10-Q 1 trip-10q_20140630.htm FORM 10-Q

 

 

 

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 June 30, 2014

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.)

141 Needham Street

Newton, MA 02464

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code:

(617) 670-6300

 

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 July 23, 2014

Common Stock, $0.001 par value per share

 

129,985,348 shares

Class B common stock, $0.001 par value per share

 

12,799,999 shares

 

 

 

 


 

TripAdvisor, Inc.

Form 10-Q

For the Quarter Ended June 30, 2014

Table of Contents

 

 

  

Page

Part I—Financial Information

 

  

 

Item 1. Unaudited Financial Statements

 

  

 

Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2014 and 2013

  

3

Unaudited Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013

  

4

Unaudited Consolidated Balance Sheets at June 30, 2014 and December 31, 2013

  

5

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014

  

6

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013

  

7

Notes to Unaudited Consolidated Financial Statements

  

8

 

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

  

22

Item 3. Quantitative and Qualitative Disclosures about Market Risk

  

33

Item 4. Controls and Procedures

  

34

 

Part II—Other Information

  

 

 

Item 1. Legal Proceedings

  

35

Item 1A. Risk Factors

  

35

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

  

35

Item 4. Mine Safety Disclosures

  

35

Item 5. Other Information

 

35

Item 6. Exhibits

  

36

 

Signature

  

37

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

 

TRIPADVISOR, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

 

 

 

Three months ended June 30,

 

 

Six months ended June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

 

$

323

 

 

$

247

 

 

$

604

 

 

$

477

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue (1)

 

 

9

 

 

 

4

 

 

 

17

 

 

 

8

 

Selling and marketing (2)

 

 

127

 

 

 

83

 

 

 

228

 

 

 

162

 

Technology and content (2)

 

 

41

 

 

 

32

 

 

 

79

 

 

 

61

 

General and administrative (2)

 

 

32

 

 

 

25

 

 

 

58

 

 

 

48

 

Depreciation

 

 

11

 

 

 

7

 

 

 

21

 

 

 

13

 

Amortization of intangible assets

 

 

3

 

 

 

2

 

 

 

5

 

 

 

3

 

Total costs and expenses:

 

 

223

 

 

 

153

 

 

 

408

 

 

 

295

 

Operating income

 

 

100

 

 

 

94

 

 

 

196

 

 

 

182

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2

)

 

 

(2

)

 

 

(4

)

 

 

(5

)

Interest income and other, net

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

(3

)

Total other expense, net

 

 

(2

)

 

 

(4

)

 

 

(4

)

 

 

(8

)

Income before income taxes

 

 

98

 

 

 

90

 

 

 

192

 

 

 

174

 

Provision for income taxes

 

 

(30

)

 

 

(23

)

 

 

(56

)

 

 

(45

)

Net income

 

$

68

 

 

$

67

 

 

$

136

 

 

$

129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to common stockholders (Note 14):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.47

 

 

$

0.95

 

 

$

0.90

 

Diluted

 

$

0.47

 

 

$

0.46

 

 

$

0.93

 

 

$

0.89

 

Weighted average common shares outstanding (Note 14):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

143

 

 

 

144

 

 

 

143

 

 

 

143

 

Diluted

 

 

146

 

 

 

146

 

 

 

146

 

 

 

145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Excludes amortization as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of website development costs included in depreciation

 

$

7

 

 

$

5

 

 

$

13

 

 

$

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2) Includes stock-based compensation as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and marketing

 

$

3

 

 

$

2

 

 

$

6

 

 

$

5

 

Technology and content

 

$

6

 

 

$

4

 

 

$

12

 

 

$

10

 

General and administrative

 

$

6

 

 

$

4

 

 

$

11

 

 

$

9

 

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

 

 

 

3


 

TRIPADVISOR, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in millions)

 

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Net income

 

$

68

 

 

$

67

 

 

$

136

 

 

$

129

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

(3

)

Available-for-sale investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Change in net unrealized loss

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

Total other comprehensive loss, net of tax

 

 

(1

)

 

 

(1

)

 

 

-

 

 

 

(4

)

Comprehensive income

 

$

67

 

 

$

66

 

 

$

136

 

 

$

125

 

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

 

 

 

4


 

TRIPADVISOR, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

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

 

 

 

June 30,

 

 

December 31,

 

 

 

 

2014

 

 

 

2013

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

587

 

 

$

351

 

Short-term marketable securities (Note 5)

 

 

51

 

 

 

131

 

