated with the equity component of convertible debt of
$2.8 million
after tax were recorded in additional paid-in capital related to the 2018 Notes at March 31, 2012.
For the
three
months ended
March 31, 2016
and
2015
, the Company recognized interest expense of
$23.4 million
and
$23.3 million
, respectively, related to convertible notes. Interest expense related to convertible notes for the
three
months ended
March 31, 2016
and
2015
was comprised of
$5.6 million
and
$5.7 million
, respectively, for the contractual coupon
interest,
$16.7 million
and
$16.5 million
, respectively, related to the amortization of debt discount, and
$1.1 million
for each period related to the amortization of debt issuance costs. For the
three
months ended
March 31, 2016
and
2015
, included in the amortization of debt discount mentioned above was
$0.7 million
of original issuance discount for each period related to the 2020 Notes. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt. The weighted-average effective interest rate for both the
three
months ended
March 31, 2016
and
2015
was
3.5%
related to convertible notes.
Other Long-term Debt
In November 2015, the Company issued Senior Notes due November 25, 2022, with an interest rate of
2.15%
(the "2022 Notes") for an aggregate principal amount of
750 million
Euros. The 2022 Notes were issued with an initial discount of
2.2 million
Euros. In addition, the Company paid
$3.7 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2022 Notes is payable annually on November 25, beginning November 25, 2016. Subject to certain limited exceptions, all payments of interest and principal, including payments made upon any redemption of the 2022 Notes will be made in Euros.
In March 2015, the Company issued Senior Notes due March 15, 2025, with an interest rate of
3.65%
(the "2025 Notes") for an aggregate principal amount of
$500 million
. The 2025 Notes were issued with an initial discount of
$1.3 million
. In addition, the Company paid
$3.2 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2025 Notes is payable semi-annually on March 15 and September 15, beginning September 15, 2015.
In March 2015, the Company issued Senior Notes due March 3, 2027, with an interest rate of
1.8%
(the "2027 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2027 Notes were issued with an initial discount of
0.3 million
Euros. In addition, the Company paid
$6.3 million
in debt issuance costs during the year ended December 31, 2015. Interest on the 2027 Notes is payable annually on March 3, beginning March 3, 2016. Subject to certain limited exceptions, all payments of interest and principal for the 2027 Notes will be made in Euros.
In September 2014, the Company issued Senior Notes due September 23, 2024, with an interest rate of
2.375%
(the "2024 Notes") for an aggregate principal amount of
1.0 billion
Euros. The 2024 Notes were issued with an initial discount of
9.4 million
Euros. In addition, the Company paid
$6.5 million
in debt issuance costs during the year ended December 31, 2014. Interest on the 2024 Notes is payable annually on September 23, beginning September 23, 2015. Subject to certain limited exceptions, all payments of interest and principal for the 2024 Notes will be made in Euros.
The aggregate principal value of the 2022 Notes, 2024 Notes and 2027 Notes and accrued interest thereon are designated as a hedge of the Company's net investment in certain Euro functional currency subsidiaries. The foreign currency transaction gains or losses on these liabilities are measured based upon changes in spot rates and are recorded in "
Accumulated other comprehensive income
" in the Unaudited Consolidated Balance Sheets. The Euro-denominated net assets of these subsidiaries are translated into U.S. Dollars at each balance sheet date, with effects of foreign currency changes also reported in "
Accumulated other comprehensive income
"in the Unaudited Consolidated Balance Sheets. Since the notional amount of the recorded Euro-denominated debt and related interest are not greater than the notional amount of the Company's net investment, the Company does not expect to incur any ineffectiveness on this hedge.
Debt discount is amortized using the effective interest method over the period from the origination date through the stated maturity date. The Company estimated the effective interest rates at debt origination to be
2.20%
for the 2022 Notes,
3.68%
for the 2025 Notes,
1.80%
for the 2027 Notes and
2.48%
for the 2024 Notes.
For the
three
months ended
March 31, 2016
and
2015
, the Company recognized interest expense of
$21.4 million
and
$9.5 million
, respectively, related to other long-term debt which was comprised of
$20.5 million
and
$9.0 million
, respectively, for the contractual coupon interest,
$0.4 million
and
$0.3 million
, respectively, related to the amortization of debt discount and
$0.5 million
and
$0.2 million
, respectively, related to the amortization of debt issuance costs. The remaining period for amortization of debt discount and debt issuance costs is the period until the stated maturity dates for the respective debt.
In March 2016, the Company received a
ten
-year loan from the State of Connecticut in the amount of
$2.5 million
with an interest rate of
1%
in connection with the construction of office space in Connecticut. The loan is reported in "
Other long-term liabilities
" in the Unaudited Consolidated Balance Sheet. The loan will be forgiven if certain employment and salary conditions are met.
8.
TREASURY STOCK
In the first quarter of 2016, the Company's Board of Directors authorized a program to repurchase up to
$3.0 billion
of the Company's common stock. In the
three
months ended
March 31, 2016
, the Company repurchased
111,486
shares of its common stock in the open market for an aggregate cost of
$142.2 million
.
As of
March 31, 2016
, the Company had a remaining authorization of
$2.9 billion
to purchase its common stock. The Company may make additional repurchases of shares under its stock repurchase programs, depending on prevailing market conditions, alternate uses of capital and other factors. Whether and when to initiate and/or complete any purchase of common stock and the amount of common stock purchased will be determined at the Company's discretion.
The Board of Directors has given the Company the general authorization to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation. The Company repurchased
90,401
shares and
53,062
shares at aggregate costs of
$117.2 million
and
$65.8 million
in the
three
months ended
March 31, 2016
and
2015
, respectively, to satisfy employee withholding taxes related to stock-based compensation.
As of
March 31, 2016
, there were
12,629,864
shares of the Company's common stock held in treasury.
9.
INCOME TAXES
Income tax expense consists of U.S. and international income taxes, determined using an estimate of the Company's annual effective tax rate. A deferred tax liability is recognized for all taxable temporary differences, and a deferred tax asset is recognized for all deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes income tax expense based upon the applicable tax rates and tax laws of the countries in which the income is generated. During the
three
months ended
March 31, 2016
and
2015
, a substantial majority of the Company's income was generated in the Netherlands. Income tax expense for the
three
months ended
March 31, 2016
and
2015
differs from the expected tax expense at the U.S. federal statutory rate of
35%
, primarily due to lower international tax rates, partially offset by U.S. state income taxes and certain non-deductible expenses.
According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of
5%
("Innovation Box Tax") rather than the Dutch statutory rate of
25%
. A portion of Booking.com's earnings during the
three
months ended
March 31, 2016
and 2015 qualifies for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods.
The Company has significant deferred tax assets including U.S. net operating loss carryforwards ("NOLs"). The amount of NOLs available for the Company's use is limited by Section
382
of the U.S. Internal Revenue Code ("IRC Section
382
"). At
December 31, 2015
, after considering the impact of IRC Section
382
, the Company had approximately
$847.9 million
of available NOLs for U.S. federal income tax purposes, comprised of
$25.6 million
of NOLs generated from operating losses and approximately
$822.3 million
of NOLs generated from equity-related transactions, including equity-based compensation and stock warrants. The NOLs mainly expire from
December 31, 2019
to
December 31, 2021
. The utilization of these NOLs is dependent upon the Company's ability to generate sufficient future taxable income in the United States. Pursuant to current accounting guidance, tax benefits related to equity deductions will be recognized by crediting additional paid-in capital when they are realized by reducing the Company's current income tax liability. Under the new accounting standard issued in April 2016 (see Note 1), all previously unrecognized excess tax benefits will be recognized as a deferred tax asset, net of any valuation allowance, with a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption of this standard. In addition, prospectively all excess tax benefits will be recognized in the income statement in the period in which equity deductions are claimed on the Company's income tax return. The Company periodically evaluates the likelihood of the realization of deferred tax assets, and reduces the carrying amount of these deferred tax assets by a valuation allowance to the extent it believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of the deferred tax assets, including its recent cumulative earnings experience by taxing jurisdiction, expectations of future income, tax planning strategies, the carryforward periods available for tax reporting purposes, and other relevant factors.
It is the practice and intention of the Company to reinvest the earnings of its international subsidiaries in those operations. As a result, at
March 31, 2016
,
no
provision had been made for U.S. taxes on cumulative undistributed international earnings. At
December 31, 2015
, international earnings intended to be indefinitely reinvested outside of the
United States amounted to approximately
$9.9 billion
. It is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not indefinitely reinvested.
