Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Three and NineSix Months Ended SeptemberJune 30, 20172023 compared to the Three and NineSix Months Ended SeptemberJune 30, 20162022
We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period operating and 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. Foreign exchange rate fluctuations impacted our year-over-year growth in gross bookings, revenues, and operating expenses for the three and six months ended June 30, 2023. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations.
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, reservationsSee "Results of accommodationOperations" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on our Operating and Statistical Metrics, including room nights, rental car days, and airline tickets, capture the volume of units booked through our OTC brands by our travel reservation services customers. Gross bookings is an operating and statistical metric that captures the total dollar value, generally inclusive of taxesmerchant and fees, of all travel services booked through our OTC brands by our customers, net of cancellations, and is widely used in the travel business. Our non-OTC brands (KAYAK and OpenTable) have different business metrics from those of our OTC brands and therefore search queries through KAYAK and restaurant reservations through OpenTable do not contribute to ouragency gross bookings.
Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the three and nine months ended September 30, 2017 and 2016 were as follows (numbers may not total due to rounding):
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| | Three Months Ended September 30, (in millions) | | | | Nine Months Ended September 30, (in millions) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Agency | | $ | 18,594 |
| | $ | 15,757 |
| | 18.0 | % | | $ | 54,681 |
| | $ | 45,660 |
| | 19.8 | % |
Merchant | | 3,168 |
| | 2,703 |
| | 17.2 | % | | 8,564 |
| | 7,316 |
| | 17.1 | % |
Total | | $ | 21,762 |
| | $ | 18,460 |
| | 17.9 | % | | $ | 63,245 |
| | $ | 52,975 |
| | 19.4 | % |
Gross bookings increased by 17.9% and 19.4% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016 (growth on a constant-currency basis was approximately 16% and 20%, respectively), almost entirely due to growth of 18.6% and 22.2%, respectively, in accommodation room night reservations. Accommodation ADRs on a constant-currency basis were down approximately 1% and relatively unchanged for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016. For the three months ended September 30, 2017, foreign exchange rate fluctuations benefited gross bookings growth in U.S. Dollars, but were a detriment to gross bookings growth in U.S. Dollars for the nine months ended September 30, 2017. We believe that unit growth rates and total gross bookings and gross profit growth on a constant-currency basis, each of which exclude the impact of foreign exchange rate fluctuations, are important measures to understand the fundamental performance of the business.
Agency gross bookings are derived from travel-related transactions where we do not facilitate payments for the travel services provided. Agency gross bookings increased by 18.0% and 19.8% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016, almost entirely due to the growth in gross bookings from Booking.com agency retail accommodation room night reservations.
Merchant gross bookings are derived from services where we facilitate payments for the travel services provided. Merchant gross bookings increased by 17.2% and 17.1% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016. Approximately 95% and 90% of the increases were due to growth in gross bookings from our merchant accommodation reservation services for the three months and nine months ended September 30, 2017, respectively, compared to the three months and nine months ended September 30, 2016. Growth in our merchant gross bookings from rental car reservation services also contributed to this growth, partially offset by a decrease in merchant airline ticket reservations.
Accommodation roomRoom nights, rental car days, and airline tickets reserved through our services for the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 were as follows:
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Room nights | | 268 | | 246 | | 8.8 | % | | 542 | | 444 | | 21.9 | % |
Rental car days | | 20 | | 16 | | 24.0 | % | | 39 | | 32 | | 23.4 | % |
Airline tickets | | 9 | | 6 | | 58.3 | % | | 17 | | 10 | | 65.2 | % |
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| | Three Months Ended September 30, (in millions) | | | | Nine Months Ended September 30, (in millions) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Room Nights | | 177.5 | | 149.6 | | 18.6 | % | | 521.6 | | 426.8 | | 22.2 | % |
Rental Car Days | | 19.0 | | 18.0 | | 5.5 | % | | 58.3 | | 52.7 | | 10.7 | % |
Airline Tickets | | 1.7 | | 1.9 | | (11.8 | )% | | 5.3 | | 5.7 | | (7.6 | )% |
Room nights reserved through our services increased for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, driven primarily by the continued recovery in Asia. Room nights reserved through our services increased for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, driven primarily by the continued recovery in Asia and Europe.
Accommodation room night reservations
Rental car days reserved through our services increased by 18.6% and 22.2% for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022, driven primarily due to strong execution by year-over-year growth in rental car demand, which benefited from lower average daily car rental prices.
Airline tickets reserved through our brand teams to add new properties to our accommodation reservation services advertise our brands to consumers and provide a continuously improving experience for customers on our desktop and mobile platforms, as well as the ongoing shift from offline to online for travel bookings.
Rental car day reservations increased by 5.5% and 10.7% for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2023, compared to the three and ninesix months ended SeptemberJune 30, 2016, due to strong execution2022, driven primarily by the expansion of Booking.com’s flight offering.
Gross bookings resulting from reservations of room nights, rental car days, and airline tickets made through our brand teams to advertise our brands to consumersmerchant and provide a continuously improving experience for customers on our desktop and mobile platforms, as well as the ongoing shift from offline to online for travel bookings.
Airline ticket reservations decreased by 11.8% and 7.6%agency categories for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2023 and 2022 were as follows (numbers may not total due to rounding):
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Merchant gross bookings | | $ | 21,122 | | | $ | 15,097 | | | 39.9 | % | | $ | 41,049 | | | $ | 26,104 | | | 57.3 | % |
Agency gross bookings | | 18,570 | | | 19,448 | | | (4.5) | % | | 38,070 | | | 35,734 | | | 6.5 | % |
Total gross bookings | | $ | 39,692 | | | $ | 34,545 | | | 14.9 | % | | $ | 79,119 | | | $ | 61,838 | | | 27.9 | % |
Merchant gross bookings increased for the three and six months ended June 30, 2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022 due to a declinethe continued improvement in priceline.com's retail airline ticket reservations and the discontinuation on September 1, 2016 of priceline.com’s Name Your Own Price® airline ticket reservation offering.
Revenues
We classify our revenue into three categories:
Agency revenues are derived from travel-related transactions where we do not facilitate payments for the travel services provided. Agency revenues consist primarily of travel reservation commissions,demand trends, as well as certain GDSthe expansion of merchant accommodation reservation booking feesservices at Booking.com. Agency gross bookings decreased for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, almost entirely due to the ongoing shift from agency bookings to merchant bookings at Booking.com. Agency gross bookings increased for the six months ended June 30, 2023, compared to the
six months ended June 30, 2022, due primarily to the year-over-year increase in agency gross bookings in the first quarter of 2023, partially offset by the year-over-year decrease in agency gross bookings in the second quarter of 2023.
The year-over-year increase in gross bookings during the three and six months ended June 30, 2023 was due primarily to the increase in room nights, the increase in constant-currency accommodation ADRs of approximately 5% and 7%, respectively, and the positive impact from year-over-year growth in gross bookings from reservations for airline tickets, partially offset by the negative impact of foreign exchange rate fluctuations.
Gross bookings resulting from reservations of airline tickets increased 62% and 82% year-over-year, during the three and six months ended June 30, 2023, respectively, due to higher airline ticket growth and ticket price increases. Gross bookings resulting from reservations of rental car days decreased 9% and 4% year-over-year, during the three and six months ended June 30, 2023, respectively, due primarily to lower average daily car rental prices, partially offset by higher rental car days growth.
Revenues
Online travel insurance fees, and are reported at the net amounts received, without any associated cost of revenue. reservation services
Substantially all of the revenue for Booking.com is agency revenue comprised of accommodation reservation commissions.
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• | Merchant revenues are derived from services where we facilitate payments for the travel services provided. Merchant revenues include (1) transaction net revenues (i.e., the amount charged to a customer, less the amount charged to us by travel service providers) and travel reservation commissions in connection with (a) the accommodation reservations provided through our merchant retail accommodation reservation services at agoda.com, Booking.com and priceline.com, (b) the reservations provided through our merchant rental car service at Rentalcars.com, and (c) the reservations provided through our priceline.com’s Express Deals® reservation services; (2) ancillary fees, including damage excess waiver and travel insurance fees and certain GDS reservation booking fees; (3) transaction revenues representing the price of Name Your Own Price® reservations charged to a customer (with a corresponding travel service provider cost recorded in cost of revenues); and (4) customer processing fees charged in connection with (a) the merchant retail accommodation reservation services at priceline.com and agoda.com and (b) priceline.com's opaque reservation services.
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Advertising and other revenues are derived primarily from (1) revenues earnedgenerated by KAYAK for (a) sending referrals to OTCs andproviding online travel reservation services, which facilitate online travel purchases between travel service providers and (b) advertising placementstravelers. See "Results of Operations" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees earned by OpenTable for restaurant reservation management services; (3) revenues earned by priceline.com for advertising on its websites; and (4) revenues generated by Booking.com's BookingSuite branded accommodation marketing and business analytics services.
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Agency Revenues | | $ | 3,523,706 |
| | $ | 2,892,449 |
| | 21.8 | % | | $ | 7,641,390 |
| | $ | 6,245,439 |
| | 22.4 | % |
Merchant Revenues | | 684,289 |
| | 620,290 |
| | 10.3 | % | | 1,624,467 |
| | 1,608,189 |
| | 1.0 | % |
Advertising and Other Revenues | | 226,034 |
| | 177,813 |
| | 27.1 | % | | 612,132 |
| | 540,945 |
| | 13.2 | % |
Total Revenues | | $ | 4,434,029 |
| | $ | 3,690,552 |
| | 20.1 | % | | $ | 9,877,989 |
| | $ | 8,394,573 |
| | 17.7 | % |
Agency Revenues
Agency revenues increased by 21.8% and 22.4%Form 10-K for the threeyear ended December 31, 2022 for additional information on our revenues, including merchant and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016, almost entirely due to growth in agency accommodation room night reservations at Booking.com.
Merchant Revenues
Merchant revenues increased by 10.3% and 1.0% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016, primarily due to increases in our merchant price-disclosed accommodation and rental car reservation services, partially offset by a significant decrease in revenues from priceline.com's Name Your Own Price®reservation services. On September 1, 2016, priceline.com's Name Your Own Price® airline ticket reservation offering was discontinued. Our priceline.com Name Your Own Price® reservation services, which declined year-over-year, are recorded "gross" in revenue with a corresponding travel service provider cost recorded in cost of revenues. Our other merchant revenues, which in total grew year-over-year, are recorded in revenue "net" of travel service provider costs. As a result, changes in Name Your Own Price® reservation revenue disproportionately affect merchant revenues as compared to our other merchant revenues.
Advertising and Other Revenues
Advertising and other revenues during
See "Results of Operations" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the threeyear ended December 31, 2022 for additional information on our advertising and nine months ended September 30, 2017 consisted primarily ofother revenues.
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Merchant revenues | | $ | 2,770 | | | $ | 1,749 | | | 58.4 | % | | $ | 4,522 | | | $ | 2,799 | | | 61.6 | % |
Agency revenues | | 2,429 | | | 2,301 | | | 5.5 | % | | 4,211 | | | 3,751 | | | 12.3 | % |
Advertising and other revenues | | 263 | | | 244 | | | 8.0 | % | | 507 | | | 439 | | | 15.4 | % |
Total revenues | | $ | 5,462 | | | $ | 4,294 | | | 27.2 | % | | $ | 9,240 | | | $ | 6,989 | | | 32.2 | % |
% of Total gross bookings | | 13.8 | % | | 12.4 | % | | | | 11.7 | % | | 11.3 | % | | |
Merchant, agency, and advertising revenues, restaurant reservation revenues and subscription revenues for restaurant reservation management services. Advertising and other revenues increased by 27.1% and 13.2% for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022, due primarily due to the inclusioncontinued improvement in travel demand trends, partially offset by the negative impact of the Momondo Group amounting to approximately $33 million in revenue since its acquisition on July 24, 2017, other growth in our KAYAK business and increased diner reservation volumes at OpenTable.
Cost of Revenues
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Cost of Revenues | | $ | 59,476 |
| | $ | 101,489 |
| | (41.4 | )% | | $ | 217,387 |
| | $ | 356,242 |
| | (39.0 | )% |
For the three and nine months ended September 30, 2017, cost offoreign exchange rate fluctuations. Merchant revenues consisted primarily of: (1) the cost paid to travel service providers for priceline.com's Name Your Own Price® and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by KAYAK and priceline.com to return travel itinerary information for consumer search queries. Cost of revenues decreased by 41.4% and 39.0% for the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared2023 increased more than agency revenues due to the three and nine months ended September 30, 2016, primarily dueongoing shift from agency revenues to a decrease in priceline.com's Name Your Own Price® reservation services.merchant revenues at Booking.com.
AgencyTotal revenues have no cost of revenue.
Gross Profit
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Gross Profit | | $ | 4,374,553 |
| | $ | 3,589,063 |
| | 21.9 | % | | $ | 9,660,602 |
| | $ | 8,038,331 |
| | 20.2 | % |
Gross Margin | | 98.7 | % | | 97.3 | % | | | | 97.8 | % | | 95.8 | % | | |
Total gross profit increased by 21.9% and 20.2% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016 (growth on a constant-currency basis was approximately 19% and 20%, respectively). Gross profit from our accommodation reservation services contributed approximately 90% of the increase. In addition, the inclusion of the Momondo Group since its acquisition on July 24, 2017 contributed approximately $33 million of gross profit. Total gross margin (gross profit as a percentage of total revenue) increased during the three and nine months ended September 30, 2017, compared to the three and nine months ended September 30, 2016, because our revenues are disproportionately affected by priceline.com's Name Your Own Price® reservation services. Name Your Own Price® reservation services are recorded "gross" in revenue with a corresponding travel service provider cost recorded in cost of revenues, and in the three and nine months ended September 30, 2017 these revenues represented a smaller percentage of total revenues than in the three and nine months ended September 30, 2016. Our price-disclosed reservation services, which are recorded in revenue "net" of travel service provider costs, have been growing and priceline.com's Name Your Own Price®reservation services have been declining. As a result, we believe that gross profit is an important measure for evaluating growth in our business.
Gross profit as a percentage of gross bookings was 20.1%were 13.8% and 15.3%11.7% for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, as compared to 19.4%an increase from 12.4% and 15.2%11.3% for the three and ninesix months ended SeptemberJune 30, 2016. Gross profit as2022, respectively, due primarily to a percentage of gross bookings increased for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due toless negative impact from differences in the timing of booking versus travel as well as the inclusion of the Momondo Group since its acquisition on July 24, 2017.
Our international operations accounted for approximately $4.0 billion and $8.6 billion of our gross profit forin the three and ninesix months ended SeptemberJune 30, 2017, respectively, compared to $3.3 billion and $7.1 billion for the three and nine months ended September 30, 2016, respectively. Gross profit attributable to our international operations increased by 23.0% and 21.8% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016 (growth on a constant-currency basis was approximately 20% and 22%, respectively). Gross profit attributable to our U.S. businesses increased by 10.9% and 8.3% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016, due to growth in gross profit for all of our U.S. businesses.2023.
Operating Expenses
AdvertisingMarketingExpenses
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Performance Advertising | | $ | 1,224,345 |
| | $ | 1,040,149 |
| | 17.7 | % | | $ | 3,352,707 |
| | $ | 2,740,821 |
| | 22.3 | % |
% of Total Gross Profit | | 28.0 | % | | 29.0 | % | | | | 34.7 | % | | 34.1 | % | | |
Brand Advertising | | $ | 112,796 |
| | $ | 72,792 |
| | 55.0 | % | | $ | 306,995 |
| | $ | 254,958 |
| | 20.4 | % |
% of Total Gross Profit | | 2.6 | % | | 2.0 | % | | | | 3.2 | % | | 3.2 | % | | |
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Marketing expenses | | $ | 1,801 | | | $ | 1,737 | | | 3.6 | % | | $ | 3,318 | | | $ | 2,884 | | | 15.0 | % |
% of Total gross bookings | | 4.5 | % | | 5.0 | % | | | | 4.2 | % | | 4.7 | % | | |
% of Total revenues | | 33.0 | % | | 40.5 | % | | | | 35.9 | % | | 41.3 | % | | |
Marketing expenses consist primarily of the costs of:
•search engine keyword purchases;
•affiliate programs;
•referrals from meta-search and travel research websites;
•offline and online brand marketing; and
•other performance-based marketing.
We adjust our marketing spend based on our growth and profitability objectives, as well as the travel demand and expected ROIs in our marketing channels. We rely on performance advertisingour marketing channels to generate a significant amount of traffic to our websites. 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 and ninesix months ended SeptemberJune 30, 2017, performance advertising expenses increased compared to the three and nine months ended September 30, 2016, to generate increased gross bookings and gross profit. We adjust2023, our performance advertising spend based on our growth and profitability objectives and the expected performance of our performance advertising channels. Performance advertising as a percentage of gross profit for the three months ended September 30, 2017 decreased compared to the three
months ended September 30, 2016 due to the timing of performance advertising spend relative to when associated revenue is recognized, as well as changes in the share of traffic by channel. We recognize the substantial majority of our performance advertising expenses as they are incurred, which is typically in the quarter in which the associated reservations are booked. In contrast, we generally do not recognize revenue from these reservations until the travel occurs, which can be in a quarter other than when the reservations are booked. In addition, we may from time to time, as we did in the third quarter of 2017, pursue a strategy of improving our performance advertising ROIs, which could negatively impact growth and positively impact performance advertising efficiency. Performance advertising as a percentage of gross profit for the nine months ended September 30, 2017 increased compared to the nine months ended September 30, 2016 due to lower ROIs and changes in share of traffic by channel.
Brand advertising expenses consist mainly of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising. For the three and nine months ended September 30, 2017, brand advertising expenses increasedby 55.0% and 20.4%, respectively, compared to the three and nine months ended September 30, 2016, primarily due to increased brand advertising to support our brands Booking.com, KAYAK, which includes expenses related to the Momondo Group since its acquisition on July 24, 2017, and priceline.com.
