filings.toolsItem 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 Annual Report on Form 10-K for the year ended December 31, 2021, including Part I, Item 1A "Risk Factors," as well as our Unaudited Consolidated Financial Statements and accompanying notes and the Section entitled "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. 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 connect consumers who wish to make travel reservations with travel service providers around the world through our online platforms. We offer these services through six primary consumer-facing brands: Booking.com, Priceline, agoda, Rentalcars.com, KAYAK, and OpenTable. See Note 2 to our 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 advertising services, restaurant reservations and restaurant management services, and various other services, such as travel-related insurance revenues.
Trends
The COVID-19 pandemic and the resulting implementation of travel restrictions by governments around the world resulted in a significant decline in travel activities and consumer demand for related services. Accommodation room nights, which include the impact of cancellations, declined rapidly as the COVID-19 pandemic spread in 2020. Since the beginning of the second quarter of 2020 and through 2021, accommodation room night declines versus the comparable period in 2019 have generally improved as government-imposed travel restrictions have eased, vaccines and other medical interventions have become more widespread, and consumer demand for travel has started to rebound. However, there have been periods of worsening trends due to spikes in COVID-19 cases and newly implemented travel restrictions, primarily related to new variants. In the first quarter of 2022, many countries in Europe and some countries in Asia relaxed COVID-19 related travel restrictions, which we believe positively impacted room night trends in those regions. For the first quarter of 2022 compared to the first quarter of 2019, room nights were down 9%, an improvement from the 21% room night decline in the fourth quarter of 2021 compared to the fourth quarter of 2019. Room night growth further improved to 16% in the second quarter of 2022 compared to the second quarter of 2019.
For the third quarter of 2022 compared to the third quarter of 2019, room nights were up 8%, a moderation from the 16% room night growth in the second quarter of 2022 compared to the second quarter of 2019, driven primarily by lower room night growth in Europe. Within the third quarter of 2022, room nights were up 4% in July 2022 compared to July 2019, a moderation from the 14% room night growth in June 2022 compared to June 2019, driven by lower room night growth in all regions. Room night growth improved from July levels to about 10% in both August 2022 and September 2022 relative to August 2019 and September 2019, respectively, driven by improving room night trends in all our regions. Room night growth improved slightly from August and September to about 12% in October 2022 compared to October 2019 driven primarily by the continued recovery in Asia, as well as a slight improvement in Europe.
The comparison of room nights in 2021 and 2022 to the comparable period in 2019 avoids the distortion created from comparing to a prior year period that was significantly impacted by the COVID-19 pandemic.
Quarterly Room Nights and Change versus 2019
In early March 2022, following Russia's invasion of Ukraine, we suspended the booking of travel services in Russia and Belarus. This led to the loss of new bookings from bookers in these countries, although we do not believe this impact to be material at this time. After excluding room nights from bookers in Russia, Ukraine, and Belarus from the first three quarters of 2022 and the first three quarters of 2019, our overall room nights were down about 6% in the first quarter, up about 21% in the second quarter, and up about 11% in the third quarter, all versus 2019.
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 significant increases in COVID-19 cases and newly imposed travel restrictions. The cancellation rate in the first quarter of 2022 was about in line with the first quarter of 2019 and improved compared to the first quarter of 2021. The cancellation rate in the second and third quarters of 2022 improved compared to the second and third quarters of 2019 and 2021. For the nine months ending September 30, 2022, a higher share of our room nights were booked with flexible cancellation policies, as compared to the nine months ending September 30, 2019 and 2021, which could result in higher cancellation rates in future quarters.
Because we recognize revenue from bookings when the traveler checks in, our reported revenue is not at risk of being reversed due to cancellations. Increases in cancellation rates can negatively impact our marketing efficiency as a result of incurring performance marketing expense at the time a booking is made even though that booking could be canceled in the future if it was booked under a flexible cancellation policy. There are many factors in addition to cancellation rates that contribute to marketing efficiency including average daily rates ("ADRs"), costs per click, foreign currency exchange rates, our ability to convert paid traffic to booking customers, the timing and effectiveness of our brand marketing campaigns, and the extent to which consumers come directly to our platforms for bookings. Finally, we may see increased customer service costs during periods with significant increases in cancellation rates, which we have not observed since the second quarter of 2020.
Since the second quarter of 2020, government-imposed travel restrictions have generally limited international travel (travelers booking a stay at a property located outside their own country) more than domestic travel (travelers booking a stay within their own country). We believe the continued easing of government-imposed travel restrictions in many countries throughout the world in 2022 helped drive an increase in the share of room nights booked for international travel versus 2021, however, the share remained below 2019 levels.
We saw an increase in the share of room nights booked on a mobile device in the third quarter of 2022 compared to the third quarter of 2019, however, we saw a decrease in the share of room nights booked on a mobile device in the third quarter of 2022 compared to the third quarter of 2021, due to a year-over-year increase in the share of room nights booked for international travel and a year-over-year expansion of the booking window. Room nights booked on a mobile device generally have a lower mix of international travel and a shorter booking window than room nights booked on a desktop. The share of room nights booked on a mobile app in the third quarter of 2022 was above the third quarters of 2019 and 2021. We continue to see favorable repeat direct booking behavior from consumers in our mobile apps which allow us more opportunities to engage directly with consumers. The revenue earned on a transaction from a mobile device may be less than a typical desktop transaction as we see different consumer purchasing patterns across devices. For example, accommodation reservations made on a mobile device typically are for shorter lengths of stay and have lower accommodation ADRs.