10.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The table below provides the balances for each classification of accumulated other comprehensive income as of
March 31, 2016
and
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
December 31,
2015
|
Foreign currency translation adjustments, net of tax
(1)
|
|
$
|
(139,891
|
)
|
|
$
|
(217,263
|
)
|
Net unrealized gain on marketable securities, net of tax
(2)
|
|
437,656
|
|
|
462,115
|
|
Accumulated other comprehensive income
|
|
$
|
297,765
|
|
|
$
|
244,852
|
|
(1)
Foreign currency translation adjustments, net of tax, include net losses from fair value adjustments of
$34.8 million
after tax (
$52.6 million
before tax) associated with derivatives designated as net investment hedges at both
March 31, 2016
and
December 31, 2015
(see Note
5
).
Foreign currency translation adjustments, net of tax, include foreign currency transaction gains of
$43.2 million
after tax (
$75.8 million
before tax) and
$126.8 million
after tax (
$220.5 million
before tax) associated with the Company's 2022 Notes, 2024 Notes and 2027 Notes at
March 31, 2016
and
December 31, 2015
, respectively. The 2022 Notes, 2024 Notes and 2027 Notes are Euro-denominated debt and are designated as hedges of certain of the Company's Euro-denominated net assets (see Note
7
).
The remaining balance in foreign currency translation adjustments excludes income taxes as a result of the Company's intention to indefinitely reinvest the earnings of its international subsidiaries outside of the United States.
(2)
The unrealized gains before tax at
March 31, 2016
were
$460.8 million
, of which unrealized gains of
$368.1 million
were exempt from tax in the Netherlands and unrealized gains of
$92.7 million
were taxable. The unrealized gains before tax at
December 31, 2015
were
$456.1 million
, of which unrealized gains of
$481.3 million
were exempt from tax in the Netherlands and unrealized losses of
$25.2 million
were taxable.
11.
COMMITMENTS AND CONTINGENCIES
Competition Reviews
The online travel industry has become the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. Investigations predominately related to Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, were initiated by NCAs in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland, and a number of other NCAs are also looking, or have looked, at these issues. The investigations primarily relate to whether Booking.com's price parity provisions are anti-competitive because they require accommodation providers to provide Booking.com with room rates that are at least as low as those offered to other online travel companies ("OTCs") or through the accommodation provider's website.
On April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted "commitments" offered by Booking.com to resolve and close the investigations in France, Italy and Sweden. Under the commitments, Booking.com replaced its existing price parity agreements with accommodation providers with "narrow" price parity agreements. Under a "narrow" price parity agreement, subject to certain exceptions, an accommodation provider is still required to offer the same or better rates on Booking.com as it offers to a consumer directly online, but it is no longer required to offer the same or better rates on Booking.com as it offers to other OTCs. The commitments also allow an accommodation provider to, among other things, offer different terms and conditions (e.g., free WiFi) and availability to consumers that book with on-line travel companies that offer lower rates of commission or other benefits, offer lower rates to consumers that book through off-line channels and continue to discount through, among other things, accommodation loyalty programs, as long as those rates are not published or marketed online. The commitments apply to accommodations in France, Italy and Sweden and were effective on July 1, 2015. The foregoing description is a summary only and is qualified in its entirety by reference to the commitments published by the NCAs on April 21, 2015.
Booking.com is in ongoing discussions with various NCAs in other countries regarding their concerns. On July 1, 2015, Booking.com voluntarily implemented the commitments given to the French, Italian and Swedish NCAs throughout the European Economic Area and Switzerland, and Booking.com is working with certain other European NCAs towards closing their investigations or inquiries. In October 2015, the Irish NCA closed its investigation on the basis of commitments by Booking.com identical to those given to the French, Italian and Swedish NCAs. In November 2015, the Swiss NCA closed its investigation, prohibiting any reintroduction of Booking.com's old "wide" parity agreements but permitting Booking.com to retain its existing "narrow" parity agreements with accommodations in Switzerland. The Austrian NCA stated in March 2016 that it will close its investigation against Booking.com in light of the move to “narrow” price parity. A number of additional NCAs in the European Economic Area have now closed their investigations following Booking.com's implementation of the commitments in their jurisdictions. However, the Company is currently unable to predict the impact the implementation of these commitments throughout the European Economic Area and Switzerland will have on Booking.com's business or on the on-going investigations in other European countries, or on industry practice more generally. On December 23, 2015, the German NCA issued a final decision prohibiting Booking.com's "narrow" price parity agreements with accommodations in Germany. The German NCA did not issue a fine, but has reserved its position regarding an order for disgorgement of profits. Booking.com intends to appeal the German NCA's decision. An Italian hotel association has appealed the Italian NCA's decision to accept the commitments by Booking.com. The Company is unable to predict how these appeals and the remaining investigations in other countries will ultimately be resolved. Possible outcomes include requiring Booking.com to amend or remove its rate parity clause from its contracts with accommodation providers in those jurisdictions and/or the imposition of fines.
In August 2015, French legislation known as the "Macron Law" became effective. Among other things, the Macron Law makes price parity agreements illegal, including the "narrow" price parity agreements agreed to by the French NCA in April 2015. Similar legislation prohibiting "narrow" price parity agreements has been proposed in Italy and currently is awaiting action by the Italian Senate. It is not yet clear how the Macron Law or the proposed Italian legislation may affect our business in the long-term in France and Italy, respectively.
Litigation Related to Travel Transaction Taxes
The Company and certain third-party OTCs are currently involved in approximately
thirty
lawsuits, including certified and putative class actions, brought by or against U.S. states, cities and counties over issues involving the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.) related to the priceline.com business. Generally, the complaints allege, among other things, that the OTCs violated each jurisdiction's respective relevant travel transaction tax ordinance with respect to the charge and remittance of amounts to cover taxes under each law. The Company believes that the laws at issue generally do not apply to the services it provides, namely the facilitation of travel reservations, and, therefore, that it does not owe the taxes that are claimed to be owed. However, the Company has been involved in this type of litigation for many years, and state and local jurisdictions where these issues have not been resolved could assert that the Company is subject to travel transaction taxes and could seek to collect such taxes, retroactively and/or prospectively. From time to time, the Company has found it expedient to settle claims pending in these matters without conceding that the claims at issue are meritorious or that the claimed taxes are in fact due to be paid. The Company may also settle current or future travel transaction tax claims.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries and also could result in substantial liabilities for past and/or future bookings, including, among other things, interest, penalties, punitive damages and/or attorneys’ fees and costs. An adverse outcome in one or more of these unresolved proceedings could have an adverse effect on our results of operations or cash flow in any given operating period. However, the Company believes that even if the Company were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated, given results to date it would not have a material impact on its liquidity or financial condition.
Accrual for Travel Transaction Taxes
As a result of this litigation and other attempts by jurisdictions to levy similar taxes, the Company has established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately
$27 million
for both the period ended
March 31, 2016
and the period ended
December 31, 2015
. The Company's legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
Patent Infringement
On February 9, 2015, International Business Machines Corporation ("IBM") filed a complaint in the U.S. District Court for the District of Delaware against The Priceline Group Inc. and its subsidiaries KAYAK Software Corporation, OpenTable, Inc. and priceline.com LLC (the "Subject Companies"). In the complaint, IBM alleges that the Subject Companies have infringed and continue to willfully infringe certain IBM patents that IBM claims relate to the presentation of applications and advertising in an interactive service, preserving state information in online transactions and single sign-on processes in a computing environment and seeks unspecified damages (including a request that the amount of compensatory damages be trebled), injunctive relief and costs and reasonable attorneys’ fees. The Subject Companies believe the claims to be without merit and intend to contest them. The Subject Companies moved the District Court to dismiss the case due to lack of patentable subject matter in the asserted patents, and on March 30, 2016 that motion was denied without prejudice to refiling later in the case.
French and Italian Tax Matters
French tax authorities recently concluded an audit of Booking.com that started in 2013 of the years 2003 through 2012. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes ("VAT"). In December 2015, the French tax authorities issued Booking.com assessments for approximately
356 million
Euros, the majority of which would represent penalties and interest. The Company believes that Booking.com has been, and continues to be, in compliance with French tax law, and the Company intends to contest the assessments. If the Company is unable to resolve the matter with the French authorities, it would expect to challenge the assessments in the French courts. In order to contest the assessments in court, the Company may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by it that it owes the tax. French authorities may decide to also audit subsequent tax years, which could result in additional assessments.
Italian tax authorities have initiated a process to determine whether Booking.com should be subject to additional tax obligations in Italy. Italian tax authorities may determine that the Company owes additional taxes, and may also assess penalties and interest. The Company believes that it has been, and continues to be, in compliance with Italian tax law.
Other
The Company accrues for certain legal contingencies where it is probable that a loss has been incurred and the amount can be reasonably estimated. Such accrued amounts are not material to the Company's consolidated balance sheets and provisions recorded have not been material to the Company's consolidated results of operations or cash flows. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made.
