A Dark Vector Cognition product

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

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

The following discussion should be read in conjunction with our Unaudited Consolidated Financial Statements, including the notes to those statements, included elsewhere in this Quarterly Report on Form 10-Q, and the Section entitled "Special Note Regarding Forward-Looking Statements" at the end of this Item 2. 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 Quarterly Report. The information on our websites is not a part of this Quarterly Report and is not incorporated herein by reference.

We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period operating and financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.

Overview

Our mission is to make it easier for everyone to experience the world. We seek to empower people to cut through travel barriers, such as money, time, language and overwhelming options, so they can use our services to easily and confidently go where they want to go, stay where they want to stay, dine where they want to dine, pay how they want to pay and experience what they want to experience. We connect consumers wishing to make travel reservations with providers of travel services around the world through our online platforms. Through one or more of our brands, consumers can: book a broad array of accommodations (including hotels, motels, resorts, homes, apartments, bed and breakfasts, hostels and other properties); make a car rental reservation or arrange for an airport taxi; make a dinner reservation; or book a flight, cruise, vacation package, tour or activity. Consumers can also use our meta-search services to easily compare travel reservation information, such as airline ticket, hotel reservation and rental car reservation information, from hundreds of online travel platforms at once. In addition, we offer various other services to consumers and partners, such as certain travel-related insurance products and restaurant management services to restaurants.

We offer these services through six primary consumer-facing brands: Booking.com, Priceline, agoda, Rentalcars.com, KAYAK and OpenTable. While historically our brands operated on a largely independent basis and many of them focused on a particular service (e.g., accommodation reservations) or geography, we are increasing the collaboration, cooperation and interdependency among our brands in our efforts to provide consumers with the best and most comprehensive services. We also seek to maximize the benefits of our scale by sharing resources and technological innovations, co-developing new services and coordinating activities in key markets among our brands. For example, Booking.com, the world’s leading brand for booking online accommodation reservations (based on room nights booked), offers rental car and other ground transportation services, flights, tours and activities reservations and other services, many of which are supported by our other brands. Similarly, hotel reservations available through Booking.com are also generally available through agoda and Priceline.

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 the results of our international businesses, which consist of the results of Booking.com, agoda and Rentalcars.com in their entirety 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 (which is domiciled in the Netherlands) at a hotel in New York by a consumer in the United States is part of the results of our international businesses. In 2020, the revenues from our international businesses (the substantial majority of which is generated by Booking.com) represented approximately 88% of our consolidated revenues. A significant majority of our revenues, including a significant majority of our revenues from our international businesses, is earned in connection with facilitating accommodation reservations. See Note 2 to the Unaudited Consolidated Financial Statements for more geographic information.

We derive substantially all of our revenues from enabling consumers to make travel service reservations. We also earn revenues from credit card processing rebates and customer processing fees, advertising services, restaurant reservations and restaurant management services, and various other services, such as travel-related insurance revenues.

Trends

In response to the outbreak of the novel strain of the coronavirus, COVID-19 (the "COVID-19 pandemic"), as well as subsequent outbreaks driven by new variants of COVID-19, governments around the world have implemented, and continue to implement, a variety of measures to reduce the spread of COVID-19, including travel restrictions, bans and advisories, instructions to residents to practice social distancing, curfews, quarantine advisories, including quarantine restrictions after travel in certain locations, shelter-in-place orders, required closures of non-essential businesses, vaccination mandates or requirements for businesses to confirm employees’ vaccination status, and other restrictions. These government mandates have had a significant adverse effect on many of the partners on whom our business relies, including hotels and other accommodation providers, airlines and restaurants, as well as on our workforce, operations and consumers. Our financial results and prospects are almost entirely dependent on the sale of travel-related services. The COVID-19 pandemic and the resulting economic conditions and government orders resulted in a material decrease in consumer spending and a significant decline in travel and restaurant activities and consumer demand for related services in 2020 in particular. The comparison of our 2021 results to the same period in 2019 avoids the distortion created from comparing to the same period in 2020, which was severely impacted by the COVID-19 pandemic. Accommodation room nights, which include the impact of cancellations ("room nights"), declined rapidly as the COVID-19 pandemic spread in the first quarter of 2020 and the beginning of the second quarter of 2020, but then steadily improved through the end of the second quarter and into the summer travel period in the third quarter of 2020. However, in the fourth quarter of 2020, we saw an increased decline in room nights, due in part to increased COVID-19 case counts and reimposed or additional government-imposed travel restrictions, particularly in Europe, some of which continued to remain in place during the nine months ended September 30, 2021. In spite of these travel restrictions, room night trends improved in the first quarter of 2021, driven by domestic travel (travelers booking a stay within their own country) in Europe and the United States. The United States had positive room night growth in the first quarter of 2021 as compared to the first quarter of 2019.

Global room night trends further improved in the second quarter of 2021, primarily driven by domestic and international (travelers booking a stay at a property located outside their own country) travel in Europe, as well as continued improvement in domestic travel in the United States. The improvement in international room nights in Europe was mainly driven by travel within the European region, which benefited from an increase in vaccination rates and the easing of many government-imposed travel restrictions towards the end of the second quarter. The United States had strong room night growth in the second quarter of 2021 as compared to the second quarter of 2019.

In the third quarter of 2021, room nights declined 18% relative to the third quarter of 2019, which was an improvement of about 8 percentage points from the room night decline in the second quarter of 2021 relative to the second quarter of 2019. This improvement was driven primarily by Europe, which benefited from continued improvement in international travel within the region. The United States had strong growth in room nights in the third quarter of 2021, although below the level of growth seen in the second quarter of 2021.

While vaccinations continue to advance throughout the world, many countries in Asia, Africa, South America and other parts of the world have made slower progress. In the second and third quarters of 2021, many countries experienced a spike in COVID-19 cases due to the Delta variant of COVID-19. While many reports indicate that existing COVID-19 vaccines appear to be mostly effective against the Delta variant, it has caused certain authorities to reimpose mask requirements and other restrictions, including in countries that have widely distributed vaccines. We believe that as effective vaccines become more widely distributed, people will increasingly feel it is safe to travel again and government restrictions will be relaxed, although the timing remains uncertain.

From April 2020 through the first quarter of 2021, we saw a substantial increase versus 2019 in the share of room nights booked for domestic travel while room nights booked for international travel remained very limited. However, during the second and third quarters of 2021 we saw sequential increases in the share of room nights booked for international travel. In the third quarter of 2021, the share of room nights booked for international travel was about 33%, which compares to about 15% and 25% in first and second quarters of 2021, respectively. We have seen an increase in the share of room nights booked on a mobile device and an increased share of mobile app bookings for the year ended December 31, 2020 and the nine months ended September 30, 2021, as compared to the year ended December 31, 2019 and the nine months ended September 30, 2019. We have also seen an increase in the mix of room nights booked for alternative accommodation properties for the year ended December 31, 2020 and the nine months ended September 30, 2021, as compared to the year ended December 31, 2019 and the nine months ended September 30, 2019. In addition, we have observed an improvement in cancellation rates since the high in April 2020, though we have seen periods of elevated cancellation rates typically coinciding with newly imposed or reimposed travel restrictions. The cancellation rate in the third quarter of 2021 was slightly higher than it was in the third quarter of 2019.

In October 2021, room nights declined about 10% relative to October 2019, which compares to a 14% decline in September 2021 relative to September 2019. The improvement in room night declines in October 2021 relative to September 2021 was primarily driven by improving room night trends in Asia. Given the ongoing uncertainty around the level of COVID-19 cases, including the recent rise in case counts in many European countries, and the potential impact on travel, it is difficult to predict how room nights in November and December 2021 will compare with the 10% reduction we saw in October 2021. As a result, we cannot accurately predict the level of room night declines in the fourth quarter of 2021 relative to the fourth quarter of 2019. We expect that the decline in gross bookings in the fourth quarter of 2021 relative to the fourth quarter of 2019 will be lower than the decline in room nights. We also expect that revenues as a percentage of gross bookings in the fourth quarter of 2021 will be lower than it was in the fourth quarter of 2019. In addition, we currently expect that we will have an operating profit in the fourth quarter of 2021.

While we have seen signs of a recovery in travel demand in many parts of the world including the United States and Europe as well as more recently in Asia, we continue to expect that our business will be adversely impacted by surges of COVID-19 case counts, including those driven by variants of COVID-19, as well as any government-imposed travel restrictions in reaction to COVID-19 outbreaks, which could remain a risk for an extended period of time.

The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. These include, but are not limited to, the severity, extent and duration of the COVID-19 pandemic, including as a result of any new variants of COVID-19 and any resurgences of the pandemic, the global distribution of the vaccines and their efficacy against existing and any future variants of COVID-19, and their impact on the travel and restaurant industries and consumer spending more broadly. For more information, see Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance."

