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.


•	KAYAK - a leading online 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.


•	priceline - a leading hotel, rental car, airline ticket and vacation package online reservation service in North America.


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


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


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

Our results include the Momondo Group, FareHarbor and HotelsCombined since they were acquired in July 2017, April 2018 and November 2018, respectively. 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 and Rentalcars.com 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, 2018, our international business (the substantial majority of which is generated by Booking.com) represented approximately 89% of our consolidated revenues. A significant majority of our revenues, including a significant majority of our international revenues, 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 revenues and, prior to January 1, 2018, gross profit from the following sources:


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


•	Travel reservation commissions and transaction net revenues, credit card processing rebates and customer processing fees, in each case in connection with our merchant transactions;


•	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 platforms;


•	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


•	Ancillary revenues including travel insurance-related revenues and global distribution system ("GDS") reservation booking fees, in each case related to certain of our travel services.

Our priceline brand offers merchant Name Your Own Price® opaque travel services, which were previously recorded in revenue on a "gross" basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue recognition accounting standard ("the current revenue standard"), Name Your Own Price® revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, we no longer present "Cost of revenues" or "Gross profit" in our Consolidated Statements of Operations. Total revenues for periods beginning after December 31, 2017 are comparable to gross profit reported in prior periods. For further information on the adoption of the current revenue standard, see Note 2 to the Consolidated Financial Statements.

Trends

Over the last several years we have experienced significant 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 increase the number and the variety of accommodations we offer our travelers, increase and improve content, build distribution and improve the consumer experience on our online platforms, as well as consistently and effectively marketing our brands through performance and brand marketing 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 slow, similarly to the trend 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 2,180,000 properties on its website at December 31, 2018, consisting of approximately 436,000 hotels, motels and resorts and approximately 1,744,000 homes, apartments and other unique places to stay, compared to approximately 1,586,000 properties (including approximately 396,000 hotels, motels and resorts and approximately 1,190,000 homes, apartments, and other unique places to stay) at December 31, 2017. Booking.com categorizes properties listed on its website as either (a) hotels, motels and resorts, which groups together more traditional accommodation types (including hostels and inns), or (b) homes, apartments and other unique places to stay, also referred to as alternative accommodations, which encompasses all other types of accommodations, including bed and breakfasts, villas, apart-hotels and beyond.

We intend to continue to invest in adding accommodations available for reservation on our platforms, such as hotels, motels, resorts, homes, apartments and other unique places to stay, however the growth rate of our accommodations may vary in part as a result of removing accommodations from our platforms from time to time. 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. We may also experience lower profit margins with respect to these properties due to certain additional costs, such as increased customer service costs, related to offering these accommodations on our platforms. 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 platforms, 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 provide more payment options to our customers and travel service providers, increase the number and variety of accommodations available on Booking.com and enable the growth of our in-destination activities businesses, Booking.com is increasingly processing transactions on a merchant basis, where it receives payments on behalf of customers. This allows Booking.com to process transactions for travel service providers and to increase its ability to offer secure and flexible transaction terms to consumers, such as the form and timing of payment. We believe that adding these types of service offerings will benefit our customers and partners, as well as our gross bookings, room night and earnings growth rates. However, this results in additional expenses for personnel, payment processing, customer chargebacks (including those related to fraud) and other expenses related to these transactions, which are recorded in "Personnel" and "Sales and other expenses" in our Statements of Operations, as well as associated incremental revenues in the form of credit card rebates, for example, which are recorded in "Merchant revenues." As this business continues to grow, we may experience a significant increase in these expenses that may not be fully offset by an increase in associated incremental revenues, which would negatively impact our operating margins.

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, constantly evolving and subject to rapid change, and current and new competitors can launch new services at relatively low cost. Some of our current and potential competitors, such as Google, Apple, Alibaba, Tencent, Amazon and Facebook, have significantly more customers or users, consumer data and financial and other resources than we do, and they may be able to leverage other aspects of their businesses (e.g., search or mobile device businesses) to enable them to compete more effectively with us. For example, Google has entered various aspects of the online travel market, including by establishing a flight meta-search product (Google Flights) and a hotel meta-search product (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 revenue 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, have lower ADRs 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 Google and Apple to compete directly with us." and "We may not be able to keep up with rapid technological or other market changes."

Although we believe that providing an extensive collection of properties, excellent customer service and an intuitive, easy-to-use consumer 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. As a result, it is increasingly important to offer travel services, such as accommodation reservations, at competitive prices, whether through discounts, coupons, closed-user group rates or loyalty programs, or otherwise. These initiatives may result in lower revenue as a percentage of gross bookings. Discounting and couponing coupled with a high degree of consumer shopping behavior is particularly common in Asian markets. 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.

We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Both our performance and brand marketing expenses have increased significantly in recent years, and we expect our performance and brand marketing expenses to continue to increase. For the years ended December 31, 2018, 2017 and 2016, our total performance marketing expense was approximately $4.4 billion, $4.2 billion and $3.5 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. Growth of some of these channels has slowed. We also invested $509 million, $435 million

and $327 million in brand marketing for the years ended December 31, 2018, 2017 and 2016, respectively, primarily related to costs associated with producing and airing television advertising, online video advertising (for example, on YouTube and Facebook), online display advertising and other brand marketing. We intend to continue a strategy of promoting brand awareness through both online and offline marketing efforts, including by expanding brand campaigns into additional markets, which may significantly increase our brand marketing expenses. We have observed increased brand marketing by OTCs, meta-search services and travel service providers, which may make our brand marketing efforts more expensive and less effective.