From time to time, the Company has been, and expects to continue to be, subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of third-party intellectual property rights. Such claims, even if not meritorious, could result in the expenditure of significant financial and managerial resources, divert management's attention from the Company's business objectives and adversely affect the Company's business, results of operations, financial condition and cash flows.
Contingent Consideration for Business Acquisitions
As of
March 31, 2016
and
December 31, 2015
, the Company recognized a liability of approximately
$9 million
for each period for estimated contingent payments. The estimated acquisition-date contingent liability is based upon the probability-weighted average payments for specific performance factors from the acquisition date through the performance period which ends at March 31, 2019. The range of undiscounted outcomes for the estimated contingent payments is approximately
$0
to
$90 million
.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report, and the Section entitled
"
Special Note Regarding Forward-Looking Statements
"
at the end of Management's Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report. As discussed in more detail in the Section entitled
"
Special Note Regarding Forward-Looking Statements,
"
this discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in
"
Risk Factors
"
and elsewhere in this Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.
We evaluate our results of operations on both an as reported and constant currency basis. We calculate constant currency by converting our current-year period financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.
Overview
We help people experience the world by providing consumers, travel service providers and restaurants with leading travel and restaurant reservation and related services. Through our online travel companies ("OTCs"), we connect consumers wishing to make travel reservations with providers of travel services around the world. We are the leader in the worldwide online accommodation reservation market based on room nights booked. We offer consumers a broad array of accommodation reservations (including hotels, bed and breakfasts, hostels, apartments, vacation rentals and other properties) through our Booking.com, priceline.com and agoda.com brands. Our priceline.com brand also offers consumers reservations for rental cars, airline tickets, vacation packages and cruises. We offer rental car reservations worldwide through Rentalcars.com. We also allow consumers to easily compare airline ticket, hotel reservation and rental car reservation information from hundreds of travel websites at once through KAYAK. We provide restaurants with reservation management services and consumers with the ability to make restaurant reservations at participating restaurants through OpenTable, a leading provider of online restaurant reservations. We refer to our company and all of our subsidiaries and brands, including Booking.com, priceline.com, KAYAK, agoda.com, Rentalcars.com, OpenTable and various smaller brands, collectively as "The Priceline Group," the "Company," "we," "our" or "us."
We launched our business in the United States in 1998 under the priceline.com brand and have since expanded our operations to include five other primary, independently operated brands: Booking.com, KAYAK, agoda.com, Rentalcars.com and OpenTable. Our principal goal is to help people experience the world by serving both consumers and our travel service provider and restaurant partners with worldwide leadership in online reservation and related services. Our business is driven primarily by international results, which consist of the results of Booking.com, agoda.com and Rentalcars.com and the results of the internationally-based websites of KAYAK and OpenTable (in each case regardless of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant). During the year ended
December 31, 2015
, our international business (the substantial majority of which is generated by Booking.com) represented approximately 86% of our consolidated gross profit. A significant majority of our gross profit is earned in connection with facilitating accommodation reservations.
We derive substantially all of our gross profit from the following sources:
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Commissions earned from facilitating reservations of accommodations, rental cars, cruises and other travel services;
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Transaction gross profit and customer processing fees from our accommodation, rental car, airline ticket and vacation package reservation services;
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Advertising revenues primarily earned by KAYAK from sending referrals to OTCs and travel service providers, as well as from advertising placements on KAYAK's websites and mobile apps;
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Reservation revenues paid by restaurants for diners seated through OpenTable's online reservation services, subscription fees for restaurant reservation management services provided by OpenTable and other OpenTable revenues; and
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Damage excess waiver fees, travel insurance fees and global distribution system ("GDS") reservation booking fees, in each case related to certain of our travel services.
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Our priceline.com brand offers merchant
Name Your Own Price
®
opaque travel services, which are recorded in revenue on a "gross" basis and have associated cost of revenue. All of our other services are recorded in revenue on a "net"
basis and have no associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our revenues between
Name Your Own Price
®
travel services and other services. Gross profit reflects the commission or net margin earned for all of our services. Consequently, gross profit is an important measure to evaluate growth in our business because, in contrast to our revenues, it is not affected by the different methods of recording revenue and cost of revenue between our
Name Your Own Price
®
travel reservation services and our other services.
Trends
Over the last several years we have experienced strong growth in our accommodation reservation services. We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices, the high growth of travel overall in emerging markets such as Asia-Pacific and South America, and the continued innovation and execution by our teams around the world to build accommodation supply, content and distribution and to improve the consumer experience on our websites and mobile apps. These year-over-year growth rates have generally decelerated in recent years. For example, for the year ended December 31, 2015, our accommodation room night reservation growth was 25%, a deceleration from 28% in 2014, 37% in 2013, and 40% in 2012. Given the size of our hotel reservation business, we expect that our year-over-year growth rates will continue to decelerate, though the rate of deceleration may fluctuate.
The size of the travel market outside of the United States is substantially greater than that within the United States. Historically, Internet use and e-commerce activity of international consumers have trailed that of consumers in the United States. However, international consumers are increasingly moving to online means for purchasing travel. Accordingly, recent international online travel growth rates have substantially exceeded, and are expected to continue to exceed, the growth rates within the United States. We expect that over the long term, international online travel growth rates will follow a similar trend to that experienced in the United States. In addition, the base of hotel properties in Europe and Asia is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the leading online accommodation reservation service provider in the world as measured by room nights booked. We believe that the opportunity to continue to grow our business exists for the markets in which we operate.
Our growth has primarily been generated by our worldwide accommodation reservation service brand, Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large and growing number of directly bookable properties through Booking.com. Booking.com included about
900,000
properties on its website as of
May 2, 2016
, which included approximately
422,000
vacation rental properties (updated property counts are available on the Booking.com website), and compares to over
685,000
properties (including approximately
301,000
vacation rental properties) a year ago. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business. As part of our strategy to increase the number and variety of accommodations available on Booking.com, in particular vacation rentals, Booking.com is increasingly processing transactions on a merchant basis. Processing transactions on a merchant basis allows Booking.com to process transactions for properties that do not accept credit cards and to increase its ability to offer flexible transaction terms to customers, such as regarding the form and timing of payment. Although we will incur additional credit card processing costs related to these transactions, which are recorded as sales and marketing expenses in our statement of operations and which will negatively impact our operating margins, we believe that adding these types of properties and service offerings will benefit our customers and our gross bookings, room night and earnings growth rates.
As our international business represents the substantial majority of our financial results, we expect our operating results and other financial metrics to continue to be largely driven by international performance. For example, certain markets in which we operate that are in earlier stages of development have lower operating margins compared to more mature markets, which could have a negative impact on our overall margins as these markets increase in size over time. Also, we intend to continue to invest in adding accommodations available for reservation on our websites, including hotels, bed and breakfasts, hostels and vacation rentals. Vacation rentals generally consist of, among others, properties categorized as single-unit and multi-unit villas, apartments, "aparthotels" (which are apartments with a front desk and cleaning service) and chalets and are generally self-catered (i.e., include a kitchen), directly bookable properties. Many of the newer accommodations we add to our travel reservation services, especially in highly penetrated markets, may have fewer rooms, lower average daily rates ("ADRs") or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts), and therefore may also negatively impact our margins. For example, because a vacation rental is either a single unit or a small collection of independent units, vacation rental properties represent more limited booking opportunities than non-vacation rental properties, which generally have more units to rent per property. Our vacation rental properties in general may be subject to increased seasonality due to local tourism seasons, weather or other factors. As we increase our vacation rental property business, these
different market characteristics could negatively impact our profit margins; and, to the extent these properties represent an increasing percentage of the properties added to our websites, we expect that our gross bookings growth rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of vacation rental properties increases, we expect that the number of reservations per property will likely continue to decrease.
Concerns persist about the outlook for the global economy in general, including uncertainty in the European Union. In addition, many governments around the world, including the U.S. government and certain European governments, are operating at large financial deficits, resulting in high levels of sovereign debt in such countries. Greece, Ireland, Portugal and certain other European Union countries with high levels of sovereign debt at times have had difficulty refinancing their debt. Failure to reach political consensus regarding workable solutions to these issues has resulted in a high level of uncertainty regarding the future economic outlook. This uncertainty, as well as concern over governmental austerity measures including higher taxes and reduced government spending, could impair consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates and cancellation rates and weaker trends in hotel ADRs across many regions of the world, particularly in those European countries that appear to be most affected by economic uncertainties. We believe that these business trends are likely impacted by weak economic conditions and sovereign debt concerns. Similarly, while China's economy experienced rapid growth over the past 20 years, growth of the Chinese economy slowed in 2015 and concerns about its future growth have had an adverse impact on financial markets, currency exchange rates and other economies. Disruptions in the economies of such countries could cause, contribute to or be indicative of deteriorating macro-economic conditions, which in turn could negatively affect travel to or from such countries or the travel industry in general and therefore have an adverse impact on our results of operations. For example, we have experienced an increase in cancellation rates, which we believe is the result of these macro-economic factors and a resulting lack of consumer confidence. Increased cancellation rates negatively affect our advertising efficiency and our results of operations.