In response to the reduction in our business volumes as a result of the impact of the COVID-19 pandemic, during the year ended December 31, 2020, we took actions at all of our brands to reduce the size of our workforce to optimize efficiency and reduce costs, which resulted in annualized cost savings of approximately $370 million in personnel-related expenses. Our headcount decreased 15% year-over-year to approximately 19,600 as of September 30, 2021, compared to approximately 23,000 as of September 30, 2020, primarily due to the restructuring activities and attrition. Restructuring expenses of $9 million were recorded during the nine months ended September 30, 2021, and included in "Restructuring and other exit costs" in the Unaudited Consolidated Statement of Operations. As of September 30, 2021, we estimate that we will record additional restructuring and other exit costs of approximately $7 million, primarily related to leases, in the remainder of 2021, with $4 million recorded thereafter (see Note 14 to our Unaudited Consolidated Financial Statements). Our evaluation of various alternative courses of action related to certain other leases and contract terminations and modifications is still in progress and we may incur additional costs resulting from such actions.

Certain governments passed legislation to help businesses during the COVID-19 pandemic through loans, wage subsidies, tax relief or other financial aid. We participated in several of these programs, including the Netherlands' wage subsidy program and the United Kingdom's job retention scheme. In June 2021, we announced our intention to voluntarily return assistance received through various government aid programs and, for the nine months ended September 30, 2021, we recorded expenses of $137 million in the Unaudited Consolidated Statement of Operations, principally in "Personnel" expense, to reflect the return of such assistance. As of September 30, 2021, we repaid $107 million of assistance and wrote off a previously recorded receivable of $28 million for payments expected to be received for government aid programs where we met the qualifying requirements (see Note 15 to our Unaudited Consolidated Financial Statements). See Part II, Item 1A, Risk Factors - "Participation in government stimulus programs may negatively impact our business, operations and/or reputation." In addition, certain governments have extended support for the travel and tourism industry through special programs whereby discounts are extended to travelers through travel service providers or through travel agents for reservations facilitated by them.

Prior to the COVID-19 pandemic, we experienced many years of significant growth in our accommodation reservation services. We believe this growth was 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. We also believe this growth was 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 consumers, 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. Prior to the COVID-19 pandemic, these year-over-year growth rates generally decelerated due to the size of our accommodation reservation business and the generally slowing growth rate of the online travel market. As the travel market recovers from the impact of the COVID-19 pandemic, we expect to see higher than pre-COVID-19 pandemic growth rates until we return to the level of travel market demand that we observed prior to the COVID-19 pandemic, after which we expect prior trends to generally resume.

We are a global business, and online travel growth rates vary across the world depending on numerous factors, including local and regional economic conditions, individual disposable income, access to the internet and adoption of e-commerce. Over the last several years, and prior to the COVID-19 pandemic, online travel growth rates had generally slowed in markets such as North America and Europe where online activity was high and consumers had been engaging in e-commerce transactions for many years, while online travel growth rates remained relatively high in markets such as Asia-Pacific where incomes were rising more quickly and the increased availability and use of mobile devices had accelerated the growth of internet usage and travel e-commerce transactions. Over the long term, we expect the broader global economy and online travel market to recover from the COVID-19 pandemic, and following the recovery of the travel industry to the level of pre-COVID-19 pandemic demand, we would expect online travel growth rates will slow as markets continue to mature. However, we believe that the opportunity to grow our business beyond pre-COVID-19 pandemic levels exists for the markets in which we operate, including in both mature and less mature markets. Further, we believe that this opportunity for growth exists because we provide significant value to travel service providers of all types, regardless of size or geography, due to our global reach and marketing expertise, which enables them to reach a broader audience of potential customers.

Historically, our growth has primarily been generated by the worldwide accommodation reservation business of Booking.com, which is our most significant brand, and has been due, in part, to the availability of a large number of properties through Booking.com. Booking.com included approximately 2,392,000 properties on its website at September 30, 2021, consisting of approximately 432,000 hotels, motels and resorts and approximately 1,960,000 homes, apartments and other unique places to stay, compared to approximately 2,483,000 properties (including approximately 450,000 hotels, motels and resorts and approximately 2,033,000 homes, apartments, and other unique places to stay) at September 30, 2020. 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 improve the accommodation choices available for reservation on our platforms, however, the number of accommodations on our platforms may vary in part as a result of removing accommodations from time to time. At September 30, 2021, we saw a year-over-year decrease in the number of properties on Booking.com’s website, as compared to September 30, 2020, driven by an elevated number of accommodations removed from the platform due primarily to the properties not providing availability on our platforms or property closures. We may see further accommodation removals in the future, however, at September 30, 2021, the number of properties on Booking.com’s website remained about in line with the number of properties at June 30, 2021.

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 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 our alternative accommodation business has grown, these different characteristics have negatively impacted our profit margins and this trend may continue. Further, to the extent that these properties represent an increasing percentage of the properties on our platforms, the number of reservations per property will likely continue to decrease since alternative accommodation properties typically have fewer booking opportunities per property. We believe that continuing to improve the choices of accommodations available through our services, in particular Booking.com, will help us to continue to grow our accommodation reservation business.

We are constantly innovating to grow our business by, among other things, providing a best-in-class user experience with intuitive, easy-to-use online platforms (i.e., websites and mobile apps) to ensure that we are meeting the needs of online consumers while aiming to exceed their expectations. As part of these ongoing efforts, we have a long-term strategy to build a more integrated offering of multiple elements of travel, which we refer to as the "Connected Trip," and we expect these efforts to increase room night growth and revenue growth over time. Although we expect our efforts to build the Connected Trip will increase revenue growth over time, we may see a negative impact on our operating margins in the near term as we incur the expenses associated with these investments. Further, to the extent our non-accommodation services (e.g., airline ticket reservation services) grow faster than our accommodation services, whether as part of the Connected Trip or otherwise, our operating margins may be negatively affected if we experience an increasing mix of revenues from lower-margin services. For more information, see Part II, Item 1A, Risk Factors - "We may not be able to keep up with rapid technological or other market changes."

As part of our strategy to provide more payment options to consumers 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 facilitates payments from travelers for the services provided. 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 consumers and travel service providers, 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 Unaudited Consolidated Statements of Operations, as well as associated incremental revenues in the form of credit card rebates, for example, which are recorded in "Merchant revenues." To the extent more of our business is generated on a merchant basis, we will incur a greater level of these merchant-related expenses, which would negatively impact our operating margins despite increases in associated incremental revenues. Components of revenues and expenses related to our merchant business may be recognized in different periods. These timing factors could impact our operating margins as well as the relationship between our gross bookings and revenues in a particular period, especially as our merchant business increases as a percentage of our overall business.

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 and has grown rapidly in this area, including by offering a flight meta-search product (Google Flights), a hotel meta-search product (Google Hotel Ads), an alternative accommodation meta-search product (Google Vacation Rentals), its "Book on Google" reservation functionality, Google Travel, a planning tool that aggregates its flight, hotel and packages products in one website and by integrating its hotel meta-search products and restaurant information and reservation products into its Google Maps app. Moreover, as the economy and the travel industry recover from the impact of the COVID-19 pandemic, the structure of the travel industry could change in unexpected ways, which could advantage or disadvantage us and benefit certain of our existing competitors or new entrants. As a result, our historical strengths may not provide the competitive advantages that they did prior to the pandemic. If we are unable to successfully adapt to any changes in how the travel industry operates or to changes in the ways in which consumers purchase travel services, our ability to compete, and therefore our business and results of operations, would be adversely affected.

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. 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 accommodation average daily rates ("ADRs") and are not made as far in advance. We have observed a higher share of our room nights made on a mobile device in the first three quarters of 2021, as compared to the first three quarters of 2019. For more detail regarding the competitive trends and risks we face, see Part II, 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 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 a competitive price, whether through discounts, coupons, closed-user group rates or loyalty programs, increased flexibility in cancellation policies, or otherwise. These initiatives have resulted and in the future may result in lower ADRs and 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 experienced a meaningful decline in constant-currency accommodation ADRs in 2020 due to the COVID-19 pandemic. However, in the second and third quarters of 2021 our global ADRs increased, as compared to the second and third

quarters of 2019. Our global ADRs increased in the third quarter of 2021, as compared to the third quarter of 2019, due in part to changes in the geographical mix of our business driven primarily by stronger room night performance in North America, which is a high ADR region, and weaker room night performance in Asia, which is a low ADR region. In addition, our global ADRs in the third quarter of 2021, as compared to the third quarter of 2019, benefited from higher ADRs in Europe and North America, which were driven by rate increases across many destination types with notable strength in beach-oriented leisure destinations. Prior to the COVID-19 outbreak, we observed a trend of declining constant-currency accommodation ADRs. We believe the trend of declining ADRs, observed prior to the outbreak, was partially driven by the negative impact of the changing geographical mix of our business (e.g., lower ADR regions like Asia were generally growing faster than higher ADR regions like Western Europe and North America) as well as pricing pressures within local markets from time to time which resulted from competitive conditions, weakening economic conditions or changes in travel patterns. These declining ADR trends have resulted in and could in the future result in our gross bookings declining more than our room nights. As the travel market recovers from the impact of the COVID-19 pandemic, we expect travel industry ADRs generally to increase and, as a result, we expect our ADRs similarly to increase during the recovery, however, it is uncertain whether industry ADRs will improve at the same pace as travel demand. In addition, we expect the ADR trends we observed before the COVID-19 pandemic will generally resume after the recovery, which would negatively pressure our ADRs, but there could be periods of stable or increasing ADRs.

