Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Annual Report on Form 10-K, and the Section entitled "Special Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K. As discussed in more detail in the Section entitled "Special Note Regarding Forward-Looking Statements," this discussion contains forward-looking statements which involve risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause those differences include those discussed in "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

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 financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.

Overview

Our mission is to help people experience the world. We aim to achieve our mission to help people experience the world through global leadership in online travel and restaurant reservation and related services by:


•	providing consumers with the best choices and prices at any time, in any place, on any device;


•	making it easy for people to find, book and experience their travel desires; and


•	providing platforms, tools and insights to our business partners to help them be successful.

We operate six primary brands:


•	Booking.com - the world’s leading brand for booking online accommodation reservations, based on room nights booked.


•	priceline.com - a leading hotel, rental car, airline ticket and vacation package reservation service in the United States.


•	KAYAK - a leading meta-search service allowing consumers to easily search and compare travel itineraries and prices, including airline ticket, accommodation and rental car reservation information, from hundreds of travel websites at once.


•	agoda.com - a leading accommodation reservation service catering primarily to consumers in the Asia-Pacific region.


•	Rentalcars.com - a leading worldwide rental car reservation service.


•	OpenTable - a leading provider of restaurant reservation and information services to consumers and restaurant reservation management and customer acquisition services to restaurants.

We refer to our company and all of our subsidiaries and brands collectively as "Booking Holdings," the "Company," "we," "our" or "us."

Our business is driven primarily by international results, which consist of the results of Booking.com, agoda.com and Rentalcars.com (which began operating as part of Booking.com on January 1, 2018) and the international businesses of KAYAK and OpenTable. This classification is independent of where the consumer resides, where the consumer is physically located while using our services or the location of the travel service provider or restaurant. For example, a reservation made through Booking.com at a hotel in New York by a consumer in the United States is part of our international results. During the year ended December 31, 2017, our international business (the substantial majority of which is generated by Booking.com) represented approximately 89% of our consolidated gross profit. A significant majority of our gross profit is earned in connection with facilitating accommodation reservations. See Note 16 to the Consolidated Financial Statements for more geographic information.

We derive substantially all of our gross profit from the following sources:


•	Commissions earned from facilitating reservations of accommodations, rental cars and other travel services on an agency basis;


•	Transaction gross profit on a merchant basis and customer processing fees from our accommodation, rental car, airline ticket and vacation package reservation services;


•	Advertising revenues primarily earned by KAYAK from sending referrals to online travel companies ("OTCs") and travel service providers, as well as from advertising placements on KAYAK's websites and mobile apps;


•	Reservation revenues paid by restaurants for diners seated through OpenTable's online reservation services, subscription fees for restaurant reservation management services provided by OpenTable; and


•	Damage excess waiver fees, travel insurance fees and global distribution system ("GDS") reservation booking fees, in each case related to certain of our travel services.

Our priceline.com brand offers merchant Name Your Own Price® opaque travel services, which are recorded in revenue on a "gross" basis and have associated cost of revenue. All of our other services are generally recorded in revenue on a "net" basis and have no significant associated cost of revenue. Therefore, revenue increases and decreases are impacted by changes in the mix of our revenues between Name Your Own Price® travel services and other services. Gross profit reflects the commission or net margin earned for all of our services. Consequently, gross profit is an important measure to evaluate growth in our business because, in contrast to our revenues, it is not affected by the different methods of recording revenue and cost of revenue between our Name Your Own Price® travel reservation services and our other services. On January 1, 2018, we adopted a new revenue recognition accounting standard which will change the presentation of our Name Your Own Price® revenue to a net basis (see Note 2 to the Consolidated Financial Statements) for periods beginning after December 31, 2017, and, as a result, we will no longer report cost of revenues or gross profit.

Trends

Over the last several years we have experienced strong growth in our accommodation reservation services. We believe this growth is the result of, among other things, the broader shift of travel purchases from offline to online, the widespread adoption of mobile devices and the growth of travel overall, including in higher growth emerging markets such as Asia-Pacific and South America. We also believe this growth is the result of the continued innovation and execution by our teams around the world to add accommodations to our travel reservation services, increase and improve content, build distribution and improve the consumer experience on our websites and mobile apps, as well as consistently and effectively marketing our brands through performance and brand advertising efforts. These year-over-year growth rates have generally decelerated. Given the size of our accommodation reservation business, we expect that our year-over-year growth rates will generally continue to decelerate, though the rate of deceleration may fluctuate and there may be periods of acceleration from time to time.

Our international business represents the substantial majority of our financial results, and we expect our operating results and other financial metrics to continue to be largely driven by international performance. The size of the travel market outside of the United States is substantially greater than that within the United States, and recent international online travel growth rates have exceeded, and are expected to continue to exceed, the growth rates within the United States. Over the long term, we expect that international online travel growth rates will follow a similar trend to that experienced in the United States. In addition, the base of hotel properties in Europe and Asia is particularly fragmented compared to that in the United States, where the hotel market is dominated by large hotel chains. We believe online reservation systems like ours may be more appealing to small chains and independent hotels more commonly found outside of the United States. We believe these trends and factors have enabled us to become the leading online accommodation reservation service provider in the world as measured by room nights booked. We believe that the opportunity to continue to grow our business exists for the markets in which we operate.

Our growth has primarily been generated by our worldwide accommodation reservation service brand, Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large and growing number of instantly bookable properties through Booking.com. Booking.com included approximately 1,586,000 properties on its website as of December 31, 2017, consisting of approximately 396,000 hotels, motels and resorts and approximately 1,190,000 homes, apartments and other unique places to stay (updated property counts are available on the Booking.com website), compared to approximately 1,115,000 properties (including approximately 339,000 hotels, motels and resorts and approximately 776,000 homes, apartments and other unique places to stay) as of December 31, 2016. Booking.com has begun categorizing properties listed on its website as either (a) hotels, motels and resorts, which groups together more traditional accommodation types (including hostels, resorts, inns and motels), or (b) homes, apartments and other unique places to stay, also referred to as alternative accommodations, which encompasses all other types of accommodations, including homes, apartments, villas, igloos and beyond. Booking.com previously classified properties as hotels, vacation rentals or other. We believe the new categories are more consistent with those used by other industry participants and allow for a more direct comparison of traditional and unique property counts among companies.

We intend to continue to invest in adding accommodations available for reservation on our websites, such as hotels, motels, resorts, homes, apartments and other unique places to stay. 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 alternative accommodations are often either a single unit or a small collection of independent units, these properties generally represent more limited booking opportunities than hotels, motels and resorts, which generally have more units to rent per property. Further, alternative accommodations in general may be subject to increased seasonality due to local tourism seasons, weather or other factors or may not be available at peak times due to use by the property owners, and we may also experience lower profit margins with respect to these properties due to certain additional costs related to offering these accommodations on our websites. As we increase our alternative 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 alternative accommodation properties increases, the number of reservations per property will likely continue to decrease. We believe that continuing to expand the number and variety of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.

As part of our strategy to increase the number and variety of accommodations available on Booking.com, Booking.com is increasingly processing transactions on a merchant basis where it facilitates payments on behalf of customers. This allows Booking.com to process transactions for properties that do not accept credit cards and to increase its ability to offer flexible transaction terms to consumers, such as the form and timing of payment. We believe that adding these types of properties and service offerings will benefit our customers and our gross bookings, room night and earnings growth rates. However, this results in additional payment processing costs, chargebacks and other costs related to these transactions. As this business continues to grow, we may experience a significant increase in payment processing costs, chargebacks and other costs related to these transactions, which are recorded as sales and marketing expenses in our consolidated statements of operations and which negatively impact our operating margins.

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, political uncertainty, conditions or events, such as the United Kingdom's decision to leave the European Union ("Brexit") and concerns regarding certain E.U. members with sovereign debt default risks can 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 average daily rates ("ADRs") across many regions of the world, particularly in those countries that appear to be most affected by economic and political uncertainties, which we believe are due at least in part to these macro-economic conditions and concerns. For more detail, see Part II Item 1A Risk Factors - "Declines or disruptions in the travel industry could adversely affect our business and financial performance."

These and other macro-economic uncertainties, such as 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.