Our global ADRs increased approximately 28%, on a constant currency basis, in the third quarter of 2022 as compared to the third quarter of 2019, due primarily to higher ADRs in Europe and North America as compared to the third quarter of 2019, driven by rate increases across many destination types. In addition, we estimate that our global ADRs in the third quarter of 2022, as compared to the third quarter of 2019, benefited by approximately two percentage points from changes in the geographical mix of our business driven primarily by weaker room night performance in Asia, which is a low ADR region, and stronger room night performance in North America, which is a high ADR region. Our global ADRs increased approximately 15%, on a constant currency basis, in the third quarter of 2022 as compared to the third quarter of 2021.
Prior to the COVID-19 outbreak, we observed a trend of declining constant-currency accommodation ADRs 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. Those declining ADR trends resulted in and could in the future result in accommodation gross bookings growing less than room nights. As the travel market continues to recover from the impact of the COVID-19 pandemic and with all regions experiencing general inflation in prices, we have seen travel industry ADRs generally increasing from pandemic lows in 2020. While our ADRs have continued to increase in the third quarter of 2022 as compared to the third quarter of 2019, it remains highly uncertain what the trend in industry ADRs will look like going forward.
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 our long-term strategy to build a more integrated offering of multiple elements of travel connected by a payment platform, which we refer to as the "Connected Trip", 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, 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 (e.g., credit card rebates), which are recorded in "Merchant revenues." To the extent more of our business is generated on a merchant basis, we incur a greater level of these merchant-related expenses, which negatively impacts our operating margins despite increases in associated incremental revenues.
We have established widely used and recognized e-commerce brands through marketing and promotional campaigns. Our total marketing expenses, which are substantially variable in nature and are comprised of performance marketing and brand
marketing expenses, were $4.7 billion for the nine months ended September 30, 2022, 66% above the nine months ended September 30, 2021 and 18% above the nine months ended September 30, 2019 as a result of the improving demand environment and our own efforts to invest in marketing. 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.
Marketing efficiency, expressed as marketing expense as a percentage of gross bookings, and performance marketing returns on investment ("ROIs") are impacted by a number of factors that are subject to variability and 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, and the timing and effectiveness of our brand marketing campaigns. In recent years, we observed periods of stable or increasing ROIs. We expect volatility in our ROIs as the pandemic continues to affect travel, and that ROIs could be negatively impacted in the future by increased levels of competition and other factors. 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 anticipated repeat rates.
Marketing efficiency can also be impacted by the extent to which consumers come directly to our platforms for bookings. Marketing expenses as a percentage of total gross bookings in the third quarter of 2022 were about in line with the third quarter of 2019 despite lower performance marketing ROIs due to an increase in the share of room nights booked by consumers coming directly to our platforms. Performance marketing ROIs were lower in the third quarter of 2022 versus the third quarter of 2019 due to our own efforts to invest in marketing during our peak travel season.
Historically, our growth has primarily been generated by the worldwide accommodation reservation business of Booking.com due in part to the availability of a large number of properties through Booking.com. Booking.com included over 2.6 million properties on its website at September 30, 2022, consisting of over 400,000 hotels, motels, and resorts and approximately 2.2 million alternative accommodation properties (including homes, apartments, and other unique places to stay), and representing an increase from approximately 2.4 million properties on its website at September 30, 2021. The year-over-year increase in total properties was driven by an increase in alternative accommodation properties.
The share of Booking.com’s room nights booked for alternative accommodation properties in the third quarter of 2022 was approximately 30%, up versus the third quarter of 2019 and in line with the third quarter of 2021. We have observed an overall longer-term trend of an increasing share of room nights booked for alternative accommodation properties as consumer demand for these types of properties has grown, and as we have increased the number and variety of alternative accommodation properties available to consumers on Booking.com. We may experience lower profit margins due to certain additional costs, such as increased customer service costs, related to offering alternative 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.
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, the price of the travel service is the primary factor determining whether a consumer will book a reservation. Discounting and couponing (i.e. merchandising) occurs across all of the major regions in which we operate and 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. 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. For the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, total revenue as a percentage of gross bookings was negatively impacted by investments in merchandising.
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. While the Organisation for Economic Co-operation and Development has been working on
multinational tax changes that could require all member parties to remove all digital services taxes, the timing and details are not yet known.