We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Historically, our marketing expenses increased significantly, however, we experienced more moderate growth rates in recent years, and since the COVID-19 pandemic, our marketing expenses have declined significantly. More recently in the third quarter of 2021, our marketing expenses were only down slightly as compared to the third quarter of 2019 as a result of the improving demand environment as well as our own efforts to invest in marketing during our peak travel season. Our marketing expense is comprised of performance marketing and brand marketing expenses. Our performance marketing expense, which represents a substantial majority of our marketing expense, is 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 platforms. Our brand marketing expense is 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. Total marketing expenses were $1.4 billion, $0.7 billion, and $1.4 billion for the three months ended September 30, 2021, 2020, and 2019, respectively, and $2.8 billion, $1.8 billion, and $4.0 billion for the nine months ended September 30, 2021, 2020, and 2019, respectively. We expect that our marketing expenses in 2021 will remain below 2019 levels, but higher than 2020 levels.

Marketing efficiency, expressed as marketing expense as a percentage of total revenues, 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 currency exchange rates, our ability to convert paid traffic to booking customers, the timing difference between when revenue is recognized and when marketing expense is recorded, the timing and effectiveness of our brand marketing campaigns and the extent to which consumers come directly to our platforms 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 marketing efficiency. Changes by Google or any of our other search or meta-search partners in how it presents travel search results, including, if applicable, 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.

We have observed a long-term trend of decreasing performance marketing returns on investment ("ROIs"), however, in recent years, we observed periods of stable or increasing ROIs. During the first several months of the COVID-19 pandemic in 2020, we experienced large year-over-year declines in ROIs driven by a significant increase in cancellation rates. However, we observed increases in ROIs in the first and second quarters of 2021 relative to the first and second quarters of 2019. In the third quarter of 2021, ROIs decreased slightly relative to the third quarter of 2019 as we invested in capturing consumer demand during the peak travel season. We expect volatility in our ROIs for the duration of the pandemic. When evaluating our performance marketing spend, we typically consider several factors for each channel, such as the customer experience on the advertising platform, the incremental traffic we receive and the anticipated repeat rate from a particular platform, as well as other factors. Given the elevated cancellation rates during the COVID-19 pandemic, our performance marketing spend is highly influenced by expected cancellation rates in addition to the other factors listed above. The amount of business we obtain through each performance marketing channel is impacted by numerous factors, including the level of consumer demand for travel, 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 II, Item 1A, Risk Factors - "We rely on marketing channels to generate a significant amount of traffic to our platforms and grow our business." and "Our business could be negatively affected by changes in online search and meta-search algorithms and dynamics or traffic-generating arrangements."

In 2019, our cancellation rates generally decreased, which benefited our marketing efficiency and results of operations. Earlier in the COVID-19 pandemic in 2020, we experienced significant increases in cancellation rates, which negatively impacted our marketing efficiency and results of operations. For example, increased cancellations, especially early in the pandemic, resulted in increased customer service costs, as well as higher than normal cash outlays to refund consumers for prepaid reservations. However, in the second and third quarters of 2020, we saw a steady improvement in cancellation rates, which trended towards levels that we observed in 2019. In the fourth quarter of 2020, we saw a reversal of the improving cancellation rate trend. In the first quarter of 2021, we again started to see improvements in cancellation rate trends. The improvement in cancellation rate trends continued in the second quarter of 2021, with cancellation rates in line with the second quarter of 2019. In the third quarter of 2021, cancellation rates were slightly above the rates in the third quarter of 2019. We expect to continue to see volatility in cancellation rates due to any resurgences of the pandemic leading to reinstituted or additional travel restrictions and reduced willingness to travel. Further, in the first three quarters of 2021, a higher share of our room nights were booked with flexible cancellation policies, as compared to the first three quarters of 2019 and 2020, which could result in higher than normal cancellation rates in future quarters.

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 have impaired and could, in the future, impair consumer spending and adversely affect travel demand. We expect the lingering concerns of consumers around the safety of traveling could negatively impact leisure travel demand for an extended period of time. Further, political uncertainty, conditions or events, such as the variety of measures implemented by many governments around the world to reduce the spread of COVID-19 described above 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 ADRs across many regions of the world, particularly in those countries that appear to be most affected by economic and political uncertainties, which we believe are due at least in part to these macro-economic conditions and concerns. For more detail, see Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance." and "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 periods of significant volatility in the exchange rates between the U.S. Dollar and the Euro, the British Pound Sterling and other currencies. Significant fluctuations in foreign currency exchange rates, stock markets and oil prices can also impact consumer travel behavior.

As noted earlier, our international businesses represent a substantial majority of our financial results. Therefore, because we report our results in U.S. Dollars, we face exposure to movements in foreign 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 foreign currency exchange rate changes. For example, total revenues from our international businesses increased by 40% for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020, but, without the impact of changes in foreign currency exchange rates, increased year-over-year on a constant-currency basis by approximately 37%. 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. We designate certain portions of the aggregate principal value of our Euro-denominated debt as a hedge of the foreign currency exposure of the net investment in certain Euro functional currency subsidiaries. Foreign currency transaction gains or losses on the Euro-denominated debt that is not designated as a hedging instrument for accounting purposes are recognized in "Other income (expense), net" in the Unaudited Consolidated Statements of Operations (see Notes 6 and 9 to our Unaudited Consolidated Financial Statements). Such foreign currency transaction gains or losses are dependent on the amount of net assets of the Euro functional currency subsidiaries, the amount of the Euro-denominated debt that is designated as a hedge and fluctuations in foreign currency exchange rates. For more information, see Part II, Item 1A, Risk Factors - "We are exposed to fluctuations in foreign currency exchange rates."

We generally enter into derivative instruments to minimize the impact of foreign currency exchange rate fluctuations on our transactional balances denominated in currencies other than the functional currency. We will continue to evaluate the use of derivative instruments in the future. See Note 6 to our Unaudited Consolidated Financial Statements for additional information related to our derivative contracts.

Many taxing authorities are increasingly focused on ways to increase tax revenues and have targeted large multinational technology companies in these efforts. As a result, many countries and some U.S. states have implemented or are considering the adoption of a digital services tax or similar tax that imposes a tax on revenue earned from digital advertisements

or the use of online platforms, even when there is no physical presence in the jurisdiction. Currently, rates for this tax range from 1.5% to 10% of revenue deemed generated in the jurisdiction. The digital services taxes currently in effect, which we record in "General and administrative" expense in the Unaudited Consolidated Statements of Operations, have negatively impacted our results of operations and if many other jurisdictions pass similar legislation, the collective impact of all of these measures could have a materially adverse impact on our results of operations and cash flows. While the Organisation for Economic Co-operation and Development’s Statement on the Inclusive Framework issued on October 8, 2021 states that the Multilateral Convention will require all parties to remove all digital services taxes, the timing and modality for the removal of existing digital services taxes has not yet been clarified. For more information, see Part II, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."

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, Italy, Belgium and Austria have passed legislation prohibiting parity contract clauses in their entirety. Also, a number of governments are investigating or conducting information-gathering exercises with respect to compliance by online travel companies ("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. In December 2020, the European Commission proposed the Digital Markets Act and the Digital Services Act, which are expected to give regulators more instruments to investigate digital businesses and impose new rules on certain digital platforms if they are determined to be "gatekeepers." The proposed legislation is not final and it is not known what the laws will look like in their final forms. If regulators were to determine that we are a gatekeeper under the proposed legislation, we could be subject to additional rules and regulations not applicable to all our competitors and our business could be harmed. For more information on these matters and their potential effects on our business, see Note 13 to our Unaudited Consolidated Financial Statements and Part II, Item 1A, Risk Factors - "Our business is subject to various competition/anti-trust, consumer protection and online commerce laws, rules and regulations around the world, and as the size of our business grows, scrutiny of our business by legislators and regulators in these areas may intensify." If there is an adverse outcome of the ongoing litigation with the Netherlands Pension Fund for the Travel Industry discussed in Note 13 to the Unaudited Consolidated Financial Statements, we could incur additional ongoing expenses related to employee benefits. There could also be other employee benefit related expenses that we may become subject to in the Netherlands and/or other locations. Such increased employee benefit costs could be significant and would negatively impact our results of operations and cash flows. In addition to the price parity and consumer protection investigations and the ongoing pension matter, 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. 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 and Other Timing Factors

In recent years prior to 2020, the majority of our gross bookings have been generated in the first half of the year, as consumers planned and reserved their spring and summer vacations in Europe and North America. However, we would generally recognize revenue from these bookings when the travel begins (at "check-in"), which can be in a quarter other than when the associated reservations are booked. In contrast, we expensed the substantial majority of our marketing activities as the expense is incurred, which is typically in the quarter in which associated reservations were booked. As a result of this timing difference between when we recorded marketing expense and when we recognized associated revenue, we have experienced our highest levels of profitability in the third quarter of the year, which coincides with the highest levels of accommodation check-ins for the year for our European and North American markets. The first quarter of the year was typically the quarter in which we recognized the lowest amount of revenue as well as the lowest level of profitability and highest level of volatility in earnings growth rates due to these seasonal timing factors. The COVID-19 pandemic impacted seasonality in 2020 and 2021; for example, in the nine months ended September 2021 there was a higher share of travel booked during the second and third quarters as well as a higher share of check-ins during the third quarter than in 2019. We cannot currently predict travel patterns given the COVID-19 pandemic, and we may not experience typical seasonality effects on our business throughout the duration of the pandemic, and potentially for some time thereafter.