As noted earlier, our international business represents a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to 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. As a result of 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 year ended December 31, 2017 compared to the year ended December 31, 2016. For example, gross profit from our international operations grew 22.0% for the year ended December 31, 2017 compared to the year ended December 31, 2016, but, without the positive impact of changes in currency exchange rates, grew year-over-year on a constant-currency basis by approximately 21%. 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 against the impact of currency exchange rate fluctuations on the net assets of certain of our Euro functional currency subsidiaries. For more information, see Part I Item 1A Risk Factors - "We are exposed to fluctuations in currency exchange rates."

We generally enter into derivative instruments to minimize the impact of short-term currency fluctuations on the translation of our consolidated operating results into U.S. Dollars. However, such derivative instruments are short term in nature and not designed to hedge against currency fluctuations that could impact growth rates for our gross bookings, revenues or gross profit (see Note 5 to our Consolidated Financial Statements for additional information on our derivative contracts).

We compete globally with both online and traditional providers of 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 to compete with us at 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 business (Google Hotel Ads) that are growing rapidly, as well as its "Book on Google" reservation functionality and its Google Trips app. Our markets are also subject to rapidly changing conditions, including technological developments, consumer behavior changes, regulatory changes and travel service provider consolidation. We expect these trends to continue. For example, we have experienced a significant shift of both direct and indirect business to mobile platforms and our advertising partners are also seeing a rapid shift of traffic to mobile platforms. Advertising and distribution opportunities may be more limited on mobile devices given their smaller screen sizes. In addition, 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. For more detail regarding the competitive trends and risks we face, see Part I Item 1 Business - "Competition," Part I Item 1A Risk Factors - "Intense competition could reduce our market share and harm our financial performance." and "Consumer adoption and use of mobile devices creates new challenges and may enable device companies such as Apple to compete directly with us." and "We may not be able to keep up with rapid technological changes."

Although we believe that providing an extensive collection of properties, excellent customer service and an intuitive, easy to use website or mobile experience are important factors influencing a consumer's decision to make a reservation, for many consumers, particularly in certain markets, the price of the travel service is the primary factor determining whether a consumer will book a reservation. We have observed an increase in promotional pricing to closed user groups (such as loyalty program participants or consumers with registered accounts), including through mobile apps. In addition, many large hotel chains and OTCs have launched initiatives, such as increased discounting and incentives, to encourage consumers to book accommodations through their websites. Discounting and couponing coupled with a high degree of consumer shopping behavior is particularly common in Asian markets, while brand loyalty in such markets is less important. In some cases, our competitors are willing to make little or no profit on a transaction, or offer travel services at a loss, in order to gain market share.

In addition to providing retail travel reservation services, our priceline.com brand is a leading provider of discounted opaque travel reservation services in the United States through its Express Deals® and Name Your Own Price® offerings. These discounted services are referred to as "opaque" because certain elements of the reservation, including the name of the travel service provider, are not made known to the traveler until after the reservation is made. In general, we expect that over time our opaque services will continue to decrease in relative importance to our overall business due, we believe, to a variety of factors, including the growth rates of our retail businesses, competition, relative complexity, travel restrictions often required by the travel service provider, difficulty in offering certain of these services on mobile devices, increased discounts available to consumers through closed user groups or couponing, and limited availability of discounted travel reservations from travel service providers, particularly during periods of high consumer demand.

We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Both our performance and brand advertising expenses have increased significantly in recent years, a trend we expect to continue. For the years ended December 31, 2017, 2016 and 2015, our total performance advertising expense was approximately $4.1 billion, $3.5 billion and $2.7 billion, respectively, primarily related to the use of online search engines (primarily Google), meta-search and travel research services and affiliate marketing to generate traffic to our websites. We also invested approximately $392 million, $296 million and $274 million in brand advertising during 2017, 2016 and 2015, respectively, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook) and online display advertising. We intend to continue a strategy of promoting brand awareness through both online and offline advertising efforts, including by expanding brand campaigns into additional markets, and we expect our brand advertising expenses to increase significantly during 2018. We have observed increased brand advertising by OTCs, meta-search services and travel service providers, particularly in North America and Europe, which may make our brand advertising efforts more expensive and less effective.

Performance advertising efficiency, expressed as performance advertising expense as a percentage of gross profit, is impacted by a number of factors that are subject to variability and that are, in some cases, outside of our control, including ADRs, costs per click, cancellation rates, foreign exchange rates, our ability to convert paid traffic to booking customers and the extent to which consumers come directly to our websites or mobile apps for bookings. For example, competition for desired rankings in search results and/or a decline in ad clicks by consumers could increase our costs-per-click and reduce our

performance advertising efficiency. We have also experienced increasing cancellation rates, which we expect to continue and which negatively affects our advertising efficiency and results of operations. Changes by Google in how it presents travel search results, including by placing its own offerings at or near the top of search results, 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. 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. We have observed a long-term trend of decreasing performance advertising returns on investment ("ROIs"), 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. In addition, we may from time to time, as we did in the third and fourth quarters of 2017, pursue a strategy of improving our performance advertising ROIs, which could negatively impact growth and positively impact performance advertising efficiency. See Part I Item 1A Risk Factors - "We rely on performance and brand advertising channels to generate a significant amount of traffic to our websites and grow our business." and "Our business could be negatively affected by changes in internet search engine algorithms and dynamics or traffic-generating arrangements."

We estimate our effective tax rate for 2018 to be approximately 18-21%, which represents our best estimate of our tax expense including the impact of the U.S. Tax Cuts and Jobs Act (the "Tax Act"), estimated U.S. state income taxes and international withholding taxes on our international earnings, and an increase in the Innovation Box Tax rate in the Netherlands from 5% to 7%. The provisions of the Tax Act are broad and complex, and to date there has been little interpretation or clarification of the act from U.S. tax authorities. As a result, our estimate is based on our current understanding and could change as more information becomes available. See Part I Item 1A Risk Factors - "We may have exposure to additional tax liabilities." and "We may not be able to maintain our 'Innovation Box Tax' benefit."

The national competition authorities ("NCAs") of many governments have conducted or are conducting investigations into competitive practices within the online travel industry, and we may be involved or affected by such investigations and their results. Some countries have adopted or proposed legislation that could also affect business practices within the online travel industry. For example, France and Italy, among others, have adopted legislation making price parity agreements illegal and similar legislation is under consideration in other countries. For more information on these investigations and their potential effects on our business, see Note 14 to our Consolidated Financial Statements and Part I Item 1A Risk Factors - "As the size of our business grows, we may become increasingly subject to the scrutiny of anti-trust, competition and consumer protection regulators." In addition to the price parity investigations, from time to time NCAs, other governmental agencies, trade associations and private parties take legal actions, including commencing legal proceedings, that may affect our 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 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.

Seasonality

A meaningful amount of our gross bookings are generated early in the year, as customers plan and reserve their spring and summer vacations in Europe and North America. However, historically we generally have not recognized revenue from these bookings until the travel is completed (on "check-out"), which can be in a quarter other than when the reservation is booked. Beginning on January 1, 2018, we began recognizing revenue for financial reporting purposes in our 2018 financial statements when the travel begins (on "check-in"), which can also be in a quarter other than when the reservation is booked. In contrast, we expense the substantial majority of our advertising activities as the expense is incurred, which, in the case of performance advertising in particular, is typically in the quarter in which associated reservations are booked. As a result of this potential timing difference between when we record advertising expense and when we recognize associated revenue, we have historically experienced our highest levels of profitability in the second and third quarters of the year, which is when we experience the highest levels of accommodation check-outs for the year for our European and North American businesses. We expect this to continue under our new revenue recognition policy. The first quarter of the year is typically our lowest level of profitability and may experience additional volatility in earnings growth rates due to these and other seasonal timing factors. For our Asia-Pacific business, we experience the highest levels of accommodation bookings in the third and fourth quarters of the year, and the highest levels of accommodation check-outs in the fourth quarter. As the relative growth rates for these businesses fluctuate, the quarterly distribution of our operating results may vary.

In recent years, we experienced an expansion of the booking window (the average time between the making of a travel reservation and the travel), which impacts the relationship between our gross bookings (recognized at the time of booking) and our revenue and gross profit (recognized at the time of check-out or, after January 1, 2018, at the time of check-in). Recently,

we have seen a modest contraction of the booking window. Future changes in the booking window may cause additional differences between our gross bookings growth rates and revenue growth rates.