Sales and Marketing
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Sales and Marketing | | $ | 165,539 |
| | $ | 124,865 |
| | 32.6 | % | | $ | 411,309 |
| | $ | 322,710 |
| | 27.5 | % |
% of Total Gross Profit | | 3.8 | % | | 3.5 | % | | |
| | 4.3 | % | | 4.0 | % | | |
Sales and marketing expenses consist primarily of: (1) credit card and other payment processing fees associated with merchant transactions; (2) fees paid to third parties that provide call center, website content translations and other services; (3) promotional and public relations costs; (4) customer relations costs; (5) provisions for bad debt, primarily related to agency accommodation commission receivables; and (6) provisions for customer chargebacks associated with merchant transactions. For the three and nine months ended September 30, 2017, sales and marketing expenses, which are substantially variable in nature, increased compared to the three and ninesix months ended SeptemberJune 30, 20162022, to help drive additional gross bookings and revenues. Marketing expenses as a percentage of total gross bookings decreased for the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, due to year-over-year increases in performance marketing ROIs and year-over-year increases in the mix of direct traffic. Performance marketing ROIs were higher in the second quarter of 2023 versus the second quarter 2022 due in part to our ongoing efforts to improve the efficiency of our marketing spend.
Sales and Other Expenses
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Sales and other expenses | | $ | 666 | | | $ | 465 | | | 43.2 | % | | $ | 1,208 | | | $ | 804 | | | 50.2 | % |
% of Total gross bookings | | 1.7 | % | | 1.3 | % | | | | 1.5 | % | | 1.3 | % | | |
% of Total revenues | | 12.2 | % | | 10.8 | % | | | | 13.1 | % | | 11.5 | % | | |
Sales and other expenses consist primarily of:
•credit card and other payment processing fees associated with merchant transactions;
•fees paid to increased transaction volumes, as well as higher promotionalthird parties that provide call center and public relations costsother customer services, airline ticketing-related services, website content translations, and higher bad debt expenseother services;
•chargeback provisions and fraud prevention expenses associated with merchant transactions;
•provisions for expected credit losses, primarily related to accommodation commission receivables.receivables and prepayments to certain customers;
•customer relations costs; and
Personnel•travel transaction taxes.
For the three and six months ended June 30, 2023, sales and other expenses, which are substantially variable in nature, increased compared to the three and six months ended June 30, 2022, due primarily to an increase in merchant transaction costs of $109 million and $239 million, respectively, and an increase in third-party call center costs of $57 million and $119 million, respectively. Merchant transactions increased year-over-year in the first half of 2023 due to the continued improvement in travel demand trends, as well as the expansion of merchant accommodation reservation services at Booking.com. The year-over-year increase in third-party call center costs in the first half of 2023 was due in part to the transfer of certain customer service operations of Booking.com to Majorel, which shifted costs from personnel expenses to sales and other expenses.
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| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Personnel | | $ | 483,438 |
| | $ | 347,610 |
| | 39.1 | % | | $ | 1,220,176 |
| | $ | 988,615 |
| | 23.4 | % |
% of Total Gross Profit | | 11.1 | % | | 9.7 | % | | |
| | 12.6 | % | | 12.3 | % | | |
Personnel
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| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Personnel | | $ | 752 | | | $ | 635 | | | 18.5 | % | | $ | 1,474 | | | $ | 1,231 | | | 19.7 | % |
% of Total revenues | | 13.8 | % | | 14.8 | % | | | | 16.0 | % | | 17.6 | % | | |
Personnel expenses consist of compensation to our personnel, including salaries, primarily of:
•salaries;
•stock-based compensation, bonuses, compensation;
•bonuses;
•payroll taxes,taxes; and
•employee health and other benefits.
Personnel expenses, excluding stock-based compensation, increased during18.7% and 19.7% year-over-year for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, due to an increase in salary expense of $80 million and $152 million, respectively, and an increase in bonus expense accruals of $16 million and $33 million, respectively. Employee headcount of approximately 23,100 as of June 30, 2023 increased by 19% as compared to June 30, 2022. Personnel expenses for the three and ninesix months ended SeptemberJune 30, 2016, primarily2023 and employee headcount as of June 30, 2023 were reduced due to (1) increases in aggregate salariesthe transfer of approximately $70certain customer service operations of Booking.com to Majorel, which shifted costs from personnel expenses to sales and other expenses. Stock-based compensation expense for the three and six months ended June 30, 2023 was $128 million and $163$241 million, respectively, compared to $108 million and $201 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively, primarily related to headcount growth to support our business and (2) an increase of approximately $33 million in our annual bonus accrual for the three months ended September 30, 2017, almost entirely at Booking.com. Stock-based compensation was $66.4 million and $192.2 million for the three and nine months ended September 30, 2017, respectively, compared to $54.1 million and $175.1 million for the three and nine months ended September 30, 2016,2022, respectively. Stock-based compensation expense increased during the three and nine months ended September 30, 2017, compared to the three and nine months ended September 30, 2016, primarily due to an increase in our headcount.
General and Administrative
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
General and Administrative | | $ | 142,823 |
| | $ | 114,586 |
| | 24.6 | % | | $ | 420,004 |
| | $ | 340,273 |
| | 23.4 | % |
% of Total Gross Profit | | 3.3 | % | | 3.2 | % | | |
| | 4.3 | % | | 4.2 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
General and administrative | | $ | 304 | | | $ | 207 | | | 47.6 | % | | $ | 593 | | | $ | 365 | | | 62.4 | % |
% of Total revenues | | 5.6 | % | | 4.8 | % | | | | 6.4 | % | | 5.2 | % | | |
General and administrative expenses consist primarily of: (1)
•indirect taxes such as digital services taxes and certain travel transaction taxes;
•occupancy and office expenses; (2)
•fees for outside professionals; and
•personnel-related expenses such as travel, relocation, recruiting, and training expenses; and (3) fees for outside professionals, including litigation expenses.
General and administrative expenses increased duringfor the three and nine months ended SeptemberJune 30, 2017,2023, compared to the three and nine months ended SeptemberJune 30, 2016,2022 due primarily to higher personnel-related, occupancyan increase of $50 million in indirect taxes, which was impacted by a $23 million accrual related to the settlement of certain indirect tax matters. The year-over-year increase in general and officeadministrative expenses associated with increased headcountfor the three months ended June 30, 2023 was also due to support the expansionan increase of our international businesses.$20 million in fees for outside professionals. General and administrative expenses duringincreased for the ninesix months ended SeptemberJune 30, 2017,2023, compared to the ninesix months ended SeptemberJune 30, 2016, also included2022 due to an increase of $130 million in indirect taxes, which was impacted by a $7$62 million litigation accrual and higher fees for outside professionals, including professional fees related to the settlement of certain indirect tax matters as well as by the reversal in the first quarter of 2022 of accruals for certain travel transaction taxes of approximately $25 million (see Note 13 to our acquisitionUnaudited Consolidated Financial Statements). The year-over-year increase in general and administrative expenses for the six months ended June 30, 2023 was also due to an increase of the Momondo Group.$36 million in personnel-related expenses.
Information Technology
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Information Technology | | $ | 47,901 |
| | $ | 36,389 |
| | 31.6 | % | | $ | 132,677 |
| | $ | 104,974 |
| | 26.4 | % |
% of Total Gross Profit | | 1.1 | % | | 1.0 | % | | | | 1.4 | % | | 1.3 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Information technology | | $ | 144 | | | $ | 137 | | | 5.5 | % | | $ | 281 | | | $ | 271 | | | 3.7 | % |
% of Total revenues | | 2.6 | % | | 3.2 | % | | | | 3.0 | % | | 3.9 | % | | |
Information technology expenses consist primarily of: (1)
•software license and system maintenance fees; (2)
•cloud computing costs and outsourced data center costs;
•payments to contractors; and
•data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. services.
Information technology expenses increased during the three and ninesix months ended SeptemberJune 30, 2017,2023 compared to the three and ninesix months ended SeptemberJune 30, 2016,2022 due primarily to growth in our worldwide operations.increased cloud computing costs and outsourced data center costs.
Depreciation and Amortization
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Depreciation and Amortization | | $ | 95,910 |
| | $ | 78,745 |
| | 21.8 | % | | $ | 265,212 |
| | $ | 229,328 |
| | 15.6 | % |
% of Total Gross Profit | | 2.2 | % | | 2.2 | % | | |
| | 2.7 | % | | 2.9 | % | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Depreciation and amortization | | $ | 121 | | | $ | 107 | | | 12.7 | % | | $ | 241 | | | $ | 218 | | | 10.4 | % |
% of Total revenues | | 2.2 | % | | 2.5 | % | | | | 2.6 | % | | 3.1 | % | | |
Depreciation and amortization expenses consist of: (1)
•amortization of intangible assets with determinable lives; (2)
•amortization of internally-developed and purchased software;
•depreciation of computer equipment; (3) depreciation of internally developed and purchased software; and (4)
•depreciation of leasehold improvements, furniture and fixtures, and office equipment.
Depreciation and amortization expenses increased during the three and ninesix months ended SeptemberJune 30, 2017,2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022, due primarily as a result ofto increased depreciation expenses dueamortization expense related to capital expenditures for additional data center capacityinternally-developed and office build-outs to support growthpurchased software.
Restructuring, disposal, and geographic expansion, the inclusion of intangible amortizationother exit activities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Restructuring, disposal, and other exit activities | | $ | 1 | | | $ | 6 | | | (86.8) | % | | $ | 2 | | | $ | 42 | | | (94.6) | % |
| | | | | | | | | | | | |
Restructuring, disposal, and other exit activities for the Momondo Group since its acquisition on July 24, 2017, as well as increased capitalized software development costs.
Impairment of Goodwill
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Impairment of Goodwill | | $ | — |
| | $ | 940,700 |
| | N/A | | $ | — |
| | $ | 940,700 |
| | N/A |
% of Total Gross Profit | | N/A |
| | 26.2 | % | | | | N/A |
| | 11.7 | % | | |
During the three and six months ended SeptemberJune 30, 2016, we recognized a non-cash impairment charge for goodwill related2022 relate to OpenTable, which is not tax deductible,the loss on transfer of $940.7 million (seecertain customer service operations of Booking.com to Majorel. See Note 615 to theour Unaudited Consolidated Financial Statements for additional information.
Interest Expense and Critical Accounting Policies and Estimates included in this Management's Discussion and Analysis of Financial Condition and Results of Operations).Other Income (Expense), Net
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | | | Six Months Ended June 30,
| | |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Interest expense | | $ | 241 | | | $ | 76 | | | | | $ | 435 | | | $ | 144 | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Other Income (Expense), Net
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Interest Income | | $ | 41,483 |
| | $ | 24,218 |
| | 71.3 | % | | $ | 110,296 |
| | $ | 65,857 |
| | 67.5 | % |
Interest Expense | | (66,338 | ) | | (55,480 | ) | | 19.6 | % | | (182,997 | ) | | (152,664 | ) | | 19.9 | % |
Foreign Currency Transactions and Other | | (10,101 | ) | | (4,431 | ) | | 128.0 | % | | (21,249 | ) | | (15,362 | ) | | 38.3 | % |
Impairment of Cost-method Investments | | — |
| | — |
| | N/A |
| | — |
| | (63,208 | ) | | N/A |
|
Total | | $ | (34,956 | ) | | $ | (35,693 | ) | | (2.1 | )% | | $ | (93,950 | ) | | $ | (165,377 | ) | | (43.2 | )% |
ForThe following table sets forth the composition of "Other income (expense), net" for the three and ninesix months ended SeptemberJune 30, 2017,2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Six Months Ended June 30,
|
(in millions) | | 2023 | | 2022 | | 2023 | | 2022 |
Interest and dividend income | | $ | 266 | | | $ | 24 | | | $ | 494 | | | $ | 27 | |
Net (losses) gains on equity securities | | (34) | | | 181 | | | (167) | | | (806) | |
| | | | | | | | |
Foreign currency transaction (losses) gains | | (48) | | | 16 | | | (101) | | | 46 | |
| | | | | | | | |
Other | | 2 | | | (1) | | | 7 | | | (2) | |
Other income (expense), net | | $ | 186 | | | $ | 220 | | | $ | 233 | | | $ | (735) | |
The following table presents the changes in interest and dividend income on cash and marketable securitiesinterest expense for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
| | | | | | | | | | | | |
Interest and dividend income | | $ | 266 | | | $ | 24 | | | 1,024.2 | % | | $ | 494 | | | $ | 27 | | | 1,742.2 | % |
Interest expense | | (241) | | | (76) | | | 216.2 | % | | (435) | | | (144) | | | 201.0 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Interest and dividend income increased for the three and six months ended June 30, 2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022, primarily due to an increasethe impact of higher interest rates on cash management activities (with related expenses recorded in the average invested balanceinterest expense) and higher yields.investment activities. Interest expense increased for the three and ninesix months ended SeptemberJune 30, 2017,2023, compared to the three and ninesix months ended SeptemberJune 30, 2016,2022, primarily due to higher interest expense attributablerates related to our Senior Notes issued in March 2017 and August 2017. For the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, this increasecash management activities (with related income recorded in interest expense is also attributable to our Senior Notes issuedincome) and the issuance of senior notes in November 2022 and May 2016. 2023, partially offset by the maturities of senior notes during 2022 and 2023.
See Note 714 to our Unaudited Consolidated Financial Statements.Statements for additional information on "Other income (expense), net". See Note 5 to our Unaudited Consolidated Financial Statements for additional information related to net (losses) gains on equity securities.
Foreign currency transactions and other includes foreign currencytransaction (losses) gains or losses on derivative contracts, foreign currency transaction gains or losses, including costs related to foreign currency transactions, net realized gains or losses on investments and other income or expense.
Derivative contracts that hedge our exposure to the impact of currency fluctuations on the translation of our international operating results into U.S. Dollars upon consolidation resulted in foreign currency losses of $1.1 million and $1.3 million for the three and ninesix months ended SeptemberJune 30, 2017, respectively. The impact2023 include losses of foreign exchange fluctuations was insignificant$8 million and $34 million, respectively, related to our Euro-denominated debt and accrued interest that were not designated as net investment hedges and losses of $67 million and $84 million, respectively, on derivative contracts. Foreign currency transaction (losses) gains for the three and ninesix months ended SeptemberJune 30, 2016.
Foreign currency transaction losses, including costs2022 include gains of $38 million and $68 million, respectively, related to foreign currency transactions, resulted in foreign currencyour Euro-denominated debt and accrued interest that were not designated as net investment hedges offset by losses of $8.4$40 million and $21.4$56 million, for the three and nine months ended September 30, 2017, respectively, and foreign currency losses of $4.9 million and $15.0 million for the three and nine months ended September 30, 2016, respectively.on derivative contracts.
During the nine months ended September 30, 2016, we recognized impairments of $63.2 million related to cost-method investments (see Note 4 to the Unaudited Consolidated Financial Statements).
Income Taxes
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, (in thousands) | | | | Nine Months Ended September 30, (in thousands) | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change |
Income Tax Expense | | $ | 346,454 |
| | $ | 291,517 |
| | 18.8 | % | | $ | 561,349 |
| | $ | 489,496 |
| | 14.7 | % |
% of Total Earnings Before Income Taxes | | 16.8 | % | | 36.6 | % | | | | 16.2 | % | | 25.1 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30,
| | Increase (Decrease) | | Six Months Ended June 30,
| | Increase (Decrease) |
(in millions) | | 2023 | | 2022 | | | 2023 | | 2022 | |
Income tax expense | | $ | 328 | | | $ | 287 | | | 14.0 | % | | $ | 365 | | | $ | 138 | | | 163.9 | % |
% of Income before income taxes | | 20.3 | % | | 25.1 | % | | | | 19.0 | % | | 46.8 | % | | |
Our 20172023 effective tax rates differ from the U.S. federal statutory tax rate of 35%21%, primarily due to lowerthe benefit of the Netherlands Innovation Box Tax (discussed below), partially offset by higher international tax rates and current year excess tax benefits of $1.3 million and $13.9 million for the three and nine months ended September 30, 2017, respectively, recognized from vesting of equity awards pursuant to the adoption of an accounting update effective January 1, 2017 (see Note 1 to the Unaudited Consolidated Financial Statements), partially offset by certain non-deductible expenses. Our 20162022 effective tax rates differdiffered from the U.S. federal statutory tax rate of 35%21%, primarily due to the non-deductible impairment charge for goodwill of $940.7 millionhigher international tax rates, valuation allowance related to OpenTable recognized incertain unrealized losses on equity securities, and certain non-deductible expenses, partially offset by the third quarterbenefit of 2016 (see Note 6the Netherlands Innovation Box Tax.
Our effective tax rates for the three and six months ended June 30, 2023 are lower compared to the Unaudited Consolidated Financial Statements)effective tax rates for the three and the impairment of the Company's cost-method investment in Hotel Urbano of $60 million recognized in the first half of 2016 (see Note 4six months ended June 30, 2022, primarily due to the Unaudited Consolidated Financial Statements), partially offset bya lower valuation allowance related to certain unrealized losses on equity securities, lower international tax rates, and lower U.S. federal and state tax law changesassociated with our international earnings, partially offset by a decrease in the second quarterbenefit of 2016 that resulted in a net decrease to deferred tax liabilities associated with acquired intangible assets.the Netherlands Innovation Box Tax.