Performance marketing efficiency, expressed as performance marketing expense as a percentage of total revenues in 2018 or as a percentage of gross profit in 2017, 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 marketing efficiency. In recent years, we experienced significant increases in our cancellation rates, which negatively affected our marketing efficiency and results of operations. More recently our cancellation rates have decreased, which has benefited our marketing efficiency and results of operations. We believe that many factors influence cancellation rates, and it is uncertain whether future cancellation rates will continue to decrease, stabilize or continue their prior trend of generally increasing over time. Further, cancellation rates could vary period to period without following a discernible trend. 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 marketing 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 beginning the third quarter of 2017 and continuing through 2018, pursue a strategy of improving our performance marketing ROIs, which could negatively impact growth and positively impact performance marketing efficiency and profitability. When evaluating our performance marketing spend, we consider several factors for each channel, such as the customer experience on the advertising platform, the incrementality of the traffic we receive and the anticipated repeat rate from a particular platform, as well as other factors. The amount of business we obtain through each performance marketing channel is impacted by numerous factors, including bidding decisions by us and our competitors (including decisions to optimize performance marketing ROIs) and the marketing efforts and success of those channels to attract consumers and generate demand. See Part I Item 1A Risk Factors - "We rely on performance and brand marketing 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 and meta-search algorithms and dynamics or traffic-generating arrangements."

Perceived or actual adverse economic conditions, including slow, slowing or negative economic growth, high or rising unemployment rates, inflation and weakening currencies, and concerns over government responses such as higher taxes or tariffs 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"), including uncertainty or delays in the implementation of 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 I 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 and the financial condition of our international businesses are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. As a result, both the absolute amounts of and percentage changes in our foreign-

currency-denominated net assets, gross bookings, revenues, operating expenses and net income as expressed in U.S. Dollars are affected by currency exchange rate changes. Our foreign-currency-denominated gross bookings, revenues and operating expenses as expressed in U.S. Dollars are higher for the year ended December 31, 2018 than they would have been had foreign exchange rates remained where they were for the year ended December 31, 2017. For example, total revenues in 2018 compared to gross profit in 2017 from our international operations grew 17.4% for the year ended December 31, 2018 as compared to the year ended December 31, 2017, but, without the impact of changes in currency exchange rates, grew year-over-year on a constant-currency basis by approximately 17%. 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 hedge against the impact of currency exchange rate fluctuations on the net assets of certain of our Euro functional currency subsidiaries (see Note 5 to our Consolidated Financial Statements). 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 or revenues (see Note 5 to our Consolidated Financial Statements for additional information on our derivative contracts).

Many national 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 all price parity agreements illegal and similar legislation is under consideration in other countries. Also, a number of governments are investigating or conducting information-gathering exercises in respect of compliance by OTCs with consumer protection laws, including practices related to the display of search results and search ranking algorithms, claims regarding discounts, disclosure of charges and availability, and similar messaging. 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 and consumer protection investigations, from time to time national competition authorities, 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 a negative impact on our growth and results of operations, and is expected to continue to negatively impact our results of operations. In general, increased regulatory focus on online businesses, including online travel businesses like ours, could result in increased compliance costs or otherwise adversely affect our business.

Seasonality

A meaningful amount of our gross bookings is 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 (at "check-out") or for periods beginning after December 31, 2017 when the travel begins (at "check-in") as a result of the adoption of the current revenue standard (see Note 2 to our Consolidated Financial Statements), which, in either case, can be in a quarter other than when the reservation is booked. In contrast, we expense the substantial majority of our marketing activities as the expense is incurred, which, in the case of performance marketing 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 marketing expense and when we recognize associated revenue, we experience our highest levels of profitability in the third quarter of the year, which is when we experience the highest levels of accommodation check-ins for the year for our European and North American businesses. 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 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-ins in the fourth quarter. As the relative growth rates for our businesses fluctuate, the quarterly distribution of our operating results may vary.

For several 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 revenues (recognized at the time of check-out or, for periods beginning after December 31, 2017, at the time of check-in). However, in 2018, we saw a contraction of the booking window. Future changes in the length of the booking

window will affect the degree to which our gross bookings and revenues occur in the same period and, as a result, whether our gross bookings growth rates and revenue growth rates converge or diverge.

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 fell in the second quarter instead of the first quarter. However, because Easter was on April 1, 2018 and a meaningful amount of Easter travel commenced in the week leading up to Easter (i.e., during the first quarter), Easter had a positive effect on our first quarter 2018 year-over-year growth rates and had a negative effect on our second quarter 2018 year-over-year growth rates primarily due to the change in our revenue recognition policy from "check-out" to "check-in." In 2019, Easter will be on April 21, and the associated Easter-related travel will generally begin in the second quarter of 2019. As a result, the shift in timing of Easter, relative to 2018, will have a negative effect on our year-over-year growth rates in the first quarter of 2019 and a positive effect on our year-over-year growth rates in the second quarter of 2019. The timing of other holidays such as Ramadan can also impact our quarterly year-over-year growth rates.

The impact of seasonality can be exaggerated in the short term by the gross bookings growth rate of the business. For example, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit from relatively less variable marketing expense. In addition, revenue 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, but any such deceleration would negatively impact revenue growth in subsequent periods. Conversely, in periods where our gross bookings growth rate accelerates, our operating margins are typically negatively impacted by relatively more variable marketing expense. In addition, revenue growth is typically less impacted by accelerating gross bookings growth in the near term, but any such acceleration would positively impact revenue growth in subsequent periods 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, fires, 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, tarriffs or surcharges by regulatory authorities, changes in trade policies or trade disputes, changes in immigration policies or travel-related accidents, can disrupt travel, limit the ability or willingness of travelers to visit certain locations 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. For example, because consumers often utilize other online services more frequently than online travel services, a competitor or potential competitor that has established other, more frequent online interactions with consumers may be able to more easily or cost-effectively acquire customers for its online travel services than we can. Our goal is to grow revenue 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 revenue 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 Intangible Assets. The application of the acquisition 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. When we deem appropriate, we utilize assistance from a third-party valuation firm. The consideration transferred is allocated to the assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The excess of the consideration transferred over the net of the amounts allocated to the identifiable 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 Intangible Assets. The application of the acquisition 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. When we deem appropriate, we utilize assistance from a third-party valuation firm. The consideration transferred is allocated to the assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The excess of the consideration transferred over the net of the amounts allocated to the identifiable 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 the Company's intangibles and goodwill relates to the acquisitions of OpenTable in July 2014 and KAYAK in May 2013. At September 30, 2018, we performed our annual goodwill impairment testing and concluded that there was no impairment of goodwill. Other than OpenTable, the fair values of our reporting units substantially exceeded their respective carrying values at September 30, 2018.