Upon adoption of the new revenue recognition accounting standard, for periods beginning after December 31, 2017, the timing of revenue recognition for travel reservation services will change. For example, revenue for accommodation reservation services, which is primarily recognized at check-out under the current accounting standard, will change to be recognized at check-in under the new revenue standard. We currently expect this timing change will not have a significant impact to our annual revenues and net income, although the effects on quarterly revenues and net income are expected to be more significant because a meaningful amount of travel typically starts in December each year and is completed in January of the following year. Under the new revenue standard, this revenue will be recognized in the fourth quarter each year rather than the first quarter of the following year. Therefore, we estimate that revenue will be more than 2% lower in first quarter of 2018, slightly less than 1% lower in second and third quarters of 2018 and 4% higher in fourth quarter of 2018 recognized at check-in, as it is under the new revenue standard, than it would have been if recognized at check-out, as it would have been under the current accounting standard.

In addition, the date on which certain holidays fall can have an impact on our quarterly results. For example, in 2017, our second quarter year-over-year growth rates in revenue, gross profit, operating income and operating margins were positively impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. Conversely, our first quarter 2017 year-over-year growth rates in revenue, gross profit, operating income and operating margins were adversely impacted by Easter falling in the second quarter instead of the first quarter, as it did in 2016. Similar to 2017, in 2018 Easter will fall in the second quarter instead of the first quarter. However, because Easter will be on April 1, 2018 and we expect that a meaningful amount of Easter travel will commence in the week leading up to Easter, which is during the first quarter 2018, we expect that Easter will have a negative effect on our second quarter 2018 year-over-year growth rates and a positive effect on our first quarter 2018 year-over-year growth rates due to the change in our revenue recognition policy from "check-out" to "check-in." The timing of other holidays such as Chinese New Year, Ramadan and Carnival can also impact our quarterly year-over-year growth rates.

The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable advertising expense. In addition, gross profit growth is typically less impacted by decelerating gross bookings growth in the near term due to the benefit of revenue related to reservations booked in previous quarters. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable advertising expense. In addition, gross profit growth is typically less impacted by accelerating gross bookings growth in the near term as a portion of the revenue recognized from such gross bookings will occur in future quarters.

Other Factors

We believe that our future success depends in large part on our ability to continue to profitably grow our brands worldwide, and, over time, to offer other travel and travel-related services. Factors beyond our control, such as oil prices, stock market volatility, 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, changes in economic conditions, regional hostilities, imposition of taxes or surcharges by regulatory authorities or travel-related accidents, can disrupt travel or otherwise result in declines in travel demand. Because these events or concerns, and the full impact of their effects, 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. See Part I Item 1A Risk Factors - "Declines or disruptions in the travel industry could adversely affect our business and financial performance."

We intend to continue to invest in marketing and promotion, technology and personnel within parameters consistent with attempts to improve long-term operating results, even if those expenditures create pressure on operating margins. We have experienced pressure on operating margins as we prioritize initiatives that drive growth. We also intend to broaden the scope of our business, and to that end, we explore strategic alternatives from time to time in the form of, among other things, acquisitions. As the overall size of our business has grown, the competitive pressure to innovate will encompass a wider range of services and technologies, including services and technologies that may be outside of our historical core business, and our ability to keep pace may slow. Potential competitors, such as emerging start-ups, may be able to innovate and focus on developing a particularly new product or service faster than we can or may foresee consumer need for new services or technologies before us. Some of our larger competitors or potential competitors have more resources or more established or diversified relationships with consumers than we do, and they could use these advantages in ways that could affect our

competitive position, including by making acquisitions, entering or investing in travel reservation businesses, investing in research and development, and competing aggressively for highly-skilled employees. Our goal is to grow gross profit and achieve healthy operating margins in an effort to maintain profitability. The uncertain and highly competitive environment in which we operate makes the prediction of future results of operations difficult, and accordingly, we may not be able to sustain gross profit growth and profitability.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Our significant accounting policies and estimates are more fully described in Note 2 to our Consolidated Financial Statements. Certain of our accounting estimates are particularly important to our financial position and results of operations and require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. We evaluate our estimates on an ongoing basis. Estimates are based on, among other things, historical experience, terms of existing contracts, our observance of trends in the travel industry and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies that involve significant estimates and judgments of management include the following:


•	Valuation of Goodwill, Long-Lived Assets and Intangibles. The application of the purchase method of accounting for business combinations requires the use of significant estimates and assumptions to determine the fair value of the assets acquired and liabilities assumed. Our estimates of the fair value are based upon assumptions that we believe are reasonable and, when we deem appropriate, include assistance from a third-party valuation firm. The purchase price consideration is allocated to the assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The excess of the purchase price consideration over the net of the amounts allocated to the assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date.

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Valuation of Goodwill, Long-Lived Assets and Intangibles. The application of the purchase method of accounting for business combinations requires the use of significant estimates and assumptions to determine the fair value of the assets acquired and liabilities assumed. Our estimates of the fair value are based upon assumptions that we believe are reasonable and, when we deem appropriate, include assistance from a third-party valuation firm. The purchase price consideration is allocated to the assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The excess of the purchase price consideration over the net of the amounts allocated to the assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination as of the acquisition date.

We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. A substantial portion of our intangibles and goodwill relates to the acquisitions of OpenTable in July 2014 and KAYAK in May 2013. As of September 30, 2017, we performed our annual quantitative goodwill impairment test. Other than OpenTable, the fair values of our reporting units substantially exceeded their respective carrying values.

OpenTable

We estimated OpenTable’s fair value using a combination of standard valuation techniques, including an income approach (discounted cash flows) and market approaches (EBITDA multiples of comparable publicly-traded companies and precedent transactions). At September 30, 2017, OpenTable's fair value was approximately 18% higher than its fair value at September 30, 2016, which reflects performance that exceeded forecast.

Despite this increase in fair value, OpenTable's fair value was approximately 6% lower than its carrying value at September 30, 2017, thus failing Step 1 of the goodwill impairment test. Therefore, we received assistance from a third-party valuation firm to develop a hypothetical purchase price allocation (Step 2). The results of Step 2 indicated there was no goodwill impairment at September 30, 2017 because the implied fair value of OpenTable's goodwill exceeded its carrying value by approximately 24%. We tested the recoverability of OpenTable’s other long-lived assets and concluded there was no impairment as of September 30, 2017. Since the annual impairment test as of September 30, 2017, there have been no events or changes in circumstances to indicate a potential impairment.

For the year ended December 31, 2016, we recognized a non-cash impairment charge for goodwill of $940.7 million, which was not tax deductible. If OpenTable does not achieve the results currently expected or if any of the assumptions underlying our estimate of the fair value of the OpenTable business prove to be incorrect, we may refine our forecast for the OpenTable business and recognize an additional goodwill impairment, which could have a material adverse effect on our results of operations. See Part I Item 1A Risk Factors - "The success of our acquisition of OpenTable is subject to numerous risks and uncertainties."


•	Income Taxes. We determine our tax expense based on our income and statutory tax rates applicable in the various jurisdictions in which we operate. Due to the complex nature of tax legislation and frequent changes with such associated legislation, significant judgment is required in computing our tax expense and determining our tax positions. On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act made significant changes to U.S. federal tax law, including a reduction in the U.S. federal statutory tax rate from 35% to 21%, effective January 1, 2018. The Tax Act imposes a one-time deemed repatriation tax on accumulated unremitted international earnings, to be paid over eight years.

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Income Taxes. We determine our tax expense based on our income and statutory tax rates applicable in the various jurisdictions in which we operate. Due to the complex nature of tax legislation and frequent changes with such associated legislation, significant judgment is required in computing our tax expense and determining our tax positions. On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act made significant changes to U.S. federal tax law, including a reduction in the U.S. federal statutory tax rate from 35% to 21%, effective January 1, 2018. The Tax Act imposes a one-time deemed repatriation tax on accumulated unremitted international earnings, to be paid over eight years.

The Tax Act also introduced in 2018 a tax on 50% of global intangible low-taxed income (“GILTI”), which is income determined to be in excess of a specified routine rate of return, and also introduced a base erosion and anti-abuse tax (“BEAT”) aimed at preventing the erosion of the U.S. tax base. We continue to review the GILTI and BEAT provisions of the Tax Act for applicability to us and expect further guidance from the U.S. Treasury Department, the U.S. Internal Revenue Service, U.S. state tax authorities and/or other authorities on the application of these provisions. We have not yet adopted an accounting policy as to whether we will treat taxes on GILTI as period costs or whether we will recognize deferred tax assets and liabilities when basis differences exist that are expected to affect the amount of GILTI inclusion upon reversal.