Accounts receivable, net of allowance for doubtful accounts of $4 and $3 at June 30, 2014 and

     December 31, 2013, respectively

 

 

185

 

 

 

113

 

Prepaid expenses and other current assets

 

 

32

 

 

 

35

 

Total current assets

 

 

855

 

 

 

630

 

Long-term assets:

 

 

 

 

 

 

 

 

Long-term marketable securities (Note 5)

 

 

83

 

 

 

188

 

Property and equipment, net (Note 6)

 

 

141

 

 

 

82

 

Other long-term assets

 

 

32

 

 

 

19

 

Intangible assets, net (Note 7)

 

 

113

 

 

 

52

 

Goodwill (Note 7)

 

 

607

 

 

 

502

 

TOTAL ASSETS

 

$

1,831

 

 

$

1,473

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

27

 

 

$

10

 

Deferred merchant payables

 

 

109

 

 

 

30

 

Deferred revenue

 

 

61

 

 

 

44

 

Credit facility borrowings (Note 8)

 

 

33

 

 

 

28

 

Borrowings, current (Note 8)

 

 

40

 

 

 

40

 

Taxes payable

 

 

11

 

 

 

5

 

Accrued expenses and other current liabilities

 

 

105

 

 

 

86

 

Total current liabilities

 

 

386

 

 

 

243

 

Deferred income taxes, net

 

 

28

 

 

 

13

 

Other long-term liabilities (Note 10)

 

 

111

 

 

 

52

 

Borrowings, net of current portion (Note 8)

 

 

280

 

 

 

300

 

Total Liabilities

 

 

805

 

 

 

608

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Stockholders’ equity: (Note 12)

 

 

 

 

 

 

 

 

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: 132,091,353 and 131,537,798

 

 

 

 

 

 

 

 

Shares outstanding: 129,970,644 and 129,417,089

 

 

 

 

 

 

 

 

Class B common stock, $0.001 par value

 

 

-

 

 

 

-

 

Authorized shares: 400,000,000

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Additional paid-in capital

 

 

633

 

 

 

608

 

Retained earnings

 

 

538

 

 

 

402

 

Treasury stock-common stock, at cost, 2,120,709 and 2,120,709 shares

 

 

(145

)

 

 

(145

)

Total Stockholders’ Equity

 

 

1,026

 

 

 

865

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

1,831

 

 

$

1,473

 

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

 

5


 

TRIPADVISOR, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2014

(in millions, except number of shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class B

 

 

paid-in

 

 

Retained

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

common stock

 

 

capital

 

 

earnings

 

 

Treasury Stock

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Total

 

Balance as of December 31, 2013

 

 

131,537,798

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

608

 

 

$

402

 

 

 

(2,120,709

)

 

$

(145

)

 

$

865

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

136

 

 

 

 

 

 

 

 

 

 

 

136

 

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

 

 

553,555

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

Tax benefits on equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

Minimum withholding taxes on net share settlements of equity awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23

)

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of June 30, 2014

 

 

132,091,353

 

 

$

-

 

 

 

12,799,999

 

 

$

-

 

 

$

633

 

 

$

538

 

 

 

(2,120,709

)

 

$

(145

)

 

$

1,026

 

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

 

 

6


 

TRIPADVISOR, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

 

 

 

Six months ended June 30,

 

 

 

2014

 

 

2013

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

136

 

 

$

129

 

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

 

 

21

 

 

 

13

 

Stock-based compensation

 

 

29

 

 

 

24

 

Amortization of intangible assets

 

 

5

 

 

 

3

 

Amortization of discounts and premiums on marketable securities, net

 

 

2

 

 

 

3

 

Deferred tax benefit

 

 

(3

)

 

 

(4

)

Excess tax benefits from stock-based compensation

 

 

(14

)

 

 

(5

)

Other, net

 

 

1

 

 

 

3

 

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

 

 

 

 

 

 

 

 

Accounts receivable, prepaid expenses and other assets

 

 

(65

)

 

 

(74

)

Accounts payable, accrued expenses and other liabilities

 

 

35

 

 

 

(1

)

Deferred merchant payables

 

 

79

 

 

 

16

 

Income taxes, net

 

 

25

 

 

 

18

 

Deferred revenue

 

 

16

 

 

 

8

 

Net cash provided by operating activities

 

 

267

 

 

 

133

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Acquisitions, net of cash acquired

 

 

(152

)

 

 

(31

)

Capital expenditures, including internal-use software and website development

 