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. The Digital Markets Act (“DMA”) and the Digital Services Act (“DSA”) were both recently signed into law in the European Union. The DMA came into force on November 1, 2022 and the DSA will come into force in the coming weeks. Both Acts will give regulators more instruments to investigate and regulate digital businesses and impose new rules on certain digital platforms determined to be "gatekeepers" (under the DMA) or online platforms more generally, with separate rules for "Very Large Online Platforms" ("VLOPs") (under the DSA). If regulators were to determine that we are a gatekeeper under the DMA, we could be subject to additional rules and regulations not applicable to our competitors, which could adversely impact our business. If we are determined to be a VLOP under the DSA, our business would be subject to additional scrutiny and obligations that could increase costs and complexity. Any designation as a "gatekeeper" under the DMA or VLOP under the DSA is not expected to take place until 2023 at the earliest, and any such designation may be subject to a further implementation and review process under the relevant legislation. The requirements for "gatekeepers" and VLOPs are also subject to further interpretation and regulatory engagement, including as to when these requirements would become effective. For more information on these matters and their potential effects on our business, see Note 13 to our Unaudited Consolidated Financial Statements. 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.
Our businesses outside of the U.S. represent a substantial majority of our financial results, but 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 businesses outside of the U.S. are translated from local currency (principally Euros and British Pounds Sterling) into U.S. Dollars. For example, the U.S. Dollar strengthened versus both the Euro and British Pound Sterling by about 15% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. As a result of the movements in foreign currency exchange rates, 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. For example, total revenues from our businesses outside of the U.S. increased by 29% for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, but without the impact of changes in foreign currency exchange rates, increased year-over-year on a constant-currency basis by approximately 48%. 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 9 and 17 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.
We generally enter into derivative instruments to minimize the impact of foreign currency exchange rate fluctuations. See Note 6 to our Unaudited Consolidated Financial Statements for additional information related to our derivative contracts.
Outlook
In October 2022, we saw a slight improvement in the room night growth rate relative to September 2022, with room nights growing about 12% versus October 2019, driven primarily by the continued recovery in Asia, as well as a slight improvement in Europe. Given the continued uncertainty in the near-term environment, we cannot accurately predict the number of room nights that will be booked in the fourth quarter of 2022. Assuming room night growth is about 10% for the fourth quarter of 2022 relative to the fourth quarter of 2019, which is about in line with the levels of growth over the last three months, we currently expect the following for the fourth quarter of 2022:
- the change in gross bookings relative to the fourth quarter of 2019 will be about 15 percentage points better than the change in room nights relative to the same period, due primarily to an increase in constant currency accommodation
ADRs, partially offset by the negative impact of foreign exchange rate fluctuations, which we expect to be higher than they were in the third quarter of 2022;
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revenues as a percentage of gross bookings will be lower than it was in the fourth quarter of 2019; and
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operating profit will be lower than the fourth quarter of 2019, but would be higher than the fourth quarter of 2019 if not for the negative impact of foreign exchange rate fluctuations.
Seasonality and Other Timing Factors
Prior to the COVID-19 pandemic, our gross bookings were generally similar in the first three quarters of the year and higher than in the fourth quarter. We generally recognize our marketing activities as the expense is incurred, which is typically in the quarter when the gross bookings for the associated reservations are recognized. However, we would generally recognize revenue from these bookings when the travel begins (at "check-in"), and accommodation check-ins in Europe and North America are generally highest in the third quarter during those regions' peak summer travel season and lowest in the first quarter. As a result of this timing difference between when we record marketing expense and when we generally recognize associated revenue, we typically experience our highest levels of profitability in the third quarter and our lowest level of profitability in the first quarter. In addition to the typical seasonality effects on our business, our quarterly results and quarterly year-over-year growth rates can be impacted by:
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the length 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);
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the level of acceleration or deceleration in the gross bookings growth rate. For example, our operating margins are typically negatively impacted in the near term from gross bookings and related variable marketing expense growth acceleration, as revenue growth is typically less impacted by accelerating gross bookings growth in the near term. 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. Conversely, in periods where our gross bookings growth rate substantially decelerates, our operating margins typically benefit; and
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the date on which certain holidays (e.g., Easter and Ramadan) fall.
The COVID-19 pandemic has impacted the booking window and seasonality of our business since its onset in 2020. For example, in the third quarter of 2022, we saw a shorter booking window than we saw in the third quarter of 2019, as an increased percentage of bookings were made for travel that was to occur close to the time of booking. However, in the third quarter of 2022, we saw the booking window expand compared to the third quarter of 2021. It is difficult to accurately 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. As the travel market recovers from the impact of the COVID-19 pandemic, we expect to see periods of gross bookings growth rate acceleration, 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
The extent of the effects of the COVID-19 pandemic on our business, results of operations, cash flows, and growth prospects, are highly uncertain. While we have seen a recovery in travel demand in most parts of the world, we believe that our business could 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.
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, including exploring strategic alternatives such as acquisitions.
The competition for technology talent in our industry has intensified, including among established technology companies, startups, and companies transitioning to digital. 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 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.
As a result of the highly competitive labor market and inflationary pressure on compensation, our personnel expenses to attract and retain key talent are increasing, which may adversely affect our results of operations.
Critical Accounting 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 of America ("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 due to the need to make estimates of matters that are inherently uncertain. We use our judgment to determine the appropriate assumptions to be used in the determination of certain estimates and we evaluate our estimates on an ongoing basis. Estimates are based on 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 estimates, see the "Critical Accounting 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, 2021.
Valuation of Investments in Private Companies
See Notes 5 and 6 to our Unaudited Consolidated Financial Statements for additional information related to the Company's 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").