The provisions of Tax Act are broad and complex, and there are significant uncertainties about how it will be interpreted at both the U.S. federal and state levels, and limited guidance is available from tax authorities at this time. Further interpretation and implementation of the Tax Act may materially impact our provisional income tax expense and future income tax expense and obligations.

On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued by the Securities and Exchange Commission to address the application of U.S. GAAP in situations when the registrant does not have all the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, to the extent a registrant can reasonably estimate the effects of the Tax Act, a provisional tax amount can be recorded, but must be finalized prior to December 22, 2018. Further analysis is necessary to finalize our accumulated unremitted international earnings subject to the U.S. federal deemed repatriation tax. In addition, since we are still evaluating whether and to what extent we will utilize our net operating loss carryforwards against the transition tax liability, our U.S. deferred tax assets or liabilities may be impacted. Therefore, we consider our accounting related to the Tax Act for U.S. federal and state income taxes as well as international withholding taxes to be provisional. As we refine our estimates and continue to evaluate the Tax Act, we will adjust our provision for income taxes in the period when a change in estimate occurs (see Note 13 to our Consolidated Financial Statements).

We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of temporary differences and tax planning strategies and record valuation allowances as required.

We are subject to ongoing tax examinations and assessments in various jurisdictions. To date, we have been audited in several taxing jurisdictions with no significant impact on our financial condition, results of operations or cash flows. Although we believe that our tax filing positions are reasonable, the final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals. Accordingly, we may incur additional tax expense based upon our assessment of the more likely than not outcomes or we may adjust previously recorded tax expense to reflect examination results.


•	Stock-Based Compensation. We record stock-based compensation expense for equity-based awards over the recipient's service period based upon the grant date fair value of the award. A number of our equity awards have performance targets (a performance "contingency") which, if satisfied, can increase the number of shares issued to the recipients at the end of the performance period or, in certain instances, if not satisfied, reduce the number of shares issued to the recipients, sometimes to zero, at the end of the performance period. The performance periods for our performance based equity awards are typically three years. We record stock-based compensation expense for these performance-based awards based upon our estimate of the probable outcome at the end of the performance period (i.e., the estimated performance against the performance targets). We periodically adjust the cumulative stock-based compensation expense recorded when the probable outcome for these performance-based awards is updated based upon changes in actual and

•

Stock-Based Compensation. We record stock-based compensation expense for equity-based awards over the recipient's service period based upon the grant date fair value of the award. A number of our equity awards have performance targets (a performance "contingency") which, if satisfied, can increase the number of shares issued to the recipients at the end of the performance period or, in certain instances, if not satisfied, reduce the number of shares issued to the recipients, sometimes to zero, at the end of the performance period. The performance periods for our performance based equity awards are typically three years. We record stock-based compensation expense for these performance-based awards based upon our estimate of the probable outcome at the end of the performance period (i.e., the estimated performance against the performance targets). We periodically adjust the cumulative stock-based compensation expense recorded when the probable outcome for these performance-based awards is updated based upon changes in actual and

forecasted operating results. Stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015 includes charges amounting to $10.6 million, $20.7 million and $22.6 million, respectively, representing the impact of adjusting the estimated probable outcome of unvested performance share units. Our actual performance against the performance targets could differ materially from our estimates.

Recent Accounting Pronouncements - See Note 2 to the Consolidated Financial Statements for details, which is incorporated into this Item 7 by reference thereto.

Results of Operations

Year Ended December 31, 2017 compared to Year Ended December 31, 2016

Operating and Statistical Metrics

Our financial results are driven by certain operating metrics that encompass the booking and other business activity generated by our travel and travel-related services. Specifically, reservations of accommodation room nights, rental car days and airline tickets capture the volume of units booked 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 taxes 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 our 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 years ended December 31, 2017 and 2016 were as follows (numbers may not total due to rounding):



	Year Ended December 31,
	(in millions)
	2017		2016		Change
Agency	$	69,697	$	58,638	18.9	%
Merchant	11,529		9,449		22.0	%
Total	$	81,225	$	68,087	19.3	%

Gross bookings increased by 19.3% for the year ended December 31, 2017, compared to the year ended December 31, 2016 (growth on a constant-currency basis was approximately 19%), almost entirely due to growth of 20.9% in accommodation room night reservations. Accommodation ADRs on a constant-currency basis were relatively unchanged for the year ended December 31, 2017, compared to the year ended December 31, 2016. For the year ended December 31, 2017, compared to the year ended December 31, 2016, foreign exchange rate fluctuations slightly benefited gross bookings growth in U.S. Dollars. 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 18.9% for the year ended December 31, 2017, compared to the year ended December 31, 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 22.0% for the year ended December 31, 2017, compared to the year ended December 31, 2016. Approximately 91% of the increase was due to growth in gross bookings from our merchant accommodation reservation services for the year ended December 31, 2017, compared to the year ended December 31, 2016. Growth in our merchant gross bookings from rental car reservation services and airline ticket reservation services also contributed to this growth.

Accommodation room nights, rental car days and airline tickets reserved through our services for the years ended December 31, 2017 and 2016 were as follows:



	Year Ended December 31,
	(in millions)
	2017	2016	Change
Room Nights	673.1	556.6	20.9	%
Rental Car Days	73.0	66.6	9.6	%
Airline Tickets	6.9	7.3	(5.3	)%

Accommodation room night reservations increased by 20.9% for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to strong execution by 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 9.6% for the year ended December 31, 2017, compared to the year ended December 31, 2016, due to strong execution by our brand teams to 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.

Airline ticket reservations decreased by 5.3% for the year ended December 31, 2017, compared to the year ended December 31, 2016, due to a decline 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, partially offset by an increase in priceline.com's Express Deals® 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, as well as certain GDS reservation booking fees and certain travel insurance fees, and are reported at the net amounts received, without any associated cost of revenue. Substantially all of the revenue for Booking.com is agency revenue comprised of accommodation reservation commissions.

•

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, as well as certain GDS reservation booking fees and certain travel insurance fees, and are reported at the net amounts received, without any associated cost of revenue. Substantially all of the revenue for Booking.com is agency revenue comprised of accommodation reservation commissions.


•	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 priceline.com’s Express Deals® reservation services; (2) ancillary fees, including damage excess waiver fees and certain 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.

•

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 priceline.com’s Express Deals® reservation services; (2) ancillary fees, including damage excess waiver fees and certain 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.


•	Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (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.

•

Advertising and other revenues are derived primarily from (1) revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on KAYAK's websites and mobile apps; (2) revenues earned by OpenTable for (a) reservation fees (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.



	Year Ended December 31,
	(in thousands)
	2017		2016		Change
Agency Revenues	$	9,714,126	$	7,982,116	21.7	%
Merchant Revenues	2,133,017		2,048,005		4.2	%
Advertising and Other Revenues	833,939		712,885		17.0	%
Total Revenues	$	12,681,082	$	10,743,006	18.0	%

Agency Revenues

Agency revenues increased by 21.7% for the year ended December 31, 2017, compared to the year ended December 31, 2016, almost entirely due to the growth in agency accommodation room night reservations at Booking.com.

Merchant Revenues

Merchant revenues increased by 4.2% for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to increases in our merchant price-disclosed accommodation and rental car reservation services, mostly 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 the year ended December 31, 2017 consisted primarily of advertising revenues, restaurant reservation revenues and subscription revenues for restaurant reservation management services. Advertising and other revenues increased by 17.0% for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to the inclusion of the Momondo Group revenue amounting to approximately $72 million since its acquisition on July 24, 2017, other growth in our KAYAK business and increased diner reservation volumes at OpenTable.

Cost of Revenues



	Year Ended December 31,
	(in thousands)
	2017		2016		Change
Cost of Revenues	$	250,537	$	428,314	(41.5	)%

For the year ended December 31, 2017, cost of revenues consisted primarily of: (1) the cost paid to travel service providers for priceline.com's Name Your Own Price® and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by KAYAK and priceline.com to return travel itinerary information for consumer search queries. Cost of revenues decreased by 41.5% for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to a decrease in priceline.com's Name Your Own Price® reservation services. For the year ended December 31, 2017, cost of revenues benefited from a reversal of previously accrued travel transaction taxes of approximately $12 million (including estimated interest and penalties) recorded in December 2017 related to a favorable ruling in one of the travel transaction tax proceedings involving the Company.

Agency revenues have no cost of revenues.