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, 2018, OpenTable's estimated fair value was approximately 13% higher than its carrying value, therefore, there was no impairment to OpenTable's goodwill.

Since the annual impairment test, there have been no events or changes in circumstances to indicate a potential impairment to our goodwill. In addition, we did not identify an impairment indicator for our long-lived assets and intangible assets at December 31, 2018.

For the year ended December 31, 2016, we recognized a non-cash impairment charge for goodwill of $941 million related to OpenTable, which was not tax deductible. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in the current forecast, including key assumptions regarding OpenTable's expected growth rates and operating margins as well as other key assumptions with respect to matters outside of our control, such as discount rates, currency exchange rates and market EBITDA comparables. 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 need to adjust our forecast for the OpenTable business and recognize a 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. In December 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 imposed 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. In December 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 imposed 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 a base erosion and anti-abuse tax (“BEAT”) aimed at preventing the erosion of the U.S. tax base. We have adopted an accounting policy to treat taxes on GILTI as period costs.

In December 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. In 2018, we completed our accounting for the income tax effects of the Tax Act. We recorded an income tax benefit of $46 million to adjust our provisional income tax expense that was recorded during the year ended December 31, 2017 relating to the federal one-time deemed repatriation liability, as well as U.S. state income taxes and international withholding taxes associated with the mandatory deemed repatriation. In addition, we recorded an income tax benefit of $2 million in 2018 to adjust the remeasurement of our U.S. deferred tax assets and liabilities as of December 31, 2017 due to the reduction of the U.S. federal statutory tax rate that resulted from the Tax Act. We utilized $133 million of deferred tax assets related to federal operating loss carryforwards and $23 million of other tax credit carryforwards as of December 31, 2017 to reduce our transition tax liability.

We do not intend to indefinitely reinvest our international earnings that were subject to U.S. taxation pursuant to the mandatory deemed repatriation or subject to U.S. taxation as GILTI.

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 results of operations. After the French tax authorities issued a formal demand for payment of the amounts assessed, in the first quarter of 2019, we paid 356 million Euros to French tax authorities in order to preserve our right to contest the assessments in court (see Note 14 to our Consolidated Financial Statements). Although we believe that our tax filing positions comply with applicable laws, 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 forecasted operating results. Stock-based compensation expense for the years ended December 31, 2018, 2017 and 2016 includes charges amounting to $48 million, $11 million and $21 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.

•

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, 2018, 2017 and 2016 includes charges amounting to $48 million, $11 million and $21 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

For reporting periods beginning after December 31, 2017, the financial statements are prepared in accordance with the current revenue standard adopted on January 1, 2018. The financial statements for all periods prior to January 1, 2018 are presented under the previous revenue recognition accounting standard.

In addition, we have changed the presentation of advertising expenses and sales and marketing expenses and reclassified certain expense from "Cost of revenues" to "Sales and other expenses" or "General and administrative" expense in the Consolidated Statement of Operations for the year ended December 31, 2018. The Consolidated Statements of Operations for the years ended December 31, 2017 and 2016 have been conformed to the current period presentation and classification.

See Note 2 to our Consolidated Financial Statements for further information.

Year Ended December 31, 2018 compared to Year Ended December 31, 2017

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, 2018 and 2017 were as follows (numbers may not total due to rounding):



	Year Ended December 31,
	(in millions)
	2018		2017		Change
Agency	$	73,919	$	69,697	6.1	%
Merchant	18,812		11,529		63.2	%
Total	$	92,731	$	81,225	14.2	%

Gross bookings increased by 14.2% for the year ended December 31, 2018, compared to the year ended December 31, 2017 (growth on a constant-currency basis was approximately 13%), almost entirely due to growth of 12.9% in accommodation room night reservations. Accommodation ADRs on a constant-currency basis were relatively unchanged for the year ended December 31, 2018, compared to the year ended December 31, 2017. For the year ended December 31, 2018, compared to the year ended December 31, 2017, foreign exchange rate fluctuations benefited gross bookings growth in U.S. Dollars. We believe that unit growth rates and growth in total gross bookings on a constant-currency basis, which excludes 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 receive payments from travelers for the travel services provided. Agency gross bookings increased by 6.1% for the year ended December 31, 2018, compared to the year ended December 31, 2017, almost entirely due to the growth in gross bookings from agency accommodation room night reservations at Booking.com and agoda.

Merchant gross bookings are derived from services where we receive payments from travelers for the travel services provided. Merchant gross bookings increased by 63.2% for the year ended December 31, 2018, compared to the year ended

December 31, 2017, almost entirely due to growth in gross bookings from our merchant accommodation reservation services at Booking.com and agoda. Booking.com has been expanding its merchant accommodation reservation services to provide greater payment options for both consumers and travel service providers.

Accommodation room nights, rental car days and airline tickets reserved through our services for the years ended December 31, 2018 and 2017 were as follows:



	Year Ended December 31,
	(in millions)
	2018	2017	Change
Room nights	760	673	12.9	%
Rental car days	73	73	0.3	%
Airline tickets	7	7	3.8	%

Accommodation room night reservations increased by 12.9% for the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily due to strong execution by our brand teams to increase the accommodation choices we offer our travelers, invest in performance and brand marketing and provide a continuously improving consumer experience, as well as the overall growth in the travel industry and the ongoing shift from offline to online for travel bookings. The increase for the year ended December 31, 2018, compared to the year ended December 31, 2017 was also positively impacted by a decrease in cancellation rates.