Greece, in particular, has recently faced and continues to face significant economic challenges, in large part due to its high levels of sovereign debt and difficulties refinancing that debt. This may increase the likelihood that Greece, and in turn other countries, could exit the European Union, which could lead to added economic uncertainty and further devaluation or eventual abandonment of the Euro common currency. The United Kingdom plans to hold a non-binding referendum in June 2016 regarding whether to remain in the European Union. These and other macro-economic uncertainties, such as sovereign default risk becoming more widespread, declining oil prices and geopolitical tensions, have led to significant volatility in the exchange rate between the Euro, the U.S. Dollar and other currencies. In March 2015, the European Central Bank, in an effort to stimulate the European economy, launched a quantitative easing program to purchase public debt and, in March 2016, announced an expansion of the program and other stimulus measures.
As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to adverse movements in currency exchange rates as the financial results of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. Throughout 2015, the U.S. Dollar strengthened significantly year-over-year relative to substantially all currencies in which we transact, most notably the Euro, Brazilian Real, British Pound Sterling, Russian Ruble and Australian Dollar. In the first quarter of 2016, the U.S. Dollar continued to be stronger year-over-year relative to the Euro, British Pound Sterling and most other major currencies in which we transact. As a result, our foreign currency denominated net assets, gross bookings, gross profit, operating expenses and net income have been negatively impacted as expressed in U.S. Dollars, although to a lesser extent in the first quarter of 2016 than in the first quarter of 2015. For example, gross profit from our international operations grew 23.5% for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, but, without the negative impact of changes in currency exchange rates, grew year-over-year on a constant currency basis by approximately 31%. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins are not significantly impacted by currency fluctuations. The aggregate principal value of our Euro-denominated 2022 Notes, 2024 Notes and 2027 Notes, and accrued interest thereon, provide a natural hedge of the net assets of certain of our Euro functional currency subsidiaries.
We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on our consolidated operating results. However, such derivative instruments are short term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings, revenues or gross profit (see Note
5
to the Unaudited Consolidated Financial Statements for additional information on our derivative contracts).
Significant fluctuations in currency exchange rates, stock markets and oil prices can also impact consumer travel behavior. Consumers traveling from a country whose currency has weakened against other currencies may book lower ADR accommodations, choose to shorten or cancel their international travel plans or choose to travel domestically rather than internationally, any of which could adversely affect our gross bookings, revenues and results of operations, in particular when
expressed in U.S. Dollars. For example, the strengthening of the U.S. Dollar relative to the Euro in 2015 resulted in it becoming more expensive for Europeans to travel to the United States. Similarly, dramatic depreciation of the Russian Ruble in 2014 and 2015 resulted in it becoming more expensive for Russians to travel to Europe and most other non-Ruble destinations. In addition, although lower oil prices may lead to increased travel activity as consumers have more discretionary funds and airline fares decrease, recent declines in oil prices and stock market volatility may be indicative of broader macro-economic weakness, which in turn could negatively affect the travel industry and our business.
The uncertainty of macro-economic factors and their impact on consumer behavior, which may differ across regions, makes it more difficult to forecast industry and consumer trends and the timing and degree of their impact on our markets and business, which in turn could adversely affect our ability to effectively manage our business and adversely affect our results of operations.
We compete with both online and traditional travel and restaurant reservation and related services. The market for the services we offer is intensely competitive, a trend we expect to continue, and current and new competitors can launch new services at a relatively low cost. We currently, or may potentially in the future, compete with a variety of companies, including:
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online travel reservation services such as those owned by Expedia (including Travelocity and Orbitz), Ctrip (in which we hold a minority interest), Rakuten, eDreams ODIGEO and Jalan (which is owned by Recruit);
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online accommodation search and/or reservation services, such as Airbnb and HomeAway (which is owned by Expedia), currently focused on vacation rental properties and other non-hotel accommodations, including individually owned properties;
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large online companies, including search, social networking and marketplace companies such as Google, Facebook, Alibaba, Amazon and Groupon;
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traditional travel agencies, wholesalers and tour operators, such as Carlson Wagonlit, American Express, Thomas Cook and TUI Travel, as well as thousands of individual travel agencies around the world;
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travel service providers such as accommodation providers, rental car companies and airlines;
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online travel search and price comparison services (generally referred to as "meta-search" services), such as TripAdvisor, trivago (in which Expedia holds a majority ownership interest), Qunar (which is controlled by Ctrip) and HotelsCombined;
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online restaurant reservation services, such as TripAdvisor's LaFourchette, Yelp's SeatMe and Zomato; and
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companies offering new rental car business models or car- or ride-sharing services that affect demand for rental cars, some of which have developed innovative technologies to improve efficiency of point-to-point transportation and extensively utilize mobile platforms, such as Uber, Lyft and Zipcar.
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For more detail regarding the competitive trends and risks we face, see Part II Item 1A Risk Factors - "
Intense competition could reduce our market share and harm our financial performance.
" and "
Consumer adoption and use of mobile devices creates new challenges and may enable device companies such as Apple to compete directly with us.
"
During 2015, Expedia acquired Travelocity, Orbitz and HomeAway. To the extent these acquisitions enhance Expedia's ability to compete with us, in particular in the United States, which is Expedia's, Travelocity's, Orbitz's and HomeAway's largest market, our market share and results of operations could be adversely affected.
Widespread adoption of mobile devices, such as the iPhone, Android-enabled smart phones and tablets such as the iPad, coupled with the web browsing functionality and development of thousands of useful "apps" available on these devices, is driving substantial online traffic and commerce to mobile platforms. We have experienced a significant shift of business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Our major competitors and certain new market entrants are offering mobile apps for travel products and other mobile functionality, including proprietary last-minute discounts for accommodation reservations. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. The gross profit earned on a mobile transaction may be less than a typical desktop transaction due to different consumer purchasing patterns. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay and are not made as far in advance. Further, given the device sizes and technical limitations of tablets and smart phones, mobile consumers may not be willing to download multiple apps from
multiple companies providing a similar service and instead prefer to use one or a limited number of apps for their mobile travel and restaurant research and reservation activity. As a result, the consumer experience with mobile apps as well as brand recognition and loyalty are likely to become increasingly important. Our mobile offerings have received generally strong reviews and are driving a material and increasing share of our business. We believe that mobile bookings present an opportunity for growth and are necessary to maintain and grow our business as consumers increasingly turn to mobile devices instead of a personal computer. If we are unable to continue to rapidly innovate and create new, user-friendly and differentiated mobile offerings and efficiently and effectively advertise and distribute on these platforms, or if our mobile offerings are not used by consumers, we could lose market share to existing competitors or new entrants and our business, future growth and results of operations could be adversely affected.
In addition, we have observed an increase in promotional pricing to closed user groups (such as loyalty program participants or consumers with registered accounts), including through mobile apps. For example, Marriott International, Hilton and Hyatt Hotels each recently announced additional initiatives to encourage consumers to book accommodations directly through their websites, with increased discounting and incentives. If we are not as effective as our competitors in offering discounted prices to closed user groups or if we are unable to entice members of our competitors' closed user groups to use our services, our ability to grow and compete could be harmed. If we need to fund discounts out of our gross profit, our profitability could be adversely affected. Further, growth in discounted closed user group retail prices for hotel rooms lessens the price difference for members of closed user groups between a retail hotel reservation and an opaque hotel reservation, which we believe has led to fewer consumers using our opaque hotel reservation services. In addition, hotels typically make available only a limited number of hotel rooms for opaque services like those of our priceline.com business, especially during periods of high occupancy. Recent high hotel occupancy levels in the United States, which have had an adverse impact on our access to hotel rooms for our opaque hotel reservation services, and, we believe, the increased use by consumers of discounted closed user group retail prices for hotel rooms have negatively affected our opaque hotel reservation gross profit.