Gross Profit



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Gross Profit	$	12,430,545		$	10,314,692		20.5	%
Gross Margin	98.0		%	96.0		%

Total gross profit increased by 20.5% for the year ended December 31, 2017, compared to the year ended December 31, 2016 (growth on a constant-currency basis was approximately 19%). 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 $72 million of gross profit. Total gross margin (gross profit as a percentage of total revenue) increased during the year ended December 31, 2017, compared to the year ended December 31, 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 year ended December 31, 2017 these revenues represented a smaller percentage of total revenues than in the year ended December 31, 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 15.3% for the year ended December 31, 2017, as compared to 15.1% for the year ended December 31, 2016. The increase is due in part to the timing of booking versus travel resulting from the impact of decelerating gross bookings growth in the year ended December 31, 2017, as well as the inclusion of the Momondo Group since its acquisition on July 24, 2017.

Our international operations accounted for approximately $11.1 billion of our gross profit for the year ended December 31, 2017, compared to $9.1 billion for the year ended December 31, 2016. Gross profit attributable to our international operations increased by 22.0% for the year ended December 31, 2017 compared to the year ended December 31, 2016 (growth on a constant-currency basis was approximately 21%). Gross profit attributable to our U.S. businesses increased by 9.9% for the year ended December 31, 2017, compared to the year ended December 31, 2016, due to growth in gross profit for all of our U.S. businesses.

Operating Expenses

Advertising



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Performance Advertising	$	4,141,771		$	3,479,287		19.0	%
% of Total Gross Profit	33.3		%	33.7		%
Brand Advertising	$	391,584		$	295,698		32.4	%
% of Total Gross Profit	3.2		%	2.9		%

We rely on performance advertising 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 year ended December 31, 2017, performance advertising expenses increased compared to the year ended December 31, 2016, to generate increased gross bookings and gross profit. We adjust our performance advertising spend based on our growth and profitability objectives and the expected performance of our performance advertising channels. Performance advertising expense as a percentage of gross profit for the year ended December 31, 2017 decreased compared to the year ended December 31, 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. In addition, during the third and fourth quarters of 2017, we pursued a strategy of improving our performance advertising ROIs, which positively impacted performance advertising efficiency. 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.

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 year ended December 31, 2017, brand advertising expenses increased by 32.4% compared to the year ended December 31, 2016, primarily due to increased brand advertising by Booking.com, KAYAK, which includes expenses related to the Momondo Group since its acquisition on July 24, 2017, and priceline.com. We increased our brand advertising expense in order to increase awareness of our brands and grow the number of customers that come directly to our websites.

Sales and Marketing



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Sales and Marketing	$	561,958		$	435,225		29.1	%
% of Total Gross Profit	4.5		%	4.2		%

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 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 year ended December 31, 2017, sales and marketing expenses, which are substantially variable in nature, increased compared to the year ended December 31, 2016 due primarily to increased transaction volumes, as well as higher promotional costs and higher bad debt expense related to accommodation commission receivables.

Personnel



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Personnel	$	1,659,581		$	1,350,032		22.9	%
% of Total Gross Profit	13.4		%	13.1		%

Personnel expenses consist of compensation to our personnel, including salaries, bonuses, stock-based compensation, payroll taxes, and employee health and other benefits. Personnel expenses increased during the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to increases in aggregate salaries of approximately $239 million for the year ended December 31, 2017 primarily related to headcount growth to support our business. Stock-based compensation expense was $260.9 million for the year ended December 31, 2017, compared to $249.6 million for the year ended December 31, 2016.

General and Administrative



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
General and Administrative	$	585,541		$	455,909		28.4	%
% of Total Gross Profit	4.7		%	4.4		%

General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) 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 during the year ended December 31, 2017, compared to the year ended December 31, 2016, due primarily to higher personnel-related, occupancy and office expenses associated with increased headcount to support the expansion of our international businesses, as well as a $27 million litigation-related expense, of which

$19.3 million was recorded in the fourth quarter of 2017, and higher fees for outside professionals, including professional fees related to our acquisition of the Momondo Group.

Information Technology



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Information Technology	$	189,344		$	142,393		33.0	%
% of Total Gross Profit	1.5		%	1.4		%

Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expenses increased during the year ended December 31, 2017, compared to the year ended December 31, 2016, due primarily to growth in our worldwide operations.

Depreciation and Amortization



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Depreciation and Amortization	$	362,774		$	309,135		17.4	%
% of Total Gross Profit	2.9		%	3.0		%

Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) 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 year ended December 31, 2017, compared to the year ended December 31, 2016, primarily as a result of increased depreciation expenses due to capital expenditures for additional data center capacity and office build-outs to support growth and geographic expansion, the inclusion of intangible amortization for the Momondo Group since its acquisition on July 24, 2017, and increased capitalized software development costs.

Impairment of Goodwill



	Year Ended December 31,
	(in thousands)
	2017		2016			Change
Impairment of Goodwill	$	—	$	940,700		N/A
% of Total Gross Profit	N/A		9.1		%

During the year ended December 31, 2016, we recognized a non-cash impairment charge for goodwill related to OpenTable, which is not tax deductible, of $940.7 million (see Note 9 to our Consolidated Financial Statements).

Other Income (Expense)



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Interest Income	$	157,194		$	94,946		65.6	%
Interest Expense	(253,976		)	(207,900		)	22.2	%
Foreign Currency Transactions and Other	(35,291		)	(16,913		)	108.7	%
Impairment of Cost-method Investments	(7,597		)	(63,208		)	(88.0	)%
Total	$	(139,670	)	$	(193,075	)	(27.7	)%

For the year ended December 31, 2017, interest income on cash and marketable securities increased compared to the year ended December 31, 2016, primarily due to an increase in the average invested balance and higher yields. Interest expense increased for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to interest expense attributable to our Senior Notes issued in May 2016, March 2017 and August 2017 (see Note 10 to our Consolidated Financial Statements).

Foreign currency transactions and other includes foreign currency gains or losses on derivative contracts, foreign currency transaction gains or losses, including costs related to foreign currency transactions, and net realized gains or losses on investments. 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 $2.8 million for the year ended December 31, 2017, compared to foreign currency gains of $3.4 million for the year ended December 31, 2016. Foreign currency transaction losses, including costs related to foreign currency transactions, resulted in foreign currency losses of $31.2 million and $19.6 million for the years ended December 31, 2017 and 2016, respectively.

See Note 4 to our Consolidated Financial Statements for additional information on impairments of cost-method investments.

Income Taxes



	Year Ended December 31,
	(in thousands)
	2017			2016			Change
Income Tax Expense	$	2,057,557		$	578,251		255.8	%
% of Total Earnings Before Income Taxes	46.8		%	21.3		%

Our 2017 effective tax rate differs from the 2017 U.S. federal statutory tax rate of 35%, principally due to a one-time transition tax of approximately $1.6 billion on mandatory deemed repatriation of accumulated unremitted international earnings pursuant to the Tax Act, which includes U.S. state income taxes and international withholding taxes (see Note 13 to our Consolidated Financial Statements), partially offset by (1) a net tax benefit of approximately $217 million related to the remeasurement of the Company’s U.S. deferred tax assets and liabilities due to the reduction of the U.S. federal statutory tax rate from 35% to 21% and (2) lower international tax rates. Our 2016 effective tax rate differs from the 2016 U.S. federal statutory tax rate of 35%, due to lower international tax rates, partially offset by the non-deductible impairment charge for goodwill of $940.7 million related to OpenTable recognized in 2016 (see Note 9 to our Consolidated Financial Statements) and the non-deductible impairment charge of approximately $60 million associated with a cost-method investment recognized in 2016 (see Note 4 to our Consolidated Financial Statements).

Our effective tax rate for the year ended December 31, 2017 is higher than our effective tax rate for the year ended December 31, 2016, due to the net tax expense resulting from the Tax Act, partially offset by an increased proportion of our income being taxed at lower international tax rates due to the growth of our international businesses and the non-deductible impairment charges recognized in 2016 referred to above that caused an increase in the 2016 effective tax rate.

A portion of Booking.com's earnings during the years ended December 31, 2017 and 2016 qualified for Innovation Box Tax treatment under Dutch tax law, which had a significant beneficial impact on the Company's effective tax rate for those periods. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit, whether due to a change in tax law or a determination by the Dutch government that Booking.com's activities are not "innovative" or for any other reason, would substantially increase our effective tax rate and adversely impact our results of operations. During December 2017, legislation was enacted in the Netherlands that increased the Innovation Box Tax rate from 5% to 7%, effective for tax years beginning on or after January 1, 2018. See Part I Item 1A Risk Factors - "We may not be able to maintain our 'Innovation Box Tax' benefit."