Our effective tax rates were lower forDuring the three and ninesix months ended SeptemberJune 30, 2017, compared to the three2023 and nine months ended September 30, 2016, primarily as2022, a result of the non-deductible impairment charges in 2016 referred to above, an increased proportionmajority of our income beingwas reported in the Netherlands, where Booking.com is based. Under Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at lower international tax rates due toa rate of 9% ("Innovation Box Tax") rather than the growthDutch statutory rate of our international businesses and current year excess tax benefits recognized from vesting of equity awards. The decrease in our effective tax rate for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was partially offset by tax benefits recorded in the second quarter of 2016 arising from U.S. state tax law changes that resulted in a net decrease to deferred tax liabilities associated with acquired intangible assets.
25.8%. A portion of Booking.com's earnings during the three and ninesix months ended SeptemberJune 30, 20172023 and 20162022 qualified for Innovation Box Tax treatment, which had a significant beneficial impact on the Company's effective tax raterates for thosethese periods. While we expect Booking.comFor additional information relating to continue to qualify forBooking.com's 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. Seeincluding associated risks, please see Part III, Item 1A, Risk Factors - "We may not be able to maintain our 'Innovation"Innovation Box Tax'Tax" benefit." in our Annual Report on Form 10-K for the year ended December 31, 2022.
Liquidity and Capital Resources
AsOur financial results and prospects are almost entirely dependent on facilitating the sale of Septembertravel-related services. Marketing expenses and personnel expenses are the most significant operating expenses for our business. We rely on marketing channels to generate a significant amount of traffic to our websites. See our Unaudited Consolidated Statements of Operations and "Trends" and "Results of Operations" above for additional information on marketing expenses and personnel expenses including stock-based compensation expenses. Our continued access to sources of liquidity depends on multiple factors which are more fully described in Part I, Item 1A, Risk Factors - "Our liquidity, credit ratings, and ongoing access to capital could be materially and negatively affected by global financial conditions and events" in our Annual Report on Form 10-K for the year ended December 31, 2022.
At June 30, 2017,2023, we had $18.4$15.7 billion in cash, cash equivalents, short-termand investments, and long-term investments. Approximately $15.9of which approximately $10.1 billion is held by our international subsidiaries. Cash, cash equivalents, and long-term investments held by our international subsidiaries and isare denominated primarily in Euros, U.S. Dollars, and Euros and, to a lesser extent, British Pounds SterlingSterling. See Notes 5 and other currencies. Cash equivalents, short-term investments and long-term investments are comprised of U.S. and international corporate bonds, U.S. and international government securities, high-grade commercial paper, U.S. government agency securities, convertible debt securities and American Depositary Shares ("ADSs") of Ctrip, money market funds and time deposits (see Note 56 to theour Unaudited Consolidated Financial Statements).Statements for additional information about our cash equivalents and investments. Our investment policy seeks to preserve capital and maintain sufficient liquidity to meet operational and other needs of the business. In February 2023, we completed the sale of our investment in equity securities of Meituan and received gross proceeds of $1.7 billion.
We intendDeferred merchant bookings of $6.0 billion at June 30, 2023 represents cash payments received from travelers in advance of us completing our performance obligations and are comprised principally of amounts estimated to indefinitely reinvestbe payable to travel service providers as well as our estimated future revenue for our commission or margin and fees. The amounts are mostly subject to refunds for cancellations.
At June 30, 2023, we had a remaining transition tax liability of $692 million as a result of the unremitted earningsU.S. Tax Cuts and Jobs Act ("Tax Act"), which included $516 million reported as "Long-term U.S. transition tax liability" and $176 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next three years. In accordance with the Tax Act, generally, future repatriation of our international subsidiaries outside of the United States. At December 31, 2016, we had approximately $13.0 billion of cumulative unremitted international earnings. We estimated that the deferredcash will not be subject to a U.S. federal income tax liability we would record if such earnings were not indefinitely reinvested internationally was approximately $2.3 billion as of December 31, 2016. If we repatriate casha dividend, but will be subject to the United States, we would utilize our available net operating loss carryforwardsU.S. state income taxes and beyond that amount incur additional tax payments in the United States.international withholding taxes, which have been accrued by us.
On October 23, 2017, we invested $450 million in Meituan-Dianping through the purchase of preferred shares. On July 24, 2017, we acquired the Momondo Group for $555.5 million. Both transactions were funded using our international cash.
In August 2017,May 2023, we issued Senior Notessenior notes due March 15, 2023, with an interest rate of 2.75% (the "2023 Notes"), and Senior Notes due March 15,November 2028 with an interest rate of 3.55% (the "2028 Notes"), each having an aggregate principal amount of $500 million. Interest on the 2023 Notes and the 2028 Notes is payable semi-annually on March 15 and September 15, beginning March 15, 2018. In March 2017, we issued Senior Notes due March 10, 2022, with an interest rate of 0.8% (the "March 2022 Notes")3.625% for an aggregate principal amount of 1.0500 million Euros and senior notes due May 2033 with an interest rate of 4.125% for an aggregate principal amount of 1.25 billion Euros. Interest onThe proceeds from the March 2022 Notes is payable annually on March 10, beginning March 10, 2018. The net proceedsissuance of these senior notes may be usedare available for general corporate purposes, which may include share repurchases, repaymentincluding to repurchase shares of debtour common stock. In March 2023, we repaid $500 million on the maturity of the Senior Notes due March 2023. The convertible senior notes due in May 2025 are currently convertible at the option of the holder and acquisitions.have been classified as "Short-term debt" in the Consolidated Balance Sheet as of June 30, 2023. See Note 79 to theour Unaudited Consolidated Financial Statements for further details on the 2023 Notes, 2028 Notesadditional information related to our debt arrangements, including principal amounts, interest rates, and March 2022 Notes.maturity dates.
In June 2015,May 2023, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. Borrowings under theThe revolving credit facility will bear interest, at our option, atextends a rate per annum equalrevolving line of credit up to either (i)$2.0 billion to 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%,Company 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$80 million of letters of credit, as well as borrowings of up to $50.0$100 million of borrowings on same-day notice, referred to as swingline loans. Borrowings under thenotice. The revolving credit facility may be madecontains a maximum leverage ratio covenant, compliance with which is a condition to our ability to borrow thereunder. Upon entering into this new revolving credit facility, we terminated the $2.0 billion five-year revolving credit facility entered into in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes, which could include acquisitions, share repurchases or debt repayments. As of SeptemberAugust 2019. At June 30, 2017,2023 there were no borrowings outstanding and approximately $3.8$17 million of letters of credit issued under the new revolving credit facility.
Our Convertible Senior Notes due March 15, 2018, with an interest rate of 1.0% (the "2018 Notes"), are convertible at the option of the holders as of September 30, 2017 and mature in March 2018 and, accordingly, we reported the carrying value of the 2018 Notes as a current liability in See Note 9 to our Unaudited Consolidated Balance Sheet as of September 30, 2017. Financial Statements for additional information related to the new revolving credit facility.
During the period from October 1, 2017 through November 3, 2017, we received notices for conversion of $196.1 million aggregate principal amount of our 2018 Notes. If note holders exercise their option to convert, we are required to repay the principal amount of the 2018 Notes in cash and may deliver shares of common stock or cash, at our option, to satisfy the conversion value in excess of the principal amount.
As of September 30, 2017, we had a remaining aggregate amount of $3.1 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. During the ninesix months ended SeptemberJune 30, 2017,2023, we repurchased 632,006used $5.2 billion of cash to repurchase shares of our common stock for an aggregate cost of $1.1 billion. During the period from October 1, 2017 through November 3, 2017, we repurchased 86,882 additional shares for an aggregate cost of $166.1 million.
stock. In September 2016, we signed a turnkey agreement to construct an office building in the Netherlands for the future headquarters of Booking.com for approximately 270 million Euros. Upon signing the agreement, we paid approximately 48
million Euros to the developer, principally related to acquired land use rights, and we expect to pay approximately 34 million Euros related to building construction in the first quarter of 2018, with2023, the Board authorized a program to repurchase up to $20.0 billion of the Company's common stock and at June 30, 2023, we had a total remaining authorization of $18.8 billion. We expect to complete the share repurchases under the remaining amount being paid periodically afterauthorization within four years from when we started the first quarterprogram at the beginning of 2018 untilthis year, assuming no major downturn in the expected completiontravel market. Effective January 1, 2023, the Inflation Reduction Act of 2022 has mandated a 1% excise tax on share repurchases. Excise tax obligations that result from our share repurchases are accounted for as a cost of the building in late 2020. We will also make additional capital expenditures to fit out and furnish the office space. We expect all payments for this project to be made from international cash.treasury stock transaction. See Note 1110 to theour Unaudited Consolidated Financial Statements.Statements for additional information.
In November 2021, we entered into an agreement to acquire global flight booking provider Etraveli Group for approximately 1.6 billion Euros ($1.8 billion). Completion of the acquisition is subject to certain closing conditions, including regulatory approvals. See Note 15 to our Unaudited Consolidated Financial Statements for additional information.
At June 30, 2023, we had lease obligations of $836 million. Additionally, at June 30, 2023, we had, in the aggregate, $328 million of non-cancellable purchase obligations individually greater than $10 million. Such purchase obligations relate to agreements to purchase goods and services that are enforceable and legally binding and that specify all significant terms, including the quantities to be purchased, price provisions, and the approximate timing of the transaction.
At June 30, 2023, there were $919 million of standby letters of credit and bank guarantees issued on our behalf. These are obtained primarily for regulatory purposes.
See Note 13 to our Unaudited Consolidated Financial Statements for additional information related to our commitments and contingencies.
We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures, and other obligations through at least the next twelve months. However, if we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plans, either of which could have a material adverse effect on our business, our ability to compete or our future growth prospects, financial condition, and results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. We may not generate sufficient cash flow from operations in the future, revenue growth or sustained profitability may not be realized, and future borrowings or equity sales may not be available in amounts sufficient to make anticipated capital expenditures, finance our strategies, or repay our indebtedness.
Cash Flow Analysis
Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172023 was $3.5$4.6 billion, resulting from net income of $2.9$1.6 billion, a favorable impact from adjustments for non-cash and other items of $509 million, and a favorable impact of $535.5 million for non-cash items and favorable changesnet change in working capital and otherlong-term assets and liabilities of $56.7 million.$2.6 billion. Non-cash and other items were principally associated with deferred income tax benefit, depreciation and amortization, stock-based compensation expense and other stock-based payments, net losses on equity securities, provision for expected credit losses and chargebacks, and operating lease amortization. For the ninesix months ended SeptemberJune 30, 2017, prepaid expenses and other current assets increased by $136.3 million, primarily related to prepayments of Netherlands income taxes to earn prepayment discounts, principally by Booking.com. For the nine months ended September 30, 2017, accounts receivable increased by $479.2 million, primarily related to increases in business volumes. For the nine months ended September 30, 2017, accounts payable, accrued expenses2023, deferred merchant bookings and other current liabilities increased by $641.0$3.1 billion and accounts receivable increased by $672 million, primarily relateddue to increases in business volumes. Due to the typical seasonality of our business, our gross bookings and revenues are generally higher in the third quarter of the year than in the fourth quarter of the year which typically results in higher accounts receivable, deferred merchant bookings, accounts payable and accrued expenses at September 30 compared to December 31. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, and amortization of debt discount on our convertible notes.
Net cashprovided by operating activities for the ninesix months ended SeptemberJune 30, 20162022 was $2.9$4.4 billion, resulting from net income of $1.5 billion,$157 million, a favorable impact of $1.5 billion for non-cash items, partially offset by net unfavorable changeschange in working capital and otherlong-term assets and liabilities of $72.1 million.$3.0 billion, and a favorable impact from adjustments for non-cash and other items of $1.2 billion. Non-cash and other items were principally associated with net losses on equity securities, depreciation and amortization, stock-based compensation expense and other stock-based payments, deferred income tax benefit, provision for expected credit losses and chargebacks, and operating lease amortization. For the ninesix months ended SeptemberJune 30, 2016, prepaid expenses and other current assets increased by $104.1 million, primarily related to prepayments of 2016 income taxes in the first and third quarter to earn prepayment discounts, principally by Booking.com. For the nine months ended September 30, 2016, accounts receivable increased $470.3 million and accounts payable, accrued expenses2022, deferred merchant bookings and other current liabilities increased by $523.3 million,$4.9 billion and accounts receivable increased by $1.1 billion, primarily relateddue to the aforementioned business seasonality and increases in business volumes. Non-cash items were principally associated with impairment of goodwill, stock-based compensation expense, depreciation and amortization, impairment of cost-method investments, amortization of debt discount on our convertible notes, deferred income taxes and excess tax benefits on stock-based awards and other equity deductions.
Net cash used inprovided by investing activities was $3.6 billion for the ninesix months ended SeptemberJune 30, 2017,2023 was $1.5 billion, principally resulting from net purchasesproceeds from sale and maturity of investments of $2.9$1.7 billion, partially offset by additions to property and acquisitions and other investments, netequipment of cash acquired, of $552.8$180 million. Net cash used in investing activities was $2.2 billion for the ninesix months ended SeptemberJune 30, 2016,2022 was $243 million, principally resulting from net purchases of investments of $2.0 billion and $48.5 million for the acquisition of land use rights. Cash invested in the purchase of property and equipment was $223.7 million and $168.1 million in the nine months ended September 30, 2017 and 2016, respectively.equipment.
Net cash provided byused in financing activities was $821.5 million for the ninesix months ended SeptemberJune 30, 2017, which primarily consisted of total proceeds of $2.02023 was $3.8 billion, resulting from the issuance of Senior Notes and the proceeds from the exercise of employee stock options of $4.3 million, partially offset by payments for the repurchase of common stock of $1.1$5.2 billion and payments related toon the conversion of Senior Notes of $89.6 million and paymentmaturity of debt of $15.1$500 million, assumed in the acquisition of the Momondo Group. Net cash providedpartially offset by financing activities was $253.6 million for the nine months ended September 30, 2016, which primarily consisted of net proceeds of $994.7 million from the issuance of Senior Notes andlong-term debt of $1.9 billion. Net cash used in financing activities for the exercise of employee stock options of $13.3 million, partially offset bysix months ended June 30, 2022 was $3.4 billion, resulting from payments for the repurchase of common stock of $754.3 million.$2.3 billion and the repayment of debt of $1.1 billion.
Contingencies
French tax authorities conducted an audit of the years 2003 through 2012 to determine whether Booking.com is in compliance with its tax obligations in France. Booking.com received formal assessments in December 2015 in which the French tax authorities claim that Booking.com has a permanent establishment in France and seek to recover unpaid income taxes and value-added taxes of approximately 356 million Euros, the majority of which would represent penalties and interest. We believe that Booking.com has been, and continues to be, in compliance with French tax law and we intend to contest the assessments. If we are unable to resolve the matter with the French authorities, we would expect to challenge the assessments in the French courts. In order to contest the assessments in court, we may be required to pay, upfront, the full amount or a significant part of any such assessments, though such payment would not constitute an admission by the Company that its owes the taxes. Alternatively, any resolution or settlement of the matter with the French authorities may also require payment as part of such resolution or settlement. In each case, any such payment would not necessarily constitute an admission by us that we owe the taxes. French authorities have begun a similar audit of the tax years 2013 through 2015, which could result in additional assessments. See Part II Item IA Risk Factors - "We may have exposure to additional tax liabilities."
A number of U.S. jurisdictions have initiated lawsuits against online travel companies, including us,For information 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,matters, see Note 1113 to our Unaudited Consolidated Financial Statements and Part III, Item 1AIA, Risk Factors- "Adverse application of U.S. state and localWe may have exposure to additional tax laws could have an adverse effectliabilities" in our Annual Report 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)Form 10-K for the potential resolution of issuesyear ended December 31, 2022.
For information related to travel transaction taxes in the amount of approximately $24 millionpension matter and $27 million at September 30, 2017 and December 31, 2016, respectively. 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 loss may be less or greater, potentially significantly, than the liability recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount accrued cannot be reasonably made. If we wereother contingent liabilities, see Note 13 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.Unaudited Consolidated Financial Statements.
Off-Balance Sheet Arrangements
As of September 30, 2017, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of thisThis 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, containcontains forward-looking statements. These forward-looking statements reflect theour views of our management regarding current expectations and projections about future events and conditions 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;predict including the Risk Factors identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022; therefore, our 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," "aims," "seeks," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," orand "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended December 31, 2016, and2022, our subsequent Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have exposure to several types of market risk, including changes in interest rates, foreign currency exchange rates, and equity prices. See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on our policies and how we manage our exposure to interest rate risksuch risks.
See Note 9 to our Unaudited Consolidated Financial Statements for additional information about our convertible senior notes and foreign currency risk through internally established policies and procedures and, when deemed appropriate, throughother debt. Excluding the use of derivative financial instruments. We use currency exchange derivative contracts to manage short-term foreign currency risk.
The objective of our policies is to mitigate potential income statement, cash flow and fair value exposures resulting from possible future adverse fluctuations in rates. We evaluate our exposure to market risk by assessing the anticipated near-term and long-term fluctuations in interest rates and foreign exchange rates. This evaluation includes the review of leading market indicators, discussions with financial analysts and investment bankers regarding current and future economic conditions and the review of market projections as to expected future rates. We utilize this information to determine our own investment strategies as well as to determine if the use of derivative financial instruments is appropriate to mitigate any potential future market exposure that we may face. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading
purposes and are not a party to any leveraged derivatives. To the extent that changes in interest rates and currency exchange rates affect general economic conditions, we would also be affected by such changes.
We did not experience any material changes in interest rate exposures during the three months ended September 30, 2017.