For several years, we experienced an expansion of the booking window (the average time between the booking of a travel reservation and when the travel begins), which impacts the relationship between our gross bookings (recognized at the time of booking) and our revenues (recognized at the time of check-in). However, we saw a contraction of the booking window throughout 2018 and 2019. Due to the impact of the COVID-19 pandemic on our booking trends, we saw an initial expansion in the booking window in the second quarter of 2020 versus the comparable prior-year period as an increased percentage of bookings were made for travel occurring in the third quarter of 2020. However, in the third and fourth quarters of 2020, we saw a significant contraction of the booking window versus the comparable prior-year period as an increased percentage of

bookings were made for travel that was to occur close to the time of booking. In the first three quarters of 2021 we continued to see a contraction of the booking window as compared to the first three quarters of 2019. The contraction in the third quarter of 2021 as compared to the third quarter of 2019 was more significant than the contraction in the second quarter of 2021 as compared to the second quarter of 2019, as we saw a higher mix of near-term bookings during our peak travel season. We expect that the length of the booking window will be volatile and difficult to predict throughout the duration of the COVID-19 pandemic, and potentially for some time thereafter. 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 (e.g., Easter and Ramadan) fall can have an impact on our quarterly results and our quarterly year-over-year growth rates. Due to the similar timing of Easter in April 2021 and April 2020, the timing of the Easter holiday did not have a meaningful impact on our year-over-year growth rates in the first and second quarters of 2021.

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. As the travel market recovers from the impact of the COVID-19 pandemic, we expect to see higher than pre-COVID-19 pandemic gross bookings growth rates, which will likely result in periods where our operating margins are negatively impacted due to the timing difference of when marketing expense is recorded and when revenue is recognized.

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 COVID-19 and other coronaviruses, Ebola and Zika, political instability, changes in economic conditions, wars and regional hostilities, imposition of taxes, tariffs or surcharges by regulatory authorities, changes in trade policies or trade disputes, changes in immigration policies or travel-related accidents or increased focus on the environmental impact of travel, can disrupt travel, limit the ability or willingness of travelers to visit certain locations or otherwise result in declines in travel demand. These kinds of events have negatively affected our business and results of operations in the past and may do so again in the future. 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 and our relationships with travel service providers and other partners, any of which can adversely affect our business and results of operations. See Part II, Item 1A, Risk Factors - "The COVID-19 pandemic has materially adversely affected, and may further adversely impact, our business and financial performance." and "Declines or disruptions in the travel industry could adversely affect our business and financial performance."

The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. While we have seen signs of a recovery in travel demand in certain parts of the world including the United States and Europe as well as more recently in Asia, we continue to expect that our business will be adversely impacted by surges of COVID-19 case counts, including those driven by variants of COVID-19, as well as any government-imposed travel restrictions in reaction to COVID-19 outbreaks, which could remain a risk for an extended period of time. Over the long term, 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. In recent years, we have experienced pressure on operating margins as we invested in initiatives to drive future 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. We believe 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 return to the levels of revenue growth and profitability we experienced prior to the COVID-19 pandemic.

A variety of factors has made and may continue to make the attraction and retention of well-qualified employees more difficult and costly. The competition for talent in our industry has intensified, including among established technology companies and startups. There is also competition for technology talent from companies that are transitioning to digital, with whom we did not historically compete for talent. The competition for talent is exacerbated by an increased willingness of certain companies to offer flexible and remote working policies, which expands the pool of candidates from which our competitors may attract talent. This could continue in the future due to other technology companies recruiting and hiring our employees, an actual or perceived slower pace of recovery of the travel industry as a result of the COVID-19 pandemic than other industries, and other factors beyond our control. If we do not succeed in attracting well-qualified employees, our business, our ability to grow and innovate, competitive position, reputation and results of operations would be adversely affected. The current labor market is highly competitive and our personnel expenses to attract and retain key talent are increasing, which may adversely affect our results of operations. We are unable to predict if there will be any significant and continuing impact on our workforce as a result of the COVID-19 pandemic. See Part II, Item 1A, Risk Factors - "We rely on the performance of highly skilled employees; and, if we are unable to retain or motivate key employees or attract, retain and motivate well-qualified employees, our business would be harmed."

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). 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. For a complete discussion of our critical accounting policies, see the "Critical Accounting Policies and Estimates" section of the Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended December 31, 2020.

Valuation of Goodwill

We test goodwill for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We test goodwill at a reporting unit level and our annual goodwill impairment tests are performed as of September 30. As of September 30, 2021, we performed our annual goodwill impairment test and concluded that there was no impairment of goodwill.

A substantial portion of our goodwill relates to the acquisitions of OpenTable and KAYAK. Due to the significant and negative financial impact of the COVID-19 pandemic (see Note 1 to our Unaudited Consolidated Financial Statements), we performed an interim period goodwill impairment test at March 31, 2020 and recognized a goodwill impairment charge of $489 million related to the OpenTable and KAYAK reporting unit for the three months ended March 31, 2020, which is not tax-deductible. As of September 30, 2020, we performed our annual goodwill impairment test and recognized a goodwill impairment charge of $573 million for the same reporting unit for the three months ended September 30, 2020, which is not tax-deductible.

The estimation of fair values of our reporting units reflect numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding each reporting unit's expected growth rates and operating margin, expected length and severity of the impact from the COVID-19 pandemic, the shape and timing of the subsequent recovery and the competitive environment, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. It requires significant judgments and estimates and actual results could be materially different than

the judgments and estimates used to estimate fair value. Future events and changing market conditions may lead us to re-evaluate the assumptions used to estimate the fair values of our reporting units, particularly the assumptions related to the length and severity of the COVID-19 pandemic and the shape and timing of the subsequent recovery, which may result in a need to recognize additional goodwill impairment charges that could have a material adverse effect on our results of operations.

Valuation of Investments in Private Companies

See Note 5 to our Unaudited Consolidated Financial Statements for additional information related to the investments in private companies. The fair value of these investments are measured using unobservable inputs when little or no market data is available ("Level 3 inputs"). See Note 6 to our Unaudited Consolidated Financial Statements for additional information.

Our investments measured using Level 3 inputs primarily consist of preferred stock investments in privately-held companies that are classified as either debt securities or equity securities without readily determinable fair values. Fair values of privately held securities are estimated using a variety of valuation methodologies, including both market and income approaches. We have used valuation techniques appropriate for the type of investment and the information available about the investee as of the valuation date to determine fair value. Recent financing transactions in the investee, such as new investments in preferred stock, are generally considered the best indication of the enterprise value and therefore used as a basis to estimate fair value. As applicable, we also consider publicly disclosed information for certain merger transactions (not yet consummated), including those involving special purpose acquisition companies. However, based on a number of factors, such as the proximity in timing to the valuation date or the volume or other terms of these financing transactions, we may also use other valuation techniques to supplement this data, including the income approach. In addition, an option-pricing model ("OPM") is utilized to allocate value to the various classes of securities of the investee, including the class owned by us. In certain situations, the current value method ("CVM") is utilized to allocate value to the various classes of equity based on their as-converted values. The OPM and CVM include assumptions around the investees’ expected time to liquidity and volatility.

In April 2021, Grab announced its intention to pursue a public listing of its shares in the U.S. through a merger with Altimeter Growth Corp. ("Altimeter") (the "Grab Transaction") (see Note 5 to our Unaudited Consolidated Financial Statements). Our investment in Grab, which is classified as a debt security for accounting purposes, had an estimated fair value of $330 million and $200 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, we measured this investment using Level 3 inputs and management's estimates that incorporate current market participant expectations of future cash flows alongside the Grab Transaction value and other relevant information.

To estimate the fair value of Grab, we used a relative weighting of 70% market approach using the Grab Transaction value and 30% income approach. The market approach uses the Grab Transaction value and an estimated discount for the lack of marketability. The key unobservable inputs used include the volatility (65%) and an estimated time to liquidity of three months. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate based on a company’s weighted-average cost of capital, and is adjusted to reflect the risks inherent in its cash flows. The key unobservable inputs and ranges used include the weighted-average cost of capital (12.0%-14.5%), terminal earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple (12x-14x), volatility (60%-70%) and an estimated time to liquidity of five months. Significant changes in any of these inputs in isolation would result in significantly different fair value measurements. Generally, a change in the assumption used for terminal EBITDA multiples would result in a directionally similar change in the fair value and a change in the assumption used for weighted-average cost of capital or volatility would result in a directionally opposite change in the fair value.

The determination of the fair value of Grab, inclusive of the consideration of the Grab Transaction value, reflects numerous assumptions that are subject to various risks and uncertainties, including the timing of when the transaction will be completed. The Grab Transaction is subject to certain closing conditions, including the effectiveness of the relevant registration statement filed with the SEC and the approval of Altimeter and Grab shareholders.

