trip-10q_20160331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                      

Commission file number: 001-35362

 

TRIPADVISOR, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

80-0743202

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 1st Avenue

Needham, MA 02494

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:

(781) 800-5000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

Class

 

Outstanding Shares at May 3, 2016

Common Stock, $0.001 par value per share

 

132,906,172 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended March 31, 2016

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Unaudited Condensed Financial Statements

 

  

 

Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015

  

3

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

  

4

Unaudited Condensed Consolidated Balance Sheets at March 31, 2016 and December 31, 2015

  

5

Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2016

  

6

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

  

7

Notes to Unaudited Condensed Consolidated Financial Statements

  

8

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

21

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

35

Item 4. Controls and Procedures

  

35

 

Part II—Other Information

  

 

 

Item 1. Legal Proceedings

  

36

Item 1A. Risk Factors

  

36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

  

49

Item 3. Defaults Upon Senior Securities

  

50

Item 4. Mine Safety Disclosures

  

50

Item 5. Other Information

  

50

Item 6. Exhibits

  

51

 

Signature

  

52

 

 

 

2


PART I – FINANCIAL INFORMATION

Item 1. Unaudited Condensed Financial Statements

 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

Revenue

 

$

352

 

 

$

363

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

16

 

 

 

13

 

Selling and marketing (2)

 

 

172

 

 

 

157

 

Technology and content (2)

 

 

61

 

 

 

49

 

General and administrative (2)

 

 

37

 

 

 

33

 

Depreciation

 

 

16

 

 

 

14

 

Amortization of intangible assets

 

 

8

 

 

 

7

 

Total costs and expenses:

 

 

310

 

 

 

273

 

Operating income

 

 

42

 

 

 

90

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

 

(4

)

 

 

(2

)

Interest income and other, net

 

 

-

 

 

 

(2

)

Total other expense, net

 

 

(4

)

 

 

(4

)

Income before income taxes

 

 

38

 

 

 

86

 

Provision for income taxes

 

 

(11

)

 

 

(23

)

Net income

 

$

27

 

 

$

63

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders (Note 11):

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

 

$

0.44

 

Diluted

 

$

0.18

 

 

$

0.43

 

Weighted average common shares outstanding (Note 11):

 

 

 

 

 

 

 

 

Basic

 

 

145

 

 

 

143

 

Diluted

 

 

147

 

 

 

146

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

Amortization of acquired technology included in amortization of intangible assets

 

$

2

 

 

$

2

 

Amortization of website development costs included in depreciation

 

 

11

 

 

 

9

 

 

 

$

13

 

 

$

11

 

 

 

 

 

 

 

 

 

 

(2) Includes stock-based compensation expense as follows:

 

 

 

 

 

 

 

 

Selling and marketing

 

$

4

 

 

$

4

 

Technology and content

 

$

9

 

 

$

6

 

General and administrative

 

$

6

 

 

$

6

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

3


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Net income

 

$

27

 

 

$

63

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (1)

 

 

9

 

 

 

(28

)

Total other comprehensive income (loss)

 

 

9

 

 

 

(28

)

Comprehensive income

 

$

36

 

 

$

35

 

 

 

(1)

Foreign currency translation adjustments exclude income taxes due to our practice and intention to indefinitely reinvest the earnings of our foreign subsidiaries in those operations.  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

 

4


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except number of shares and per share amounts)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

 

2016

 

 

 

2015

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents (Note 4)

 

$

653

 

 

$

614

 

Short-term marketable securities (Note 4)

 

 

39

 

 

 

47

 

Accounts receivable, net of allowance for doubtful accounts of $6 and $6, respectively

 

 

244

 

 

 

180

 

Prepaid expenses and other current assets

 

 

28

 

 

 

24

 

Total current assets

 

 

964

 

 

 

865

 

Long-term marketable securities (Note 4)

 

 

17

 

 

 

37

 

Property and equipment, net of accumulated depreciation of $104 and $88, respectively

 

 

252

 

 

 

247

 

Intangible assets, net of accumulated amortization of $61 and $52, respectively

 

 

172

 

 

 

176

 

Goodwill

 