Rental car day reservations increased by 0.3% for the year ended December 31, 2018, compared to the year ended December 31, 2017, due to an increase in international rental car day reservations, almost entirely offset by a decrease in U.S. rental car day reservations primarily as a result of rental car supply constraints.

Airline ticket reservations increased by 3.8% for the year ended December 31, 2018, compared to the year ended December 31, 2017, due to the benefits of priceline's investments in its flight platform and brand marketing.

Revenues

Online travel reservation services

Substantially all of our revenues are generated by providing online travel reservation services, which facilitate online travel purchases between travel service providers and travelers. For periods beginning after December 31, 2017, we recognize revenue for travel reservation services when the travel begins rather than when the travel is completed. For example, once the customer checks in to an accommodation, we record revenues, which are net of sales incentives and expected changes in reservations.

In addition, for periods beginning prior to January 1, 2018, revenues from priceline's Name Your Own Price® transactions were presented on a gross basis with the amount remitted to the travel service providers reported as cost of revenues. Under the current revenue standard, Name Your Own Price® revenues are reported on a net basis with the amount remitted to the travel service providers recorded as an offset in merchant revenues. Therefore, for periods beginning after December 31, 2017, we no longer present "Cost of revenues" or "Gross profit" in our Consolidated Statements of Operations. For further information on the adoption of the current revenue standard, see Note 2 to the Consolidated Financial Statements.

Revenues from online travel reservation services are classified into two categories:


•	Agency. Agency revenues are derived from travel-related transactions where we do not receive payments from travelers for the services provided. Agency revenues consist almost entirely of travel reservation commissions, as well as certain GDS reservation booking fees and certain travel insurance fees. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.


•	Merchant. Merchant revenues are derived from travel-related transactions where we receive payments from travelers for the services provided, generally at the time of booking. Merchant revenues include (1) travel reservation commissions and transaction net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) in connection with our merchant reservation services; (2) ancillary fees, including travel insurance-related revenues and certain GDS reservation booking fees; and (3) credit card processing rebates

•

Merchant. Merchant revenues are derived from travel-related transactions where we receive payments from travelers for the services provided, generally at the time of booking. Merchant revenues include (1) travel reservation commissions and transaction net revenues (i.e., the amount charged to travelers less the amount owed to travel service providers) in connection with our merchant reservation services; (2) ancillary fees, including travel insurance-related revenues and certain GDS reservation booking fees; and (3) credit card processing rebates

and customer processing fees. Substantially all merchant revenues are for merchant services derived from transactions where travelers book accommodation reservations or rental car reservations from travel service providers.

Advertising and other revenues

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 platforms; and (2) revenues earned by OpenTable for (a) restaurant reservation services (fees paid by restaurants for diners seated through OpenTable's online reservation service) and (b) subscription fees for restaurant management services.



	Year Ended December 31,
	(in millions)
	2018		2017		Change
Agency revenues	$	10,480	$	9,714	7.9	%
Merchant revenues	2,987		2,133
Advertising and other revenues	1,060		834		27.1	%
Total revenues	$	14,527	12,681
Cost of revenues			242
Gross profit			$	12,439

Agency revenues increased by 7.9% for the year ended December 31, 2018, compared to the year ended December 31, 2017, almost entirely due to growth in agency accommodation room night reservations at Booking.com.

Merchant revenues were $3.0 billion for the year ended December 31, 2018, compared to merchant revenues less cost of revenues of $1.9 billion for the year ended December 31, 2017. Revenue from our merchant accommodation reservation services contributed approximately 91% of the year-over-year increase in merchant revenues for the year ended December 31, 2018. Booking.com has been expanding its merchant accommodation reservation services to provide greater payment options for both customers and travel service providers.

Advertising and other revenues increased by 27.1% for the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily due to (1) the inclusion of $168 million in revenue related to the Momondo Group for the year ended December 31, 2018, compared to $72 million in revenue related to the Momondo Group since its acquisition in July 2017 for the year ended December 31, 2017; (2) increased diner reservation revenues at OpenTable; (3) organic growth in our KAYAK business; and (4) a benefit from the reversal of $27 million related to OpenTable's loyalty program liability in the first quarter of 2018, which resulted from the introduction of a three-year time-based expiration for points earned by diners.

Total revenues of $14.5 billion for the year ended December 31, 2018 as compared to gross profit of $12.4 billion for the year ended December 31, 2017, increased by 16.8% (growth on a constant-currency basis was approximately 16%). Revenue from our accommodation reservation services contributed approximately 85% of the year-over-year increase for the year ended December 31, 2018.

Total revenues for the year ended December 31, 2018 under the current revenue standard, where revenue is recognized when the travel begins (at "check-in"), were substantially similar to total revenues for the year ended December 31, 2018, if reported under the previous revenue recognition accounting standard, where revenue was recognized when travel was completed (at "check-out") (see Note 2 to our Consolidated Financial Statements).

Total revenues as a percentage of gross bookings was 15.7% for the year ended December 31, 2018 as compared to gross profit as a percentage of gross bookings of 15.3% for the year ended December 31, 2017. 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, 2018.

Our international businesses accounted for approximately $13.0 billion of our total revenues for the year ended December 31, 2018, compared to $11.1 billion of our gross profit for the year ended December 31, 2017. Total revenues attributable to our international businesses for the year ended December 31, 2018 increased by 17.4%, compared to gross profit attributable to our international businesses for the year ended December 31, 2017 (growth on a constant-currency basis was approximately 17%). Total revenues attributable to our U.S. businesses for the year ended December 31, 2018 increased by

11.6%, compared to gross profit attributable to our U.S. businesses for the year ended December 31, 2017, due to growth in each of our U.S. businesses. In addition, the adjustment to reverse a portion of OpenTable's loyalty program liability had a favorable impact on total revenues attributable to our U.S. businesses for the year ended December 31, 2018 of $27 million.