Our investments measured using Level 3 inputs primarily consist of investments in privately-held companies that are classified as 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 use 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. 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. When a recent financing transaction occurs and represents fair value, we also use the calibration process, as appropriate, when estimating fair value on subsequent measurement dates. Calibration is the process of using observed transactions in the investee company's own instruments to ensure that the valuation techniques that will be employed to value the investee company investment on subsequent measurement dates begin with assumptions that are consistent with the original observed transaction as well as any more recent observed transactions in the instruments issued by the investee company.
In July 2021, Yanolja announced a new round of funding which was completed in October 2021 along with certain other transactions. As a result of these observable transactions, we increased the carrying value of our investment in Yanolja to $306 million as of December 31, 2021. Considering the recent significant adverse changes in the market valuations of companies in the travel and technology industries, we evaluated our investment in Yanolja for impairment and recognized an impairment charge of $184 million during the three months ended June 30, 2022, resulting in an adjusted carrying value of $122 million at June 30, 2022 and September 30, 2022. As discussed below, we used unobservable inputs to determine fair value. We used a combination of the market approach and the income approach in estimating the fair value of our investment in Yanolja as of June 30, 2022. The market approach estimates value using prices and other relevant information generated by market transactions involving identical or comparable companies. 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, for the market approach, percentage decrease in the calibrated EBITDA multiple (36%) and for the income approach, the weighted average cost of capital (10%-14%) and terminal EBITDA multiple (14x-16x). 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 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 would result in a directionally opposite change in the fair value.
The determination of the fair values of investments where we are a minority shareholder and have access to limited information from the investee reflects numerous assumptions that are subject to various risks and uncertainties, including key assumptions regarding the investee’s expected growth rates and operating margin, 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 those judgments and estimates utilized in the fair value estimate. Future events and changing market conditions may lead us to re-evaluate the assumptions reflected in the valuation which may result in a need to recognize an additional impairment charge that could have a material adverse effect on our results of operations.
Valuation of Goodwill and other Long-lived Assets
The application of the acquisition method of accounting for business combinations requires the use of significant estimates and assumptions to determine the fair value of the assets acquired and liabilities assumed. Our estimates of the fair value are based upon assumptions that we believe are reasonable. When we deem appropriate, we utilize assistance from third-party valuation firms. The consideration transferred is allocated to the assets acquired and liabilities assumed based on their respective fair values at the acquisition date. The excess of the consideration transferred over the net of the amounts allocated to the identifiable assets acquired and liabilities assumed is recognized as goodwill. Goodwill is assigned to reporting units that are expected to benefit from the synergies of the business combination.
A substantial portion of our intangible assets and goodwill relates to the acquisitions of OpenTable, KAYAK, and Getaroom. See Note 14 to our Unaudited Consolidated Financial Statements for further information related to the acquisition of Getaroom in December 2021.
We review long-lived assets whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the carrying value of the assets from the estimated undiscounted future net cash flows, before interest and taxes, of the related asset group.
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, 2022, we performed our annual goodwill impairment test and concluded that there was no impairment of goodwill.
During the year ended December 31, 2020, as a result of our interim and annual goodwill impairment tests, we recognized goodwill impairment charges of $1.1 billion related to the OpenTable and KAYAK reporting unit. See the "Critical Accounting 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, 2021 for additional information. As of September 30, 2022, the carrying value of goodwill for the OpenTable and KAYAK reporting unit was $973 million.
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, as well as other key assumptions with respect to matters outside of our control, such as discount rates and market comparables. Generally, changes in the assumptions used for comparable company multiples would result in directionally similar changes in the fair value and changes in the assumptions used for discount rates would result in directionally opposite changes in the fair value. The estimation of fair value requires significant judgments and estimates and actual results could be materially different than the judgments and estimates used. Future events and changing market conditions may lead us to re-evaluate the assumptions used to estimate the fair values of our reporting units. During the nine months ended September 30, 2022, there have been significant adverse changes in the market valuation of companies in the travel and technology industries. Discount rates have also been impacted during the period due to rising interest rates and adverse changes in the macroeconomic environment.
Income Taxes
We determine our tax expense based on our income and statutory tax rates applicable in the various jurisdictions in which we operate. Due to the complex nature of tax legislation and frequent changes with such associated legislation, significant judgment is required in computing our tax expense and determining our tax positions. The U.S. Tax Cuts and Jobs Act (the "Tax Act") enacted in December 2017 made significant changes to U.S. federal tax law, including a one-time deemed repatriation tax imposed on accumulated unremitted international earnings, to be paid over eight years. We do not intend to indefinitely reinvest our international earnings that were subject to U.S. taxation pursuant to the mandatory deemed repatriation or subject to U.S. taxation as global intangible low-taxed income ("GILTI").
We regularly review our deferred tax assets for recoverability considering historical profitability, projected future taxable income, the expected timing of the reversals of temporary differences, and tax planning strategies and record valuation allowances as required.
We are subject to ongoing tax examinations and assessments in various jurisdictions. We have been audited in many jurisdictions and from time to time face challenges regarding the amount of taxes due. These challenges include questions regarding the timing and amount of deductions that we have taken on our tax returns. Although we believe that our tax filing positions are reasonable and comply with applicable law, we regularly review our tax filing positions, especially in light of tax law or business practice changes, and we may change our positions or determine that previous positions should be amended, either of which could result in additional tax liabilities. The final determination of tax audits or tax disputes may be different from what is reflected in our historical income tax provisions and accruals.