 

737

 

 

 

732

 

Other long-term assets

 

 

72

 

 

 

71

 

TOTAL ASSETS

 

$

2,214

 

 

$

2,128

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15

 

 

$

10

 

Deferred merchant payables

 

 

179

 

 

 

105

 

Deferred revenue

 

 

93

 

 

 

64

 

Current portion of debt (Note 5)

 

 

1

 

 

 

1

 

Taxes payable

 

 

10

 

 

 

9

 

Accrued expenses and other current liabilities (Note 8)

 

 

134

 

 

 

123

 

Total current liabilities

 

 

432

 

 

 

312

 

Deferred income taxes, net

 

 

16

 

 

 

15

 

Other long-term liabilities

 

 

192

 

 

 

189

 

Long-term debt (Note 5)

 

 

110

 

 

 

200

 

Total Liabilities

 

 

750

 

 

 

716

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 100,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 0 and 0

 

 

 

 

 

 

 

 

Common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 1,600,000,000

 

 

 

 

 

 

 

 

Shares issued: 134,295,396 and 133,836,242, respectively

 

 

 

 

 

 

 

 

Shares outstanding: 132,878,188 and 132,443,111, respectively

 

 

 

 

 

 

 

 

Class B common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 400,000,000

 

 

 

 

 

 

 

 

Shares issued and outstanding: 12,799,999 and 12,799,999, respectively

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

758

 

 

 

741

 

Retained earnings

 

 

853

 

 

 

826

 

Accumulated other comprehensive income (loss)

 

 

(54

)

 

 

(63

)

Treasury stock-common stock, at cost, 1,417,208 and 1,393,131 shares, respectively

 

 

(93

)

 

 

(92

)

Total Stockholders’ Equity

 

 

1,464

 

 

 

1,412

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

2,214

 

 

$

2,128

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2016

(in millions, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

paid-in

 

 

Retained

 

 

comprehensive

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

capital

 

 

earnings

 

 

income (loss)

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2015

 

 

133,836,242

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

741

 

 

$

826

 

 

$

(63

)

 

 

(1,393,131

)

 

$

(92

)

 

$

1,412

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

 

 

 

 

 

 

 

 

 

 

9

 

Issuance of common stock related to exercises of options and vesting of RSUs

 

 

459,154

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,077

)

 

 

(1

)

 

 

(1

)

Tax benefits on equity awards, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Minimum withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2016

 

 

134,295,396

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

758

 

 

$

853

 

 

$

(54

)

 

 

(1,417,208

)

 

$

(93

)

 

$

1,464

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

TRIPADVISOR, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

27

 

 

$

63

 

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

 

 

 

 

 

 

 

 

Depreciation of property and equipment, including amortization of internal-use

   software and website development

 

 

16

 

 

 

14

 

Amortization of intangible assets

 

 

8

 

 

 

7

 

Stock-based compensation expense

 

 

19

 

 

 

16

 

Deferred tax expense

 

 

2

 

 

 

3

 

Excess tax benefits from stock-based compensation

 

 

(4

)

 

 

(7

)

Other, net

 

 

-

 

 

 

2

 

Changes in operating assets and liabilities, net of effects from acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

(65

)

 

 

(71

)

Accounts payable, accrued expenses and other liabilities

 

 

14

 

 

 

4

 

Deferred merchant payables

 

 

72

 

 

 

60

 

Income taxes, net

 

 

1

 

 

 

(13

)

Deferred revenue

 

 

30

 

 

 

21

 

Net cash provided by operating activities

 

 

120

 

 

 

99

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures, including internal-use software and website development

 

 

(17

)

 

 

(31

)

Acquisitions, net of cash acquired

 

 

-

 

 

 

(5

)

Purchases of marketable securities

 

 

(16

)

 

 

(32

)

Sales of marketable securities

 

 

33

 

 

 

25

 

Maturities of marketable securities

 

 

11

 

 

 

9

 

Net cash provided by (used in) investing activities

 

 

11

 

 

 

(34

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

(1

)

 

 

-

 

Proceeds from Chinese credit facilities

 

 

-

 

 

 

2

 