Fixed rate investments are subject to unrealized gains and losses due to interest rate volatility. We performed a sensitivity analysis to determine the impact a change in interest rates would haveeffect on the fair value of our available-for-sale investments assuming an adverse change of 100 basis points. Aconvertible senior notes, a hypothetical 100 basis point (1.0%) increasedecrease in interest rates would have resulted in a decreasean increase in the estimated fair valuesvalue of our investments as of September 30, 2017other debt of approximately $224 million. These hypothetical losses would only be realized if we sold the investments prior to their maturity. This amount excludes our investment in Ctrip.com International Ltd. ("Ctrip")$630 million at June 30, 2023. Our convertible senior convertible notes which are more sensitive to the equity market price volatility of Ctrip's American Depositary Shares ("ADSs")our shares than changes in interest rates. The fair value of our Ctripthe convertible senior convertible notes will most likely increase as the market price of Ctrip's ADSs increaseour shares increases and will likely decrease as the market price of Ctrip's ADSs fall.our shares falls.
As of September 30, 2017, the outstanding aggregate principal amount of our debt was approximately $9.8 billion. We estimate that the market value of such debt was approximately $11.5 billion as of September 30, 2017. A substantial portion of the market value of our debt in excess of the outstanding principal amount relates to the conversion premium on our outstanding convertible notes.
We conduct a significant portion of our business outside the United States through subsidiaries with functional currencies other than the U.S. Dollar (primarily Euro). As a result, we face exposuresexposure to adverse movements in foreign currency exchange rates as the operatingfinancial results and the financial condition of our international operationsbusinesses outside of the U.S., which represent a substantial majority of our financial results, are translated from local currencies (principally Euros and British Pounds Sterling) into U.S. Dollars upon consolidation. If the U.S. Dollar weakens against the local currencies, the translationDollars. See Notes 9 and 14 to our Unaudited Consolidated Financial Statements and Item 2. Management's Discussion and Analysis of these foreign-currency-denominated balances will result in increased net assets, gross bookings, gross profit, operating expenses,Financial Condition and net income. Similarly, our net assets, gross bookings, gross profit, operating expenses, and net income will decrease if the U.S. Dollar strengthens against the local currencies. Additionally,Results of Operations for additional information about foreign exchange rate fluctuations on transactions, denominated in currencies other than the functional currency result intransaction gains and losses, that are reflectedchanges in the Unaudited Consolidated Statements of Operations.
As a result offoreign currency exchange rate changes, our foreign-currency-denominated net assets, gross bookings, gross profit, operating expenses and net income have been positively impacted as expressed in U.S. Dollars for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. Since our expenses are generally denominated in foreign currencies on a basis similar to our revenues, our operating margins have not been significantly impacted by currency fluctuations. The aggregate principal value of our Euro-denominated long-term debt, and accrued interest thereon, provide a natural hedge againstrates, the impact of currency exchange rate fluctuationssuch changes on the net assetsincrease in our revenues and operating margins, and our designation of certain portions of our Euro denominated debt as a hedge of the foreign currency exposure of the net investment in certain Euro functional currency subsidiaries.
From timeSee Notes 5 and 6 to time, we enter into foreign currency derivative contracts to minimize the impactour Unaudited Consolidated Financial Statements for additional information about our investments in equity securities of short-term foreign currency fluctuations on our consolidated operating results. Our derivative contracts principally address foreign currency translation risks for the Euro, the British Pound Sterlingpublicly-traded companies and certain other currencies versus the U.S. Dollar. As of September 30, 2017 and December 31, 2016, there were no such outstanding derivative contracts. Foreign currency losses of $1.1 million and$1.3 million for the three and nine months ended September 30, 2017, respectively, are recorded related to these derivatives in "Foreign currency transactions and other"private companies. A hypothetical 10% decrease in the Unaudited Consolidated Statementsfair values at June 30, 2023 of Operations. The impactsuch investments would have resulted in a loss, before tax, of foreign exchange fluctuations was insignificant for the three and nine months ended September 30, 2016.approximately $40 million being recognized in net income.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such a term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
No change in our internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(e)13a-15(f), occurred during the three months ended SeptemberJune 30, 20172023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
In 2022, we began a multi-year implementation to integrate and upgrade certain cross-brand global financial systems and processes, including but not limited to SAP S4 HANA ("SAP"). The first phase of this implementation became operational in 2022 at select financially immaterial entities at Booking.com. The second phase of this implementation became operational in July 2023 at the remaining Booking.com entities. As the phased implementation of SAP continues, there are certain changes to our processes and procedures that impact our internal control over financial reporting. We believe we are taking the necessary steps to monitor and maintain appropriate internal control over financial reporting during this period of change and we will continue to evaluate the operating effectiveness of key controls during subsequent periods.
While we expect this implementation to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as the implementation continues.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
A description of any material legal proceedings to which we are a party, and updates thereto, is containedincluded in Note 1113 to our Unaudited Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the three months ended SeptemberJune 30, 2017,2023, and is incorporated into this Part II, Item 1 by reference thereto.
Item 1A. Risk Factors
The following risk factorsOur operations and other information included in this Quarterly Report should be carefully considered. Thefinancial results are subject to various risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial may also impair our business, results of operations or financial condition. If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected.
Declines or disruptions in the travel industry could adversely affect our business and financial performance.
Our financial results and prospects are almost entirely dependent upon the sale of travel services. Travel, including accommodation (including hotels, bed and breakfasts, homes, hostels, apartments, vacation rentals and other properties), rental car and airline ticket reservations, is significantly dependent on discretionary spending levels. As a result, sales of travel services tend to decline during general economic downturns and recessions when consumers engage in less discretionary spending, are concerned about unemployment or inflation, have reduced access to credit or experience other concerns or effects that reduce their ability or willingness to travel. For example, the worldwide recession that began in 2007 led to a weakening in the fundamental demand for our travel reservation services and an increase in the number of consumers who canceled existing travel reservations with us. Also during the recession, the accommodation industry experienced a significant decrease in occupancy rates and average daily rates ("ADRs"). While lower occupancy rates have historically resulted in accommodation providers increasing their distribution of accommodation reservations through third-party intermediaries such as us, our remuneration for accommodation reservation transactions changes proportionately with price, and therefore, lower ADRs generally have a negative effect on our accommodation reservation business and a negative effect on our gross profit.
Concerns persist about the outlook for the global economy in general, including uncertainty in the European Union and China. Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, unemployment rates and weakening currencies and concerns over government responses such as higher taxes and reduced government spending, could impair consumer spending and adversely affect travel demand. Further, uncertainty regarding the future of the European Union following the United Kingdom's vote to leave ("Brexit"), as well as concerns regarding certain E.U. members with sovereign debt default risks could also negatively affect consumer spending and adversely affect travel demand. At times, we have experienced volatility in transaction growth rates, increased cancellation rates and weaker trends in hotel ADRs across many regions of the world, particularly in those countries that appear to be most affected by economic uncertainties, which we believe are due at least in part to macro-economic conditions and concerns. 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.
These and other macro-economic uncertainties, such as oil prices, geopolitical tensions and differing central bank monetary policies, have led to significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in currency exchange rates, stock markets and oil prices can also impact consumer travel behavior. For example, although lower oil prices may lead to increased travel activity as consumers have more discretionary funds and airline fares decrease, 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.
Since the United Kingdom's Brexit vote, global markets and foreign exchange rates have experienced increased volatility, including a sharp decline in the value of the British Pound Sterling as compared to the U.S. Dollar. Upon leaving the European Union, among other things, the United Kingdom could lose access to the single European Union market and travel between the United Kingdom and European Union countries could be restricted. We could face new regulatory costs and challenges if U.K. regulations and policies diverge from those of the European Union. Since the timing and terms of the United Kingdom's exit from the European Union are unknown, we are unable to predict the effect Brexit will have on our business (including the effect on non-U.K. citizens employed by us in the United Kingdom) and results of operations. The United Kingdom's decision to leave the European Union could result in other member countries also determining to leave, which could
lead to added economic and political uncertainty and further devaluation or eventual abandonment of the Euro common currency, any of which could have a negative impact on travel and therefore our business and results of operations.
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.
In addition, other unforeseen events beyond our control, such as worldwide recession, oil prices, terrorist attacks, unusual or extreme weather or natural disasters such as earthquakes, hurricanes, tsunamis, floods, droughts and volcanic eruptions, travel-related health concerns including pandemics and epidemics such as Ebola, Zika and MERS, political instability, regional hostilities, imposition of taxes or surcharges by regulatory authorities, changes in trade or immigration policies or travel-related accidents, can disrupt travel or otherwise result in declines in travel demand. Because these events or concerns are largely unpredictable, they can dramatically and suddenly affect travel behavior by consumers, and therefore demand for our services, which can adversely affect our business and results of operations. For example, our business and operations have been negatively impacted by terrorist attacks, Hurricanes Harvey and Irma, which disrupted travel in the southeastern United States and parts of the Caribbean, respectively, in August 2017, and the coup attempt in Turkey in July 2016. Also, since 2015, regional hostilities in the Middle East have spurred an unprecedented flow of migrants from that region to Europe and other areas. As countries respond to the migrant crisis, travel between countries within 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. In the United States, the Trump administration has implemented or proposed, or is considering, various travel restrictions and actions that could affect U.S. trade policy or practices, which could also adversely affect travel to or from the United States. Future terrorist attacks, natural disasters, health concerns, civil or political unrest or other events outside our control could disrupt our business and operations and adversely affect our results of operations.
Intense competition could reduce our market share and harm our financial performance.
We compete globally with both online and traditional travel and restaurant reservation and related services. The markets for the services we offer are intensely competitive, and current and new competitors can launch new services at a relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have access to significantly greater and more diversified resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market, including by establishing a flight meta-search product ("Google Flights") and a hotel meta-search product ("Hotel Ads") that are growing rapidly, as well as its "Book on Google" reservation functionality.
We currently, or may potentially in the future, compete with a variety of companies, including:
online travel reservation services such as Expedia, Hotels.com, Hotwire, Orbitz, Travelocity, Wotif, Cheaptickets, ebookers, HotelClub, RatesToGo and CarRentals.com, which are owned by Expedia; Hotel Reservation Service (HRS) and hotel.de, which are owned by Hotel Reservation Service; and AutoEurope, CarTrawler, Ctrip (in which we hold a minority interest), eLong (in which Ctrip holds a significant minority interest), ezTravel (in which Ctrip holds a majority interest), Meituan (in which we hold a small minority interest), MakeMyTrip, OYO Rooms, Yatra, Cleartrip, Traveloka (in which Expedia holds a minority interest), Webjet, Rakuten, Jalan (which is owned by Recruit), ViajaNet, Submarino Viagens, Despegar/Decolar (in which Expedia holds a minority interest), Fliggy (operated by Alibaba), 17u.com, HotelTonight, CheapOair and eDreams ODIGEO;
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;
large online companies, including search, social networking and marketplace companies such as Google, Facebook, Alibaba, Tencent, Amazon and Baidu;
traditional travel agencies, travel management companies, wholesalers and tour operators, many of which combine physical locations, telephone services and online services, such as Carlson Wagonlit, American Express, BCD Travel, Concur, Thomas Cook, TUI, and Hotelbeds (which recently acquired Tourico and GTA), as well as thousands of individual travel agencies around the world;
travel service providers such as accommodation providers, rental car companies and airlines, many of which have their own branded websites to which they drive business, including large hotel chains such as Marriott International, Hilton and Hyatt Hotels, as well as joint efforts by travel service providers such as Room Key, an online hotel reservation service owned by several major hotel companies;
online travel search and price comparison services (generally referred to as "meta-search" services), such as Google Flights, Google Hotel Ads, TripAdvisor, trivago (in which Expedia holds a majority ownership interest), Qunar (which is controlled by Ctrip), Skyscanner (in which Ctrip holds a majority interest) and HotelsCombined;
online restaurant reservation services, such as TripAdvisor's LaFourchette, Yelp's SeatMe, Zomato, Bookatable (which is owned by Michelin), Quandoo (which is owned by Recruit) and Resy (in which Airbnb holds a minority interest); and
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, Gett, Zipcar (which is owned by Avis), BlaBlaCar, Didi Chuxing, Grab and Ola.
TripAdvisor, a leading travel research and review website, Google, the world's largest search engine, and other large, established companies with substantial resources and expertise in developing online commerce and facilitating internet traffic have launched search, meta-search and/or reservation booking services and may create additional inroads into online travel. Meta-search services leverage their search technology to aggregate travel search results for the consumer's specific itinerary across travel service provider (e.g., accommodations, rental car companies or airlines), online travel company ("OTC") and other travel websites and, in many instances, compete directly with us for customers. Meta-search services intend to appeal to consumers by showing broader travel search results than may be available through OTCs or other travel websites, which could lead to travel service providers or others gaining a larger share of search traffic. TripAdvisor and trivago, two leading meta-search companies, support their meta-search services with significant brand and performance advertising. Through our KAYAK meta-search service, we compete directly with other meta-search services. KAYAK depends on access to information related to travel service pricing, schedules, availability and other related information from OTCs and travel service providers. To the extent OTCs or travel service providers do not provide such information to KAYAK, KAYAK's business and results of operations could be harmed.
Consumers may favor travel services offered by meta-search websites or search companies over OTCs, which could reduce traffic to our travel reservation websites, increase consumer awareness of our competitors' brands and websites and increase our advertising and other customer acquisition costs. To the extent any such consumer behavior leads to growth in our KAYAK meta-search business, such growth may not result in sufficient increases in profits from our KAYAK meta-search business to offset any related decrease in profits experienced by our travel service reservation brands. Further, meta-search services may evolve into more traditional OTCs by offering consumers the ability to make travel reservations directly through their websites. For example, TripAdvisor allows consumers to make a reservation at some accommodations while staying on TripAdvisor through its "Instant Booking" offering, which includes participation by many of the leading global hotel chains, and facilitates hotel reservations on its transaction websites Tingo and Jetsetter. We have been participating in Instant Booking since 2015, however such participation may not result in substantial incremental bookings and could cannibalize business that would otherwise come to us through other ad offerings on TripAdvisor, directly (including after a consumer first visits TripAdvisor) or through other channels, some of which may be more profitable to us than reservations generated through "Instant Booking." To the extent consumers book travel services through a service such as Google's "Book on Google," a meta-search website or directly with a travel service provider after visiting a meta-search website or meta-search utility on a traditional search engine without using an OTC like us, or if meta-search services limit our participation within their search results or evolve into more traditional OTCs, we may need to increase our advertising or other customer acquisition costs to maintain or grow our reservation bookings and our business and results of operations could be adversely affected.
There has been a proliferation of new channels through which accommodation providers can offer reservations. For example, companies such as Airbnb and HomeAway (which is owned by Expedia) offer services providing vacation rental property owners, particularly individuals, an online place to list their accommodations where travelers can search and book such properties and compete directly with our vacation rental accommodation services. Airbnb may also seek to further compete with us by offering hotel and other accommodations through their online and mobile platforms. Further, meta-search services may lower the cost for new companies to enter the market by providing a distribution channel without the cost of promoting the new entrant's brand to drive consumers directly to its website. If any of these services are successful in attracting consumers who would otherwise use our services, our business and results of operations would be harmed.
Travel service providers, including hotel chains, rental car companies and airlines with which we conduct business, compete with us in online channels to drive consumers to their own websites in lieu of third-party distributors such as us. Travel service providers may charge lower prices and, in some instances, offer advantages such as loyalty points or special discounts to members of closed user groups (such as loyalty program participants or consumers with registered accounts), any of which could make their offerings more attractive to consumers than our services. For example, many large hotel chains have announced additional initiatives, such as increased discounting and incentives, to encourage consumers to book accommodations directly through their websites. Discounting may increase as competition authorities seek to allow increased pricing flexibility among providers of travel service reservations. We may need to offer similar advantages to maintain or grow our reservation bookings, which could adversely impact our profitability. Further, consolidation among travel service providers, such as Marriott International's acquisition of Starwood Hotels & Resorts, could result in lower rates of commission paid to OTCs, increased discounting and greater incentives for consumers to join closed user groups as such travel service providers expand their offerings. If we are not as effective as our competitors (including hotel chains) 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.
We are exposed to fluctuations in currency exchange rates.
We conduct a substantial majority of our business outside the United States but we report our results in U.S. Dollars. As a result, we face exposure to movements in currency exchange rates as the financial results of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. Throughout 2015, the U.S. Dollar strengthened significantly year-over-year relative to substantially all currencies in which we transact, most notably the Euro, Brazilian Real, British Pound Sterling, Russian Ruble and Australian Dollar. In 2016, the U.S. Dollar continued to be stronger year-over-year relative to the British Pound Sterling, Russian Ruble and many other major currencies in which we transact. After the "Brexit" referendum in the United Kingdom in June 2016, the U.S. Dollar strengthened significantly against the British Pound Sterling. As a result of these currency exchange rate changes, our foreign-currency-denominated net assets, gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services booked by our customers, net of cancellations), gross profit, operating expenses and net income were lower as expressed in U.S. Dollars in 2016, although to a much lesser extent than in 2015. Recently, the Euro and certain other currencies in which we transact have strengthened against the U.S. Dollar. If the U.S. Dollar were to again strengthen, our foreign-currency-denominated net assets, gross bookings, gross profit, operating expenses and net income when expressed in U.S. Dollars would decrease.
Recent years have seen significant volatility in the exchange rate between the Euro, the British Pound Sterling, the U.S. Dollar and other currencies. Significant fluctuations in currency exchange rates can affect consumer travel behavior. For example, the strengthening of the U.S. Dollar relative to the Euro in 2015 made it more expensive for Europeans to travel to the United States, and the dramatic depreciation of the Russian Ruble in 2014 and 2015 made it more expensive for Russians to travel to Europe and most other non-Ruble destinations. 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.
Additionally, foreign exchange rate fluctuations on transactions denominated in currencies other than the functional currency result in gains and losses that are reflected in our financial results.
Volatility in foreign exchange rates and its impact on consumer behavior, which may differ across regions, make 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 our results of operations.
We face risks related to the growth rate and the global expansion of our business.