Operating Expenses

Marketing



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Performance marketing	$	4,447		$	4,161		6.9	%
% of Total revenues in 2018 / % of Gross profit in 2017	30.6		%	33.5		%
Brand marketing	$	509		$	435		17.2	%
% of Total revenues in 2018 / % of Gross profit in 2017	3.5		%	3.5		%

We rely on performance marketing channels to generate a significant amount of traffic to our websites. Performance marketing 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 marketing and incentives. For the year ended December 31, 2018, performance marketing expenses increased compared to the year ended December 31, 2017, to generate increased gross bookings and revenue. We adjust our performance marketing spend based on our growth and profitability objectives and the expected performance of our performance marketing channels. Performance marketing expense as a percentage of total revenues for the year ended December 31, 2018 decreased, compared to performance marketing expense as a percentage of gross profit for the year ended December 31, 2017, due to increased performance marketing ROIs and changes in the share of traffic by channel. We recognize the substantial majority of our performance marketing 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 begins or, for periods beginning prior to January 1, 2018, until the travel is completed, which can be in a quarter other than when the reservations are booked. In addition, we may from time to time, as we did beginning the third quarter of 2017 and continuing through 2018, pursue a strategy of improving our performance marketing ROIs, which could negatively impact growth and positively impact performance marketing efficiency and profitability.

Brand marketing expenses consist primarily of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing spend such as public relations, trade shows and sponsorships. For the year ended December 31, 2018, brand marketing expenses increased by 17.2% compared to the year ended December 31, 2017, primarily due to increased brand marketing expenses at Booking.com in order to increase brand awareness and grow the number of customers that come directly to the Booking.com platforms.

Sales and Other Expenses



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Sales and other expenses	$	830		$	517		60.4	%
% of Total revenues in 2018 / % of Gross profit in 2017	5.7		%	4.2		%

Sales and other 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) provisions for customer chargebacks associated with merchant transactions; (4) provisions for bad debt, primarily related to accommodation commission receivables; and (5) customer relations costs. For the year ended December 31, 2018, sales and other expenses, which are substantially variable in nature, increased compared to the year ended December 31, 2017 due primarily to increased transaction volumes (primarily, increased merchant transaction volumes at Booking.com), higher customer chargebacks and higher bad debt expense related to accommodation commission receivables.

Personnel



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Personnel	$	2,042		$	1,660		23.1	%
% of Total revenues in 2018 / % of Gross profit in 2017	14.1		%	13.3		%

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, 2018, compared to the year ended December 31, 2017, primarily due to increases in aggregate salaries of $218 million for the year ended December 31, 2018 related to increased average salary per employee as well as headcount growth to support our businesses. Stock-based compensation expense was $317 million for the year ended December 31, 2018, compared to $261 million for the year ended December 31, 2017. Headcount increased, primarily at Booking.com, in the areas of information technology to support various business initiatives, such as alternative accommodations, marketing, payments and in-destination experiences, and customer service to support transaction growth.

General and Administrative



	Year Ended December 31,
	(in millions)
	2018			2017			Change
General and administrative	$	699		$	576		21.3	%
% of Total revenues in 2018 / % of Gross profit in 2017	4.8		%	4.6		%

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, 2018, compared to the year ended December 31, 2017, due to an accrual for travel transaction taxes of $50 million for certain subsidiaries related to prior periods recognized in 2018 (see Note 14 to our Consolidated Financial Statements), higher occupancy and office expenses associated with increased headcount to support the expansion of our international businesses, as well as the fair value adjustment recognized in 2018 of $19 million to the contingent liability related to an acquisition. These increases were partially offset by a $27 million litigation-related expense in 2017 that did not occur in 2018 and a reversal of previously accrued travel transaction taxes of $6 million recorded in 2018 based on a favorable ruling in the State of California.

Information Technology



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Information technology	$	233		$	189		23.2	%
% of Total revenues in 2018 / % of Gross profit in 2017	1.6		%	1.5		%

Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) data communications and other expenses associated with operating our services; (3) outsourced data center costs; and (4) payments to outside consultants. Information technology expenses increased during the year ended December 31, 2018, compared to the year ended December 31, 2017, due primarily to increased software fees and data center and cloud costs.

Depreciation and Amortization



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Depreciation and amortization	$	426		$	363		17.5	%
% of Total revenues in 2018 / % of Gross profit in 2017	2.9		%	2.9		%

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, 2018, compared to the year ended December 31, 2017, primarily as a result of increases of $36 million in data center equipment depreciation expenses and $19 million of internally developed software depreciation expenses due to higher capital expenditures and capitalized software development costs to support growth and geographic expansion.

Other Income (Expense)



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Interest income	$	187		$	157		18.9	%
Interest expense	(269		)	(254		)	6.1	%
Net unrealized losses on marketable equity securities	(367		)	—			N/A
Impairment of investments	—			(8		)	N/A
Foreign currency transactions and other	(57		)	(34		)	58.9	%
Total	$	(506	)	$	(139	)	262.3	%

For the year ended December 31, 2018, interest income increased compared to the year ended December 31, 2017, primarily due to the growing impact of our cash pooling structure initiated in 2017, which enables the Company to aggregate and invest daily operating cash in money market funds. In addition, for the year ended December 31, 2018, the increase in interest income, compared to the year ended December 31, 2017, was also due to higher yields in cash equivalents and marketable securities, partially offset by lower average invested balance in marketable securities. Interest expense increased for the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily attributable to our borrowings under our cash pooling structure and our Senior Notes issued in August 2017, partially offset by the maturity of our 1.0% Convertible Senior Notes in March 2018 (see Note 10 to our Consolidated Financial Statements).