Principal payments on term loan

 

 

-

 

 

 

(10

)

Payments to revolving credit facility

 

 

(90

)

 

 

-

 

Proceeds from exercise of stock options

 

 

2

 

 

 

8

 

Payment of minimum withholding taxes on net share settlements of equity awards

 

 

(9

)

 

 

(13

)

Excess tax benefits from stock-based compensation

 

 

4

 

 

 

7

 

Other financing activities, net

 

 

-

 

 

 

3

 

Net cash used in financing activities

 

 

(94

)

 

 

(3

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2

 

 

 

(12

)

Net increase in cash and cash equivalents

 

 

39

 

 

 

50

 

Cash and cash equivalents at beginning of period

 

 

614

 

 

 

455

 

Cash and cash equivalents at end of period

 

$

653

 

 

$

505

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Capitalization of construction in-process related to build to suit lease obligation

 

$

-

 

 

$

4

 

Capital expenditures incurred but not yet paid primarily related to build to suit lease

 

$

-

 

 

$

8

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 


7


 

TRIPADVISOR, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: BUSINESS DESCRIPTION AND BASIS OF PRESENTATION

We refer to TripAdvisor, Inc. and our wholly-owned subsidiaries as “TripAdvisor,” “the Company,” “us,” “we” and “our” in these notes to the unaudited condensed consolidated financial statements.

Description of Business

TripAdvisor is an online travel company, empowering users to plan and book the perfect trip. TripAdvisor’s travel research platform aggregates reviews and opinions of members about destinations, accommodations, activities and attractions, and restaurants throughout the world so that our users have access to trusted advice wherever their trips take them. Our platform not only helps users plan their trips with our unique user-generated content, but also enables users to compare real-time pricing and availability so that they can book hotels, flights, cruises, vacation rentals, activities and attractions, and restaurant reservations.

Our flagship brand is TripAdvisor.  TripAdvisor-branded websites include tripadvisor.com in the United States and localized versions of the website in 47 markets worldwide. In addition to the flagship TripAdvisor brand, we manage and operate 23 other media brands, connected by the common goal of providing comprehensive travel planning resources across the travel sector, which include: www.airfarewatchdog.com, www.bookingbuddy.com, www.cruisecritic.com, www.everytrail.com, www.familyvacationcritic.com, www.flipkey.com, www.gateguru.com, www.holidaylettings.co.uk, www.holidaywatchdog.com, www.independenttraveler.com, www.jetsetter.com, www.thefork.com (including www.lafourchette.com, www.eltenedor.com, www.iens.nl, www.besttables.com, and www.dimmi.com.au), www.niumba.com, www.onetime.com, www.oyster.com, www.seatguru.com, www.smartertravel.com, www.tingo.com, www.travelpod.com, www.tripbod.com, www.vacationhomerentals.com, www.viator.com, and www.virtualtourist.com.

We have two reportable segments: Hotel and Non-Hotel. In the first quarter of 2016, we renamed our “Other” reportable segment “Non-Hotel.” This change had no effect on our consolidated financial statements or to previously reported segment information, as there was no change in the composition of our operating or reportable segments.  Our operating segments are determined based on how our chief operating decision maker manages our business, regularly assesses information and evaluates performance for operating decision-making purposes, including allocation of resources.  For further information on our reportable segments see “Note 10 — Segment Information,” in these notes to our unaudited condensed consolidated financial statements.  

We derive the substantial portion of our revenue from our Hotel segment, through the sale of advertising, primarily through click-based advertising and commission-based transactions via our instant booking feature and, to a lesser extent, display-based advertising, subscription-based hotel advertising, room reservations sold through our websites, and from content licensing. Our Non-Hotel segment consists of our Vacation Rentals, Restaurants and Attractions businesses. We derive revenue from our Non-Hotel segment from subscription and commission-based transaction offerings from our Vacation Rental business; destination activities primarily sold through Viator; and online restaurant reservations booked primarily through thefork.com.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements present our results of operations, financial position and cash flows on a consolidated basis. The accompanying unaudited condensed consolidated financial statements include TripAdvisor, our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. All inter-company accounts and transactions have been eliminated in consolidation.