The evaluation of tax positions and recognition of income tax benefits require significant judgment and we consult with external tax and legal counsel as appropriate. We consider the technical merits of our tax positions along with the applicable tax statutes, related interpretations and precedents, and our expectation of the outcome of proceedings (or negotiations) with tax authorities. We recognize liabilities when we believe that uncertain positions may not be fully sustained upon audit by the tax authorities, including any related appeals or litigation processes. Liabilities recognized for uncertain tax positions are based on a two-step approach for recognition and measurement. First, we evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained based on its technical merits. Second, we measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. Interest and penalties attributable to uncertain tax positions, if any, are recognized as a component of income tax expense. The tax benefits ultimately realized by us may be different than what is recorded in the financial statements due to future events such as our settling the matter with the tax authorities and our success in sustaining our tax positions.
See Notes 11 and 13 to our Unaudited Consolidated Financial Statements for further information.
Recent Accounting Pronouncements
See Note 1 to our Unaudited Consolidated Financial Statements, which is incorporated by reference into this Item 2, for details regarding recent accounting pronouncements.
Results of Operations
Three and Nine Months Ended September 30, 2022 compared to the Three and Nine Months Ended September 30, 2021
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. Foreign exchange rate fluctuations negatively impacted our year-over-year growth in gross bookings, revenues, and operating expenses for the three and nine months ended September 30, 2022. 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.
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, so 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, 2022 and 2021 were as follows:
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Room nights | 240 | 183 | 31.5 | % | 685 | 440 | 55.8 | % | ||||||||||||||||||||||||||||||
| Rental car days | 16 | 13 | 24.9 | % | 48 | 37 | 31.6 | % | ||||||||||||||||||||||||||||||
| Airline tickets | 6 | 4 | 45.1 | % | 16 | 11 | 46.0 | % |
Room nights, rental car days, and airline tickets reserved through our services increased significantly for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due primarily to the continued improvement in travel demand trends as the impact of the COVID-19 pandemic has lessened in the nine months ended September 30, 2022 versus the nine months ended September 30, 2021.
Gross bookings resulting from reservations of room nights, rental car days, and airline tickets made through our agency and merchant categories for the three and nine months ended September 30, 2022 and 2021 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) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Agency gross bookings | $ | 17,614 | $ | 14,872 | 18.4 | % | $ | 53,348 | $ | 38,866 | 37.3 | % | ||||||||||||||||||||||||||
| Merchant gross bookings | 14,506 | 8,812 | 64.6 | % | 40,610 | 18,709 | 117.1 | % | ||||||||||||||||||||||||||||||
| Total gross bookings | $ | 32,120 | $ | 23,684 | 35.6 | % | $ | 93,958 | $ | 57,575 | 63.2 | % |
Agency gross bookings are derived from travel-related transactions where we do not facilitate payments from travelers for the services provided, while merchant gross bookings are derived from services where we facilitate payments. Agency and merchant gross bookings increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021 due primarily to the continued improvement in travel demand trends. Merchant gross bookings increased more than agency gross bookings due to the expansion of merchant accommodation reservation services at Booking.com.
The year-over-year increase in gross bookings during the three and nine months ended September 30, 2022 was due primarily to the increase in room nights and the increase in accommodation ADRs of approximately 15% on a constant-currency basis, partially offset by the negative impact of foreign exchange rate fluctuations. Gross bookings resulting from reservations of airline tickets increased year-over-year during the three and nine months ended September 30, 2022 due to higher unit growth and ticket price increases. Gross bookings resulting from reservations of rental car days increased year-over-year during the three and nine months ended September 30, 2022 due primarily to higher unit growth.
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:
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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 from our accommodation, rental car, and airline reservation services. Substantially all of our agency revenue is from Booking.com agency accommodation reservations.
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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 are derived from transactions where travelers book accommodation, rental car, and airline reservations. Merchant revenues include:
◦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;
◦revenues from facilitating payments, such as credit card processing rebates and customer processing fees; and
◦ancillary fees, including travel-related insurance revenues.
Advertising and other revenues
Advertising and other revenues are derived primarily from:
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revenues earned by KAYAK for (a) sending referrals to OTCs and travel service providers and (b) advertising placements on its platforms; and
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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) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Agency revenues | $ | 3,203 | $ | 2,867 | 11.7 | % | $ | 6,954 | $ | 4,912 | 41.6 | % | ||||||||||||||||||||||||||
| Merchant revenues | 2,614 | 1,622 | 61.2 | % | 5,413 | 2,656 | 103.8 | % | ||||||||||||||||||||||||||||||
| Advertising and other revenues | 235 | 187 | 25.9 | % | 674 | 409 | 64.5 | % | ||||||||||||||||||||||||||||||
| Total revenues | $ | 6,052 | $ | 4,676 | 29.4 | % | $ | 13,041 | $ | 7,977 | 63.5 | % |
Agency, merchant, and advertising and other revenues increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due primarily to the continued improvement in travel demand as the impact of the COVID-19 pandemic lessened in the nine months ended September 30, 2022 versus the nine months ended September 30, 2021, partially offset by the negative impact of foreign exchange rate fluctuations. Merchant revenues for the three and nine months ended September 30, 2022 increased more than agency revenues due to the expansion of merchant accommodation reservation services at Booking.com. For the nine months ended September 30, 2022, advertising and other revenues year-over-year growth benefited from fees 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 were 18.8% and 13.9% for the three and nine months ended September 30, 2022, versus 19.7% and 13.9% for the three and nine months ended September 30, 2021. For the three months ended September 30, 2022, compared to the three months ended September 30, 2021, total revenue as a percentage of gross bookings decreased due to investments in merchandising, an increase in the mix of airline ticket gross bookings, and negative impact of foreign exchange rate fluctuations, partially offset by increased revenues from facilitating payments.