We derive a substantial portion of our revenues, and have significant operations, outside the United States. Our international operations include the Netherlands-based accommodation reservation service Booking.com, the Asia-based accommodation reservation service agoda.com, the U.K.-based rental car reservation service Rentalcars.com and, to a lesser extent, KAYAK's international meta-search services and OpenTable's international restaurant reservation business. Our international OTC operations have achieved significant year-over-year growth in their gross bookings. This growth rate, which has contributed significantly to our growth in consolidated revenue, gross profit and earnings, has declined, a trend we expect to continue as the absolute level of our gross bookings increases. Other factors may also slow the growth rates of our international businesses, including, for example, worldwide or regional economic conditions, strengthening of the U.S. Dollar versus the Euro, the British Pound Sterling and other currencies, declines in ADRs, increases in cancellations, adverse changes in travel market conditions and the competitiveness of the market. A decline in the growth rates of our international businesses could have a negative impact on our future consolidated revenue, gross profit and earnings growth rates and, as a consequence, our stock price.
Our strategy involves continued expansion in regions throughout the world. Many of these regions have different economic conditions, customs, languages, currencies, consumer expectations, levels of consumer acceptance and use of the internet for commerce, legislation, regulatory environments (including labor laws and customs), tax laws and levels of political stability, and we are subject to associated risks typical of international businesses. International markets may have strong local competitors with an established brand and travel service provider or restaurant relationships that may make expansion in that market difficult and costly and take more time than anticipated. In addition, compliance with legal, regulatory or tax requirements in multiple jurisdictions places demands on our time and resources, and we may nonetheless experience unforeseen and potentially adverse legal, regulatory or tax consequences. In some markets such as China, legal and other regulatory requirements may prohibit or limit participation by foreign businesses, such as by making foreign ownership or management of internet or travel-related businesses illegal or difficult, or may make direct participation in those markets uneconomic, which could make our entry into and expansion in those markets difficult or impossible, require that we work with a local partner or result in higher operating costs. If we are unsuccessful in rapidly expanding in new and existing markets and effectively managing that expansion, our business, results of operations and financial condition could be adversely affected.
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, homes, apartments, "aparthotels" (which are apartments with a front desk and cleaning service) and chalets and are generally self-catered (i.e., include a kitchen), directly bookable properties. Many of the newer accommodations we add to our travel reservation services, especially in highly-penetrated markets, may have fewer rooms or higher credit risk and may appeal to a smaller subset of consumers (e.g., hostels and bed and breakfasts). Because a vacation rental is typically either a single 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 accommodations in general may be subject to increased seasonality due to local tourism seasons, weather or other factors. Our vacation rental accommodation business may also experience lower profit margins due to certain additional costs related to offering these accommodations on our websites. As we increase our vacation rental accommodation business, these different characteristics could negatively impact our profit margins; and, to the extent these properties represent an increasing percentage of the properties added to our websites, we expect that our gross bookings growth rate and property growth rate will continue to diverge over time (since each such property has fewer booking opportunities). As a result of the foregoing, as the percentage of vacation rental properties increases, the number of reservations per property will likely continue to decrease.
In addition, as our vacation rental reservation business grows, we may incur increasing numbers of complaints related to non-existent properties or properties that are significantly different than as described in the listing, as well as claims of liability based on events occurring at such properties such as robbery, injury, death and other similar events. Such complaints or claims could result in negative publicity and increased costs, which could adversely affect our business and results of operations. Further, the regulatory environment related to vacation rentals is evolving and laws, regulations or property association rules could impose restrictions or burdens on vacation rental property owners that limit or negatively affect their ability to rent their properties. Some jurisdictions have adopted or are considering statutes or ordinances that prohibit owners and managers from renting certain properties for fewer than a stated number of consecutive days or for more than an aggregate total number of days per year. In addition, several jurisdictions have adopted or are considering adopting statutes or ordinances requiring online platforms that list non-hotel accommodations to obtain a license to list such accommodations and/or to comply
with other restrictions or requirements. Such regulations could negatively impact the growth and/or size of our vacation rental reservation business.
We believe that the increase in the number of accommodation providers that participate on our websites, and the corresponding access to accommodation room nights, has been a key driver of the growth of our accommodation reservation business. The growth in our accommodation bookings typically makes us an attractive source of consumer demand for our accommodation providers. However, accommodation providers may wish to limit the amount of business that flows through a single distribution channel. As a result, we may experience constraints on the number of accommodation room nights available to us, which could negatively impact our growth rate and results of operations.
The number of our employees worldwide has grown from less than 700 in the first quarter of 2007 to approximately 23,000 as of September 30, 2017, which growth is mostly comprised of hires by our international operations. We may not be able to hire, train, retain, motivate and manage required personnel, which may limit our growth, damage our reputation, negatively affect our financial performance, and otherwise harm our business. In addition, expansion increases the complexity of our business and places additional strain on our management, operations, technical performance, financial resources and internal financial control and reporting functions. Our current and planned personnel, systems, procedures and controls may not be adequate to support and effectively manage this growth and our future operations, especially as we employ personnel in multiple geographic locations around the world.
We rely on performance and brand advertising channels to generate a significant amount of traffic to our websites and grow our business.
We believe that maintaining and strengthening our brands are important aspects of our efforts to attract and retain customers. We have invested considerable money and resources in the establishment and maintenance of our brands, and we will continue to invest resources in brand advertising, marketing and other brand building efforts to preserve and enhance consumer awareness of our brands. In addition, effective performance advertising has been an important factor in our growth, and we believe it will continue to be important to our future success. As our competitors spend increasingly more on advertising, we are required to spend more in order to maintain our brand recognition and, in the case of performance advertising, to maintain and grow traffic to our websites. We may not be able to successfully maintain or enhance consumer awareness and acceptance of our brands, and, even if we are successful in our branding efforts, such efforts may not be cost-effective. If we are unable to maintain or enhance consumer awareness and acceptance of our brands in a cost-effective manner, our business, market share and results of operations would be materially adversely affected.
Our online performance advertising efficiency, expressed as performance advertising expense as a percentage of gross profit, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our websites or mobile apps for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs-per-click and reduce our performance advertising efficiency. We use third-party websites, including online search engines (primarily Google), meta-search and travel research services and affiliate marketing as primary means of generating traffic to our websites. Our performance advertising expense has increased significantly and our performance advertising efficiency has declined in recent years, a trend we expect to continue, though the rate of decrease may fluctuate and there may be periods of stable or increasing ROIs from time to time. Any reduction in our performance advertising efficiency could have an adverse effect on our business and results of operations, whether through reduced gross profit or gross profit growth or through advertising expenses increasing faster than gross profit and thereby reducing margins and earnings growth.
We believe that a number of factors could cause consumers to increase their shopping activity before making a travel purchase. Increased shopping activity reduces our performance advertising efficiency and effectiveness because traffic becomes less likely to result in a reservation through our website, and such traffic is more likely to be obtained through paid performance advertising channels than through free direct channels. Further, consumers may favor travel services offered by search or meta-search companies over OTCs, which could reduce traffic to our travel reservation websites, increase consumer awareness of our competitors' brands and websites, increase our advertising and other customer acquisition costs and adversely affect our business, margins and results of operations. To the extent any such increased shopping behavior leads to growth in our KAYAK meta-search business, such growth may not result in sufficient increases in gross profit from our KAYAK meta-search business to offset any related decrease in gross profit or increase in advertising and other customer acquisition costs experienced by our OTC brands.
Our business could be negatively affected by changes in internet search and meta-search algorithms and dynamics or traffic-generating arrangements.
We use Google to generate a significant portion of the traffic to our websites, and, to a lesser extent, we use other search and meta-search websites to generate traffic to our websites, principally through pay-per-click advertising campaigns. The pricing and operating dynamics on these search and meta-search websites can experience rapid change commercially, technically and competitively. For example, Google frequently updates and changes the logic which determines the placement and display of results of a consumer's search, such that the placement of links to our websites can be negatively affected and our costs to improve or maintain our placement in search results can increase. In June 2017, the European Commission fined Google 2.4 billion Euros for breaching European Union antitrust rules by giving its comparison shopping service priority placement in Google search results. Google has appealed the European Commission's decision, and it is not yet clear how Google may implement the European Commission's decision, or what effect it may have on the ranking of Google's travel meta-search services (Google Flights and Google Hotel Ads) in Google search results. Changes by Google in how it presents travel search results, including its promotion of its travel meta-search services, or the manner in which it conducts the auction for placement among search results, may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites, which in turn would have an adverse effect on our business, market share and results of operations. Similarly, changes by our other search and meta-search partners in how they present travel search results or the manner in which they conduct the auction for placement among search results may be competitively disadvantageous to us and may impact our ability to efficiently generate traffic to our websites.
In addition, we purchase website traffic from a number of other sources, including some operated by our competitors, in the form of pay-per-click arrangements that can be terminated with little or no notice. If one or more of such arrangements is terminated, our business, market share and results of operations could be adversely affected. We rely on various third-party distribution channels (i.e., marketing affiliates) to distribute accommodation, rental car and airline ticket reservations. Should one or more of such third parties cease distribution of reservations made through us, or suffer deterioration in its search or meta-search ranking, due to changes in search or meta-search algorithms or otherwise, our business, market share and results of operations could be negatively affected.
Consumer adoption and use of mobile devices creates new challenges and may enable device companies such as Apple to compete directly with us.
Widespread adoption of mobile devices, such as the iPhone, Android-enabled smartphones, 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, both direct and indirect, 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 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 smartphones, 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. As a result, it is increasingly important for us to develop and maintain effective mobile apps and websites optimized for mobile devices to provide consumers with an appealing, easy-to-use mobile experience. 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.
Google's Android operating system is the leading smartphone operating system in the world. As a result, Google could leverage its Android operating system to give its travel services a competitive advantage, either technically or with prominence on its Google Play app store or within its mobile search results. Further, Google is the leading internet search service and has leveraged its search popularity to promote its travel meta-search services. Similarly, Apple, the producer of, among other things, the iPhone and iPad, obtained a patent for "iTravel," a mobile app that would allow a traveler to check in for a travel reservation. In addition, Apple's iPhone operating system includes "Wallet" (formerly known as "Passbook"), a
virtual wallet app that holds tickets, boarding passes, coupons and gift cards, and, along with iTravel, may be indicative of Apple's intent to enter the travel reservations business in some capacity. Apple has substantial market share in the smartphone category and controls integration of offerings, including travel services, into its mobile operating system. Apple also has more experience producing and developing mobile apps and has access to greater resources than we have. Apple may use or expand iTravel, Wallet, Siri (Apple's voice recognition "concierge" service), Apple Pay (Apple's mobile payment system) or another mobile app or functionality as a means of entering the travel reservations marketplace. To the extent Apple or Google use their mobile operating systems, app distribution channels or, in the case of Google, search services, to favor their own travel service offerings, our business and results of operations could be harmed.
We may not be able to keep up with rapid technological changes.
The markets in which we compete are characterized by rapidly changing technology, evolving industry standards, consolidation, frequent new service announcements, introductions and enhancements and changing consumer demands. We may not be able to keep up with these rapid changes. In addition, these market characteristics are heightened by the progress of technology adoption in various markets, including the continuing adoption of the internet and online commerce in certain geographies and the emergence and growth of the use of smartphones and tablets for mobile e-commerce transactions, including through the increasing use of mobile apps. As a result, our future success will depend on our ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to continually innovate and improve the performance, features and reliability of our services in response to competitive service offerings and the evolving demands of the marketplace. In particular, we believe that it is increasingly important for us to effectively offer our services through mobile apps and mobile-optimized websites on smartphones and tablets. Any failure by us to successfully develop and achieve customer adoption of our mobile apps and mobile-optimized websites would likely have a material and adverse effect on our growth, market share, business and results of operations. Further, to the extent mobile devices enable users to block advertising content on their devices, our advertising revenue and our ability to market our brands and acquire new customers may be negatively affected. We believe that ease-of-use, comprehensive functionality and the look and feel of our mobile apps and mobile-optimized websites increasingly will be competitively critical as consumers obtain more of their travel and restaurant services through mobile devices. As a result, we intend to continue to spend significant resources maintaining, developing and enhancing our websites and mobile platforms, including our mobile-optimized websites and mobile apps, and other technologies.
In addition, the widespread adoption of new internet, networking or telecommunications technologies or other technological changes (including new devices and services, such as Amazon's Echo and Alexa and Google Home, and developing technologies, such as artificial intelligence, chatbot and virtual reality technologies) could require us to incur substantial expenditures to modify or adapt our services or infrastructure to those new technologies, which could adversely affect our results of operations or financial condition. For example, KAYAK generates revenues, in part, by allowing consumers to compare search results that appear in additional "pop-under" windows. Changes in browser functionality, such as changes that either block or otherwise limit the use of "pop-under" windows, at times have had a negative impact on our revenues. Any failure to implement or adapt to new technologies in a timely manner or at all could adversely affect our ability to compete, increase our customer acquisition costs or otherwise adversely affect our business, and therefore adversely affect our brand, market share and results of operations.
Our processing, storage, use and disclosure of personal data exposes us to risks of internal or external security breaches and could give rise to liabilities.
The security of data when engaging in electronic commerce is essential to maintaining consumer and travel service provider confidence in our services. Any security breach whether instigated internally or externally on our systems or other internet-based systems could significantly harm our reputation and therefore our business, brand, market share and results of operations. We currently require consumers who use certain of our services to guarantee their offers with their credit card. We require user names and passwords in order to access our information technology systems. We also use encryption and authentication technologies to secure the transmission and storage of data and prevent unauthorized access to our data or accounts. It is possible that computer circumvention capabilities, new discoveries or advances or other developments, including our own acts or omissions, could result in a compromise or breach of consumer data. For example, third parties may attempt to fraudulently induce employees or customers to disclose user names, passwords or other sensitive information ("phishing"), which may in turn be used to access our information technology systems or to defraud our customers. We have experienced targeted and organized phishing attacks and may experience more in the future. Our efforts to protect information from unauthorized access may be unsuccessful or may result in the rejection of legitimate attempts to book reservations through our services, any of which could result in lost business and materially adversely affect our business, reputation and results of operations.
Our existing security measures may not be successful in preventing security breaches. A party (whether internal, external, an affiliate or unrelated third party) that is able to circumvent our security systems could steal consumer information or transaction data or other proprietary information. In the last few years, several major companies, including Equifax, Yahoo!, Sony, Apple, LinkedIn and Google experienced high-profile security breaches that exposed their customers' and/or employees' personal information. We expend significant resources to protect against security breaches, and we may need to increase our security-related expenditures to maintain or increase our systems' security or to address problems caused and liabilities incurred by breaches. These issues are likely to become more difficult to manage as we expand the number of places where we operate and as the tools and techniques used in such attacks become more advanced. As experienced by Sony, security breaches could result in severe damage to our information technology infrastructure, including damage that could impair our ability to offer our services or the ability of consumers to make reservations or conduct searches through our services, as well as loss of customer, financial or other data that could materially and adversely affect our ability to conduct our business, satisfy our commercial obligations or meet our public reporting requirements in a timely fashion or at all. Security breaches could also result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability, subject us to regulatory penalties and sanctions, or cause consumers to lose confidence in our security and choose to use the services of our competitors, any of which would have a negative effect on the value of our brand, our market share and our results of operations. Our insurance policies carry low coverage limits, and would likely not be adequate to reimburse us for all losses caused by security breaches.
We also face risks associated with security breaches affecting third parties conducting business over the internet. Consumers generally are concerned with security and privacy on the internet, and any publicized security problems could negatively affect consumers' willingness to provide private information or effect commercial transactions on the internet generally, including through our services. Some of our business is conducted with third-party marketing affiliates, which may generate travel reservations through our infrastructure or through other systems. Additionally, consumers using our services could be affected by security breaches at third parties such as travel service providers, payroll providers, health plan providers, payment processors or global distribution systems ("GDSs") upon which we rely. A security breach at any such third-party marketing affiliate, travel service provider, payment processor, GDS or other third party on which we rely, such as the security breach experienced by Sabre in May 2017, could be perceived by consumers as a security breach of our systems and in any event could result in negative publicity, damage our reputation, expose us to risk of loss or litigation and possible liability and subject us to regulatory penalties and sanctions. In addition, such third parties may not comply with applicable disclosure requirements, which could expose us to liability.
In our processing of travel transactions, we receive and store a large volume of personally identifiable data. This data is increasingly subject to legislation and regulations in numerous jurisdictions around the world, such as the European Union's Data Protection Directive and variations and implementations of that directive in the member states of the European Union. In addition, in April 2016 the European Union adopted a new General Data Protection Regulation designed to unify data protection within the European Union under a single law, which may result in significantly greater compliance burdens and costs for companies with users and operations in the European Union. Under the General Data Protection Regulation, fines of up to 20 million Euros or up to 4% of the annual global revenues of the infringer, whichever is greater, could be imposed. This government action is typically intended to protect the privacy of personal data that is collected, processed and transmitted in or from the governing jurisdiction. In many cases, these laws apply not only to third-party transactions, but also to transfers of information between us and our subsidiaries, including employee information. The General Data Protection Regulation will go into effect and apply to us beginning in May 2018. In February 2016, E.U. and U.S. authorities announced that they had reached agreement on a new data transfer framework, called the E.U.-U.S. Privacy Shield, which was formally adopted by the European Commission on July 12, 2016. The European Union and the United States are implementing the new framework, but it is currently subject to legal challenge. These laws and their interpretations continue to develop and may be inconsistent from jurisdiction to jurisdiction. Non-compliance with these laws could result in penalties or significant legal liability. We could be adversely affected if legislation or regulations are expanded to require changes in our business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our business, results of operations or financial condition.
We are also subject to payment card association rules and obligations under our contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for associated expenses and penalties. In addition, if we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
System capacity constraints, system failures or "denial-of-service" or other attacks could harm our business.