One of our subsidiaries that operates in China has a variable interest in an affiliated entity in China in order to comply with Chinese laws and regulations, which restrict foreign investment in Internet content provision businesses. Although we do not own the capital stock of this Chinese affiliate, we consolidate its results as we are the primary beneficiary of the cash losses or profits of this variable interest affiliate and have the power to direct the activity of this affiliate. Our variable interest entity is not material for all periods presented.

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim period have been included. These adjustments consist of normal recurring items. We prepared the unaudited condensed consolidated financial statements following the requirements of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, we have condensed or omitted certain footnotes or other financial information that are normally required by GAAP for annual financial statements. Our interim unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the

8


 

full year. These interim unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015, previously filed with the SEC.  The condensed consolidated balance sheet as of December 31, 2015 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures including notes required by GAAP.

Accounting Estimates

We use estimates and assumptions in the preparation of our unaudited condensed consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our unaudited condensed consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our unaudited condensed consolidated financial statements include: (i) recognition and recoverability of goodwill, intangible and other long-lived assets; (ii) accounting for income taxes; and (iii) stock-based compensation.

Seasonality

The global travel market is large and traveler expenditures tend to follow a seasonal pattern. As such, expenditures by travel advertisers to market to potential travelers, and, therefore, our financial performance, tend to be seasonal as well. As a result, our third quarter tends to be our seasonal high, as it is a key period for travel research and trip-taking, and our seasonal low generally occurs in the first and/or fourth quarter. Significant shifts in our business mix or adverse economic conditions could influence the typical trend of our seasonality in the future.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements Not Yet Adopted

In March 2016, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on stock compensation which changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued new accounting guidance on leases that is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities on the balance sheet. The new guidance will continue to classify leases as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.  

In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective approach or a modified retrospective approach, which requires the initial cumulative effect to be recognized at the date of initial application.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 and early adoption is permitted for fiscal years beginning after December 15, 2016.  We have not yet selected a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

In September 2015, the FASB issued new accounting guidance which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have

9


 

been recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted this guidance in the first quarter of 2016. The adoption of this guidance did not have a material impact on our consolidated financial statements and related disclosures.

There have been no material changes to our significant accounting policies since December 31, 2015. For additional information about our critical accounting policies and estimates, refer to “Note 2— Significant Accounting Policies”, in the notes to our consolidated financial statements in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2015.

NOTE 3: STOCK BASED AWARDS AND OTHER EQUITY INSTRUMENTS

Stock-Based Compensation Expense

The following table presents the amount of stock-based compensation expense related to stock-based awards, primarily stock options and restricted stock units (“RSUs”), on our unaudited condensed consolidated statements of operations during the periods presented:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

 

(in millions)

 

Selling and marketing

 

$

4

 

 

$

4

 

Technology and content

 

 

9

 

 

 

6

 

General and administrative

 

 

6

 

 

 

6

 

Total stock-based compensation

 

 

19

 

 

 

16

 

Income tax benefit from stock-based compensation

 

 

(7

)

 

 

(6

)

Total stock-based compensation, net of tax effect

 

$

12

 

 

$

10

 

 

Stock-Based Award Activity and Valuation

2016 Stock Option Activity

During the three months ended March 31, 2016, we have issued 629,896 service-based non-qualified stock options under the Company’s 2011 Stock and Annual Incentive Plan, as amended (the “2011 Plan”). These stock options have a term of ten years from the date of grant and vest equitably over a four-year requisite service period.