Operating Expenses
Marketing Expenses
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Marketing expenses | $ | 1,795 | $ | 1,378 | 30.3 | % | $ | 4,679 | $ | 2,827 | 65.5 | % | ||||||||||||||||||||||||||
| % of Total gross bookings | 5.6 | % | 5.8 | % | 5.0 | % | 4.9 | % | ||||||||||||||||||||||||||||||
| % of Total revenues | 29.6 | % | 29.5 | % | 35.9 | % | 35.4 | % |
Marketing expenses consist primarily of the costs of:
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search engine keyword purchases;
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referrals from meta-search and travel research websites;
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affiliate programs;
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offline and online brand marketing; and
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other performance-based marketing and incentives.
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. We rely on our marketing channels to generate a significant amount of traffic to our websites. For the three and nine months ended September 30, 2022, our marketing expenses, which are substantially variable in nature, increased significantly compared to the three and nine months ended September 30, 2021, due primarily to the continued improvement in travel demand as the impact of the COVID-19 pandemic has lessened in the first nine months of 2022 versus the first nine months of 2021. Marketing expenses as a percentage of total gross bookings decreased in the three months ended September 30, 2022 compared to the three months ended September 30, 2021 due to year-over-year increases in the mix of direct traffic and performance marketing ROIs. Marketing expenses as a percentage of total gross bookings increased in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 due to year-over-year decreases in performance marketing ROIs, partly offset by an increase in the mix of direct traffic.
Sales and Other Expenses
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Sales and other expenses | $ | 540 | $ | 302 | 79.3 | % | $ | 1,344 | $ | 620 | 116.9 | % | ||||||||||||||||||||||||||
| % of Total gross bookings | 1.7 | % | 1.3 | % | 1.4 | % | 1.1 | % | ||||||||||||||||||||||||||||||
| % of Total revenues | 8.9 | % | 6.4 | % | 10.3 | % | 7.8 | % |
Sales and other expenses consist primarily of:
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credit card and other payment processing fees associated with merchant transactions;
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fees paid to third parties that provide call center, website content translations, and other services;
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chargeback provisions and fraud prevention expenses associated with merchant transactions;
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provisions for expected credit losses, primarily related to accommodation commission receivables and prepayments to certain customers; and
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customer relations and other costs.
For the three and nine months ended September 30, 2022, sales and other expenses, which are substantially variable in nature, increased compared to the three and nine months ended September 30, 2021, due primarily to an increase in merchant transaction costs of $138 million and $448 million, respectively, and an increase in third-party call center costs of $70 million and $176 million, respectively. Merchant transactions increased year-over-year in the nine months ended September 30, 2022 due to the continued improvement in travel demand trends as the impact of the COVID-19 pandemic has lessened in the nine months ended September 30, 2022 versus the nine months ended September 30, 2021, as well as the expansion of merchant accommodation reservation services at Booking.com. The year-over-year increase in third-party call center costs in the third quarter was due in part to the transfer of certain customer service operations of Booking.com to Majorel, which shifted costs from personnel expenses to sales and other expenses.
Personnel
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Personnel | $ | 636 | $ | 591 | 7.6 | % | $ | 1,867 | $ | 1,829 | 2.1 | % | ||||||||||||||||||||||||||
| % of Total revenues | 10.5 | % | 12.6 | % | 14.3 | % | 22.9 | % |
Personnel expenses consist primarily of:
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salaries;
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bonuses;
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stock-based compensation;
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payroll taxes; and
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employee health and other benefits.
Personnel expenses, excluding stock-based compensation, increased 6% for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, due to an increase in salary expense of $21 million. Personnel expenses, excluding stock-based compensation, increased 1% for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, due to an increase in salary expense of $82 million and an increase in bonus expense accruals of $59 million, partially offset by the $137 million expense associated with the return of government assistance received through various government aid programs which was recorded in 2021. Employee headcount of approximately 20,700 as of September 30, 2022 increased by 6% versus September 30, 2021. Personnel expenses for the three and nine months ended September 30, 2022 and employee headcount as of September 30, 2022 were reduced by the transfer of certain customer service operations of Booking.com to Majorel which shifted costs from personnel expenses to sales and other expenses.
Stock-based compensation expense was $101 million and $302 million for the three and nine months ended September 30, 2022, respectively, compared to $85 million and $284 million for the three and nine months ended September 30, 2021, respectively.