For our investment in the equity securities of DiDi Global Inc. ("DiDi"), considering the impact of the COVID-19 pandemic (see Note 1 to our Unaudited Consolidated Financial Statements), we performed an impairment analysis as of March 31, 2020 that resulted in an adjusted carrying value of $400 million at each of March 31, 2020, December 31, 2020 and March 31, 2021. As a result of DiDi's initial public offering in June 2021, we reclassified our DiDi investment as equity securities with readily determinable fair values.

Recent Accounting Pronouncements

See Note 1 to our Unaudited Consolidated Financial Statements for details, which is incorporated into this Item 2 by reference thereto.

Results of Operations

Three and Nine Months Ended September 30, 2021 compared to the Three and Nine Months Ended September 30, 2020

We evaluate certain operating and financial measures on both an as-reported and constant-currency basis. We calculate constant currency by converting our current-year period operating and financial results for transactions recorded in currencies other than U.S. Dollars using the corresponding prior-year period monthly average exchange rates rather than the current-year period monthly average exchange rates.

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 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.

Room nights, rental car days and airline tickets reserved through our services for the three and nine months ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Room nights18312743.9%44027957.3%
Rental car days13944.0%372359.5%
Airline tickets42154.8%114183.8%

Room nights, rental car days, and airline tickets reserved through our services increased significantly for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic. The year-over-year increase in airline tickets for the three and nine months ended September 30, 2021 was also driven by strong execution and growth at Priceline, which operates primarily in the U.S. domestic travel market, a market that has recovered significantly faster than the global travel market from the impact of the COVID-19 pandemic, and to a lesser extent by strong growth at Booking.com, which had a relatively small amount of airline tickets booked in the first three quarters of 2020.

Gross bookings resulting from reservations of room nights, rental car days and airline tickets made through our agency and merchant models for the three and nine months ended September 30, 2021 and 2020 were as follows (numbers may not total due to rounding):

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Agency$14,872$9,52156.2%$38,866$19,377100.6%
Merchant8,8123,861128.2%18,7098,705114.9%
Total$23,684$13,38277.0%$57,575$28,082105.0%

Gross bookings increased by 77.0% and 105.0% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020 (increased on a constant-currency basis by approximately 75% and 99%, respectively), due to an increase in gross bookings from our accommodation, airline ticket and rental car reservation services.

The increase in gross bookings from our accommodation reservation services for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, was due to the 43.9% and 57.3%

increase in room nights, respectively, a year-over-year increase in accommodation ADRs of approximately 19% and 23%, respectively, on a constant-currency basis and the positive impact of foreign exchange rate fluctuations. The year-over-year increase in accommodation ADRs on a constant-currency basis was impacted by the comparison to the three and nine months ended September 30, 2020, when ADRs declined as travel demand was significantly reduced. In addition, the year-over-year increase in accommodation ADRs on a constant-currency basis benefited from strength in European ADRs, which were higher than in the comparable pre-COVID-19 pandemic periods in 2019.

The increase in gross bookings from our rental car reservation services for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, was due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic.

The increase in gross bookings from our airline ticket reservation services for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020 was driven primarily by strong execution and growth at Priceline, which operates primarily in the U.S. domestic travel market, a market that has recovered significantly faster than the global travel market from the impact of the COVID-19 pandemic, and to a lesser extent by strong growth at Booking.com, which had a relatively small amount of airline ticket gross bookings in the first three quarters of 2020.

We believe that unit growth rates and growth in total gross bookings on a constant-currency basis, which excludes the impact of foreign currency exchange rate fluctuations, are important measures to understand the fundamental performance of the business.

Agency gross bookings are derived from travel-related transactions where we do not facilitate payments from travelers for the travel services provided. Agency gross bookings increased by 56.2% and 100.6% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic.

Merchant gross bookings are derived from services where we facilitate payments from travelers for the travel services provided. Merchant gross bookings increased by 128.2% and 114.9% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic. Merchant gross bookings for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, increased more than agency gross bookings due to the expansion of merchant accommodation reservation services at Booking.com.

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.

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

  • Agency. Agency revenues are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided. Agency revenues consist almost entirely of travel reservation commissions. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.

  • Merchant. Merchant revenues are derived from travel-related transactions where we facilitate 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) credit card processing rebates and customer processing fees; and (3) ancillary fees, including travel-related insurance revenues. Substantially all merchant revenues are derived from transactions where travelers book accommodation reservations or rental car reservations.

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 its 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.

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Agency revenues$2,867$1,72366.4%$4,912$3,50440.2%
Merchant revenues1,62283793.6%2,6561,74152.5%
Advertising and other revenues18780134.9%40931331.0%
Total revenues$4,676$2,64077.1%$7,977$5,55843.5%

Total revenues for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, increased 77.1% and 43.5%, respectively (increased on a constant-currency basis by approximately 76% and 41%, respectively), due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic.

Agency revenues increased by 66.4% and 40.2% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic.

Merchant revenues increased by 93.6% and 52.5% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic. Merchant revenues for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, increased more than agency revenues due to the expansion of merchant accommodation reservation services at Booking.com.

Advertising and other revenues increased by 134.9% and 31.0% for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel and restaurant demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic. In addition, in the second and third quarters of 2021 our advertising and other revenues benefited from fees payable by restaurants for diners seated through OpenTable's online reservation service and subscription fees for restaurant management services, as the program that waived those fees ended in March 2021.

Total revenues as a percentage of gross bookings was 19.7% for the three months ended September 30, 2021 and 2020. Total revenues as a percentage of gross bookings was 13.9% for the nine months ended September 30, 2021, compared to 19.8% for the nine months ended September 30, 2020. For the nine months ended September 30, 2021, revenues as a percentage of gross bookings was negatively impacted by the timing of booking versus travel as a portion of the gross bookings made in the first three quarters of 2021 were related to expected travel in subsequent quarters, which is when we expect to recognize the associated revenue. In addition, for the nine months ended September 30, 2020, revenues as a percentage of gross bookings was positively impacted by timing of booking versus travel as revenue benefited from travel earlier in the year before the COVID-19 pandemic, while gross bookings were more negatively impacted by a significant increase in cancellations in March and April 2020.

Our international businesses accounted for approximately $4.2 billion and $6.9 billion of our total revenues for the three and nine months ended September 30, 2021, respectively, compared to $2.4 billion and $5.0 billion for the three and nine months ended September 30, 2020, respectively. Total revenues attributable to our international businesses for the three and nine months ended September 30, 2021 increased by 75% and 40%, respectively, compared to the three and nine months ended September 30, 2020 (increased on a constant-currency basis by approximately 73% and 37%, respectively). Total revenues attributable to our U.S. businesses increased 107% and 71%, for the three and nine months ended September 30, 2021, respectively, compared to the three and nine months ended September 30, 2020. Total revenues attributable to our international and U.S. businesses increased for the three and nine months ended September 30, 2021, compared to the three and nine months

ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic.

Operating Expenses

Marketing Expenses

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Marketing expenses$1,378$73188.4%$2,827$1,79357.6%
% of Total revenues29.5%27.7%35.4%32.3%

We rely on marketing channels to generate a significant amount of traffic to our websites. 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; (4) offline and online brand marketing; and (5) other performance-based marketing and incentives. For the three and nine months ended September 30, 2021, our marketing expense increased significantly compared to the three and nine months ended September 30, 2020, due primarily to the significant improvement in travel demand trends since the second quarter of 2020, which was severely impacted by the COVID-19 pandemic. We adjust our marketing spend based on our growth and profitability objectives, as well as the travel demand and expected ROIs in our marketing channels. Marketing expenses as a percentage of total revenues increased for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to a significant increase in brand marketing expense, as we took actions to reduce our brand marketing expense in the third quarter of 2020 in response to the reduced travel demand, as well as due to slightly lower ROIs in our performance marketing channels, partially offset by favorable changes in share of traffic by channel. For the nine months ended September, 30, 2021, our marketing expense as a percentage of total revenues increased compared to the nine months ended September 30, 2020, due to the differences in timing between booking and travel, with the majority of our marketing expense recognized at the time of booking and revenue recognized when travel occurs, as well as increases in brand marketing expense, as we took actions to reduce our brand marketing expense in the first three quarters of 2020 in response to the reduced travel demand. The timing differences and increased brand marketing expense were partially offset by year-over-year increases in performance marketing ROIs and favorable changes in the share of traffic by channel for the nine months ended September 30, 2021.

Sales and Other Expenses

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Sales and other expenses$302$129134.7%$620$637(2.7)%
% of Total revenues6.4%4.9%7.8%11.5%

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 chargeback provisions and fraud prevention expenses associated with merchant transactions; (4) provisions for expected credit losses, primarily related to accommodation commission receivables and prepayments to certain customers; and (5) customer relations costs and other costs. For the three months ended September 30, 2021, sales and other expenses, which are substantially variable in nature, increased compared to the three months ended September 30, 2020, due primarily to an increase in expenses related to transactions processed on a merchant basis, which increased due to the significant improvement in travel demand trends since the prior year. For the nine months ended September 30, 2021, sales and other expenses decreased compared to the nine months ended September 30, 2020, due primarily to a decrease in expected credit loss expenses as we substantially increased our provision for expected credit losses in the first quarter of 2020 due to the COVID-19 pandemic.