 

(42

)

 

 

(24

)

Purchases of marketable securities

 

 

(219

)

 

 

(346

)

Sales of marketable securities

 

 

324

 

 

 

68

 

Maturities of marketable securities

 

 

79

 

 

 

77

 

Net cash used in investing activities

 

 

(10

)

 

 

(256

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Repurchase of common stock

 

 

-

 

 

 

(34

)

Proceeds from credit facilities

 

 

8

 

 

 

7

 

Payments to credit facilities

 

 

(3

)

 

 

(15

)

Principal payments on long-term debt

 

 

(20

)

 

 

(20

)

Proceeds from exercise of stock options

 

 

2

 

 

 

20

 

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

 

 

(23

)

 

 

(6

)

Excess tax benefits from stock-based compensation

 

 

14

 

 

 

5

 

Payments on construction in-process related to build to suit lease obligation

 

 

(2

)

 

 

-

 

Net cash used in financing activities

 

 

(24

)

 

 

(43

)

Effect of exchange rate changes on cash and cash equivalents

 

 

3

 

 

 

(2

)

Net increase (decrease) in cash and cash equivalents

 

 

236

 

 

 

(168

)

Cash and cash equivalents at beginning of period

 

 

351

 

 

 

368

 

Cash and cash equivalents at end of period

 

$

587

 

 

$

200

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

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

 

$

28

 

 

$

-

 

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

 


7


 

TRIPADVISOR, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1: ORGANIZATION, 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 Consolidated Financial Statements.

Description of Business

TripAdvisor is an online travel company, empowering users to plan and have the perfect trip. TripAdvisor’s travel research platform aggregates reviews and opinions of members about destinations, accommodations, restaurants and activities throughout the world through our flagship TripAdvisor brand. TripAdvisor-branded websites include tripadvisor.com in the United States and localized versions of the website in 41 countries, including in China under the brand daodao.com. Beyond travel-related content, TripAdvisor websites also include links to the websites of our travel advertisers allowing travelers to directly book their travel arrangements. In addition to the flagship TripAdvisor brand, we manage and operate 23 other travel brands, connected by the common goal of providing comprehensive travel planning resources across the travel sector. We derive substantially all of our revenue from advertising, primarily through click-based advertising and display-based advertising sales. In addition, we earn revenue through a combination of subscription-based offerings from our Business Listings, subscription and free-to-list commission-based offerings from our Vacation Rental products, transaction revenue from making hotel room nights available for booking and online reservations made from restaurant customers on our transactional sites, and other revenue from, among other things, licensing our content to third-parties. We have one operating and reportable segment: TripAdvisor. The segment is determined based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance.

Basis of Presentation

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal recurring items. We prepared the unaudited 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 consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited 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, 2013, previously filed with the SEC.

Principles of Consolidation

These accompanying unaudited financial statements present our results of operations, financial position and cash flows on a consolidated basis. The accompanying unaudited 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. We have eliminated significant intercompany transactions and accounts.

Certain of our subsidiaries that operate in China have variable interests in affiliated entities 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 some of our Chinese affiliates, we consolidate their results as we are the primary beneficiary of the cash losses or profits of these variable interest affiliates and have the power to direct the activities of these affiliates. Our variable interest entities are not material for all periods presented.

Reclassifications

Pursuant to our disclosure in “Note 15— Related Party Transactions” 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, 2013, we no longer consider Expedia, Inc. ("Expedia”) a related party.    Certain reclassifications have been made to conform the prior period to the current presentation relating to Expedia transactions, which includes the reclassification of revenue from Expedia on our unaudited statements of operations to revenue and the reclassification of receivables from Expedia, net on our unaudited consolidated balance sheets to accounts receivable.   These reclassifications had no net effect on our unaudited consolidated financial statements.

 

8


 

All other reclassifications, made to conform the prior period to the current presentation, were not material and had no net effect on our unaudited consolidated financial statements.

Accounting Estimates

We use estimates and assumptions in the preparation of our unaudited 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 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 consolidated financial statements include recoverability of long-lived assets and investments, including intangible assets and goodwill; income taxes; purchase accounting for business combinations and stock-based compensation.

Seasonality

Expenditures by travel advertisers tend to be seasonal. Traditionally, our strongest quarter has been the third quarter, which is a key travel research period, with the weakest quarter being the fourth quarter. However, adverse economic conditions or continued growth of our international operations with differing holiday peaks may influence the typical trend of our seasonality in the future.