General and Administrative
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| General and administrative | $ | 262 | $ | 179 | 45.6 | % | $ | 627 | $ | 432 | 45.3 | % | ||||||||||||||||||||||||||
| % of Total revenues | 4.3 | % | 3.9 | % | 4.8 | % | 5.4 | % |
General and administrative expenses consist primarily of:
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indirect taxes such as digital services taxes and travel transaction taxes;
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fees for outside professionals;
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personnel-related expenses such as travel, relocation, recruiting, and training expenses; and
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occupancy and office expenses.
General and administrative expenses increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due to increases of $52 million and $100 million, respectively, for indirect taxes (primarily digital services taxes), driven by the improvement in revenue, as well as higher personnel-related expenses and higher fees for professional services.
Information Technology
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Information technology | $ | 129 | $ | 109 | 17.9 | % | $ | 400 | $ | 289 | 38.0 | % | ||||||||||||||||||||||||||
| % of Total revenues | 2.1 | % | 2.3 | % | 3.1 | % | 3.6 | % |
Information technology expenses consist primarily of:
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software license and system maintenance fees;
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payments to contractors;
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cloud computing costs and outsourced data center costs; and
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data communications and other expenses associated with operating our services.
Information technology expenses increased during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due to increased cloud computing costs, payments to contractors, and software license fees.
Depreciation and Amortization
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Depreciation and amortization | $ | 109 | $ | 102 | 6.8 | % | $ | 327 | $ | 323 | 1.2 | % | ||||||||||||||||||||||||||
| % of Total revenues | 1.8 | % | 2.2 | % | 2.5 | % | 4.0 | % |
Depreciation and amortization expenses consist of:
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amortization of intangible assets with determinable lives;
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amortization of internally-developed and purchased software;
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depreciation of computer equipment; and
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depreciation of leasehold improvements, furniture and fixtures, and office equipment.
Depreciation and amortization expenses increased during the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, due to increased amortization expense related to the acquisition of Getaroom, partially offset by decreased depreciation of computer equipment and leasehold improvements.
Restructuring, Disposal, and Other Exit Costs
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Restructuring, disposal, and other exit costs | $ | (2) | $ | — | (433.3) | % | $ | 40 | $ | 9 | 331.8 | % | ||||||||||||||||||||||||||
| % of Total revenues | — | % | — | % | 0.3 | % | 0.1 | % |
Restructuring, disposal, and other exit costs for the nine months ended September 30, 2022 relate to the transfer of certain customer service operations of Booking.com to Majorel. Restructuring, disposal, and other exit costs for the nine months ended September 30, 2021 principally relate to the restructuring charges as a result of restructuring actions taken in 2020. These restructuring charges are primarily related to employee severance and other termination benefits at Booking.com. See Note 15 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) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Interest expense | $ | 102 | $ | 80 | 25.4 | % | $ | 246 | $ | 259 | (5.3) | % | ||||||||||||||||||||||||||
Interest expense increased for the three months ended September 30, 2022, compared to the three months ended September 30, 2021, primarily due to cost increases relating to our cash management activities, offset by the adoption on January 1, 2022 of the new accounting standards for convertible instruments, and the maturity in September 2021 of convertible senior notes. Interest expense decreased for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, primarily due to the adoption of the new accounting standards update for convertible instruments, the issuance of senior notes with lower interest rates in March 2021, the redemption of senior notes with higher interest rates in April 2021, and the maturity in September 2021 of convertible senior notes. The amortization of debt discount on convertible debt was recorded in Interest expense. With the adoption of the new accounting standards update, such amortization is not recorded in the financial statements for periods after January 1, 2022 (see Note 1 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) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Other income (expense), net | $ | (305) | $ | (967) | (68.3) | % | $ | (1,040) | $ | (740) | 40.8 | % | ||||||||||||||||||||||||||
The following table sets forth the breakdown of "Other income (expense), net" for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, (in millions) | Nine Months Ended September 30, (in millions) | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Interest and dividend income | $ | 61 | $ | 4 | $ | 88 | $ | 12 | ||||||||||||||||||
| Net losses on equity securities | (336) | (1,016) | $ | (1,142) | $ | (589) | ||||||||||||||||||||
| Foreign currency transaction (losses) gains | (34) | 45 | 12 | 92 | ||||||||||||||||||||||
| Loss on early extinguishment of debt | — | — | — | (242) | ||||||||||||||||||||||
| Other | 4 | — | 2 | (13) | ||||||||||||||||||||||
| Other income (expense), net | $ | (305) | $ | (967) | $ | (1,040) | $ | (740) |
See Note 17 to our Unaudited Consolidated Financial Statements for additional information.
Interest and dividend income increased for the three and nine months ended September 30, 2022, compared to the three and nine months ended September 30, 2021, primarily due to interest income arising from our cash management activities.
See Note 5 to our Unaudited Consolidated Financial Statements for additional information related to the net losses on equity securities and Note 6 for additional information related to the impairment of an investment in equity securities.