We have established widely used and recognized e-commerce brands through aggressive marketing and promotional campaigns. Our performance and brand advertising expenses have both increased significantly in recent years, a trend we expect to continue. For the
three
months ended
March 31, 2016
, our total performance advertising expense was approximately
$780 million
, primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites. We also invested approximately
$70 million
in brand advertising during that period, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook) and online display advertising. We intend to continue a strategy of aggressively promoting brand awareness, primarily through performance advertising, although we also intend to continue our brand advertising efforts, including by expanding brand campaigns into additional markets. For example, building on its first brand advertising campaign, which it launched in the United States in 2013, Booking.com has begun brand advertising campaigns in other markets, including Australia, Canada, the United Kingdom, Germany, France, Brazil, Japan and Spain. We have observed increased brand advertising by OTCs, meta-search services and travel service providers, particularly in North America, South America and Europe, which may make our brand advertising efforts more expensive and less effective.
Performance advertising efficiency, expressed as performance advertising expense as a percentage of gross profit, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our websites or mobile apps for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs-per-click and reduce our performance advertising efficiency. From 2011 to 2013, our performance advertising expense grew faster than our gross profit due to (1) year-over-year declines in performance advertising returns on investment ("ROIs") and (2) brand mix within The Priceline Group as our international brands grew faster than our U.S. brands and spent a higher percentage of gross profit on performance advertising. In 2014, these long-term trends continued, but were more than offset by the inclusion of KAYAK and OpenTable because they spend a lower percentage of gross profit on performance advertising than our other brands. Also, our consolidated results exclude intercompany advertising by our brands on KAYAK since our acquisition of KAYAK in May 2013. In 2015, performance advertising efficiency declined compared to the prior year, mainly due to lower ROIs. If Google changes how it presents travel search results or the manner in which it conducts the auction for placement among search results in a manner that is competitively disadvantageous to us, whether to support its own travel-related services or otherwise, our ability to efficiently generate traffic to our websites could be harmed. See Part II Item 1A Risk Factors
- "
We rely on performance advertising channels to generate a significant amount of traffic to our websites and enhance our brand awareness.
" and "
Our business could be negatively affected by changes in Internet search engine algorithms and dynamics or traffic-generating arrangements.
"
The national competition authorities ("NCAs") of many governments have begun investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Various
NCAs, including those in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland, opened investigations primarily related to Booking.com's contractual parity arrangements with accommodation providers in those jurisdictions, and a number of other NCAs are looking at these issues. It is uncertain how these issues will finally be resolved. For example, the French, Italian and Swedish NCAs accepted commitments offered by Booking.com to resolve and close their investigations and Booking.com voluntarily implemented these commitments throughout the European Economic Area and Switzerland on July 1, 2015, which resolved the concerns of various other countries. However, in August 2015 France adopted legislation known as the "Macron Law" making price parity agreements illegal, including those that had been approved by the French NCA. For more information on these investigations and their potential effects on our business, see Note
11
to our Unaudited Consolidated Financial Statements and Part II Item 1A Risk Factors - "
As the size of our business grows, we may become increasingly subject to the scrutiny of anti-trust and competition regulators.
" To the extent that regulatory authorities impose fines or require changes to our business practices or to those currently common to the industry or legislation is enacted with a similar effect, our business, competitive position and results of operations could be materially and adversely affected. Negative publicity regarding any such investigations could adversely affect our brand and therefore our market share and results of operations.
Seasonality
A meaningful amount of our gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. From a cost perspective, we expense the substantial majority of our advertising activities as the expense is incurred, which is typically in the quarter in which reservations are booked. However, we generally do not recognize associated revenue until future quarters when the travel occurs. As a result, we have historically experienced our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of accommodation checkouts for the year for our European and North American businesses. We experience the highest levels of booking and travel consumption for our Asia-Pacific and South American businesses in the first and fourth quarters. As these businesses have generally been growing faster than our European and North American businesses, our operating results for the fourth quarter of the year have become more significant over time as a percentage of full year operating results.
In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2016 our first quarter year-over-year growth rates in revenue, gross profit, operating income and operating margins were positively impacted by Easter falling in the first quarter instead of the second quarter, as it did in 2015. Conversely, our second quarter 2016 year-over-year growth rates in revenue, gross profit, operating income and operating margins will be adversely impacted by Easter falling in the first quarter instead of the second quarter, as it did in 2015. The timing of other holidays such as Chinese New Year, Carnival and Ramadan can also impact our quarterly year-over-year growth rates.
The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our growth rate substantially decelerates, our operating margins typically benefit from relatively less variable advertising expense. In addition, gross profit growth is typically less impacted in the near term due to the benefit of revenue related to reservations booked in previous quarters.
Other Factors
We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services and further expand into other international markets. Factors beyond our control, such as worldwide recession, oil prices, terrorist attacks, unusual weather patterns, natural disasters such as earthquakes, hurricanes, tsunamis, floods and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika, Influenza H1N1, avian bird flu, SARS and MERS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities or travel-related accidents, could adversely affect our business and results of operations. For example, our business and operations were negatively impacted by the terror attacks in Paris in November 2015 and in Brussels in March 2016; Hurricane Sandy, which disrupted travel in the northeastern United States in late 2012; a major earthquake, tsunami and nuclear emergency in Japan in 2011; severe flooding in Thailand in October 2011; and disruptive civil unrest in Thailand in 2014. In addition, MERS had an adverse impact on our business in northeast Asia in 2015. Also, in 2015 regional hostilities in the Middle East spurred an unprecedented flow of migrants from that region to Europe. As countries respond to the European migrant crisis, travel between countries in the European Union and to and from the region could be subject to increased restrictions or the closing of borders, which could negatively impact travel to, from or within the European Union and adversely affect our business and results of operations. Future terrorist attacks, natural disasters, health concerns or civil or political unrest could further disrupt our business and operations.
We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. We have
experienced pressure on operating margins as we prioritize initiatives that drive growth. For example, we are investing in growth initiatives at OpenTable, including international expansion, and in building our BookingSuite services. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, mergers and acquisitions. Our goal is to grow gross profit and achieve healthy operating margins in an effort to maintain profitability. The uncertain environment described above makes the prediction of future results of operations difficult, and accordingly, we may not be able to sustain gross profit growth and profitability.
Subsequent Event
On April 27, 2016, following an investigation overseen by independent members of our Board of Directors, Mr. Darren Huston, our former Chief Executive Officer and President and a former Director, resigned from all positions with us, including as Chief Executive Officer of our Booking.com business. As previously disclosed, the investigation determined that Mr. Huston had acted contrary to our Code of Conduct and had engaged in activities inconsistent with our Board's expectations for executive conduct. In connection with Mr. Huston's resignation, Mr. Jeffery Boyd, our Chairman and former President and Chief Executive Officer, was appointed Interim Chief Executive Officer and President while the Board conducts a search for a permanent chief executive officer. In addition, Ms. Gillian Tans was promoted from President and Chief Operating Officer of Booking.com to President and Chief Executive Officer of Booking.com.
Results of Operations
Three Months Ended March 31, 2016 compared to the Three Months Ended March 31, 2015
Operating and Statistical Metrics
Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxes and fees, of all travel services booked by our customers, net of cancellations, and is widely used in the travel business.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the
three
months ended
March 31, 2016
and
2015
were as follows (numbers may not total due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Agency
|
|
$
|
14,534
|
|
|
$
|
11,908
|
|
|
22.1
|
%
|
Merchant
|
|
2,119
|
|
|
1,867
|
|
|
13.5
|
%
|
Total
|
|
$
|
16,653
|
|
|
$
|
13,775
|
|
|
20.9
|
%
|
Gross bookings increased by
20.9%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
(growth on a constant currency basis was approximately
26%
), principally due to growth of
30.5%
in accommodation room night reservations and growth of
10.9%
in rental car day reservations, partially offset by the impact of foreign exchange rate fluctuations. ADRs were down slightly year-over-year on a constant currency basis. The U.S. Dollar was stronger against the Euro and many other currencies for the three months ended
March 31, 2016
compared to the three months ended March 31, 2015, which adversely affected the growth of our agency and merchant gross bookings, expressed in U.S. Dollars. We therefore believe that unit growth rates and total gross bookings and gross profit growth on a constant currency basis, excluding the impact of foreign exchange rate fluctuations, are important measures to understand the fundamental performance of the business.
Agency gross bookings are derived from travel-related transactions where we do not facilitate the charging of customers’ credit cards. Agency gross bookings increased
22.1%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, primarily due to growth in gross bookings from Booking.com agency retail accommodation room night reservations, as well as growth in gross bookings from agoda.com agency retail hotel reservations and Rentalcars.com agency retail rental car reservations, partially offset by lower retail airfares and a decline in retail airline ticket reservations.
Merchant gross bookings are derived from services where we facilitate the charging of customers’ credit cards for the travel services provided. Merchant gross bookings increased
13.5%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, primarily due to increases in gross bookings by merchant retail hotel reservation services for Booking.com and priceline.com, priceline.com's
Express Deals
®
airline ticket and hotel reservation services, and merchant retail rental car reservations for Rentalcars.com.