Personnel

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Personnel$591$51714.2%$1,829$1,45325.9%
% of Total revenues12.6%19.6%22.9%26.2%

Personnel expenses consist of compensation to our personnel, including: (1) salaries; (2) bonuses; (3) stock-based compensation; (4) payroll taxes; and (5) employee health and other benefits. Personnel expenses increased during the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to a higher bonus expense accrual as well as a $22 million benefit from government grants and other assistance recognized during the three months ended September 30, 2020. Personnel expenses increased during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to $136 million of expense, recorded in the second quarter of 2021, which was associated with the return of government assistance received through various government aid programs, a $122 million benefit from government grants and other assistance recognized during the nine months ended September 30, 2020, and a higher bonus expense accrual and stock-based compensation expense, partially offset by lower salary expenses. Stock-based compensation expense was $85 million and $284 million for the three and nine months ended September 30, 2021, respectively, compared to $80 million and $163 million for the three and nine months ended September 30, 2020, respectively. The increase in stock-based compensation expense for the nine months ended September 30, 2021, was impacted by a reduction in stock-based compensation expense of $73 million recorded during the three months ended March 31, 2020 as a result of reduced financial performance driven by the COVID-19 pandemic. In addition, stock-based compensation expense increased during the nine months ended September 30, 2021 due to the modification of performance-based awards during the three months ended March 31, 2021. Headcount decreased 15% year-over-year to approximately 19,600 as of September 30, 2021, compared to approximately 23,000 as of September 30, 2020, primarily due to restructuring actions and attrition.

General and Administrative

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
General and administrative$179$14821.3%$432$453(4.6)%
% of Total revenues3.9%5.6%5.4%8.1%

General and administrative expenses consist primarily of: (1) occupancy and office expenses; (2) fees for outside professionals, including legal expenses; (3) indirect taxes such as travel transaction taxes and digital services taxes; and (4) personnel-related expenses such as travel, relocation, recruiting and training expenses. General and administrative expenses increased for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, due to higher indirect taxes driven by the improvement in revenue, as well as higher fees for professional services. General and administrative expenses decreased during the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, due to lower personnel-related expenses associated with a significant reduction in non-essential travel and entertainment, and lower occupancy and office expenses due to employees working remotely since March 2020, partially offset by higher fees for professional services and higher indirect taxes driven by the improvement in revenue.

Information Technology

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Information technology$109$7153.1%$289$21932.2%
% of Total revenues2.3%2.7%3.6%3.9%

Information technology expenses consist primarily of: (1) software license and system maintenance fees; (2) outsourced data center and cloud computing costs; (3) payments to contractors; and (4) data communications and other

expenses associated with operating our services. Information technology expenses increased during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, due to increased software license fees and payments to contractors, some of which relate to cybersecurity and data privacy.

Depreciation and Amortization

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Depreciation and amortization$102$115(11.4)%$323$344(6.1)%
% of Total revenues2.2%4.3%4.0%6.2%

Depreciation and amortization expenses consist of: (1) amortization of intangible assets with determinable lives; (2) amortization of internally-developed and purchased software; (3) depreciation of computer equipment; and (4) depreciation of leasehold improvements, furniture and fixtures and office equipment. Depreciation and amortization expenses decreased during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, as a result of decreased depreciation of computer equipment, partially offset by increased internally-developed software amortization expense.

Restructuring and Other Exit Costs

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Restructuring and other exit costs$—$41(99.1)%$9$75(87.6)%
% of Total revenues—%1.5%0.1%1.4%

Restructuring and other exit costs principally relate to the restructuring charges as a result of restructuring actions taken in response to the impact of the COVID-19 pandemic on our business. Restructuring and other exit costs decreased during the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, as these restructuring activities substantially concluded as of December 31, 2020. These restructuring charges are primarily related to employee severance and other termination benefits at Booking.com (see Note 14 to the Unaudited Consolidated Financial Statements).

Impairment of Goodwill

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Impairment of goodwill$—$573N/A$—$1,062N/A
% of Total revenuesN/A21.7%N/A19.1%

During the three and nine months ended September 30, 2020, we recorded an impairment charge to goodwill related to OpenTable and KAYAK, which is not tax-deductible, of $573 million and $1.1 billion (see Note 8 to our Unaudited Consolidated Financial Statements).

Interest Expense

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Interest expense$80$98(17.4)%$259$2580.7%

Interest expense decreased for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, primarily due to the issuance of senior notes with lower interest rates in March 2021 and the redemption of senior notes with higher interest rates in April 2021. Interest expense increased slightly for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, primarily due to interest expense attributable to our Senior Notes and Convertible Senior Notes issued in April 2020, almost entirely offset by the effect of the redemption in April 2021 of our Senior Notes issued in April 2020 and the maturity in June 2020 of our Convertible Senior Notes issued in May 2013 (see Note 9 to our Unaudited Consolidated Financial Statements).

Other Income (Expense), Net

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Other income (expense), net$(967)$618(256.3)%$(740)$1,058(169.9)%

The following table sets forth the breakdown of "Other income (expense), net" for the three and nine months ended September 30, 2021 and 2020:

Three Months Ended September 30, (in millions)Nine Months Ended September 30, (in millions)
2021202020212020
Interest and dividend income$4$5$12$49
Net (losses) gains on equity securities(1,016)733(589)1,261
Impairment of investment———(100)
Foreign currency transaction gains (losses)45(121)92(148)
Loss on early extinguishment of debt——(242)—
Other—1(13)(4)
Other income (expense), net$(967)$618$(740)$1,058

Interest and dividend income decreased for the three and nine months ended September 30, 2021, compared to the three and nine months ended September 30, 2020, primarily due to lower yields as well as the change in the mix of investments with increased usage of investments classified as cash equivalents.

Net losses on equity securities for the three and nine months ended September 30, 2021 are principally related to the losses on our equity investments in Meituan and DiDi. Net gains on equity securities for the three and nine months ended September 30, 2020 are principally related to the gains on our equity investments in Meituan. See Note 5 to our Unaudited Consolidated Financial Statements for additional information.

Impairment of investment for the nine months ended September 30, 2020 is related to the impairment of our investment in DiDi that we recorded during the three months ended March 31, 2020 (see Notes 5 and 6 to our Unaudited Consolidated Financial Statements).

Foreign currency transaction gains for the three and nine months ended September 30, 2021 include gains of $54 million and $108 million, respectively, related to the portion of our Euro-denominated debt that was not designated as a net investment hedge, partially offset by losses of $10 million and $18 million, respectively, related to derivative contracts. Foreign currency transaction losses for the three and nine months ended September 30, 2020 include losses of $117 million and $139 million, respectively, related to the portion of our Euro-denominated debt that was not designated as a net investment

hedge. In addition, foreign currency transaction losses for the nine months ended September 30, 2020 include losses on derivative contracts of $31 million.

Loss on early extinguishment of debt is related to our Senior Notes due April 2025 (the "April 2025 Notes") and our Senior Notes due April 2027 (the "April 2027 Notes") that were redeemed in April 2021 (see Note 9 to our Unaudited Consolidated Financial Statements).

Other expenses for the nine months ended September 30, 2021 include losses on reverse treasury lock agreements which were designated as cash flow hedges (see Note 6 to our Unaudited Consolidated Financial Statements).

Income Taxes

Three Months Ended September 30, (in millions)Increase (Decrease)Nine Months Ended September 30, (in millions)Increase (Decrease)
2021202020212020
Income tax expense$199$34483.1%$102$984.8%
% of Income before income taxes20.5%4.1%15.8%30.4%

Our 2021 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax (discussed below), partially offset by higher international tax rates, U.S. federal and state tax associated with our international earnings, and certain non-deductible expenses. Our 2020 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to the non-deductible goodwill impairment charges related to OpenTable and KAYAK, the valuation allowance recorded against the deferred tax assets generated from the impairment of a long-term investment and an increase in unrecognized tax benefits, partially offset by the benefit of the Netherlands Innovation Box Tax.

Our effective tax rate for the three months ended September 30, 2021 was higher than the three months ended September 30, 2020, primarily due to a decrease in the benefit of the Netherlands Innovation Box Tax, partially offset by lower international tax rates, certain lower non-deductible expenses and a decrease in discrete U.S. tax expense related to unrealized gains on equity securities. In addition, the effective tax rate for the three months ended September 30, 2020 reflected the non-deductible goodwill impairment charge related to OpenTable and KAYAK.

Our effective tax rate for the nine months ended September 30, 2021 was lower than the nine months ended September 30, 2020, primarily due to lower discrete U.S. tax expense related to unrealized gains on equity securities, lower international tax rates and certain lower non-deductible expenses, partially offset by a decrease in the benefit of the Netherlands Innovation Box Tax. In addition, the effective tax rate for the nine months ended September 30, 2020 reflected the non-deductible goodwill impairment charge related to OpenTable and KAYAK.