Results of Operations

Year Ended December 31, 2016 compared to Year Ended December 31, 2015

Operating and Statistical Metrics

Gross bookings resulting from reservations of accommodation room nights, rental car days and airline tickets made through our agency and merchant models for the years ended December 31, 2016 and 2015 were as follows (numbers may not total due to rounding):



	Year Ended December 31,
	(in millions)
	2016		2015		Change
Agency	$	58,638	$	47,969	22.2	%
Merchant	9,449		7,559		25.0	%
Total	$	68,087	$	55,528	22.6	%

Gross bookings increased by 22.6% for the year ended December 31, 2016, compared to the year ended December 31, 2015 (growth on a constant-currency basis was approximately 25%), principally due to growth of 28.7% in accommodation room night reservations and growth of 11.2% in rental car day reservations, partially offset by the impact of foreign exchange rate fluctuations, a slight decrease in accommodation ADRs (the decline on a constant-currency basis was less than 1%) and decreases in airfares and airline ticket reservations. 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 22.2% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to 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 25.0% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to growth in gross bookings from the merchant accommodation reservation services for Booking.com and agoda.com, the merchant rental car reservation service for Rentalcars.com and the merchant airline ticket reservation service for priceline.com.

Accommodation room nights, rental car days and airline tickets reserved through our services for the years ended December 31, 2016 and 2015 were as follows:



	Year Ended December 31,
	(in millions)
	2016	2015	Change
Room Nights	556.6	432.3	28.7	%
Rental Car Days	66.6	59.9	11.2	%
Airline Tickets	7.3	7.7	(5.2	)%

Accommodation room night reservations increased by 28.7% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to strong execution by our brand teams to add accommodations to our websites, advertise our brands to consumers and provide a continuously improving experience for customers on our desktop and mobile platforms.

Rental car day reservations increased by 11.2% for the year ended December 31, 2016, compared to the year ended December 31, 2015, due to an increase in rental car day reservations for Rentalcars.com.

Airline ticket reservations decreased by 5.2% for the year ended December 31, 2016, compared to the year ended December 31, 2015, due to a decline 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, partially offset by an increase in priceline.com's Express Deals® airline ticket reservations.

Revenues



	Year Ended December 31,
	(in thousands)
	2016		2015		Change
Agency Revenues	$	7,982,116	$	6,527,898	22.3	%
Merchant Revenues	2,048,005		2,082,973		(1.7	)%
Advertising and Other Revenues	712,885		613,116		16.3	%
Total Revenues	$	10,743,006	$	9,223,987	16.5	%

Agency Revenues

Agency revenues increased by 22.3% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily as a result of growth in agency accommodation room night reservations at Booking.com.

Merchant Revenues

Merchant revenues decreased by 1.7% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to decreases in revenues from priceline.com's Name Your Own Price® reservation services, partially offset by increases in our merchant price-disclosed accommodation reservation services, particularly at Booking.com, as well as our merchant price-disclosed rental car and airline ticket 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" 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 the year ended December 31, 2016 consisted primarily of advertising revenues, restaurant reservation revenues and subscription revenues for restaurant reservation management services. Advertising and other revenues increased by 16.3% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to growth in our KAYAK business, reservation fees at OpenTable, advertising revenue at priceline.com and subscription revenue at OpenTable.

Cost of Revenues



	Year Ended December 31,
	(in thousands)
	2016		2015		Change
Cost of Revenues	$	428,314	$	632,180	(32.2	)%

For the year ended December 31, 2016, cost of revenues consisted primarily of: (1) the cost paid to travel service providers for priceline.com's Name Your Own Price® and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by KAYAK and priceline.com to return travel itinerary information for consumer search queries. Cost of revenues decreased by 32.2% for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to a decrease in priceline.com's Name Your Own Price® reservation services. Cost of revenues for the year ended December 31, 2016 was positively impacted by a reduction of travel transaction taxes of $5.1 million recorded in the third quarter of 2016 related to a cash refund from the State of Hawaii based on a favorable ruling in the first quarter of 2015. Cost of revenues for the year ended December 31, 2015 was positively impacted by a reversal of previously accrued travel transaction taxes of $16.4 million (including estimated interest and penalties) recorded in the first quarter of 2015 and a reduction of travel transaction taxes of $13.7 million (including estimated interest and penalties) recorded

in the third quarter of 2015, principally related to a cash refund from the State of Hawaii, in both cases based on the aforementioned favorable ruling.

Agency revenues have no cost of revenues.

Gross Profit



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Gross Profit	$	10,314,692		$	8,591,807		20.1	%
Gross Margin	96.0		%	93.1		%

Total gross profit increased by 20.1% for the year ended December 31, 2016, compared to the year ended December 31, 2015 (growth on a constant-currency basis was approximately 23%), primarily as a result of the increased revenue discussed above. Total gross margin (gross profit as a percentage of total revenue) increased during the year ended December 31, 2016, compared to the year ended December 31, 2015, because our revenues are disproportionately affected by priceline.com's Name Your Own Price® reservation services. Name Your Own Price® revenues are recorded "gross" with a corresponding travel service provider cost recorded in cost of revenues, and in the year ended December 31, 2016 these revenues represented a smaller percentage of total revenues than in the year ended December 31, 2015. 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 for the year ended December 31, 2016 was positively impacted by a reduction of travel transaction taxes of $5.1 million recorded in the third quarter of 2016 related to a cash refund from the State of Hawaii based on a favorable ruling in the first quarter of 2015. Gross profit for the year ended December 31, 2015 was positively impacted by a reversal of previously accrued travel transaction taxes of $16.4 million (including estimated interest and penalties) recorded in the first quarter of 2015 and a reduction of travel transaction taxes of $13.7 million (including estimated interest and penalties) recorded in the third quarter of 2015, principally related to a cash refund from the State of Hawaii, in both cases based on the aforementioned favorable ruling.

Gross profit as a percentage of gross bookings was 15.1% for the year ended December 31, 2016, as compared to 15.5% for the year ended December 31, 2015. The decrease is due in part to the timing of booking versus travel resulting from the impact of accelerating gross bookings growth in the year ended December 31, 2016 and an expanding booking window (a lengthening of the average time between the making of a travel reservation and the travel). Other contributing factors to the variance are business mix impacts and the use of discounted closed user group rates.

Our international operations accounted for approximately $9.1 billion of our gross profit for the year ended December 31, 2016, compared to $7.4 billion for the year ended December 31, 2015. Gross profit attributable to our international operations increased by 22.3% for the year ended December 31, 2016 compared to the year ended December 31, 2015 (growth on a constant-currency basis was approximately 25%). Gross profit attributable to our U.S. businesses increased by 5.7% for the year ended December 31, 2016, compared to the year ended December 31, 2015 due to growth in gross profit for the U.S. businesses of KAYAK and OpenTable, partially offset by a decrease in gross profit for priceline.com resulting from higher favorable travel transaction tax adjustments recorded in 2015 as compared to 2016.

Operating Expenses

Advertising



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Performance Advertising	$	3,479,287		$	2,738,218		27.1	%
% of Total Gross Profit	33.7		%	31.9		%
Brand Advertising	$	295,698		$	273,704		8.0	%
% of Total Gross Profit	2.9		%	3.2		%

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 year ended December 31, 2016, performance advertising expenses increased compared to the year ended December 31, 2015, primarily to generate increased gross bookings and gross profit. Performance advertising as a percentage of gross profit for the year ended December 31, 2016 increased compared to the year ended December 31, 2015 due to growth of paid traffic channels, a year-over-year decline in advertising ROIs and timing of booking versus travel resulting from acceleration in gross bookings growth during the year.

Brand advertising expenses are primarily related to our Booking.com, KAYAK, priceline.com and agoda.com businesses and consist mainly of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising. For the year ended December 31, 2016, brand advertising expenses increased compared to the year ended December 31, 2015, primarily due to increased online video and television advertising, including associated production costs, at Booking.com, partially offset by lower television advertising at KAYAK and priceline.com.

Sales and Marketing



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Sales and Marketing	$	435,225		$	353,221		23.2	%
% of Total Gross Profit	4.2		%	4.1		%

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) customer relations costs; (4) provisions for customer chargebacks associated with merchant transactions; (5) provisions for bad debt, primarily related to agency accommodation commission receivables; and (6) promotional and trade show costs. For the year ended December 31, 2016, sales and marketing expenses, which are substantially variable in nature, increased compared to the year ended December 31, 2015 due primarily to increased transaction volumes and a higher provision for customer chargebacks associated with merchant transactions.