Net unrealized losses on marketable equity securities for the year ended December 31, 2018 are almost entirely related to our equity investments in Ctrip.com International Ltd. ("Ctrip"). Pursuant to the adoption of the accounting update on financial instruments in the first quarter of 2018, changes in fair value of marketable equity securities are recognized in net income for periods beginning after December 31, 2017, rather than accumulated other comprehensive income (see Note 2 to our Consolidated Financial Statements for further information).

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 and other income or expense. Foreign currency transaction losses, including costs related to foreign currency transactions, resulted in foreign currency losses of $53 million and $31 million for the years ended December 31, 2018 and 2017, respectively.

Income Taxes



	Year Ended December 31,
	(in millions)
	2018			2017			Change
Income tax expense	$	837		$	2,058		(59.3	)%
% of Earnings before income taxes	17.3		%	46.8		%

Our 2018 effective tax rates differ from the 2018 U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax and the $46 million benefit resulting from the adjustment to our prior year provisional income tax expense due to our completion of the accounting for the income tax effects of the Tax Act, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with our current year international earnings, resulting from the introduction of the Tax Act, as well as certain nondeductible expenses. 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 $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 $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 effective tax rate is lower for the year ended December 31, 2018, compared to the year ended December 31, 2017, primarily as a result of a one-time provisional income tax expense of $1.4 billion recorded during the year ended December 31, 2017 pursuant to the Tax Act, partially offset by the effect of higher international tax rates and U.S. federal and state tax associated with our current year international earnings during the year ended December 31, 2018, resulting from the introduction of the Tax Act.

A portion of Booking.com's earnings during the years ended December 31, 2018 and 2017 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 after December 31, 2017. 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, 2017 compared to Year Ended December 31, 2016

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, 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 on a constant-currency basis, which excludes 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 receive payments from travelers 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 receive payments from travelers 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	557	20.9	%
Rental car days	73	67	9.6	%
Airline tickets	7	7	(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's retail airline ticket reservations and the discontinuation on September 1, 2016 of priceline’s Name Your Own Price® airline ticket reservation offering, partially offset by an increase in priceline's Express Deals® airline ticket reservation offering.

Revenues



	Year Ended December 31,
	(in millions)
	2017		2016		Change
Agency revenues	$	9,714	$	7,982	21.7	%
Merchant revenues	2,133		2,048		4.2	%
Advertising and other revenues	834		713		17.0	%
Total revenues	$	12,681	$	10,743	18.0	%

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 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's Name Your Own Price® reservation services. On September 1, 2016, priceline’s Name Your Own Price® airline ticket reservation offering was discontinued. Our priceline's 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 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 $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 millions)
	2017		2016		Change
Cost of revenues	$	242	$	415	(41.6	)%

For the year ended December 31, 2017, cost of revenues consisted primarily of: (1) the cost paid to travel service providers for priceline's Name Your Own Price® and vacation package reservation services, net of applicable taxes and charges; and (2) fees paid to third parties by priceline to return travel itinerary information for consumer search queries. Cost of revenues decreased by 41.6% for the year ended December 31, 2017, compared to the year ended December 31, 2016, primarily due to a decrease in priceline's Name Your Own Price® reservation services.

Agency revenues have no cost of revenues.

Gross Profit



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Gross profit	$	12,439		$	10,328		20.4	%
Gross margin	98.1		%	96.1		%

Total gross profit increased by 20.4% 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 $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'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's Name Your Own Price® reservation services have been declining.

Gross profit as a percentage of gross bookings was 15.3% for the year ended December 31, 2017, as compared to 15.2% 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 businesses 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 businesses increased by 22.1% 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 8.8% 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

Marketing



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Performance marketing	$	4,161		$	3,479		19.6	%
% of Gross profit	33.5		%	33.7		%
Brand marketing	$	435		$	327		32.9	%
% of Gross profit	3.5		%	3.2		%

We rely on performance marketing channels to generate a significant amount of traffic to our websites. Performance marketing 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 marketing and incentives. For the year ended December 31, 2017, performance marketing expenses increased compared to the year ended December 31, 2016, to generate increased gross bookings and gross profit. We adjust our performance marketing spend based on our growth and profitability objectives and the expected performance of our performance marketing channels. Performance marketing 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 marketing 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 marketing ROIs, which positively impacted performance marketing efficiency. We recognize the substantial majority of our performance marketing 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 marketing expenses consist mainly of television advertising, online video advertising (including the airing of our television advertising online) and online display advertising, as well as other marketing spend such as public relations, trade shows and sponsorships. For the year ended December 31, 2017, brand marketing expenses increased by 32.9% compared to the year ended December 31, 2016, primarily due to increased brand marketing by Booking.com, KAYAK, which includes expenses related to the Momondo Group since its acquisition on July 24, 2017, and priceline. We increased our brand marketing expense in order to increase awareness of our brands and grow the number of customers that come directly to our websites.

Sales and Other Expenses



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Sales and other expenses	$	517		$	422		22.4	%
% of Gross profit	4.2		%	4.1		%

Sales and other 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 bad debt, primarily related to accommodation commission receivables; and (5) provisions for customer chargebacks associated with merchant transactions. For the year ended December 31, 2017, sales and other expenses, which are substantially variable in nature, increased compared to the year ended December 31, 2016 due primarily to increased transaction volumes and higher bad debt expense related to accommodation commission receivables.

Personnel



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Personnel	$	1,660		$	1,350		22.9	%
% of Gross profit	13.3		%	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 $219 million for the year ended December 31, 2017 primarily related to headcount growth to support our business. Stock-based compensation expense was $261 million for the year ended December 31, 2017, compared to $250 million for the year ended December 31, 2016.