 

NOTE 2: SIGNIFICANT ACCOUNTING POLICIES

New Accounting Pronouncements Not Yet Adopted

Revenue From Contracts With Customers

 

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. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a retrospective or cumulative effect transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.  We have not yet selected a transition method and we are currently evaluating the effect that the updated standard will have on our unaudited consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists

In July 2013, the FASB issued new accounting guidance on the presentation of unrecognized tax benefits. The new guidance requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013, with early adoption permitted. Accordingly, we adopted these presentation requirements during the first quarter of 2014. The adoption of this new guidance did not have a material impact on our unaudited consolidated financial statements and related disclosures.

There have been no material changes to our significant accounting policies since December 31, 2013. 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, 2013.

NOTE 3: ACQUISITIONS

During the six months ended June 30, 2014, we completed three acquisitions for total cash consideration of $152 million, net of cash acquired and holdbacks for general representations and warranties. The total cash consideration is subject to adjustment based on the finalization of working capital adjustments. We acquired Vacation Home Rentals, a U.S.-based vacation rental website featuring

9


 

more than 14,000 properties around the world; London-based Tripbod, a travel community that helps connect travelers to local experts to deliver travelers relevant recommendations to help plan the perfect trip; and Lafourchette, a provider of an online and mobile reservations platform for restaurants in France, Spain and Switzerland.

The total purchase price of these acquisitions, all of which were accounted for as purchases of businesses under the acquisition method, have been allocated to tangible and identifiable intangible assets acquired and liabilities assumed, based on their respective fair values on the acquisition date. The purchase price allocation of our 2014 acquisitions are preliminary and subject to revision as more information becomes available, but in any case will not be revised beyond twelve months after the acquisition date and any change to the fair value of assets acquired or liabilities assumed acquired will lead to a corresponding change to the purchase price allocable to goodwill on a retroactive basis. The primary areas of the purchase price allocation that are not yet finalized are related to the fair values of intangibles assets, net assets, and income tax balances. Acquisition-related costs were expensed as incurred and were $1 million during the six months ended June 30, 2014. All acquisition-related expenses are included in general and administrative expenses on our unaudited consolidated statements of operations.

The following table presents the purchase price allocations initially recorded on our consolidated balance sheet on June 30, 2014 for all 2014 acquisitions (in millions):

 

Total

 

Net assets (1)

$

6

 

Goodwill (2)

 

105

 

Intangible assets (3)

 

66

 

Deferred tax liabilities, net

 

(17

)

       Total purchase price consideration (4)

$

160

 

 

(1)

Includes cash acquired of $6 million.

(2)

The goodwill represents the excess value over both tangible and intangible assets acquired. The goodwill in these transactions is primarily attributable to expected operational synergies, potential new and expanded business relationships and user bases, the assembled workforces, and the future development initiatives of the assembled workforces. Goodwill in the amount of $4 million is expected to be deductible for tax purposes.

(3)

Identifiable definite-lived intangible assets were comprised of developed technology of $6 million, trade names of $11 million, and subscriber and customer relationships of $49 million. The overall weighted-average life of the identifiable definite-lived intangible assets acquired in the purchase of the companies was 11.5 years, which will be amortized on a straight-line basis over their estimated useful lives.

(4)

Subject to adjustment based on final working capital adjustment calculations for Vacation Home Rentals and Lafourchette as of June 30, 2014.

 

10


 

NOTE 4: 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 RSUs, on our unaudited consolidated statements of operations during the periods presented:

 

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

(in millions)

 

 

(in millions)

 

Selling and marketing

 

$

3

 

 

$

2

 

 

$

6

 

 

$

5

 

Technology and content

 

 

6

 

 

 

4

 

 

 

12

 

 

 

10

 

General and administrative

 

 

6

 

 

 

4

 

 

 

11

 

 

 

9

 

Total stock-based compensation

 

 

15

 

 

 

10

 

 

 

29

 

 

 

24

 

Income tax benefit from stock-based compensation

 

 

(6

)

 

 

(4

)

 

 

(11

)

 

 

(9

)

Total stock-based compensation, net of tax effect

 

$

9

 

 

$

6

 

 

$

18

 

 

$

15

 

 

Stock-Based Award Activity and Valuation

2014 Stock Option Activity

During the six months ended June 30, 2014, we have issued 490,508 of service-based non-qualified stock options under the TripAdvisor, Inc. 2011 Stock and Incentive Plan, as amended (the “2011 Plan”). These stock options have a term of ten years from the date of grant and generally vest equitably over a four-year requisite service period. We will amortize the fair value of the 2014 grants, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.