During the three and nine months ended September 30, 2021 and 2020, a majority of our income was reported in the Netherlands, where Booking.com is based. According to Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 9% ("Innovation Box Tax") for periods beginning on or after January 1, 2021 rather than the Dutch statutory rate of 25%. Previously, the Innovation Box Tax rate had been 7%. The 2022 tax plan presented by the Dutch Ministry of Finance includes a proposal to increase the Netherlands corporate income tax rate from 25% to 25.8%, effective January 1, 2022. A portion of Booking.com's earnings during the three and nine months ended September 30, 2021 and 2020 qualified for Innovation Box Tax treatment, which had a beneficial impact on the effective tax rates for these 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, could substantially increase our effective tax rate and adversely impact our results of operations and cash flows in future periods. See Part II, Item 1A, Risk Factors - "We may not be able to maintain our 'Innovation Box Tax' benefit."

Liquidity and Capital Resources

The COVID-19 pandemic and the resulting economic conditions and government restrictions resulted in a material decrease in consumer spending and a significant decline in travel and restaurant activities and consumer demand for related services as compared to 2019 levels. Our financial results and prospects are almost entirely dependent on the sale of travel-related services.

The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows and growth prospects is highly uncertain and will ultimately depend on future developments. These include, but are not limited to, the severity, extent and duration of the COVID-19 pandemic, including as a result of any new variants of COVID-19 and any

resurgences of the pandemic, the global distribution of the vaccines and their efficacy against existing and any future variants of COVID-19, and their impacts on the travel and restaurant industries and consumer spending more broadly. Even though we have seen some improvements in the economic and operating conditions for our business since the outset of the COVID-19 pandemic, we cannot predict the long-term effects of the pandemic on our business or the travel and restaurant industries as a whole. If the travel and restaurant industries are fundamentally changed by the COVID-19 pandemic in ways that are detrimental to our operating model, our business may continue to be adversely affected even as the broader global economy recovers.

Our continued access to sources of liquidity depends on multiple factors, including global economic conditions, the condition of global financial markets, the availability of sufficient amounts of financing, our ability to meet debt covenant requirements, our operating performance and our credit ratings. If our credit ratings were to be downgraded, or financing sources were to ascribe higher risk to our rating levels or our industry, our access to capital and the cost of any financing would be negatively impacted. There is no guarantee that additional debt financing will be available in the future to fund our obligations, or that it will be available on commercially reasonable terms, in which case we may need to seek other sources of funding. In addition, the terms of future debt agreements could include more restrictive covenants than those we are currently subject to, which could restrict our business operations. For more information, see Part II, Item 1A, Risk Factors - "Our liquidity, credit ratings and ongoing access to capital could be materially and negatively affected by the impacts of the COVID-19 pandemic."

At September 30, 2021, we had $15.4 billion in cash, cash equivalents and short-term and long-term investments, of which approximately $7.6 billion is held by our international subsidiaries. Cash, cash equivalents and long-term investments held by our international subsidiaries are denominated primarily in U.S. Dollars, Hong Kong Dollars and Euros. Cash equivalents and short-term and long-term investments are principally comprised of money market funds, time deposits and certificates of deposit, convertible debt securities of Trip.com Group, equity securities of Meituan and DiDi and our investments in private companies (see Notes 5 and 6 to the Unaudited Consolidated Financial Statements).

At September 30, 2021, we had a remaining transition tax liability of $911 million as a result of the Tax Cuts and Jobs Act (the "Tax Act"), which included $824 million reported as "Long-term U.S. transition tax liability" and $87 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next five years. In accordance with the Tax Act, generally, future repatriation of our international cash will not be subject to a U.S. federal income tax liability as a dividend, but will be subject to U.S. state income taxes and international withholding taxes, which have been accrued by us.

In August 2019, 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 $80 million of letters of credit as well as borrowings of up to $100 million on same-day notice, referred to as swingline loans. The proceeds of loans made under the facility can be used for working capital and general corporate purposes, including acquisitions, share repurchases and debt repayments. At September 30, 2021, there were no borrowings outstanding and $4 million of letters of credit issued under the facility. The revolving credit facility contains a maximum leverage ratio covenant, compliance with which is a condition to our ability to borrow thereunder. In 2020, we amended the revolving credit facility to (i) suspend the maximum leverage ratio covenant through and including the three months ending March 31, 2022, which was replaced with a $4.5 billion minimum liquidity covenant based on unrestricted cash, cash equivalents, short-term investments and unused capacity under this revolving credit facility and (ii) increase the permitted maximum leverage ratio from and including the three months ending June 30, 2022 through and including the three months ending March 31, 2023. We agreed not to declare or make any cash distribution and not to repurchase any of our shares (with certain exceptions including in connection with tax withholding related to shares issued to employees) unless (i) prior to the delivery of financial statements for the three months ending June 30, 2022, we have at least $6.0 billion of liquidity on a pro forma basis, based on unrestricted cash, cash equivalents, short-term investments and unused capacity under this revolving credit facility and (ii) after the delivery of financial statements for the three months ending June 30, 2022, we are in compliance on a pro forma basis with the maximum leverage ratio covenant then in effect. Such

restriction ends upon delivery of financial statements required for the three months ending June 30, 2023, or we have the ability to terminate this restriction earlier if we demonstrate compliance with the original maximum leverage ratio covenant in the revolving credit facility. Beginning with the three months ending June 30, 2022, the minimum liquidity covenant will cease to apply and the maximum leverage ratio covenant, as increased, will again be in effect. At September 30, 2021, we were in compliance with the minimum liquidity covenant. There can be no assurance that we will be able to meet either the minimum liquidity covenant or the maximum leverage ratio covenant, as applicable, at any particular time, and our ability to borrow under the revolving credit facility depends on compliance with the applicable covenant. Further, the lenders have the right to require repayment of any amounts borrowed under the facility if we are not in compliance with the applicable covenant (see Note 9 to the Unaudited Consolidated Financial Statements).

In September 2021, in connection with the maturity of our Convertible Senior Notes due September 2021, we paid $1.0 billion to satisfy the aggregate principal amount due and paid an additional $86 million conversion premium in excess of the principal amount.

In March 2021, we issued Senior Notes due March 2025 with an interest rate of 0.1% for an aggregate principal amount of 950 million Euros and Senior Notes due March 2028 with an interest rate of 0.5% for an aggregate principal amount of 750 million Euros. The proceeds from the issuance of these Senior Notes issued in March 2021 were used to redeem the April 2025 Notes and the April 2027 Notes. In April 2021, we paid $2.0 billion to redeem the April 2025 Notes and the April 2027 Notes (see Note 9 to the Unaudited Consolidated Financial Statements).

See Note 9 to the Unaudited Consolidated Financial Statements for additional information related to our debt arrangements, including principal amounts, interest rates and maturity dates.

During the nine months ended September 30, 2021, we repurchased 69,711 shares of our common stock for an aggregate cost of $158 million to satisfy employee withholding tax obligations related to stock-based compensation. At September 30, 2021, we had a remaining aggregate amount of $10.4 billion authorized by our Board of Directors to repurchase our common stock. We have not repurchased any shares since March 2020 under this stock repurchase authorization and do not intend to initiate any repurchases under this authorization in 2021. Assuming the travel recovery continues and we are able to meet our minimum liquidity covenant under the revolving credit facility, we plan to start repurchases in early 2022 under this authorization, and expect to complete this authorization within three years after commencing repurchases. See Note 9 to the Unaudited Consolidated Financial Statements for a description of the impact of the 2020 credit facility amendment on our ability to repurchase shares.

In September 2016, we signed a turnkey agreement to construct an office building for Booking.com’s future headquarters in the Netherlands for 270 million Euros ($313 million). Upon signing this agreement, we paid 43 million Euros ($48 million) for the acquired land-use rights. In addition, since signing the turnkey agreement we have made several progress payments principally related to the construction of the building. As of September 30, 2021, we had a remaining obligation of 22 million Euros ($25 million) related to the turnkey agreement, which will be paid through 2022, when we anticipate construction will be complete. In addition to the turnkey agreement, we have a remaining obligation at September 30, 2021 to pay 69 million Euros ($79 million) over the remaining initial term of the acquired land lease, which expires in 2065. At September 30, 2021, we had 27 million Euros ($31 million) of outstanding commitments to vendors to fit out and furnish the office space.

In 2018, we entered into an agreement to sign a future lease for office space in Manchester, United Kingdom for the future headquarters of Rentalcars.com, whereby our obligation to execute the lease was conditional upon the lessor completing certain activities. The lease commenced in October 2021 with modifications to certain terms and conditions of the 2018 agreement, for a term of approximately 13 years with a lease payment obligation of approximately 52 million British Pounds Sterling ($71 million), excluding lease incentives. In addition to our obligations under the lease, we will also make capital expenditures to fit out and furnish the office space.

At September 30, 2021 and December 31, 2020, we had lease obligations of $500 million and $590 million, respectively. Additionally, at September 30, 2021 and December 31, 2020, we had, in the aggregate, $180 million and $193 million, respectively, of non-cancellable purchase obligations individually greater than $10 million.

At September 30, 2021 and December 31, 2020, there were $351 million and $138 million, respectively, of standby letters of credit and bank guarantees issued on our behalf. These are obtained primarily for regulatory purposes and payment guarantees to third-party payment processors.