Personnel



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Personnel	$	1,350,032		$	1,166,226		15.8	%
% of Total Gross Profit	13.1		%	13.6		%

Personnel expenses consist of compensation to our personnel, including salaries, stock-based compensation, bonuses, payroll taxes, and employee health and other benefits. Personnel expenses increased during the year ended December 31,

2016, compared to the year ended December 31, 2015, due primarily to increased headcount to support the growth of our businesses.

General and Administrative



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
General and Administrative	$	455,909		$	415,420		9.7	%
% of Total Gross Profit	4.4		%	4.8		%

General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) personnel-related expenses such as travel, recruiting and training expenses; and (3) fees for outside professionals, including litigation expenses. General and administrative expenses increased during the year ended December 31, 2016, compared to the year ended December 31, 2015, due primarily to higher occupancy and office expenses related to the expansion of our international businesses, higher fees for outside professionals and higher personnel-related expenses related to increased headcount in our businesses. These increases were partially offset by $7.7 million of expense recognized in 2015 for a fair value adjustment to the contingent liability related to an acquisition.

Information Technology



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Information Technology	$	142,393		$	113,617		25.3	%
% of Total Gross Profit	1.4		%	1.3		%

Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expenses increased during the year ended December 31, 2016, compared to the year ended December 31, 2015, due primarily to growth in our worldwide operations.

Depreciation and Amortization



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Depreciation and Amortization	$	309,135		$	272,494		13.4	%
% of Total Gross Profit	3.0		%	3.2		%

Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) depreciation on computer equipment; (3) depreciation of internally developed and purchased software; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses increased during the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily as a result of increased depreciation expenses due to capital expenditures for additional data center capacity and office build-outs to support growth and geographic expansion, as well as increased capitalized software development costs.

Impairment of Goodwill



	Year Ended December 31,
	(in thousands)
	2016			2015		Change
Impairment of Goodwill	$	940,700		$	—	N/A
% of Total Gross Profit	9.1		%	N/A

Other Income (Expense)



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Interest Income	$	94,946		$	55,729		70.4	%
Interest Expense	(207,900		)	(160,229		)	29.8	%
Foreign Currency Transactions and Other	(16,913		)	(26,087		)	(35.2	)%
Impairment of Cost-method Investments	(63,208		)	—			N/A
Total	$	(193,075	)	$	(130,587	)	47.9	%

For the year ended December 31, 2016, interest income on cash and marketable securities increased compared to the year ended December 31, 2015, primarily due to an increase in the average invested balance and higher yields. Interest expense increased for the year ended December 31, 2016, compared to the year ended December 31, 2015, primarily due to interest expense attributable to our Senior Notes issued in March 2015, November 2015 and May 2016, partially offset by the maturity of our 1.25% Convertible Senior Notes in March 2015. See Note 10 to our Consolidated Financial Statements.

"Foreign currency transactions and other" includes foreign currency gains or losses on derivative contracts, foreign currency transaction gains or losses, including costs related to foreign currency transactions, and net realized gains or losses on investments.

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 gains of $3.4 million for the year ended December 31, 2016, compared to foreign currency losses of $6.6 million for the year ended December 31, 2015.

Foreign currency transaction losses, including costs related to foreign currency transactions, resulted in foreign currency losses of $19.6 million and $21.0 million for the years ended December 31, 2016 and 2015, respectively. Foreign currency losses for the year ended December 31, 2015 included approximately $5.7 million of hedging cost and a foreign currency loss related to the devaluation of the Argentine Peso.

See Note 4 to our Consolidated Financial Statements for additional information on impairments of cost-method investments.

Income Taxes



	Year Ended December 31,
	(in thousands)
	2016			2015			Change
Income Tax Expense	$	578,251		$	576,960		0.2	%
% of Total Earnings Before Income Taxes	21.3		%	18.4		%

Our 2016 effective tax rate differs from the U.S. federal statutory tax rate of 35%, due to lower international tax rates, partially offset by the non-deductible impairment charge for goodwill of $940.7 million related to OpenTable recognized in 2016 (see Note 9 to our Consolidated Financial Statements) and the non-deductible impairment charge associated with a cost-

method investment recognized in 2016 (see Note 4 to our Consolidated Financial Statements). Our 2015 effective tax rate differed from the U.S. federal statutory rate as a result of lower international tax rates, partially offset by U.S. state income taxes.

The non-deductible impairment charges referred to above have caused our effective tax rate to be higher for the year ended December 31, 2016 compared to the year ended December 31, 2015. The increase has been partially offset by the favorable impact of an increased proportion of our income being taxed at lower international tax rates due to the growth of our international businesses and the tax benefits recorded in 2016 arising from U.S. state tax law changes resulting in a net decrease to deferred tax liabilities, mostly associated with acquired intangible assets.

Liquidity and Capital Resources

As of December 31, 2017, we had $17.8 billion in cash, cash equivalents, short-term investments and long-term investments. Approximately $16.2 billion is held by our international subsidiaries and is denominated primarily in U.S. Dollars, Euros and, to a lesser extent, British Pounds Sterling and other currencies. 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 5 to our Consolidated Financial Statements).

In the first quarter of 2018, 2017 and 2016, we prepaid a portion of our Dutch income tax liability of approximately $713 million, $500 million and $431 million, respectively, to earn prepayment discounts.

As a result of the Tax Act (see Note 13 to our Consolidated Financial Statements), we have recorded a provisional transition tax liability of approximately $1.3 billion, inclusive of U.S. federal and state income taxes and international withholding taxes for the year ended December 31, 2017, net of the benefit of utilizing approximately $204 million of U.S. federal net operating loss carryforwards and approximately $46 million of other U.S. tax credit carryforwards. This tax liability is presented in the Consolidated Balance Sheet at December 31, 2017 as "Long-term U.S. transition tax liability," the majority of which is U.S. federal income tax and will be paid over eight years.

In accordance with the Tax Act, generally future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes.

In October 2017, we invested $450 million in preferred shares of Meituan-Dianping. On July 24, 2017, we acquired the Momondo Group for $555.5 million.

In August 2017, we issued Senior Notes due March 15, 2023, with an interest rate of 2.75% (the "2023 Notes"), and Senior Notes due March 15, 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") for an aggregate principal amount of 1.0 billion Euros. Interest on the March 2022 Notes is payable annually on March 10, beginning March 10, 2018. The net proceeds of these notes may be used for general corporate purposes, which may include share repurchases, repayment of debt and acquisitions. See Note 10 to our Consolidated Financial Statements for further details on the 2023 Notes, 2028 Notes and March 2022 Notes.

In June 2015, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. Borrowings under the revolving credit facility will bear interest, at our option, at a rate per annum equal to either (i) the adjusted LIBOR for the interest period in effect for such borrowing plus an applicable margin ranging from 0.875% to 1.50%; or (ii) the greatest of (a) Bank of America, N.A.'s prime lending rate, (b) the federal funds rate plus 0.50%, and (c) an adjusted LIBOR for an interest period of one month plus 1.00%, plus an applicable margin ranging from 0.00% to 0.50%. Undrawn balances available under the revolving credit facility are subject to commitment fees at the applicable rate ranging from 0.085% to 0.20%. The revolving credit facility provides for the issuance of up to $70.0 million of letters of credit as well as borrowings of up to $50.0 million on same-day notice, referred to as swingline loans. Borrowings under the revolving credit facility may be made in U.S. Dollars, Euros, British Pounds Sterling and any other foreign currency agreed to by the lenders. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. As of December 31, 2017, there were no borrowings outstanding and approximately $3.8 million of letters of credit issued under the facility.

Our Convertible Senior Notes due March 15, 2018, with an interest rate of 1.0% (the "2018 Notes"), are currently convertible and will remain convertible until the trading day prior to the maturity date of March 15, 2018, regardless of the Company's stock price. We reported the carrying value of the 2018 Notes as a current liability in our Consolidated Balance Sheet as of December 31, 2017. We are required to repay the remaining aggregate principal amount of the 2018 Notes of approximately $714 million in cash, and, in addition, we have elected to deliver cash of approximately $700 million (based on our stock closing price of February 26, 2018) to satisfy the conversion value in excess of the remaining aggregate principal amount.