A summary of the status and activity for stock option awards relating to our common stock for the three months ended March 31, 2016, is presented below:

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Exercise

 

 

Remaining

 

 

Aggregate

 

 

 

Options

 

 

Price Per

 

 

Contractual

 

 

Intrinsic

 

 

 

Outstanding

 

 

Share

 

 

Life

 

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

(in years)

 

 

(in millions)

 

Options outstanding at January 1, 2016

 

 

5,720

 

 

$

53.71

 

 

 

 

 

 

 

 

 

Granted

 

 

630

 

 

 

63.33

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(327

)

 

 

25.14

 

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

(74

)

 

 

60.62

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2016

 

 

5,949

 

 

$

56.22

 

 

 

5.9

 

 

$

93

 

Exercisable as of March 31, 2016

 

 

3,076

 

 

$

41.91

 

 

 

4.8

 

 

$

83

 

Vested and expected to vest after March 31, 2016

 

 

5,799

 

 

$

55.83

 

 

 

5.8

 

 

$

92

 

 

(1)

Inclusive of 118,491 options which were not converted into shares due to net share settlement in order to cover the aggregate exercise price and the minimum amount of required employee withholding taxes. Potential shares that had been convertible under stock options that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited condensed consolidated statements of cash flows.

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Aggregate intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on The NASDAQ Global Select Market as of March 31, 2016 was $66.50. The total intrinsic value of stock options exercised for the three months ended March 31, 2016 and 2015 was $12 million and $31 million, respectively.

The fair value of stock option grants under the 2011 Plan has been estimated at the date of grant using the Black–Scholes option pricing model with the following weighted average assumptions for the periods presented:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Risk free interest rate

 

 

1.28

%

 

 

1.51

%

Expected term (in years)

 

 

5.18

 

 

 

5.21

 

Expected volatility

 

 

41.64

%

 

 

41.86

%

Expected dividend yield

 

—  %

 

 

—  %

 

 

 

The weighted-average grant date fair value of options granted was $24.41 and $33.79 for the three months ended March 31, 2016 and 2015, respectively. The total fair value of stock options vested for the three months ended March 31, 2016 and 2015 was $23 million and $25 million, respectively.

2016 RSU Activity

During the three months ended March 31, 2016, we issued 1,503,603 RSUs under the 2011 Plan for which the fair value was measured based on the quoted price of our common stock on the date of grant. These RSUs generally vest over a four-year requisite service period.

The following table presents a summary of our RSU activity during the three months ended March 31, 2016:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Grant-

 

 

Aggregate

 

 

 

RSUs

 

 

Date Fair

 

 

Intrinsic

 

 

 

Outstanding

 

 

Value Per Share

 

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

(in millions)

 

Unvested RSUs outstanding as of January 1, 2016

 

 

1,750

 

 

$

79.02

 

 

 

 

 

Granted

 

 

1,504

 

 

 

63.73

 

 

 

 

 

Vested and released (1)

 

 

(365

)

 

 

71.37

 

 

 

 

 

Cancelled

 

 

(50

)

 

 

75.50

 

 

 

 

 

Unvested RSUs outstanding as of March 31, 2016

 

 

2,839

 

 

$

71.95

 

 

$

189

 

Expected to vest after March 31, 2016

 

 

2,415

 

 

$

72.21

 

 

$

161

 

 

(1)

Inclusive of 113,117 RSUs withheld to satisfy employee minimum tax withholding requirements due to net share settlement. Potential shares which had been convertible under RSUs that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited condensed consolidated statements of cash flows.

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized stock-based compensation expense, net of estimated forfeitures, and the weighted average remaining amortization period at March 31, 2016 related to our non-vested stock options and RSU awards is presented below (in millions, except per year information):

 

 

 

Stock

 

 

 

 

 

 

 

Options

 

 

RSUs

 

Unrecognized compensation expense (net of forfeitures)

 

$

61

 

 

$

157

 

Weighted average period remaining (in years)

 

 

2.7

 

 

 

3.2

 

 

11


 

NOTE 4: FINANCIAL INSTRUMENTS

Cash, Cash Equivalents and Marketable Securities

The following tables show our cash and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short and long-term marketable securities for the periods presented (in millions):

 

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

Short-Term

 

 

Long-Term

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cash

 

 

Marketable

 

 

Marketable

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Equivalents

 

 

Securities

 

 

Securities

 

Cash

 

$

623

 

 

$

-

 

 

$

-

 

 

$

623

 

 

$

623

 

 

$

-

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

29

 

 

 

-

 

 

 

-

 

 

 

29

 

 

 

29

 

 

 

-

 

 

 

-

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

 

10

 

 

 

-

 

 

 

-

 

 

 

10