These increases were partially offset by declines in gross bookings by priceline.com's
Name Your Own Price
®
reservation services, a portion of agoda.com's accommodation room night reservations shifting to agency and the impact of the stronger U.S. Dollar on agoda.com's merchant retail hotel ADRs.
Accommodation room nights, rental car days and airline tickets reserved through our services for the
three
months ended
March 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in millions)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Room Nights
|
|
136.5
|
|
104.6
|
|
30.5
|
%
|
Rental Car Days
|
|
16.2
|
|
14.6
|
|
10.9
|
%
|
Airline Tickets
|
|
1.8
|
|
2.0
|
|
(7.2
|
)%
|
Accommodation room night reservations increased by
30.5%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, primarily due to strong execution by our brand teams to add accommodations to our websites, advertise our brands to consumers and provide a continuously improving experience for customers on our desktop and mobile platforms. Booking.com included about
900,000
properties on its website as of
May 2, 2016
, which included approximately
422,000
vacation rental properties (updated property counts are available on the Booking.com website), compared to over
685,000
properties (including approximately
301,000
vacation rental properties) a year ago.
Rental car day reservations increased by
10.9%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, due to an increase in price-disclosed rental car day reservations for Rentalcars.com and priceline.com, as well as an increase in priceline.com's
Name Your Own Price
®
rental car day reservations.
Airline ticket reservations decreased by
7.2%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, due to a decline in priceline.com's retail and
Name Your Own Price
®
airline ticket reservations, partially offset by an increase in priceline.com's
Express Deals
®
airline ticket reservations.
Revenues
We classify our revenue into three categories:
|
|
•
|
Agency revenues are derived from travel-related transactions where we do not facilitate the charging of customers’ credit cards and where the prices of the travel services are determined by third parties. Agency revenues include travel commissions, GDS reservation booking fees related to certain travel services, customer processing fees and travel insurance fees and are reported at the net amounts received, without any associated cost of revenue. Substantially all of the revenue for Booking.com is agency revenue comprised of travel commissions.
|
|
|
•
|
Merchant revenues are derived from services where we facilitate the charging of customers’ credit cards for the travel services provided. Merchant revenues include (1) transaction net revenues (i.e., to the extent applicable, the amount charged to a customer, less the amount charged to us by travel service providers) in connection with (a) the accommodation reservations provided through our merchant price-disclosed hotel reservation services at agoda.com, priceline.com and Booking.com and (b) the reservations provided through our merchant rental car service at Rentalcars.com and
Express Deals
®
reservation services at priceline.com; (2) transaction revenues representing the price of
Name Your Own Price
®
hotel, vacation packages, rental car and airline ticket reservations charged to a customer (with a corresponding travel service provider cost recorded in cost of revenues); (3) customer processing fees charged in connection with (a) merchant retail hotel reservation services at priceline.com and agoda.com and (b) priceline.com's
Express Deals
®
and
Name Your Own Price
®
reservation services; and (4) ancillary fees, including damage excess waiver and travel insurance fees and GDS reservation booking fees related to certain of the services listed above.
|
|
|
•
|
Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (reservation fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees earned by OpenTable for restaurant reservation management services; (3) revenues earned by priceline.com for advertising on its websites; and (4) revenues generated by Booking.com's BookingSuite branded accommodation marketing and business analytics services. Revenue from KAYAK is net of intercompany revenues earned by KAYAK from other Priceline Group brands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Agency Revenues
|
|
$
|
1,500,029
|
|
|
$
|
1,199,348
|
|
|
25.1
|
%
|
Merchant Revenues
|
|
470,032
|
|
|
494,675
|
|
|
(5.0
|
)%
|
Advertising and Other Revenues
|
|
178,058
|
|
|
146,671
|
|
|
21.4
|
%
|
Total Revenues
|
|
$
|
2,148,119
|
|
|
$
|
1,840,694
|
|
|
16.7
|
%
|
Agency Revenues
Agency revenues for the
three
months ended
March 31, 2016
increased
25.1%
compared to the three months ended
March 31, 2015
primarily as a result of growth in the agency business of Booking.com, as well as the agency hotel businesses of agoda.com and priceline.com, and the agency rental car businesses of priceline.com and Rentalcars.com. The U.S. Dollar was stronger against the Euro and many other currencies for the three months ended
March 31, 2016
compared to the three months ended March 31, 2015, which adversely affected the growth of our agency revenues, expressed in U.S. Dollars.
Merchant Revenues
Merchant revenues for the
three
months ended
March 31, 2016
decreased
5.0%
compared to the three months ended
March 31, 2015
primarily due to decreases in revenues from priceline.com's
Name Your Own Price
®
hotel, airline ticket and rental car reservation services, partially offset by increases in our merchant price-disclosed hotel and rental car businesses. Our priceline.com
Name Your Own Price
®
reservation services, which declined year-over-year, are recorded "gross" with a corresponding travel service provider cost recorded in cost of revenues. Our other merchant revenues, which in total grew year-over-year, are recorded in revenue "net" of travel service provider costs. As a result, changes in
Name Your Own Price
®
reservation revenue disproportionately affect merchant revenues as compared to our other merchant revenues. We therefore believe that gross profit is an important measure of evaluating growth in our business. The U.S. Dollar was stronger against the Euro and many other currencies for the three months ended
March 31, 2016
compared to the three months ended March 31, 2015, which adversely affected the growth of our merchant revenues, expressed in U.S. Dollars.
Advertising and Other Revenues
Advertising and other revenues during the
three
months ended
March 31, 2016
consisted primarily of advertising revenues, restaurant reservation revenues and subscription revenues for restaurant reservation management services. Advertising and other revenues for the three months ended
March 31, 2016
increased
21.4%
compared to the three months ended
March 31, 2015
primarily due to growth in our KAYAK business, reservation fees at OpenTable and advertising revenue at priceline.com.
Cost of Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Cost of Revenues
|
|
$
|
128,669
|
|
|
$
|
168,458
|
|
|
(23.6
|
)%
|
For the
three
months ended
March 31, 2016
, cost of revenues consisted primarily of: (1) the cost paid to travel service providers for priceline.com's
Name Your Own Price
®
and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by KAYAK and priceline.com to return travel itinerary information for consumer search queries. Cost of revenues for the
three
months ended
March 31, 2016
decreased by
23.6%
compared to the three months ended
March 31, 2015
primarily due to a decrease in priceline.com's
Name Your Own Price
®
reservation services, which was partially offset by a reversal of previously accrued travel transaction taxes of
$16.4 million
(including estimated interest and penalties) recorded in the first quarter of 2015 based on a favorable ruling in the State of Hawaii.
Agency revenues have no cost of revenue. Agency revenues principally consist of travel commissions on accommodation reservations.
Gross Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Gross Profit
|
|
$
|
2,019,450
|
|
|
$
|
1,672,236
|
|
|
20.8
|
%
|
Gross Margin
|
|
94.0
|
%
|
|
90.8
|
%
|
|
|
Total gross profit for the
three
months ended
March 31, 2016
increased by
20.8%
compared to the three months ended
March 31, 2015
(growth on a constant currency basis was approximately
27%
), primarily as a result of the increased revenue discussed above. Total gross margin (gross profit as a percentage of total revenue) increased during the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, because our revenues are disproportionately affected by priceline.com's
Name Your Own Price
®
reservation services.
Name Your Own Price
®
revenues are recorded "gross" with a corresponding travel service provider cost recorded in cost of revenues, and in the
three
months ended
March 31, 2016
these revenues represented a smaller percentage of total revenues than in the three months ended
March 31, 2015
. Our price-disclosed reservation services, which are recorded in revenue "net" of travel service provider costs, have been growing faster than priceline.com's
Name Your Own Price
®
reservation services. As a result, we believe that gross profit is an important measure for evaluating growth in our business.
Our international operations accounted for approximately
$1.7 billion
of our gross profit for the
three
months ended
March 31, 2016
compared to $1.4 billion for the three months ended
March 31, 2015
. Gross profit attributable to our international operations increased by
23.5%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
(growth on a constant currency basis was approximately
31%
). The U.S. Dollar was stronger against the Euro and many other currencies for the three months ended
March 31, 2016
compared to the three months ended March 31, 2015, which adversely affected the growth of our total and international gross profit, expressed in U.S. Dollars. Gross profit attributable to our U.S. businesses increased by
7.0%
for the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
.