During the year ended December 31, 2017, we repurchased 1,025,890 shares of our common stock for an aggregate cost of $1.8 billion. As of December 31, 2017, we had a remaining aggregate amount of $2.4 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. During the period from January 1, 2018

through February 20, 2018, we repurchased 185,620 additional shares for an aggregate cost of $345.5 million. In the first quarter of 2018, our Board of Directors authorized an additional program to repurchase up to $8.0 billion of our common 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, with the remaining amount being paid periodically from the second quarter of 2018 until the expected completion of the building in early 2021. We will also make additional capital expenditures to fit out and furnish the office space. See Note 14 to our Consolidated Financial Statements.

Net cash provided by operating activities for the year ended December 31, 2017, was $4.7 billion, resulting from net income of $2.3 billion, a favorable impact of $742.9 million for non-cash items and net favorable changes in working capital of $293.4 million and in other assets and liabilities of $1.3 billion, which is principally related to the long-term transition tax liability recognized as a result of the U.S. Tax Act (see Note 13 to our Consolidated Financial Statements). The changes in working capital for the year ended December 31, 2017, were primarily related to a $687.4 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $269.7 million increase in accounts receivable and $124.3 million increase in prepaid expenses and other current assets. The increase in these working capital balances was primarily related to increases in business volumes. Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, and amortization of debt discount.

Net cash provided by operating activities for the year ended December 31, 2016, was $4.0 billion, resulting from net income of $2.1 billion, a favorable impact of $1.6 billion for non-cash items and net favorable changes in working capital and other assets and liabilities of $213.9 million. The changes in working capital for the year ended December 31, 2016, were primarily related to a $514.4 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $284.2 million increase in accounts receivable. The increase in these working capital balances was primarily related to 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, excess tax benefits on stock-based awards and other equity deductions, amortization of debt discount and deferred income taxes.

Net cash provided by operating activities for the year ended December 31, 2015, was $3.2 billion, resulting from net income of $2.6 billion and a favorable impact of $660.4 million for non-cash items, partially offset by net unfavorable changes in working capital and other assets and liabilities of $8.2 million. The changes in working capital for the year ended December 31, 2015, were primarily related to a $166.0 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $68.7 million increase in accounts receivable and $81.6 million increase in prepaid expenses and other current assets. The increase in these working capital balances was primarily related to increases in business volumes. Non-cash items were primarily associated with stock-based compensation expense, depreciation and amortization, excess tax benefits on stock-based awards and other equity deductions, amortization of debt discount and deferred income taxes.

Net cash used in investing activities was $4.2 billion for the year ended December 31, 2017, principally resulting from net purchases of investments of $2.9 billion and acquisitions and other investments, net of cash acquired, of $1.0 billion. Net cash used in investing activities was $3.3 billion for the year ended December 31, 2016, principally resulting from net purchases of investments of $3.1 billion and $48.5 million for the acquisition of land-use rights related to the construction of Booking.com's new headquarters in the Netherlands. Net cash used in investing activities was $3.9 billion for the year ended December 31, 2015, principally resulting from net purchases of investments of $3.6 billion, $140.3 million used for acquisitions, net of cash acquired, partially offset by net proceeds of $5.2 million for the settlement of foreign currency contracts. Cash invested in the purchase of property and equipment was $287.8 million, $219.9 million and $173.9 million in the years ended December 31, 2017, 2016 and 2015, respectively. The increases for the years ended December 31, 2017, 2016 and 2015 were related to additional data center capacity and new offices to support growth and geographic expansion, principally related to our Booking.com and agoda.com brands in 2017 and 2016 and principally related to our Booking.com brand in 2015.

Net cash used in financing activities was $78.7 million for the year ended December 31, 2017, which primarily consisted of payments for repurchase of common stock of $1.8 billion, payments related to the conversion of Senior Notes of $285.7 million and payment of debt of $15.1 million assumed in the acquisition of the Momondo Group, partially offset by net proceeds of $2.0 billion from the issuance of Senior Notes and the exercise of employee stock options of $5.1 million. Net cash used in financing activities was $1.3 million for the year ended December 31, 2016, which primarily consisted of payments for repurchase of common stock of $1.0 billion, offset by net proceeds of $994.7 million from the issuance of Senior Notes and the exercise of employee stock options of $15.6 million. Net cash used in financing activities was $831.3 million for the year ended December 31, 2015, which primarily consisted of payments for repurchase of common stock of $3.1 billion,

payments of $147.6 million related to the conversion of Senior Notes and payment of $10.7 million related to the settlement of the acquisition-date estimated contingent liability related to an acquisition, partially offset by the total proceeds of $2.4 billion from the issuance of Senior Notes and the exercise of employee stock options of $20.9 million.

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 are contesting the assessments. Our objection to the assessment was denied by the French tax authorities. If we are unable to resolve the matter with the French tax 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 owes the taxes. Alternatively, any resolution or settlement of the matter with the French tax 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 tax authorities have begun a similar audit of the tax years 2013 through 2015, which could result in additional assessments. See Part I Item IA Risk Factors - "We may have exposure to additional tax liabilities."

A number of U.S. jurisdictions have initiated lawsuits against online travel companies, including us, related to, among other things, the payment of travel transaction taxes (e.g., hotel occupancy taxes, excise taxes, sales taxes, etc.). In addition, a number of U.S. states, counties and municipalities have initiated audit proceedings, issued proposed tax assessments or started inquiries relating to the payment of travel transaction taxes. For additional information, see Note 14 to the Consolidated Financial Statements and Part I Item 1A Risk Factors - "Adverse application of U.S. state and local tax laws could have an adverse effect on our business and results of operations." in this Annual Report.

As a result of this litigation and other attempts by U.S. jurisdictions to levy similar taxes, we have established an accrual (including estimated interest and penalties) for the potential resolution of issues related to travel transaction taxes in the amount of approximately $12 million and $27 million as of December 31, 2017 and 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 cost 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 were to suffer adverse determinations in the near term in more of the pending proceedings than currently anticipated given results to date, because of our available cash we believe that it would not have a material impact on our liquidity.

The following table represents our material contractual obligations and commitments as of December 31, 2017:



	Payments due by Period (in thousands)
Contractual Obligations	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease obligations(1)	$	686,277	$	148,200	$	255,565	$	138,608	$	143,904
Land lease obligation(1)	71,194		1,499		2,998		2,998		63,699
Building construction obligation(1)	265,702		91,852		154,908		18,942		—
Senior Notes(2)	11,031,124		895,228		1,352,955		2,239,305		6,543,636
Revolving credit facility(3)	6,909		3,187		3,722		—		—
Earnout - acquisition	9,170		—		9,170		—		—
U.S. transition tax liability	1,257,191		6,345		306,016		203,758		741,072
Total(4)	$	13,327,567	$	1,146,311	$	2,085,334	$	2,603,611	$	7,492,311


(1)	See the section on "Operating Leases" and "Building Construction" section of Note 14 to our Consolidated Financial Statements for more details.


(2)	Represents the aggregate principal amount of our Senior Notes outstanding as of December 31, 2017 and cumulative interest to maturity of $1.3 billion. Convertible debt does not reflect the market value in excess of the outstanding

principal amount because we can settle the conversion premium amount in cash or shares of common stock at our option. See Note 10 to our Consolidated Financial Statements.


(3)	Represents fees on uncommitted funds and outstanding letters of credit as of December 31, 2017.

(4)

We reported "Other long-term liabilities" of $148 million in the Consolidated Balance Sheet at December 31, 2017, of which approximately $66 million related to deferred rents, approximately $28 million related to unrecognized tax benefits (see Note 13 to our Consolidated Financial Statements) and approximately $12 million related to our accrual for the potential resolution of issues related to travel transaction taxes (see Note 14 to our Consolidated Financial Statements). A variety of factors could affect the timing of payments for the liabilities related to travel transaction taxes and unrecognized tax benefits. We believe that these matters will likely not be resolved in the next twelve months and accordingly we have classified the estimated liability as non-current in the Consolidated Balance Sheet. Therefore, we have excluded long-term liabilities of $139 million from the contractual obligations table above because we cannot reasonably estimate the timing of such payments or the liability is related to deferred rents, which represents the difference in rent expense recognized in the income statements and rent payments related to operating leases.

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 during that period or thereafter, 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 plan, either of which could have a material adverse effect on our future financial condition or 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.

Off-Balance Sheet Arrangements.

As of December 31, 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.

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