A summary of the status and activity for stock option awards relating to our common stock for the six months ended June 30, 2014, 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, 2014

 

 

9,470

 

 

$

40.18

 

 

 

 

 

 

 

 

 

Granted

 

 

491

 

 

 

96.45

 

 

 

 

 

 

 

 

 

Exercised (1)

 

 

(834

)

 

 

33.46

 

 

 

 

 

 

 

 

 

Cancelled or expired

 

 

(217

)

 

 

44.99

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2014

 

 

8,910

 

 

$

43.79

 

 

 

5.5

 

 

$

578

 

Exercisable as of June 30, 2014

 

 

3,984

 

 

$

31.79

 

 

 

3.2

 

 

$

306

 

Vested and expected to vest after June 30, 2014

 

 

8,282

 

 

$

43.01

 

 

 

5.3

 

 

$

544

 

(1)

Inclusive of 432,283 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 consolidated statements of cash flows.

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 NASDAQ as of June 30, 2014 was $108.66. The total intrinsic value of stock options exercised for the six months ended June 30, 2014 and 2013 was $51 million and $27 million, respectively.

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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

 

 

Six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Risk free interest rate

 

 

1.98

%

 

 

1.07

%

 

 

1.97

%

 

 

1.07

%

Expected term (in years)

 

 

6.25

 

 

 

6.25

 

 

 

6.38

 

 

 

6.25

 

Expected volatility

 

 

47.32

%

 

 

51.82

%

 

 

48.07

%

 

 

51.73

%

Expected dividend yield

 

—  %

 

 

—  %

 

 

—  %

 

 

—  %

 

 

The weighted-average grant date fair value of options granted was $47.25 and $23.15 for the six months ended June 30, 2014 and 2013, respectively. The total fair value of stock options vested for the six months ended June 30, 2014 and 2013 was $24 million and $20 million, respectively.

2014 RSU Activity

During the six months ended June 30, 2014, we issued 512,884 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. We will amortize the fair value of the 2014 grants, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.

The following table presents a summary of RSU activity on our common stock during the six months ended June 30, 2014:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Grant-

 

 

Aggregate

 

 

 

RSUs

 

 

Date Fair

 

 

Intrinsic

 

 

 

Outstanding

 

 

Value Per Share

 

 

Value

 

 

 

(in thousands)

 

 

 

 

 

 

(in millions)

 

Unvested RSUs outstanding as of January 1, 2014

 

 

1,135

 

 

$

49.64

 

 

 

 

 

Granted

 

 

513

 

 

 

96.00

 

 

 

 

 

Vested and released (1)

 

 

(250

)

 

 

44.86

 

 

 

 

 

Cancelled

 

 

(80

)

 

 

64.27

 

 

 

 

 

Unvested RSUs outstanding as of June 30, 2014

 

 

1,318

 

 

$

67.69

 

 

$

143

 

(1)

Inclusive of 89,494 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 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 June 30, 2014 related to our non-vested stock options and RSU awards is presented below (in millions):

 

 

 

Stock

 

 

 

 

 

 

 

Options

 

 

RSUs

 

Unrecognized compensation expense (net of forfeitures)

 

$

91

 

 

$

55

 

Weighted average period remaining (in years)

 

 

3.0

 

 

 

3.2

 

 

12


 

NOTE 5: 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):

 

 

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and

 

 

Short-Term

 

 

Long-Term

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

Cash

 

 

Marketable

 

 

Marketable

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

Equivalents

 

 

Securities

 

 

Securities

 

Cash

 

$

399

 

 

$

-

 

 

$

-

 

 

$

399

 

 

$

399

 

 

$

-

 

 

$

-

 

Level 1:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

 

188

 

 

 

-

 

 

 

-

 

 

 

188

 

 

 

188

 

 

 

-

 

 

 

-

 

Level 2:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. agency securities

 

 

37

 

 

 

-

 

 

 

-

 

 

 

37

 

 

 

-

 

 

 

10

 

 

 

27

 

Certificates of deposit

 

 

10

 

 

 

-

 

 

 

-

 

 

 

10

 

 

 

-

 

 

 

7

 

 

 

3

 

Corporate debt securities

 

 

87

 

 

 

-

 

 

 

-

 

 

 

87

 

 

 

-

 

 

 

34

 

 

 

53

 

Subtotal

 

 

134