We have experienced rapid growth in consumer traffic to our websites and through our mobile apps, the number of accommodations on our extranets and the geographic breadth of our operations. If our systems cannot be expanded to cope with increased demand or fail to perform, we could experience unanticipated disruptions in service, slower response times, decreased customer service and customer satisfaction and delays in the introduction of new services, any of which could impair our reputation, damage our brands and materially and adversely affect our results of operations. Further, as an online business, we are dependent on the internet and maintaining connectivity between ourselves and consumers, sources of internet traffic, such as Google, and our travel service providers. As consumers increasingly turn to mobile devices, we also become dependent on consumers' access to the internet through mobile carriers and their systems. Disruptions in internet access, such as the denial of service attack against Dyn in October 2016 that resulted in a service outage for a number of major internet companies, whether generally, in a specific market or otherwise, especially if widespread or prolonged, could materially adversely affect our business and results of operations. While we do maintain redundant systems and hosting services, it is possible that we could experience an interruption in our business, and we do not carry business interruption insurance sufficient to compensate us for all losses that may occur.
Our computer hardware for operating our services is currently located at hosting facilities around the world. These systems and operations are vulnerable to damage or interruption from human error, floods, fires, power loss, telecommunication failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism, terrorism and similar misconduct. Despite any precautions we may take, the occurrence of any disruption of service due to any such misconduct, natural disaster or other unanticipated problems at such facilities, or the failure by such facilities to provide our required data communications capacity could result in lengthy interruptions or delays in our services. Any system failure that causes an interruption or delay in service could impair our reputation, damage our brands or result in consumers choosing to use a competitive service, any of which could have a material adverse effect on our business and results of operations.
Our existing security measures may not be successful in preventing attacks on our systems, and any such attack could cause significant interruptions in our operations. For instance, from time to time, we have experienced "denial-of-service" type attacks on our systems that have made portions of our websites slow or unavailable for periods of time. There are numerous other potential forms of attack, such as "phishing" (where a third party attempts to infiltrate our systems or acquire information by posing as a legitimate inquiry or electronic communication), SQL injection (where a third party attempts to insert malicious code into our software through data entry fields in our websites in order to gain control of the system) and attempting to use our websites as a platform to launch a "denial-of-service" attack on another party, each of which could cause significant interruptions in our operations and potentially adversely affect the value of our brands, operations and results of operations or involve us in legal or regulatory proceedings. We expend significant resources in an attempt to prepare for and mitigate the effects of any such attacks. Reductions in website availability and response time could cause loss of substantial business volumes during the occurrence of any such attack on our systems, and measures we may take to divert suspect traffic in the event of such an attack could result in the diversion of bona fide customers. These issues are likely to become more difficult to manage as we expand the number of places where we operate and as the tools and techniques used in such attacks become more advanced. Successful attacks could result in negative publicity, damage our reputation and prevent consumers from booking travel services, researching travel services or making restaurant reservations through us during the attack, any of which could cause consumers to use the services of our competitors, which would have a negative effect on the value of our brands, our market share, business and results of operations.
We rely on certain third-party computer systems and third-party service providers, including GDSs and computerized central reservation systems of the accommodation, rental car and airline industries in connection with providing some of our services. Any interruption in these third-party services and systems or deterioration in their performance could prevent us from booking related accommodation, rental car and airline reservations and have a material adverse effect on our business, brands and results of operations. Our agreements with some third-party service providers are terminable upon short notice and often do not provide recourse for service interruptions. In the event our arrangement with any such third party is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms and, as a result, it could have a material adverse effect on our business and results of operations.
We depend upon various third parties to process payments, including credit cards, for our merchant transactions around the world. In addition, we rely on third parties to provide credit card numbers which we use as a payment mechanism for merchant transactions. If any such third party were wholly or partially compromised, our cash flows could be disrupted or we may not be able to generate merchant transactions (and related revenues) until such a time as a replacement process could be put in place with a different vendor.
We do not have a completely formalized or comprehensive disaster recovery plan in every geographic region in which we conduct business. In the event of certain system failures, we may not be able to switch to back-up systems immediately and
the time to full recovery could be prolonged. Like many online businesses, we have experienced system failures from time to time. In addition to placing increased burdens on our engineering staff, these outages create a significant amount of consumer questions and complaints that need to be addressed by our customer support personnel. Any unscheduled interruption in our service could result in an immediate loss of revenues that could be substantial, increase customer service costs, harm our reputation and result in some consumers switching to our competitors. If we experience frequent or persistent system failures, our reputation and brand could be permanently and significantly harmed. We have taken and continue to take steps to increase the reliability and redundancy of our systems. These steps are expensive, may reduce our margins and may not be successful in reducing the frequency or duration of unscheduled downtime.
We use both internally developed systems and third-party systems to operate our services, including transaction processing, order management and financial systems. If the number of consumers using our services increases substantially, or if critical third-party systems stop operating as designed, we will need to significantly expand and upgrade our technology, transaction processing systems, financial and accounting systems and other infrastructure. We may not be able to upgrade our systems and infrastructure to accommodate such conditions in a timely manner, and, depending on the third-party systems affected, our transactional, financial and accounting systems could be impacted for a meaningful amount of time before upgrade, expansion or repair.
We may have exposure to additional tax liabilities.
As an international business providing reservation and advertising services around the world, we are subject to income taxes and non-income-based taxes in the United States and various international jurisdictions. Due to economic and political conditions, tax rates and tax regimes in various jurisdictions may be subject to significant change. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets or changes in tax laws or their interpretation. If our effective tax rates were to increase, our results of operations, financial condition and cash flows would be adversely affected.
Although we believe that our tax filing positions are reasonable and comply with applicable law, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals. To date, we have been audited in many taxing jurisdictions with no significant impact on our results of operations, financial condition or cash flows. If future audits find that additional taxes are due, we may be subject to incremental tax liabilities, possibly including interest and penalties, which could have a material adverse effect on our results of operations, financial condition and cash flows.
For example, French tax authorities conducted an audit that started in 2013 of the tax years 2003 through 2012. The French authorities are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes. In December 2015, the French tax authorities issued assessments related to these tax years for approximately 356 million Euros, the majority of which represents 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. Our objection to the assessments was denied by the French tax authorities. 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 such payment would not constitute an admission by us that we owe the taxes. Alternatively, any resolution or settlement of the matter with the French authorities may also require payment as part of such resolution or settlement. French authorities have begun a similar audit of the tax years 2013 through 2015, which could result in additional assessments.
In general, governments in the United States and Europe are increasingly focused on ways to increase tax revenues, which has contributed to an increase in audit activity and harsher stances taken by tax authorities. Any such additional taxes or other assessments may be in excess of our current tax provisions or may require us to modify our business practices in order to reduce our exposure to additional taxes going forward, any of which could have a material adverse effect on our business, results of operations and financial condition.
As of September 30, 2017, we held approximately $15.9 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 that intention changes and we decide to repatriate that cash to the United States, whether due to cash needs in the United States or otherwise, we would incur related U.S. income tax expense, and we would only make income tax payments when we repatriate the cash. 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. 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. After our net operating loss carryforwards have been fully
utilized, foreign tax credits associated with the repatriation of international cash may be used to reduce U.S. federal taxes on the repatriation.
On November 2, 2017 the Chairman of the House Ways and Means Committee introduced a bill, called the Tax Cuts and Jobs Act ("Act"), that proposes significant changes to current U.S. Federal tax law including changing to a territorial tax system, taxing accumulated international earnings held in cash or cash equivalents at 12% and international earnings held in illiquid assets at 5%, and allowing payment of the related tax liability to be spread over 8 years.
Other provisions include reducing the U.S. corporate income tax rate to 20%, allowing the immediate write off of the cost of certain investments in depreciable assets, limiting the deduction for net interest expense, and changing the rules on the use of net operating losses. The Act also includes provisions aimed at preventing the erosion of the U.S. tax base and introduces a tax, at the 20% new corporate income tax rate, on 50% of high return international earnings, i.e., international earnings determined to be in excess of a routine return, and also introduces a 20% excise tax on certain payments by U.S. corporations to related international corporations.
We cannot determine whether some or all of these or other proposals will be enacted into law or what, if any, changes may be made to such proposals prior to being enacted into law. If U.S. tax laws change in a manner that increases our tax obligations, our financial position and results of operations could be adversely impacted.
Additionally, in October 2015, the Organisation for Economic Co-operation and Development ("OECD") issued "final reports" in connection with its "base erosion and profit shifting" ("BEPS") project. The OECD, with the support of the G20, initiated this project in 2013 in response to concerns that international tax standards have not kept pace with changes in global business practices and that changes are needed to international tax laws to address situations where multinational businesses may pay little or no tax in certain jurisdictions by shifting profits away from jurisdictions where the activities creating those profits may take place. The final reports were endorsed by the G20 leaders in November 2015. The final reports propose 15 actions the OECD determined are needed to address base erosion and profit shifting, including: (a) enhancing transparency through the sharing of tax information between countries; (b) prescribing standardized country-by-country reporting and other documentation requirements aimed at identifying where profits, tax and economic activities occur; (c) preventing harmful tax practices including the use of preferential tax regimes; (d) modernizing the OECD's transfer pricing rules related to intangibles; (e) changing the definition of permanent establishment to prevent artificial avoidance of tax nexus; and (f) limiting tax base erosion through interest deductions and other financial payments. The measures have, among other things, resulted in the development of a multilateral instrument ("MLI") to incorporate and facilitate changes to tax treaties. In June 2017, a number of countries signed the MLI. On January 28, 2016, the European Commission unveiled a new package of proposals aimed at providing a framework for fairer taxation and to provide a coordinated European Union response to combating corporate tax avoidance. Following agreement among the European Union member states on the final content of the package, the European Council formally adopted an Anti-Tax Avoidance Directive in July 2016, which was further amended in February 2017. The Directive is aimed at preventing aggressive tax planning, increasing tax transparency and creating a fairer tax environment for all businesses in the European Union. Further, the OECD's task force on the digital economy is also working on an interim report for the G20 due in early 2018 and is considering potential ideas to address the tax challenges of the digital economy including interim solutions such as an alternative levy on electronic sales. Several EU Member states have recently also proposed the concept of an equalization tax to the EU Commission that would seek to tax the turnover of digital companies. In a press release dated October 19, 2017, the European Council concluded that the European Union needs an effective and fair taxation system for the digital era to ensure a global level playing field in line with the work being carried out at the OECD and that it is also anticipating EU Commission proposals on this subject early in 2018. We expect many countries to change their tax laws in response to these developments, and several countries have already changed or proposed changes to their tax laws in response to the final BEPS reports and/or the developments in the European Union. Any changes to international tax laws, including new definitions of permanent establishment or changes affecting the benefits of preferential tax regimes such as the Dutch "Innovation Box Tax" (discussed below), could impact the tax treatment of our foreign earnings and adversely impact our effective tax rate. Further, changes to tax laws and additional reporting requirements could increase the complexity, burden and cost of compliance. Due to the large and expanding scale of our international business activities, any changes in U.S. or international taxation of our activities may increase our worldwide effective tax rate, increase the complexity and costs associated with tax compliance (especially if changes are implemented or interpreted inconsistently across tax jurisdictions) and adversely affect our financial position and results of operations.
We are also subject to non-income-based taxes, such as value-added, payroll, sales, use, net worth, property and goods and services taxes, in the United States and various international jurisdictions, as well as the potential for travel transaction taxes in the United States as discussed below and in Note 11 to our Unaudited Consolidated Financial Statements. From time to time, we are under audit by tax authorities with respect to these non-income-based taxes and may have exposure to additional non-income-based tax liabilities.
We may not be able to maintain our "Innovation Box Tax" benefit.
The Netherlands corporate income tax law provides that income generated from qualifying innovative activities is taxed at the rate of 5% ("Innovation Box Tax") rather than the Dutch statutory rate of 25%. A portion of Booking.com's earnings currently qualifies for Innovation Box Tax treatment. In the year ended December 31, 2016, the Innovation Box Tax benefit reduced our consolidated income tax expense by approximately $324.6 million.
In order to be eligible for Innovation Box Tax treatment, Booking.com must, among other things, apply for and obtain an R&D certificate from a Dutch governmental agency every six months confirming that the activities that Booking.com intends to be engaged in over the subsequent six-month period are "innovative." The R&D certificate is current but should Booking.com fail to secure such a certificate in any future period - for example, because the governmental agency does not view Booking.com's new or anticipated activities as innovative - or should this agency determine that the activities contemplated to be performed in a prior period were not performed as contemplated or did not comply with the agency's requirements, Booking.com may lose its certificate and, as a result, the Innovation Box Tax benefit may be reduced or eliminated. Booking.com intends to apply for continued Innovation Box Tax treatment for future periods. However, Booking.com's application may not be accepted, or, if accepted, the amount of qualifying earnings may be reduced. Furthermore, the Dutch government has proposed changes to its income tax laws that include increasing the Innovation Box Tax rate to 7% with effect from 2018 and, commencing in 2019, reducing the corporate income tax statutory rate from 25% to 21% by 2021, which we currently believe, if enacted into law, would slightly increase our effective tax rate during the first two years of the transition period, and slightly reduce it thereafter, compared to our estimated effective tax rate for 2017.
The loss of the Innovation Box Tax benefit (or any material portion thereof), 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.
Adverse application of U.S. state and local tax laws could have an adverse effect on our business and results of operations.
A number of jurisdictions in the United States 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. Additional state and local jurisdictions may assert that we are subject to, among other things, travel transaction taxes and could seek to collect such taxes, either retroactively or prospectively, or both.
In many of the judicial and other proceedings initiated to date, the taxing jurisdictions seek not only historical taxes that are claimed to be owed on our gross profit, but also, among other things, interest, penalties, punitive damages and/or attorneys' fees and costs. To date, many of the taxing jurisdictions in which we facilitate travel reservations have not asserted that taxes are due and payable on our travel services. With respect to taxing jurisdictions that have not initiated proceedings to date, it is possible that they will do so in the future or that they will seek to amend their tax statutes and seek to collect taxes from us only on a prospective basis.
In connection with some travel transaction tax audits and assessments, we may be required to pay any assessed taxes, which amounts may be substantial, prior to being allowed to contest the assessments and the applicability of the laws in judicial proceedings. Payment of these amounts, if any, is not an admission that we are subject to such taxes and, even if we make such payments, we intend to continue to assert our position that we should not be subject to such taxes.
Litigation is subject to uncertainty and there could be adverse developments in these pending or future cases and proceedings. Adverse tax decisions could have a material adverse effect on our business, margins, cash flows and results of operations. An unfavorable outcome or settlement of pending litigation may encourage the commencement of additional litigation, audit proceedings or other regulatory inquiries. In addition, an unfavorable outcome or settlement of these actions or proceedings 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.
We are dependent on providers of accommodations, rental cars and airline tickets and on restaurants.
We rely on providers of accommodations, rental cars and airline tickets and on restaurants to make their services available to consumers through us. Our arrangements with travel service providers generally do not require them to make available any specific quantity of accommodation reservations, rental cars or airline tickets, or to make accommodation reservations, rental cars or airline tickets available in any geographic area, for any particular route or at any particular price.
Similarly, our arrangements with restaurants generally do not require them to provide all of their available tables and reservations to customers through us. During the course of our business, we are in continuous dialogue with our major travel service providers about the nature and extent of their participation in our services. A significant reduction on the part of any of our major travel service providers or providers that are particularly popular with consumers in their participation in our services for a sustained period of time or their complete withdrawal could have a material adverse effect on our business, market share and results of operations. To the extent any of those major or popular travel service providers ceased to participate in our services in favor of one of our competitors' systems or decided to require consumers to purchase services directly from them, our business, market share and results of operations could be harmed. During periods of higher occupancy rates, accommodation providers may decrease their distribution of accommodation reservations through third-party intermediaries like us, in particular through our discount services such as priceline.com's Express Deals® and Name Your Own Price® services. Further, as consolidation among travel service providers increases, the potential adverse effect of a decision by any particular significant travel service provider (such as a large hotel chain, airline or rental car company) to withdraw from or reduce its participation in our services also increases. To the extent restaurants limit the availability of reservations through OpenTable, consumers may not continue to use our services and/or our revenues could be adversely affected, especially if reservations during highly desirable times on high volume days are not made available through us.
KAYAK, a meta-search service, depends on access to information related to travel service pricing, schedules, availability and other related information from OTCs and travel service providers to attract consumers. To obtain this information, KAYAK maintains relationships with travel service providers and OTCs. Many of KAYAK's agreements with travel service providers and OTCs are short-term agreements that may be terminated on 30 days' notice. To the extent OTCs or travel service providers no longer provide such information to KAYAK, KAYAK's ability to provide comprehensive travel service information to consumers could be diminished and its brand, business and results of operations could be harmed. To the extent consumers do not view KAYAK as a reliable source of comprehensive travel service information, fewer consumers would likely visit its websites, which would also likely have a negative impact on KAYAK's advertising revenue and results of operations. In addition, if travel service providers or OTCs choose not to advertise with KAYAK or choose to reduce or eliminate the fees paid to KAYAK for referrals from query results, KAYAK's business and results of operations could be adversely affected.
We rely on the performance of highly skilled personnel; and, if we are unable to retain or motivate key personnel or hire, retain and motivate qualified personnel, our business would be harmed.
Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization. In particular, the contributions of key senior management in the United States, Europe and Asia are critical to the overall management of our business. We may not be able to retain the services of any members of our senior management or other key employees, the loss of whom could harm our business and competitive position.
In addition, competition for well-qualified employees in all aspects of our business, including software engineers, mobile communication talent and other technology professionals, is intense both in the United States and abroad. Our international success in particular has led to increased efforts by our competitors and others to hire our international employees. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, competitive position and results of operations would be adversely affected. We do not maintain any key person life insurance policies.