Gross profit for the
three
months ended
March 31, 2015
was positively impacted by a reversal of previously accrued travel transaction taxes of
$16.4 million
(including estimated interest and penalties) based on a favorable ruling in the State of Hawaii. Our first quarter 2016 year-over-year growth rates in revenue, gross profit, operating income and operating margins were positively impacted by Easter falling in the first quarter instead of the second quarter, as it did in 2015, which resulted in Easter-related checkouts, and therefore related revenue and gross profit, generally falling in the first quarter of 2016. We estimate that the earlier Easter timing shifted approximately $40 million of gross profit into the first quarter of 2016 that would have been recognized in the second quarter if Easter had fallen in the second quarter, as it did in 2015.
Operating Expenses
Advertising
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Performance Advertising
|
|
$
|
779,909
|
|
|
$633,544
|
|
23.1
|
%
|
% of Total Gross Profit
|
|
38.6
|
%
|
|
37.9
|
%
|
|
|
Brand Advertising
|
|
$
|
69,845
|
|
|
$
|
73,254
|
|
|
(4.7
|
)%
|
% of Total Gross Profit
|
|
3.5
|
%
|
|
4.4
|
%
|
|
|
Performance advertising expenses consist primarily of the costs of (1) search engine keyword purchases; (2) referrals from meta-search and travel research websites; (3) affiliate programs; and (4) other performance-based advertisements. For the
three
months ended
March 31, 2016
, performance advertising expenses increased over the three months ended
March 31, 2015
, primarily to generate increased gross bookings. Performance advertising as a percentage of gross profit for the
three
months ended
March 31, 2016
increased compared to the three months ended
March 31, 2015
. This increase was due in part to the beneficial impact on gross profit in the three months ended March 31, 2015 from a reversal of previously accrued travel transaction taxes of $16.4 million (including estimated interest and penalties) based on a favorable ruling in the State of Hawaii.
Brand advertising expenses are primarily related to our Booking.com, KAYAK and priceline.com businesses and consist mainly of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising. For the
three
months ended
March 31, 2016
, brand advertising decreased by
4.7%
compared to the three months ended
March 31, 2015
, primarily due to a decision to spend less on brand advertising in the first quarter of 2016 and more in the second quarter of 2016.
We have changed the presentation for advertising expenses on the statements of operations (see Note
1
to the Unaudited Consolidated Financial Statements).
Sales and Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Sales and Marketing
|
|
$
|
92,323
|
|
|
$
|
81,944
|
|
|
12.7
|
%
|
% of Total Gross Profit
|
|
4.6
|
%
|
|
4.9
|
%
|
|
|
Sales and marketing expenses consist primarily of (1) credit card processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) customer relations costs; (4) provisions for bad debt, primarily related to agency accommodation commission receivables; (5) promotional and trade show costs; and (6) provisions for credit card chargebacks. For the three months ended March 31, 2016, sales and marketing expenses, which are substantially variable in nature, increased compared to the three months ended March 31, 2015 due primarily to increased gross booking volumes and customer relations costs.
Personnel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Personnel
|
|
$
|
308,351
|
|
|
$
|
258,984
|
|
|
19.1
|
%
|
% of Total Gross Profit
|
|
15.3
|
%
|
|
15.5
|
%
|
|
|
Personnel expenses consist of compensation to our personnel, including salaries, stock-based compensation, payroll taxes, bonuses, and employee health benefits. Personnel expenses increased during the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
due primarily to increased headcount to support the growth of our businesses. Personnel expenses for the three months ended March 31, 2016 were favorably impacted by the reversal of unpaid 2015 bonus accruals.
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
General and Administrative
|
|
$
|
113,045
|
|
|
$
|
100,178
|
|
|
12.8
|
%
|
% of Total Gross Profit
|
|
5.6
|
%
|
|
6.0
|
%
|
|
|
|
General and administrative expenses consist primarily of: (1) personnel-related expenses such as travel, recruiting and training expenses; (2) occupancy and office expenses; and (3) fees for outside professionals, including litigation expenses. General and administrative expenses increased during the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, due primarily to higher occupancy and office expenses related to the expansion of our international businesses and higher fees for outside professionals.
Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Information Technology
|
|
$
|
32,788
|
|
|
$
|
25,361
|
|
|
29.3
|
%
|
% of Total Gross Profit
|
|
1.6
|
%
|
|
1.5
|
%
|
|
|
|
Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expense increased during the
three
months ended
March 31, 2016
compared to the three months ended
March 31, 2015
, due primarily to growth in our worldwide operations.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Depreciation and Amortization
|
|
$
|
72,871
|
|
|
$
|
65,002
|
|
|
12.1
|
%
|
% of Total Gross Profit
|
|
3.6
|
%
|
|
3.9
|
%
|
|
|
|
Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation on computer equipment; (3) depreciation of internally developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. For the
three
months ended
March 31, 2016
, depreciation and amortization expenses increased compared to the three months ended
March 31, 2015
primarily as a result of increased depreciation expenses due to capital expenditures for additional data center capacity and office build-outs to support growth and geographic expansion, principally related to our Booking.com business, and increased capitalized software development costs.
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Interest Income
|
|
$
|
20,347
|
|
|
$
|
11,596
|
|
|
75.5
|
%
|
Interest Expense
|
|
(46,894
|
)
|
|
(33,479
|
)
|
|
40.1
|
%
|
Foreign Currency Transactions and Other
|
|
(12,928
|
)
|
|
(4,843
|
)
|
|
166.9
|
%
|
Impairment of cost-method investment
|
|
(50,350
|
)
|
|
—
|
|
|
100.0
|
%
|
Total
|
|
$
|
(89,825
|
)
|
|
$
|
(26,726
|
)
|
|
236.1
|
%
|
For the
three
months ended
March 31, 2016
, interest income on cash and marketable securities increased compared to the
three
months ended
March 31, 2015
, primarily due to an increase in the average invested balance and higher yields. Interest expense increased for the
three
months ended
March 31, 2016
as compared to the three months ended
March 31, 2015
, primarily due to interest expense attributable to our Senior Notes issued in March 2015 and November 2015, partially offset by the maturity of our 1.25% Convertible Senior Notes in March 2015. See Note
7
to our Unaudited Consolidated Financial Statements.
Derivative contracts that hedge our exposure to the impact of currency fluctuations on the translation of our international operating results into U.S. Dollars upon consolidation resulted in foreign exchange losses of
$3.6 million
for the
three
months ended
March 31, 2016
compared to foreign exchange gains of
$1.9 million
for the three months ended
March 31, 2015
and are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
Foreign exchange transaction losses, including costs related to foreign exchange transactions, resulted in losses of
$6.3 million
and
$8.4 million
for the
three
months ended
March 31, 2016
and 2015, respectively, and are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
For the
three
months ended
March 31, 2016
we recognized
$2.9 million
of net realized losses compared to
$1.8 million
of net realized gains for the three months ended March 31, 2015, related to investments, which are recorded in "Foreign currency transactions and other" in the Unaudited Consolidated Statements of Operations.
During the three months ended
March 31, 2016
, we recognized an impairment of approximately
$50 million
related to a cost-method investment (see Note 4 to the Unaudited Consolidated Financial Statements).
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
(in thousands)
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
Income Tax Expense
|
|
$
|
86,069
|
|
|
$
|
73,916
|
|
|
16.4
|
%
|
Our effective tax rate for the
three
months ended
March 31, 2016
was
18.7%
compared to
18.2%
for the three months ended
March 31, 2015
. Our effective tax rate differs from the U.S. federal statutory tax rate of 35%, due to lower tax rates outside the United States, partially offset by U.S. state income taxes and certain non-deductible expenses. Notwithstanding an increased proportion of our income being taxed at lower international tax rates due to the growth of our international businesses, our effective tax rate was higher for the three months ended
March 31, 2016
, compared to the three months ended
March 31, 2015
, due to an impairment of approximately $50 million in our investment in Hotel Urbano which is not tax deductible (see Note 4 to the Unaudited Consolidated Financial Statements). According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. A portion of Booking.com's earnings during the three months ended
March 31, 2016
and
2015
qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax rate for those periods. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit, whether due to a change in tax law or a determination by the Dutch government that Booking.com's activities are not "innovative" or for any other reason, would substantially increase our effective tax rate and adversely impact our results of operations.
Until our U.S. net operating loss carryforwards are utilized or expire, most of our U.S. income will not be subject to a cash tax liability, other than federal alternative minimum tax and state income taxes. However, we expect to pay foreign taxes on our international income except in countries where we have operating loss carryforwards. We expect that our international operations will grow their pretax income faster than our U.S. businesses over the long term and, therefore, it is our expectation that our cash tax payments will increase as our international businesses generate an increasing share of our pretax income.