General and Administrative



	Year Ended December 31,
	(in millions)
	2017			2016			Change
General and administrative	$	576		$	452		27.7	%
% of Gross profit	4.6		%	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 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 millions)
	2017			2016			Change
Information technology	$	189		$	142		33.0	%
% of 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 millions)
	2017			2016			Change
Depreciation and amortization	$	363		$	309		17.4	%
% of 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 millions)
	2017		2016			Change
Impairment of goodwill	$	—	$	941		N/A
% of 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 $941 million (see Note 9 to our Consolidated Financial Statements).

Other Income (Expense)



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Interest income	$	157		$	95		65.6	%
Interest expense	(254		)	(208		)	22.2	%
Impairment of investments	(8		)	(63		)	(88.0	)%
Foreign currency transactions and other	(34		)	(17		)	108.7	%
Total	$	(139	)	$	(193	)	(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).

See Note 4 to our Consolidated Financial Statements for additional information on impairments of our equity investments without readily determinable fair value.

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. Foreign currency transaction losses, including costs related to foreign currency transactions, resulted in foreign currency losses of $31 million and $20 million for the years ended December 31, 2017 and 2016, respectively.

Income Taxes



	Year Ended December 31,
	(in millions)
	2017			2016			Change
Income tax expense	$	2,058		$	578		255.8	%
% of 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 $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 $941 million related to OpenTable recognized in 2016 (see Note 9 to our Consolidated Financial Statements) and the non-deductible impairment charge of $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.

Liquidity and Capital Resources

At December 31, 2018, we had $14.0 billion in cash, cash equivalents and short-term and long-term investments in marketable securities, of which approximately $6.4 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 and short-term and long-term investments in marketable securities 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, Meituan Dianping equity securities, money market funds and time deposits (see Note 5 to our Consolidated Financial Statements).

In the first quarter of 2019, 2018 and 2017, we prepaid a portion of our Dutch income tax liability of $650 million, $726 million and $500 million, respectively, to earn prepayment discounts. In the first quarter of 2019, we paid assessments of 356 million Euros to French tax authorities in order to preserve our right to contest the assessments in court (see Note 14 to our Consolidated Financial Statements).

As a result of the Tax Act, we recorded a provisional transition tax liability as of December 31, 2017 of $1.3 billion. At December 31, 2018, the liability of $1.3 billion includes $1.2 billion in "Long-term U.S. transition tax liability" and $111 million in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. 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, which have been accrued by the Company. See Note 13 to our Consolidated Financial Statements for further information.

In April 2018, we paid $139 million, net of cash acquired, and issued shares of our common stock in an amount of $110 million in connection with the acquisition of FareHarbor, a leading provider of business-to-business activities distribution services. In November 2018, we paid $134 million, net of cash acquired, to complete the acquisition of HotelsCombined, a hotel meta-search company.

In July 2018, we invested $500 million in preferred shares of Didi Chuxing, the leading mobile transportation and ride-hailing platform in China. In October 2018, we invested $200 million in preferred shares of Grab, a leading on-demand transportation and mobile service platform in Southeast Asia.

In June 2015, we entered into a $2.0 billion five-year unsecured revolving credit facility with a group of lenders. The revolving credit facility provides for the issuance of up to $70 million of letters of credit as well as borrowings of up to $50 million on same-day notice, referred to as swingline loans. The proceeds of loans made under the facility will be used for working capital and general corporate purposes. At December 31, 2018, there were no borrowings outstanding and $5 million of letters of credit issued under the facility. We borrowed $100 million under this revolving credit facility in January 2019. See Note 10 to our Consolidated Financial Statements for further information related to the revolving credit facility.

In March 2018, in connection with the maturity of the remaining outstanding 2018 Notes, we paid $714 million to satisfy the aggregate principal amount due and paid an additional $773 million in satisfaction of the conversion value in excess of the principal amount.

In the first quarter of 2018, the Board of Directors authorized a program to repurchase up to $8.0 billion of our common stock, in addition to amounts previously authorized. During the year ended December 31, 2018, we repurchased 3,100,307 shares of our common stock for an aggregate cost of $6.0 billion. At December 31, 2018, we had a remaining aggregate amount of $4.5 billion authorized by our Board of Directors to repurchase our common stock. In 2019, we have continued to make repurchases of our common stock and we may continue to make additional repurchases of our common stock from time to time, depending on prevailing market conditions, alternate uses of capital and other factors.

In September 2016, we signed a turnkey agreement to construct an office building for Booking.com’s headquarters in the Netherlands for 270 million Euros. Upon signing this agreement, we paid 48 million Euros to the developer, which included 43 million Euros for the acquired land-use rights and 5 million Euros for the building construction. The remaining 222 million Euro obligation related to the turnkey agreement principally relates to the building construction cost. During the year ended December 31, 2018, we paid 66 million Euros ($80 million) related to our obligation under the turnkey agreement and have a 156 million Euro obligation remaining at December 31, 2018, which will be paid between 2019 and 2021 when we anticipate construction will be complete. In addition to the turnkey agreement, we have a remaining obligation at December 31, 2018 to pay 75 million Euros over the remaining term of the acquired land lease, which expires in 2065. We will also make additional capital expenditures to fit out and furnish the office space. See Note 14 to our Consolidated Financial Statements.

Cash Flow Analysis

Net cash provided by operating activities for the year ended December 31, 2018, was $5.3 billion, resulting from net income of $4.0 billion, a favorable impact from adjustments for non-cash items of $1.2 billion and net favorable changes in working capital and long-term assets and liabilities of $125 million. Non-cash items were principally associated with net unrealized losses on marketable equity securities, stock-based compensation expense, depreciation and amortization and the provision for uncollectible accounts. The changes in working capital for the year ended December 31, 2018, reflecting the increase in business volume and growth in Booking.com's merchant transactions, were primarily related to a $635 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $319 million increase in accounts receivable and $201 million increase in prepaid expenses and other current assets.