As the size of our business grows, we may become increasingly subject to the scrutiny of anti-trust and competition regulators.
The online travel industry has become the subject of investigations by various national competition authorities ("NCAs"), particularly in Europe. We are or have been involved in investigations predominantly related to whether Booking.com's contractual parity arrangements with accommodation providers, sometimes also referred to as "most favored nation" or "MFN" provisions, are anti-competitive because they require accommodation providers to provide Booking.com with room rates that are at least as low as those offered to other OTCs or through the accommodation provider's website. Some investigations relate to other issues such as reservation and cancellation clauses, commission payments and pricing behavior. For instance, on September 8, 2017 the Swiss Price Surveillance Office opened an investigation into the level of commissions of Booking.com in Switzerland.
Investigations into Booking.com's parity provisions were initiated in 2013 and 2014 by NCAs in France, Germany, Italy, Austria, Sweden, Ireland and Switzerland. A number of other NCAs have also looked at these issues. On April 21, 2015,
the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted "commitments" offered by Booking.com to resolve and close the investigations in France, Italy and Sweden. Under the commitments, Booking.com replaced its existing price parity agreements with accommodation providers with "narrow" price parity agreements. Under a narrow price parity agreement, subject to certain exceptions, an accommodation provider is still required to offer the same or better rates on Booking.com as it offers to a consumer directly online, but it is no longer required to offer the same or better rates on Booking.com as it offers to other OTCs. The commitments also allow an accommodation provider to, among other things, offer different terms and conditions (e.g., free WiFi) and availability to consumers that book with online travel companies that offer lower rates of commission or other benefits, offer lower rates to consumers that book through offline channels and continue to discount through, among other things, accommodation loyalty programs, as long as those rates are not published or marketed online. The commitments apply to accommodations in France, Italy and Sweden and were effective on July 1, 2015. The foregoing description is a summary only and is qualified in its entirety by reference to the commitments published by the NCAs on April 21, 2015.
On July 1, 2015, Booking.com voluntarily implemented the commitments given to the French, Italian and Swedish NCAs throughout the European Economic Area and Switzerland. Nearly all NCAs in the European Economic Area have now closed their investigations following Booking.com's implementation of the commitments in their jurisdictions. Booking.com has also recently agreed with the NCAs in Australia, New Zealand and Georgia to implement the narrow price parity clause in these countries. However, the Australian NCA indicated in February 2017 that it is reassessing narrow price parity clauses between online travel agencies and accommodation providers. In January 2017, the Turkish NCA imposed fines on Booking.com following an investigation into Booking.com's "wide" parity clauses. Further to the Turkish NCA's decision, Booking.com has also implemented the narrow price parity clause in Turkey. We are in ongoing discussions with various NCAs in other countries regarding their concerns. We are currently unable to predict the long-term impact the implementation of these commitments will have on Booking.com's business, on investigations by other countries, or on industry practice more generally.
On December 23, 2015, the German NCA issued a final decision prohibiting Booking.com's narrow price parity agreements with accommodations in Germany. The German NCA did not issue a fine, but has reserved its position regarding an order for disgorgement of profits. Booking.com is appealing the German NCA's decision. An Italian hotel association has appealed the Italian NCA's decision to accept the commitments by Booking.com.
A working group of 10 European NCAs (France, Germany, Belgium, Hungary, Ireland, Italy, the Netherlands, Czech Republic, the United Kingdom and Sweden) was established by the European Commission in December 2015 to monitor the effects of the narrow price parity clause in Europe. This working group (the "ECN Working Group") issued questionnaires during 2016 to online travel agencies, including Booking.com and Expedia, meta-search sites and hotels about the narrow price parity clause. On April 6, 2017, the ECN Working Group published the results of this monitoring exercise. The report indicates that the introduction of the narrow price parity clause generally improved conditions for competition. Although neither the European Commission nor any of the participating NCAs has opened a new investigation following the publication of the report, the ECN Working Group decided to keep the sector under review and re-assess the competitive situation in due course.
We are unable to predict how these appeals and the remaining investigations in other countries will ultimately be resolved, or whether further action in Europe will be taken as a result of the ECN Working Group's ongoing review. Possible outcomes include requiring Booking.com to amend or remove its rate parity clause from its contracts with accommodation providers in those jurisdictions and/or the imposition of fines.
A number of European countries have adopted legislation making price parity agreements illegal, and it is possible other countries may adopt similar legislation in the future. For example, in August 2015, French legislation known as the "Macron Law" became effective. Among other things, the Macron Law makes price parity agreements illegal, including the narrow price parity agreements agreed to by the French NCA in April 2015. Legislation prohibiting narrow price parity agreements became effective in Austria on December 31, 2016 and in Italy on August 29, 2017. A motion calling on the Swiss government to introduce legislation prohibiting the narrow price parity clause was approved by the Swiss Parliament on September 18, 2017. In July 2017, a Belgian government minister announced plans to put forward a similar proposal before the Belgian Parliament. It is not yet clear how the Macron Law, the Austrian and Italian legislation or the proposed Swiss or Belgian legislation may affect our business in the long term.
Further, the European Commission published a communication in May 2017 on the Mid-Term Review on the implementation of the Digital Single Market Strategy. As part of the Digital Single Market Strategy, the Commission is undertaking a comprehensive assessment of the role of online platforms. In particular, the Commission states in its Communication that, by the end of 2017, it will prepare actions, which could take the form of legislation, to address potential
unfair terms and practices identified in relationships between online platforms and businesses, including delisting and transparency in search rankings. Consumer protection issues, including platform search rankings, are also being reviewed by European NCAs. The United Kingdom's NCA launched a consumer law investigation into the clarity, accuracy and presentation of information on hotel booking sites with a specific focus on the display of search results, claims regarding discounts, methods of "pressure selling" (such as creating false impressions regarding room availability), and failure to disclose hidden charges. The consumer protection department of the German NCA announced the opening of a sector inquiry into online price comparison sites in various sectors including travel and hotels on October 24, 2017. We are unable to predict what, if any, effect such actions will have on our business, industry practices or online commerce more generally.
To the extent that regulatory authorities impose fines on us or require changes to our business practices or to those currently common to the industry, our business, competitive position and results of operations could be materially and adversely affected. Negative publicity regarding competition investigations could adversely affect our brands and therefore our market share and results of operations. Further, the Macron Law, the Italian and Austrian laws and any similar legislation enacted by other countries, and the decision by the German NCA to prohibit narrow price parity agreements, could have a material adverse effect on our business and our results of operations, in particular if consumers use our services to shop for accommodation reservations but make their reservations directly with an accommodation provider.
Competition-related investigations, legislation or issues could also give rise to private litigation. For example, Booking.com is involved in private litigation in Sweden related to its narrow price parity provisions. We are unable to predict how this litigation will be resolved, or whether it will impact Booking.com's business in Sweden.
In addition, as our business grows, we may increasingly become the target of competition investigations or be limited by anti-trust or competition laws. For example, our size and market share may negatively affect our ability to obtain regulatory approval of proposed acquisitions, our ability to expand into complementary businesses or our latitude in dealing with travel service providers (such as by limiting our ability to provide discounts, rebates or incentives or to exercise contractual rights), any of which could adversely affect our business, results of operations or ability to grow and compete.
Regulatory and legal requirements and uncertainties could harm our business.
The services we offer are subject to legal regulations (including laws, ordinances, rules and other requirements and regulations) of national and local governments and regulatory authorities around the world, many of which are evolving and subject to the possibility of new or revised interpretations. Our ability to provide our services is and will continue to be affected by such regulations. For example, our Rentalcars.com business recently began offering optional rental car-related insurance products to customers protecting them against accidental damage to their rental vehicles, which subjects us to certain insurance regulations and related increased compliance costs and complexities, any of which could negatively impact our business and results of operations. Similarly, laws and proposed legislation in some countries relating to data localization, registration as a travel agent and other local requirements could, if applicable to us, adversely affect our ability to conduct business in those countries.
The implementation of unfavorable regulations or unfavorable interpretations of existing regulations by judicial or regulatory bodies could require us to incur significant compliance costs, cause the development of the affected markets to become impractical and otherwise have a material adverse effect on our business and results of operations. For example, in March 2017, in connection with a lawsuit begun in 2015 by the Association of Turkish Travel Agencies claiming that Booking.com is required to meet certain registration requirements in Turkey, a Turkish court unexpectedly ordered Booking.com to suspend offering Turkish hotels and accommodations to Turkish residents. Although Booking.com is appealing the order and believes it to be without basis, this order has had, and is likely to continue to have, a negative impact on our growth and results of operations.
Compliance with the laws and regulations of multiple jurisdictions increases our cost of doing business. These laws and regulations, which vary and sometimes conflict, include the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and local laws which also prohibit corrupt payments to governmental officials or third parties, data privacy requirements, labor relations laws, tax laws, anti-trust or competition laws, U.S., E.U. or U.N. sanctioned country or sanctioned persons mandates, and consumer protection laws. Violations of these laws and regulations could result in fines and/or criminal sanctions against us, our officers or our employees and/or prohibitions on the conduct of our business. Any such violations could result in prohibitions on our ability to offer our services in one or more countries, could delay or prevent potential acquisitions, and could also materially damage our reputation, our brands, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Even if we comply with these laws and regulations, doing business in certain jurisdictions could harm our reputation and brands, which could adversely affect our results of operations or stock price. In addition, these restrictions may provide a competitive advantage to our competitors unless they are also subject to
comparable restrictions. Our success depends, in part, on our ability to anticipate these risks and manage these difficulties. We are also subject to a variety of other regulatory and legal risks and challenges in managing an organization operating in various countries, including those related to:
regulatory changes or other government actions;
additional complexity to comply with regulations in multiple jurisdictions, as well as overlapping or inconsistent legal regimes, in particular with respect to tax, labor, consumer protection, digital content, advertising, promotions, privacy and anti-trust laws;
our ability to repatriate funds held by our international subsidiaries to the United States at favorable tax rates;
difficulties in transferring funds from or converting currencies in certain countries; and
reduced protection for intellectual property rights in some countries.
Our business has grown substantially over the last several years and continues to expand into new geographic locations. In addition, we have made efforts and expect to make further efforts to integrate access to travel services across our various brands. These changes add complexity to legal and tax compliance, and our increased size and operating history may increase the likelihood that we will be subject to regulatory scrutiny or audits by tax authorities in various jurisdictions.
We face increased risks as the level of our debt increases.
We have a substantial amount of outstanding indebtedness and we may incur substantial additional indebtedness in the future, including through public or private offerings of debt securities. Our outstanding indebtedness and any additional indebtedness we incur may have significant consequences, which could include:
requiring the dedication of a portion of our cash flow from operations to service our indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures, share repurchases and acquisitions;
increased vulnerability to downturns in our business, to competitive pressures and to adverse changes in general economic and industry conditions;
decreased or lost ability to obtain additional financing on terms acceptable to us for working capital, capital expenditures, acquisitions, share repurchases or other general corporate purposes; and
decreased flexibility when planning for or reacting to changes in our business and industry.
Our ability to make payments of principal of and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated results of operations and financial condition, many of which are beyond our control. Further, we may not have access to equity or debt markets or other sources of financing, or such financing may not be available to us on commercially reasonable terms, to repay or refinance our debt as it comes due or, in the case of our convertible notes, upon conversion. If we are unable to generate sufficient cash flow from our U.S. operations in the future to service our debt, we may be required to, among other things, repatriate funds to the United States at substantial tax cost.
Our stock price is highly volatile.
The market price of our common stock is highly volatile and is likely to continue to be subject to wide fluctuations in response to factors such as the following, some of which are beyond our control:
operating results that vary from the expectations of securities analysts and investors;
quarterly variations in our operating results;
changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
worldwide economic conditions in general and in Europe in particular;
fluctuations in currency exchange rates, particularly between the U.S. Dollar and the Euro;
occurrences of a significant security breach;
announcements of technological innovations or new services by us or our competitors;
changes in our capital structure;
changes in market valuations of other internet or online service companies;
announcements by us or our competitors of price reductions, promotions, significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
loss of a major travel service provider participant, such as a hotel chain, rental car company or airline, from our services;
changes in the status of our intellectual property rights;
lack of success in the expansion of our business models geographically;
announcements by third parties of significant claims or initiation of litigation proceedings against us or adverse developments in pending proceedings;
additions or departures of key personnel; and
trading volume fluctuations.
Sales of a substantial number of shares of our common stock, including through the conversion of our convertible notes, could adversely affect the market price of our common stock by introducing a large number of sellers to the market. Given the volatility that exists for our shares, such sales could cause the market price of our common stock to decline significantly. In addition, fluctuations in our stock price and our price-to-earnings multiple may have made our stock attractive to momentum, hedge or day-trading investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction, particularly when viewed on a quarterly basis.
The trading prices of internet company stocks in general, including ours, have experienced extreme price and volume fluctuations. To the extent that the public's perception of the prospects of internet or e-commerce companies is negative, our stock price could decline, regardless of our results. Other broad market and industry factors may decrease the market price of our common stock, regardless of our operating performance. Market fluctuations, as well as general political and economic conditions, such as a recession, interest rate or currency rate fluctuations, political instability (e.g., "Brexit" and the July 2016 coup attempt in Turkey) or a natural disaster or terrorist attack affecting a significant market for our business, such as Europe or the United States, could cause our stock price to decline. Negative market conditions could adversely affect our ability to raise additional capital or the value of our stock for purposes of acquiring other companies or businesses.
We have, in the past, been a defendant in securities class action litigation. Securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. To the extent our stock price declines or is volatile, we may in the future be the target of additional litigation. This additional litigation could result in substantial costs and divert management's attention and resources, either of which could adversely affect our business, financial condition, and results of operations.
We face risks related to our intellectual property.
We regard our intellectual property as critical to our success, and we rely on domain name, trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees, travel service providers, partners and others to protect our proprietary rights. We have filed various applications for protection of certain aspects of our intellectual property in the United States and other jurisdictions, and we currently hold a number of issued patents in several jurisdictions. Further, in the future we may acquire additional patents or patent portfolios, which could require significant cash expenditures. However, we may choose not to patent or otherwise register some of our intellectual property and instead rely on trade secret or other means of protecting our intellectual property. We have licensed in the past, and may license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material, to third parties, and these licensees may take actions that diminish the value of our proprietary rights or harm our reputation. In addition, effective intellectual property protection may not be available in every country in which our services are made available online. We may be required to expend significant time and resources to prevent infringement or to enforce our intellectual property rights.
We believe that our intellectual property rights, including our issued patents and pending patent applications, help to protect our business. We endeavor to defend our intellectual property rights diligently, but intellectual property litigation is extremely expensive and time-consuming, and may divert managerial attention and resources from our business objectives. We may not be able to successfully defend our intellectual property rights or they may not be sufficient to effectively protect our business, which could materially adversely affect our business, brands and results of operations.
From time to time, in the ordinary course of our business, we have been subject to, and are currently subject to, legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties will continue to assert intellectual property claims, in particular patent claims, against us, particularly as we expand the complexity and scope of our business. For example, in February 2015, IBM sued us and certain of our subsidiaries asserting that we infringed certain IBM patents and claiming damages and injunctive relief. While we believe the suit to be without merit and are contesting it, litigation is uncertain and we may not be successful. See Note 11 to our Unaudited Consolidated Financial Statements for more information regarding this litigation. Successful infringement claims against us could result in a significant monetary liability or prevent us from operating our business, or portions of our business. In addition, resolution of claims may require us to obtain licenses to use intellectual property rights belonging to third parties, which may be expensive to procure, or possibly to cease using those rights altogether. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
The success of our acquisition of OpenTable is subject to numerous risks and uncertainties.
On July 24, 2014, we acquired OpenTable, a leading brand for booking online restaurant reservations. We believe that the online restaurant reservation business is complementary to our online travel businesses, and that both OpenTable and our travel businesses benefit from the addition of OpenTable to The Priceline Group. As a result of our acquisition of OpenTable, we are subject to risks associated with OpenTable's business, many of which are the same risks that our other businesses face. Other risks include: OpenTable's ability to increase the number of restaurants and diners using its products and services and retain existing restaurants and diners; OpenTable's ability to expand internationally; competition both to provide reservation management services to restaurants and to attract diners to make reservations through OpenTable's websites and apps; OpenTable's ability to effectively and efficiently market to new restaurants and diners; and any risks that cause people to refrain from dining at restaurants, such as economic downturns, severe weather, outbreaks of pandemic or contagious diseases, or threats of terrorist attacks.
OpenTable's post-acquisition strategy was premised on significant and rapid investment in international expansion and various other growth initiatives, resulting in near-term reduced earnings and profit margins but with the goal of achieving significantly increased revenues and profitability in the long term. As this strategy was achieving limited progress, in the third quarter of 2016 OpenTable modified its strategy. As a result, while OpenTable intends to continue to pursue and invest in international expansion and its other growth initiatives, it intends to do so in a more measured and deliberate manner. This change in strategy resulted in OpenTable updating its forecasted financial results to reflect (a) a material reduction in forecasted long-term financial results from these initiatives, partially offset by (b) improved earnings and profit margins in the near term as a result of the reduced investments. As previously disclosed, based on the updated forecast, we estimated a significant reduction in the fair value of the OpenTable business and, for the quarter ended September 30, 2016, recognized a non-deductible goodwill impairment charge of $940.7 million.