We will be subject to increased income taxes in the event that our cash balances held outside the United States are remitted to the United States. As of
March 31, 2016
, we held approximately
$10.3 billion
of cash, cash equivalents, short-term investments and long-term investments outside of the United States. We currently intend to use our cash held outside the United States to reinvest in our international operations. If our cash balances outside the United States continue to grow and our ability to reinvest those balances outside the United States diminishes, under U.S. GAAP we will be obligated to record additional income tax expense in the United States with respect to our unremitted international earnings. We would not make additional U.S. income tax payments unless we were to actually repatriate our international cash to the United States. We would pay only U.S. federal alternative minimum tax and certain U.S. state income taxes as long as we have net operating loss carryforwards available to offset our U.S. taxable income. As of December 31, 2015, we had net operating loss carryforwards of $847.9 million and $620.9 million for federal and state tax purposes, respectively. If our foreign earnings were repatriated, this could result in us being subject to a cash income tax liability on the earnings of our U.S. businesses sooner than would otherwise have been the case.
Liquidity and Capital Resources
As of
March 31, 2016
, we had
$11.0 billion
in cash, cash equivalents, short-term investments and long-term investments. Approximately
$10.3 billion
is held by our international subsidiaries and is denominated primarily in U.S. Dollars, Euros and, to a lesser extent, British Pounds Sterling and other currencies. We currently intend to indefinitely reinvest these funds outside of the United States. If we repatriate cash to the United States, we would utilize our net operating loss carryforwards and beyond that amount incur additional tax payments in the United States. Cash equivalents, short-term investments and long-term investments are comprised of U.S. and foreign corporate bonds, U.S. and foreign government securities, commercial paper, U.S. government agency securities, convertible debt securities and American Depositary Shares ("ADSs") of Ctrip and bank deposits.
On
March 31, 2016
, the Company utilized a credit line in an amount of
$100.0 million
associated with the purchase of marketable debt securities, which was repaid on April 1, 2016.
In June 2015, we entered into a
$2.0 billion
five-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at our option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from
0.875%
to
1.50%
; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus
0.50%
, and (c) an adjusted LIBOR for an interest period of one month plus
1.00%
, plus an applicable margin ranging from
0.00%
to
0.50%
. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from
0.085%
to
0.20%
.
The revolving credit facility provides for the issuance of up to
$70.0 million
of letters of credit as well as borrowings of up to
$50.0 million
on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. As of March 31, 2016, there were no borrowings outstanding and approximately
$2.5 million
of letters of credit issued under the facility.
During the three months ended
March 31, 2016
, we repurchased
201,919
shares of our common stock for an aggregate cost of
$259.4 million
. As of
March 31, 2016
, we had a remaining aggregate amount of
$2.9 billion
authorized by our Board of Directors to purchase our common stock. We may from time to time make additional repurchases of our common stock, depending on prevailing market conditions, alternate uses of capital and other factors. We expect to use cash on hand and cash generated by our operations in the United States to fund our share repurchases. We may also utilize our revolving credit facility or raise funds through the debt capital markets to fund share repurchases.
Our merchant transactions are structured such that we collect cash up front from consumers and then we pay most of our travel service providers at a subsequent date. We therefore tend to experience significant seasonal swings in accounts receivable, deferred merchant bookings and travel service provider payables depending on the level of our merchant transactions during the last few weeks of every quarter.
Net cash provided by operating activities for the
three
months ended
March 31, 2016
was
$344.3 million
, resulting from net income of
$374.4 million
and a favorable impact of
$189.2 million
for non-cash items not affecting cash flows, partially offset by net unfavorable changes in working capital and other assets and liabilities of
$219.3 million
. For the
three
months ended
March 31, 2016
, prepaid expenses and other current assets increased by
$340.5 million
, primarily related to prepayments of 2016 income taxes in the first quarter of $431.3 million to earn prepayment discounts, principally by Booking.com. For the
three
months ended
March 31, 2016
, accounts receivable increased
$191.7 million
, primarily related to increases in business volumes. For the three months ended
March 31, 2016
, accounts payable, accrued expenses and other current liabilities increased by
$312.0 million
, primarily related to increases in business volumes partially offset by a reduction in the compensation payable as a result of the 2015 bonuses being paid in the first quarter of 2016. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, impairment of a cost-method investment, amortization of debt discount on our convertible notes and deferred income taxes.
Net cash provided by operating activities for the three months ended March 31, 2015, was $209.0 million, resulting from net income of $333.3 million and a favorable impact of $111.6 million for non-cash items not affecting cash flows, partially offset by net unfavorable changes in working capital and other assets and liabilities of $236.0 million. For the three months ended March 31, 2015, prepaid expenses and other current assets increased by $292.7 million, principally related to a $361.4 million prepayment of 2015 income taxes by Booking.com to earn a prepayment discount. For the three months ended March 31, 2015, accounts receivable increased $120.6 million primarily due to increases in business volumes. For the three months ended March 31, 2015, accounts payable, accrued expenses and other current liabilities increased by $201.2 million
primarily related to increases in business volumes, partially offset by a reduction in compensation payable as a result of 2014 bonuses being paid in the first quarter of 2015. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, amortization of debt discount on our convertible notes and deferred income taxes.
Net cash provided by investing activities was
$147.3 million
for the
three
months ended
March 31, 2016
. Investing activities for the
three
months ended
March 31, 2016
were principally affected by net proceeds from sales of investments of
$201.3 million
. Net cash used in investing activities was $1.1 billion for the three months ended March 31, 2015. Investing activities for the three months ended March 31, 2015 were affected by net purchases of investments of $1.1 billion, $26.2 million used for acquisitions, net of cash acquired, and net proceeds of $5.2 million for the settlement of foreign currency contracts. Cash invested in the purchase of property and equipment was
$53.3 million
and
$31.3 million
in the
three
months ended
March 31, 2016
and
2015
, respectively.
Net cash used in financing activities was
$134.0 million
for the
three
months ended
March 31, 2016
. Cash used in financing activities for the
three
months ended
March 31, 2016
primarily consisted of treasury stock purchases of
$259.4 million
, partially offset by proceeds from short-term borrowing of
$100.0 million
, excess tax benefits from stock-based compensation of
$18.1 million
, the exercise of employee stock options of
$4.8 million
and proceeds from the issuance of other long term debt of
$2.5 million
. Net cash provided by financing activities was
$1.2 billion
for the
three
months ended
March 31, 2015
. Cash provided by financing activities for the
three
months ended
March 31, 2015
primarily consisted of total proceeds of
$1.6 billion
from the issuance of Senior Notes, the exercise of employee stock options of
$9.1 million
and excess tax benefits from stock-based compensation of
$49.5 million
, partially offset by treasury stock purchases of
$308.6 million
and payments of
$147.6 million
related to the conversion of Senior Notes.
Contingencies
French tax authorities recently concluded an audit that started in 2013 of the years 2003 through 2012 to determine whether Booking.com is in compliance with its tax obligations in France. Booking.com received formal assessments in December 2015 in which the French tax authorities claim that Booking.com has a permanent establishment in France and seek to recover unpaid income taxes and VAT of approximately
356 million
Euros, the majority of which would represent penalties and interest. We believe that Booking.com has been and continues to be, in compliance with French tax law and we intend to contest the assessments. If we are unable to resolve the matter with the French authorities, we would expect to challenge the assessments in the French courts. In order to contest the assessments in court, we may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by us that we owe the taxes. French authorities may decide to also audit subsequent tax years, which could result in additional assessments. See Part II Item IA Risk Factors - "
We may have exposure to additional tax liabilities.
"
A number of U.S. jurisdictions have initiated lawsuits against online travel companies, including us, related to, among other things, the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.). In addition, a number of U.S. states, counties and municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of travel transaction taxes. For additional information, see Note
11
to our Unaudited Consolidated Financial Statements and Part II Item 1A Risk Factors
- "
Adverse application of U.S. state and local tax laws could have an adverse effect on our business and results of operations.
" in this Quarterly Report.
As a result of this litigation and other attempts by U.S. jurisdictions to levy similar taxes, we have established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately
$27 million
for both the period ended
March 31, 2016
and the period ended
December 31, 2015
. The accrual is based on our estimate of the probable cost of resolving these issues. Our legal expenses for these matters are expensed as incurred and are not reflected in the amount accrued. The actual cost may be less or greater, potentially significantly, than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made. If we were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated given results to date, because of our available cash we believe that it would not have a material impact on our liquidity.
Off-Balance Sheet Arrangements
As of
March 31, 2016
, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above and the Risk Factors contained in Part II Item 1A hereof, contain forward-looking statements. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results could differ materially from those described in the forward-looking statements.
Expressions of future goals and expectations and similar expressions, including "may," "will," "should," "could," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended
December 31, 2015
, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.