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 from adjustments for non-cash items of $743 million and net favorable changes in working capital of $293 million and long-term 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). Non-cash items were principally associated with stock-based compensation expense, depreciation and amortization, and amortization of debt discount. The changes in working capital for the year ended December 31, 2017, reflecting the increase in business volume, were primarily related to a $687 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $270 million increase in accounts receivable and $124 million increase in prepaid expenses and other current assets.

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 from adjustments for non-cash items of $1.6 billion and net favorable changes in working capital and other long-term assets and liabilities of $214 million. Non-cash items were principally associated with impairment of goodwill, stock-based compensation expense and depreciation and amortization. The changes in working capital for the year ended December 31, 2016, reflecting the increase in business volume, were primarily related to a $514 million increase in accounts payable, accrued expenses and other current liabilities, offset by a $284 million increase in accounts receivable.

Net cash provided by investing activities was $2.2 billion for the year ended December 31, 2018, principally resulting from net sales of investments of $2.9 billion, partially offset by acquisitions and other investments, net of cash acquired, of $273 million. 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 $3.4 billion and acquisitions and other investments, net of cash acquired, of $553 million. 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 million paid for the acquisition of land-use rights related to the construction of Booking.com's new headquarters in the Netherlands. Cash invested in the purchase of property and equipment was $442 million, $288 million and $220 million in the years ended December 31, 2018, 2017 and 2016, respectively. The increase for the years ended December 31, 2018, 2017 and 2016 were related to additional data center capacity and new offices to support growth and geographic expansion, principally related to our Booking.com and agoda brands. Cash invested in the purchase of property and equipment for the year ended December 31, 2018 includes the payment of $78 million related to the turnkey agreement for constructing Booking.com's future headquarters.

Net cash used in financing activities was $7.4 billion for the year ended December 31, 2018, which primarily consisted of payments for repurchase of common stock of $6.0 billion and payments for the conversion of Senior Notes of $1.5 billion, partially offset by proceeds from short-term borrowing of $25 million. Net cash used in financing activities was $79 million for the year ended December 31, 2017, which primarily consisted of payments for repurchase of common stock of $1.8 billion, payments for the conversion of Senior Notes of $286 million and repayment of the debt of $15 million assumed in the acquisition of the Momondo Group, partially offset by proceeds from the issuance of Senior Notes of $2.0 billion. Net cash used in financing activities was $1 million for the year ended December 31, 2016, which primarily consisted of payments for repurchase of common stock of $1.0 billion, offset by proceeds from the issuance of Senior Notes of $995 million and proceeds from the exercise of stock options of $16 million.

Contingencies

French tax authorities conducted an audit of the years 2003 through 2012. They are asserting that Booking.com has a permanent establishment in France and are seeking to recover what they claim are unpaid income taxes and value-added taxes. In December 2015, the French tax authorities issued Booking.com assessments related to those tax years for 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. In December 2018, the French tax

authorities issued a formal demand for payment of the amounts assessed. As a result, in January 2019, we paid the amount assessed in order to preserve our right to contest the assessments in court. Such payment does not constitute an admission that we owe the taxes and will be refunded (with interest) to us to the extent we prevail. If we are unable to resolve the matter with the French tax authorities, we plan to challenge the assessments in the French courts. The 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 1A Risk Factors - "We may have exposure to additional tax liabilities."

Contractual Obligations

The following table represents our material contractual obligations and commitments at December 31, 2018:



	Payments due by Period (in millions)
Contractual Obligations	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease obligations(1)	$	643	$	163	$	248	$	114	$	118
Land lease obligation(1)	81		1		4		4		72
Building construction obligation(1)	178		68		110		—		—
Senior Notes(2)	9,897		174		2,342		2,788		4,593
Revolving credit facility(3)	4		3		1		—		—
Contingent consideration(4)	28		28		—		—		—
U.S. transition tax liability	1,277		111		206		223		737
Total(5)	$	12,108	$	548	$	2,911	$	3,129	$	5,520


(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 at December 31, 2018 and cumulative interest to maturity of $1.1 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 both uncommitted funds and outstanding letters of credit at December 31, 2018.


(4)	See Note 18 to our Consolidated Financial Statements for more details.


(5)	We reported "Other long-term liabilities" of $162 million in the Consolidated Balance Sheet at December 31, 2018, which principally consists of $68 million in deferred rents and $39 million unrecognized tax benefits (see Note 13 to our Consolidated Financial Statements). We have excluded these long-term liabilities from the contractual obligations table above. Deferred rents represent the difference in rent expense recognized in the income statements and rent payments related to operating leases. A variety of factors could affect the timing of payments for the liabilities related to unrecognized tax benefits. Therefore, we cannot reasonably estimate the timing of such payments. 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.

(5)

We reported "Other long-term liabilities" of $162 million in the Consolidated Balance Sheet at December 31, 2018, which principally consists of $68 million in deferred rents and $39 million unrecognized tax benefits (see Note 13 to our Consolidated Financial Statements). We have excluded these long-term liabilities from the contractual obligations table above. Deferred rents represent the difference in rent expense recognized in the income statements and rent payments related to operating leases. A variety of factors could affect the timing of payments for the liabilities related to unrecognized tax benefits. Therefore, we cannot reasonably estimate the timing of such payments. 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.

In 2018, we signed an agreement for a lease related to approximately 222,000 square feet of office space in the city of Manchester in the United Kingdom for the headquarters of Rentalcars.com. Rentalcars.com's obligation to execute the lease is conditional upon the developer completing certain activities, which are expected to be completed in 2020. If these activities are completed, the lease will commence for a term of approximately 13 years and we will have a lease obligation of approximately 65 million British Pounds Sterling, excluding lease incentives. Rentalcars.com will also make capital expenditures to fit out and furnish the office space. The obligation is not included in the table of contraction obligations presented above.

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.

At December 31, 2018, 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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