Future events and changing market conditions may lead us to again re-evaluate the assumptions reflected in the updated forecast, including key assumptions regarding OpenTable's expected growth rates and operating margins and the success and timing of its international expansion and other growth initiatives, as well as other key assumptions with respect to matters outside of our control, such as discount rates, currency exchange rates, market EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) comparables, and changes in accounting policies or practices, including proposed changes affecting measurement of goodwill and/or impairment testing methodology. If OpenTable does not achieve the results currently expected, if its investments, in particular its investments in its international expansion efforts and other growth initiatives, are not successful, or if any of the assumptions underlying our estimate of the value of the OpenTable business, including those mentioned above, prove to be incorrect, we may further refine our forecast for the OpenTable business and recognize an additional goodwill impairment and an impairment of intangible assets, which could have a material adverse effect on our results of operations.
The value of our investments could decline, which could adversely affect our financial condition and results of operations.
We maintain an investment portfolio of various holdings, types and maturities. These securities are predominantly classified as available-for-sale and, consequently, are recorded in our balance sheets at fair value with unrealized gains or losses reported as a component of accumulated other comprehensive income (loss), net of tax. Our portfolio includes fixed-income securities and equity securities of publicly traded companies, the values of which are subject to market price volatility. If such investments suffer market price declines, we may recognize in earnings the decline in the fair value of our investments below their cost basis when the decline is judged to be other than temporary. We have invested a significant amount in Ctrip convertible notes and ADSs. See Note 4 to our Unaudited Consolidated Financial Statements for more information regarding our investments in Ctrip securities. The value of these securities is subject to the risks associated with Ctrip's business, as well as any changes by the Chinese government in foreign investment laws or elevated scrutiny or regulation of foreign investments in Chinese companies. For example, because of foreign ownership restrictions applicable to its business, Ctrip is a Cayman Islands company operating in China through what is commonly referred to as a variable interest entity, or VIE, structure where it conducts part of its business through contractual relationships with affiliated Chinese entities. Although VIE structures are commonly used by Chinese internet and e-commerce companies, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations to VIE structures, and it is possible that the PRC government may view the VIE structure as in violation of PRC law. VIE contractual relationships are not as effective in providing control over the affiliated Chinese companies as direct ownership, and Ctrip would have to rely on the PRC legal system to enforce those contracts in the event of a breach by one of these entities. Further, conflicts of interest could arise to the extent Ctrip's officers or directors are also shareholders, officers or directors of the affiliated Chinese entities. Any of these risks could materially and adversely affect Ctrip's business and therefore the value of our investment in Ctrip. Similar considerations and risks apply in respect of our investment in securities of Meituan-DianPing, a private Cayman Islands company operating in China through a VIE structure.
We also invest from time to time in private companies and these investments are generally accounted for under the cost method. Such investments are inherently risky in that such companies are typically at an early stage of development, may have no or limited revenues, may not be or ever become profitable, may not be able to secure additional funding or their technologies, services or products may not be successfully developed or introduced to the market. Further, our ability to liquidate any such investments is typically dependent on a liquidity event, such as a public offering or acquisition, as no public market exists for such securities. Valuations of privately-held companies are inherently complex and uncertain due to the lack of a liquid market for the company's securities. If we determine that any of our investments in such companies have experienced a decline in value, we may be required to record an other-than-temporary impairment. For example, in 2016, we recognized impairments totaling approximately $63 million related to investments in two private companies.
We could lose the full amount of any of our investments, and any impairment of our investments could have a material adverse effect on our financial condition and results of operations.
Investment in new business strategies and acquisitions could disrupt our ongoing business and present risks not originally contemplated.
Our mission is to help people experience the world. As a result, our strategy involves evaluating and potentially entering complementary businesses in furtherance of that mission. We have invested, and in the future may invest, in new business strategies and acquisitions. For example, we entered the restaurant reservation business through our acquisition of OpenTable in 2014, and Booking.com has invested in its BookingSuite accommodation services business and has been testing the offering of activities (such as tours and museum tickets) in various locations. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, greater than expected liabilities and expenses, inadequate return on capital, new risks with which we are not familiar, legal compliance obligations that previously did not apply to us, integration risks and difficulties, and unidentified issues not discovered in our investigations and evaluations of those strategies and acquisitions. As a result, entering new businesses involves risks and costs that could, if realized, have an adverse effect on our business, reputation, results of operations, cash flows, or financial condition, as well as on our ability to achieveand the expected benefits of any such investments or acquisitions.
We may decide to make minority investments, including through joint ventures, in which we have limited or no management or operational control. The controlling person in such a case may have business interests, strategies or goals that are inconsistent with ours, and decisions of the company or venture in which we invested may result in harm to our reputation or adversely affect the value of our investment. A substantial portion of our goodwill and intangible assets were acquired in acquisitions. If we determine that any of the goodwill and intangible assets, or any goodwill or intangible assets acquired in future transactions, experiences a decline in value, we may be required to record an other-than-temporary impairment, which
could materially adversely affect our results of operations. Further, we may issue sharestrading price of our common stock in these transactions, which could result in dilution to our stockholders.
Our use of "open source" software could adversely affect our ability to protect our proprietary software and subject us to possible litigation.
We use open source software in connection with our software development. From time to time, companies that use open source software have faced claims challenging the use of open source software and/or compliance with open source license terms. We could be subject to suits by parties claiming ownership of what we believe to be open source software, or claiming non-compliance with open source licensing terms. Some open source licenses require users who distribute software containing open source to make available all or partstock. For a discussion of such software, whichrisks, please refer to Part I, Item 1A, "Risk Factors" in some circumstances could include valuable proprietary code of the user. While we monitor our use of open source software and try to ensure that none is used in a manner that would require us to disclose our proprietary source code or that would otherwise breach the terms of an open source agreement, such use could inadvertently occur, in part because open source license terms are often ambiguous. Any requirement to disclose our proprietary source code or pay damages for breach of contract could be harmful to our business, results of operations or financial condition, and could help our competitors develop services that are similar to or better than ours.
Our business is exposed to risks associated with processing credit card transactions.
Because we facilitate the processing of customer credit cards in many of our transactions, including a majority of our priceline.com, agoda.com and Rentalcars.com transactions, our results have been negatively impacted by customer purchases made using fraudulent credit cards. We may be held liable for accepting fraudulent credit cardsAnnual Report on our websites as well as other payment disputes with our customers. Additionally, we may be held liable for accepting fraudulent credit cards in certain transactions when we do not facilitate the processing of customer credit cards. Accordingly, we calculate and record an allowanceForm 10-K for the resulting customer chargebacks. If we are unable to combat the use of fraudulent credit cards on our websites, our business, results of operations and financial condition could be materially adversely affected.year ended December 31, 2022.
In addition, in the event that one of our major travel service providers voluntarily or involuntarily declares bankruptcy, we could experience an increase in chargebacks from customers with travel reservations with such travel service provider. For example, airlines that participate in our services and declare bankruptcy or cease operations may be unable or unwilling to honor tickets sold for their flights. Our policy in such event is to direct customers seeking a refund or exchange to the airline, and not to provide a remedy ourselves. Because we process sales of Express Deals® airline tickets on a merchant basis, we could experience a significant increase in demands for refunds or credit card chargebacks from customers, which could materially adversely affect our results of operations and financial condition. We have in the past experienced an increase in chargebacks from customers with tickets on airlines that ceased operations. We process credit card transactions and operate in numerous currencies. Credit card and other payment processing costs are typically higher for foreign currency transactions and in instances where cancellations occur.
"Cookie" laws could negatively impact the way we do business.
A "cookie" is a text file that is stored on a user's web browser by a website. Cookies are common tools used by thousands of websites, including ours, to, among other things, store or gather information (e.g., remember log-on details so a user does not have to re-enter them when revisiting a website), market to consumers and enhance the user experience on a website. Cookies are valuable tools for websites like ours to improve the customer experience and increase conversion on their websites. Many countries have adopted regulations governing the use of "cookies" by websites servicing consumers, especially in the European Union. To the extent any such regulations require "opt-in" consent before certain cookies can be placed on a user's web browser, our ability, in particular Booking.com's ability, to serve certain customers in the manner we currently do might be adversely affected and our ability to continue to improve and optimize performance on our websites might be impaired, either of which could negatively affect a consumer's experience using our services and our business, market share and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth information relating to repurchases of our equity securities during the three months ended SeptemberJune 30, 2017.2023.
ISSUER PURCHASES OF EQUITY SECURITIES
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| | | | | | | | | | | | | | | | |
Period | | (a) Total Number of Shares (or Units) Purchased | | (b) Average Price Paid per Share (or Unit) | | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | | |
July 1, 2017 – | | — |
| | $ | — |
| | — |
| | $ | 3,670,848,218 |
| | (1) (2) |
July 31, 2017 | | 970 |
| (3) | $ | 1,940.94 |
| | N/A |
| | N/A |
| | |
| | | | | | | | | | |
August 1, 2017 – | | 150,875 |
| (1) | $ | 1,822.59 |
| | 150,875 |
| | $ | 3,395,864,685 |
| | (1) (2) |
August 31, 2017 | | 2,420 |
| (3) | $ | 1,852.68 |
| | N/A |
| | N/A |
| | |
| | | | | | | | | | |
September 1, 2017 – | | 165,141 |
| (1) | $ | 1,846.82 |
| | 165,141 |
| | $ | 3,090,878,601 |
| | (1) (2) |
September 30, 2017 | | 82 |
| (3) | $ | 1,871.13 |
| | N/A |
| | N/A |
| | |
Total | | 319,488 |
| | $ | 1,835.72 |
| | 316,016 |
| | $ | 3,090,878,601 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased | | Average Price Paid per Share (or Unit) (1) | | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | | |
April 1, 2023 – | | 292,335 | | (2) | $ | 2,631 | | | 292,335 | | | $ | 21,118,657,214 | | | (2) (4) |
April 30, 2023 | | 23 | | (3) | $ | 2,653 | | | N/A | | N/A | | |
| | | | | | | | | | |
May 1, 2023 – | | 447,539 | | (2) (4) | $ | 2,641 | | | 447,539 | | | $ | 19,936,533,082 | | | (4) |
May 31, 2023 | | 1,162 | | (3) | $ | 2,656 | | | N/A | | N/A | | |
| | | | | | | | | | |
June 1, 2023 – | | 436,848 | | (4) | $ | 2,644 | | | 436,848 | | | $ | 18,781,555,424 | | | (4) |
June 30, 2023 | | 23 | | (3) | $ | 2,562 | | | N/A | | N/A | | |
Total | | 1,177,930 | | | | | 1,176,722 | | | $ | 18,781,555,424 | | | |
_____________________________
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(1) | Pursuant to a stock repurchase program announced on February 17, 2016, whereby the Company was(1) These amounts exclude the 1% excise tax mandated by the Inflation Reduction Act on share repurchases. (2) Pursuant to a stock repurchase program announced on May 9, 2019, whereby we were authorized to repurchase up to $15 billion of our common stock. (3) Pursuant to a general authorization, not publicly announced, whereby we are authorized to repurchase up to $3,000,000,000 of its common stock. |
| |
(2) | Pursuantto a stock repurchase program announced on February 27, 2017, whereby the Company was authorized to repurchase up to $2,000,000,000 of its common stock.
|
| |
(3) | Pursuant to a general authorization, not publicly announced, whereby the Company is authorized to repurchase shares of its common stock to satisfy employee withholding tax obligations related to stock-based compensation. |
Sales of Unregistered Securities
Between July 1, 2017 and September 30, 2017, we issued 3,281 shares of our common stock in connection withto satisfy employee withholding tax obligations related to stock-based compensation. The table above does not include adjustments during the conversionthree months ended June 30, 2023 to previously withheld share amounts (reduction of $6.1 million principal amount104 shares) that reflect changes to the estimates of employee tax withholding obligations.
(4) Pursuant to a stock repurchase program announced on February 23, 2023, whereby we were authorized to repurchase up to $20 billion of our 1.0% Convertible Senior Notes due 2018. The conversions were effected in accordance withcommon stock.
Item 5. Other Information
On May 19, 2023, Director Lynn Vojvodich Radakovich adopted a trading plan intended to satisfy the indenture, which provides thataffirmative defense of Rule 10b5-1(c) for the principal amountsale of converted notes be paid in cash and the conversion premium be paid in cash and/orup to 455 shares of the Company's common stock at our election. In each case, we chose to pay the conversion premium in shares of common stock (fractional shares are paid in cash). The issuances of the shares were not registered under the Securities Act of 1933, as amended (the "Act") pursuant to Section 3(a)(9) of the Act.
until May 25, 2024.
Item 6. Exhibits
The exhibits listed below are filed as part of this Quarterly Report on Form 10-Q.
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| | | | | | | |
Exhibit Number
| Description | |
| | |
| Restated Certificate of Incorporation. | |
| Certificate of Amendment of the Restated Certificate of Incorporation, dated as of June 4, 2021. | |
| Amended and Restated By-Laws dated July 23, 2015. |
| Indenture,of Booking Holdings Inc., dated as of August 8, 2017, between the Company and U.S. Bank National Association, as trustee.June 4, 2021. | |
| Form of 2.750%3.625% Senior Note due 2023.2028. | |
| Form of 3.550%4.125% Senior Note due 2028.2033. | |
| Officers' Certificate, dated August 15, 2017,May 12, 2023, with respect to the 2.750%3.625% Senior Notes due 2023 issued pursuant to the Base Indenture.2028. | |
| Officers' Certificate, dated August 15, 2017,May 12, 2023, with respect to the 3.550%4.125% Senior Notes due 2028 issued pursuant to the Base Indenture.2033. | |
| StatementAgency Agreement, dated as of Ratio of Earnings to Fixed Charges.May 12, 2023, by and between Booking Holdings Inc., as issuer, Elavon Financial Services DAC, UK Branch, as paying agent, and U.S. Bank Trust Company, National Association, as transfer agent, registrar, and trustee. | |
| Credit Agreement, dated as of May 17, 2023, among the Company, the lenders from time to time party thereto, and JPMorgan Chase Bank, N.A. as Administrative Agent. | |
| Employment Agreement, dated December 4, 2019, by and between Booking.com and Paulo Pisano. | |
| Description of Termination Pay Policy, effective as of April 5, 2023. | |
| Certification of Glenn D. Fogel, the Chief Executive Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification of Daniel J. Finnegan,David I. Goulden, the Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification of Glenn D. Fogel, the Chief Executive Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| Certification of Daniel J. Finnegan,David I. Goulden, the Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101101.INS | The following materialsXBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
104 | Cover Page Interactive Data File - the cover page from the Company'sthis Quarterly Report on Form 10-Q for the three monthsquarter ended SeptemberJune 30, 2017 are furnished herewith,2023, formatted in Inline XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements.(included in Exhibit 101). | |
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(a) | Previously filed as an exhibit to our Current Report on Form 8-K filed on July 18, 2014 and incorporated herein by reference. |
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(b) | Previously filed as an exhibit to our Current Report on Form 8-K filed on July 28, 2015 and incorporated herein by reference. |
| |
(c) | Previously filed as an exhibit to our Registration Statement on Form S-3 filed on August 8, 2017 (File No. 333-219800) and incorporated herein by reference. |
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(d) | Previously filed as an exhibit to our Current Report on Form 8-K filed on August 15, 2017 and incorporated herein by reference. |
* Schedules or similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules or similar attachments upon request by the Securities and Exchange Commission.
+ Indicates a management contract or compensatory plan or arrangement.
(a) Previously filed as an exhibit to the Current Report on Form 8-K filed on February 21, 2018 and incorporated herein by reference.
(b) Previously filed as an exhibit to the Current Report on Form 8-K filed on June 4, 2021 and incorporated herein by reference.
(c) Previously filed as an exhibit to the Current Report on Form 8-K filed on May 12, 2023 and incorporated herein by reference.
(d) Previously filed as an exhibit to the Current Report on Form 8-K filed on May 19, 2023 and incorporated herein by reference.
(e) Previously filed as an exhibit to the Current Report on Form 8-K filed on April 11, 2023 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | | | | | | | |
| | | THE PRICELINE GROUPBOOKING HOLDINGS INC. |
| | | (Registrant) |
| | | |
| | | |
Date: | November 6, 2017August 3, 2023 | By: | /s/ Daniel J. FinneganDavid I. Goulden |
| | | Name: Daniel J. Finnegan David I. Goulden Title: Executive Vice President and Chief Financial Officer |
| | | (On behalf of the Registrant and as principal financial officer) |
Exhibit Index
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| |
Exhibit
Number | Description |
| |
| Restated Certificate of Incorporation. |
| Amended and Restated By-Laws, dated July 23, 2015. |
| Indenture, dated as of August 8, 2017, between the Company and U.S. Bank National Association, as trustee. |
| Form of 2.750% Senior Note due 2023. |
| Form of 3.550% Senior Note due 2028. |
| Officers' Certificate, dated August 15, 2017, with respect to the 2.750% Senior Notes due 2023 issued pursuant to the Base Indenture. |
| Officers' Certificate, dated August 15, 2017, with respect to the 3.550% Senior Notes due 2028 issued pursuant to the Base Indenture. |
| Statement of Ratio of Earnings to Fixed Charges. |
| Certification of Glenn D. Fogel, the Chief Executive Officer and President, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Daniel J. Finnegan, the Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Glenn D. Fogel, the Chief Executive Officer and President, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification of Daniel J. Finnegan, the Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the three months ended September 30, 2017 are furnished herewith, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements. |
| |
(a) | Previously filed as an exhibit to our Current Report on Form 8-K filed on July 18, 2014 and incorporated herein by reference. |
| |
(b) | Previously filed as an exhibit to our Current Report on Form 8-K filed on July 28, 2015 and incorporated herein by reference. |
| |
(c) | Previously filed as an exhibit to our Registration Statement on Form S-3 filed on August 8, 2017 (File No. 333-219800) and incorporated herein by reference. |
| |
(d) | Previously filed as an exhibit to our Current Report on Form 8-K filed on August 15, 2017 and incorporated herein by reference. |