See Note 13 to the Unaudited Consolidated Financial Statements for additional information related to our commitments and contingencies.

In order to improve our liquidity following the impact of the COVID-19 pandemic on our business, among other actions, we raised additional capital through the issuance of Senior Notes and Convertible Senior Notes, reduced capital expenditures and operating expenses by significantly reducing marketing spend worldwide and working to eliminate non-essential operating costs, monitored the financial health of our partners, suppliers and other third-party relationships, implemented a general temporary company-wide hiring freeze for much of 2020 and undertook certain personnel actions such as furloughs and workforce reductions. We may have to take additional actions to improve our liquidity in the future. 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, whether as a result of the COVID-19 pandemic or otherwise, if we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned capital expenditures and scale back the scope of our business plans, either of which could have a material adverse effect on our business, our ability to compete or our future growth prospects, financial condition and results of operations. If additional funds were raised through the issuance of equity securities, the percentage ownership of our then current stockholders would be diluted. We may not generate sufficient cash flow from operations in the future, revenue growth or sustained profitability may not be realized, and future borrowings or equity sales may not be available in amounts sufficient to make anticipated capital expenditures, finance our strategies or repay our indebtedness.

Cash Flow Analysis

Net cash provided by operating activities for the nine months ended September 30, 2021 was $2.5 billion, resulting from net income of $547 million, a favorable impact from adjustments for non-cash items of $1.3 billion, and a favorable net change in working capital and other long-term assets and liabilities of $717 million. Non-cash items were principally associated with net losses on equity securities, deferred income tax benefit, depreciation and amortization, stock-based compensation expense and other stock-based payments, loss on early extinguishment of debt, and operating lease amortization. For the nine months ended September 30, 2021, accounts receivable increased by $1.2 billion and deferred merchant bookings and other current liabilities increased by $2.1 billion, primarily due to increases in business volumes.

Net cash provided by operating activities for the nine months ended September 30, 2020 was $662 million, resulting from a net income of $224 million and a favorable impact from adjustments for non-cash items of $1.2 billion, partially offset by an unfavorable net change in working capital and other long-term assets and liabilities of $721 million. Non-cash items were principally associated with net gains on equity securities, impairment of goodwill, depreciation and amortization, provision for expected credit losses and chargebacks, stock-based compensation expense and other stock-based payments, unrealized foreign currency transaction losses on Euro-denominated debt and operating lease amortization. For the nine months ended September 30, 2020, prepaid expenses and other current assets decreased by $230 million, primarily due to the refund for overpayment from a vendor and lower prepayment to third-party payment processors due to decreases in business volumes as a result of the COVID-19 pandemic. For the nine months ended September 30, 2020, accounts receivable decreased by $554 million and deferred merchant bookings and other current liabilities decreased by $1.6 billion primarily due to decreases in business volumes as a result of the COVID-19 pandemic.

Net cash used in investing activities for the nine months ended September 30, 2021 was $215 million, principally resulting from the purchase of property and equipment of $203 million. Net cash provided by investing activities for the nine months ended September 30, 2020 was $2.7 billion, resulting from the proceeds from sales and maturities of investments of $3.0 billion, net of purchases of $72 million, and the purchase of property and equipment of $222 million.

Net cash used in financing activities for the nine months ended September 30, 2021 was $1.2 billion, almost entirely resulting from payments for redemption and conversion of debt of $3.1 billion and payments for the repurchase of common stock of $159 million, partially offset by the proceeds from the issuance of long-term debt of $2.0 billion. Net cash provided by financing activities was $1.5 billion for the nine months ended September 30, 2020, almost entirely resulting from the proceeds from the issuance of long-term debt of $4.1 billion, partially offset by payments for the repurchase of common stock of $1.3 billion and payments for the conversion of convertible notes of $1.2 billion.

Contingencies

French tax authorities conducted audits of Booking.com for the years 2003 through 2012 and years 2013 through 2015 and currently are conducting an audit for the years 2016 through 2018. In December 2015, the French tax authorities issued Booking.com assessments for unpaid income and value added taxes ("VAT") related to tax years 2006 through 2012 for

approximately 356 million Euros ($403 million), the majority of which represents penalties and interest. The assessments assert that Booking.com had a permanent establishment in France. In December 2019, the French tax authorities issued an additional assessment of 70 million Euros ($81 million), including interest and penalties, for the 2013 tax year asserting that Booking.com had taxable income attributable to a permanent establishment in France. The French tax authorities also have issued assessments totaling 39 million Euros ($45 million), including interest and penalties, for certain tax years between 2011 and 2015 on Booking.com's French subsidiary asserting that the subsidiary did not receive sufficient compensation for the services it rendered to Booking.com in the Netherlands. As a result of a formal demand from the French tax authorities for payment of the amounts assessed against Booking.com for the years 2006 through 2012, in January 2019, we paid the assessments of approximately 356 million Euros ($403 million) in order to preserve our right to contest those assessments in court. The payment, which is included in "Other assets, net" in the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020, does not constitute an admission that we owe the taxes and will be refunded (with interest) to us to the extent we prevail. In December 2019 and October 2020, we initiated court proceedings with respect to certain of the assessments. Although we believe that Booking.com has been, and continues to be, in compliance with French tax law, and we are contesting the assessments, during the three months ended September 30, 2020, we contacted the French tax authorities regarding the potential to achieve resolution of the matter through a settlement. After assessing several potential outcomes and potential settlement amounts and terms, an unrecognized tax benefit in the amount of 50 million Euros ($59 million) was recorded during the year ended December 31, 2020, of which the majority was included as a partial reduction to the tax payment recorded in "Other assets, net" in the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020. In December 2020, the French Administrative Court (Conseil d’Etat) delivered a decision in the "ValueClick" case that could have an impact on the outcome in our case. After considering the potential adverse impact of the new decision on the potential outcomes for the Booking.com assessments, we currently estimate that the reasonably possible loss related to VAT is approximately 20 million Euros ($23 million). Additional assessments could result when the French tax authorities complete the outstanding audits. For additional information related to the French and other tax assessments, see Note 13 to our Unaudited Consolidated Financial Statements and Part II, Item 1A, Risk Factors - "We may have exposure to additional tax liabilities."

Beginning in 2014, Booking.com received several letters from the Netherlands Pension Fund for the Travel Industry (Reiswerk) ("BPF") claiming that Booking.com is required to participate in the mandatory pension scheme of the BPF with retroactive effect to 1999, which has a higher contribution rate than the pension scheme in which Booking.com is currently participating. BPF instituted legal proceedings against Booking.com and in 2016 the District Court of Amsterdam rejected all of BPF’s claims. BPF appealed the decision to the Court of Appeal, and, in May 2019, the Court of Appeal also rejected all of BPF’s claims, in each case by ruling that Booking.com does not meet the definition of a travel intermediary for purposes of the mandatory pension scheme. BPF then appealed to the Netherlands Supreme Court. In April 2021, the Supreme Court overturned the previous decision of the Court of Appeal and held that Booking.com meets the definition of a travel intermediary for the purposes of the mandatory pension scheme. The Supreme Court ruled only on the qualification of Booking.com as a travel intermediary for the purposes of the mandatory pension scheme, and did not rule on the various other defenses we brought forward against BPF's claims. The Supreme Court referred the matter to another Court of Appeal that will have to assess the other defenses we brought forward if BPF were to proceed with the litigation. We intend to pursue a number of defenses in any subsequent proceedings and may ultimately prevail in whole or in part. While we continue to believe that Booking.com is in compliance with its pension obligations and that the Court of Appeal could ultimately rule in favor of Booking.com, given the Supreme Court’s decision, we believe it is probable that we have incurred a loss related to this matter. We are not able to reasonably estimate a loss or a range of loss because there are significant factual and legal questions yet to be determined in any subsequent proceedings. As a result, as of September 30, 2021, we have not recorded a liability in connection with a potential adverse ultimate outcome to this litigation. However, if Booking.com were to ultimately lose and all of BPF’s claims were to be accepted (including with retroactive effect to 1999), we estimate that as of September 30, 2021, the maximum loss, not including any potential interest or penalties, would be approximately 278 million Euros ($322 million). Such estimated potential loss increases as Booking.com continues not to contribute to the BPF and depends on Booking.com’s applicable employee compensation after September 30, 2021. For additional information related to the pension matter and our other contingent liabilities, see Note 13 to our Unaudited Consolidated Financial Statements.

Off-Balance Sheet Arrangements

At September 30, 2021, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Sections of this Form 10-Q including, in particular, our Management's Discussion and Analysis of Financial Condition and Results of Operations above and the Risk Factors contained in Part II Item 1A hereof, contain forward-looking statements. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results could differ materially from those described in the forward-looking statements.

Expressions of future goals and expectations and similar expressions, including "may," "will," "should," "could," "aims," "seeks," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. Our actual results could differ materially from those described in the forward-looking statements for various reasons including the risks we face which are more fully described in Part II, Item 1A, Risk Factors. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents we file or furnish from time to time with the Securities and Exchange Commission, particularly our Annual Report on Form 10-K for the year ended December 31, 2020, and our subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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