Foreign currency transaction (losses) gains for the three and nine months ended September 30, 2022 include gains of $2 million and $70 million, respectively, related to our Euro-denominated debt and accrued interest that were not designated as net investment hedges offset by losses of $58 million and $114 million, respectively, on derivative contracts. Foreign currency
transaction (losses) gains for the three and nine months ended September 30, 2021 include gains of $54 million and $108 million, respectively, related to our Euro-denominated debt and accrued interest that were not designated as net investment hedges, offset by losses of $10 million and $18 million, respectively, on derivative contracts.
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).
Income Taxes
| Three Months Ended September 30, (in millions) | Increase (Decrease) | Nine Months Ended September 30, (in millions) | Increase (Decrease) | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||
| Income tax expense | $ | 510 | $ | 199 | 156.2 | % | $ | 648 | $ | 102 | 532.6 | % | ||||||||||||||||||||||||||
| % of Income before income taxes | 23.4 | % | 20.5 | % | 26.2 | % | 15.8 | % |
Our 2022 effective tax rates differ from the U.S. federal statutory tax rate of 21%, primarily due to higher international tax rates, unrecognized tax benefits, valuation allowance related to certain unrealized losses on equity securities, and certain non-deductible expenses, partially offset by the benefit of the Netherlands Innovation Box Tax (discussed below). Our 2021 effective tax rates differed from the U.S. federal statutory tax rate of 21%, primarily due to the benefit of the Netherlands Innovation Box Tax, partially offset by higher international tax rates, U.S. federal and state tax associated with our international earnings, and certain non-deductible expenses.
Our effective tax rates for the three and nine months ended September 30, 2022 are higher compared to the three and nine months ended September 30, 2021, primarily due to higher unrecognized tax benefits, and a decrease in the benefit of the Netherlands Innovation Box Tax, partially offset by lower U.S. federal and state tax associated with our international earnings, certain lower non-deductible expenses, and lower international tax rates.
During the three and nine months ended September 30, 2022 and 2021, a majority of our income was reported in the Netherlands, where Booking.com is based. Under Dutch corporate income tax law, income generated from qualifying innovative activities is taxed at a rate of 9% ("Innovation Box Tax") rather than the Dutch statutory rate. Effective January 1, 2022, the Netherlands corporate income tax rate increased from 25% to 25.8%. A portion of Booking.com's earnings during the three and nine months ended September 30, 2022 and 2021 qualified for Innovation Box Tax treatment, which had a beneficial impact on the effective tax rates for these periods. For further information relating to Booking.com's Innovation Box Tax treatment, including associated risks, please see Part I, Item 1A-Risk Factors - "We may not be able to maintain our
"Innovation Box Tax" benefit." in our Annual Report on Form 10-K for the year ended December 31, 2021.
Liquidity and Capital Resources
Our financial results and prospects are almost entirely dependent on the sale of travel-related services. The COVID-19 pandemic and the resulting implementation of restrictive measures resulted in a significant decline in travel activities and consumer demand for related services, in 2020 in particular.
Marketing expenses and personnel expenses are the most significant operating expenses for our business. We rely on marketing channels to generate a significant amount of traffic to our websites. See our Unaudited Consolidated Statements of Operations and "Trends" and "Results of Operations" above for additional information on marketing expenses and personnel expenses including stock-based compensation expenses.
Our continued access to sources of liquidity depends on multiple factors which are more fully described in Part I, 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” in our Annual Report on Form 10-K for the year ended December 31, 2021.
At September 30, 2022, we had $11.8 billion in cash, cash equivalents, and short-term and long-term investments, of which approximately $9.3 billion is held by our international subsidiaries. Cash, cash equivalents, and long-term investments held by our international subsidiaries are denominated primarily in Euros, Hong Kong Dollars, and British Pounds Sterling. Cash equivalents and short-term and long-term investments are principally comprised of money market funds, time deposits and certificates of deposit, government and corporate debt securities, equity securities of Meituan, Grab, DiDi, and our investments in private companies (see Notes 5 and 6 to our Unaudited Consolidated Financial Statements).
Deferred merchant bookings of $2.3 billion and $906 million at September 30, 2022 and December 31, 2021, respectively, represent cash payments received from travelers in advance of us completing our performance obligations and are comprised principally of amounts estimated to be payable to travel service providers as well as our estimated future revenue for our commission or margin and fees. The amounts are subject to refunds for cancellations.
At September 30, 2022, we had a remaining transition tax liability of $811 million as a result of the Tax Act, which included $711 million reported as "Long-term U.S. transition tax liability" and $100 million included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheet. This liability will be paid over the next four 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 2022, the U.S. Congress passed the Inflation Reduction Act of 2022. The key tax provisions applicable to us are a 15% corporate minimum tax on book income and a 1% excise tax on stock repurchases effective January 1, 2023. We are currently evaluating the impacts, if any, of these provisions to our results of operations and cash flows.
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, 2022, there were no borrowings outstanding and $11 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. After a 2020 amendment to the revolving credit facility, the permitted maximum leverage ratio is increased through and including the three months ending March 31, 2023 and we may not declare or make any cash distribution or repurchase any of our shares (with certain exceptions including in connection with tax withholding related to shares issued to employees) unless 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. At September 30, 2022, we were in compliance with the relevant financial covenant. There can be no assurance that we will be able to meet the maximum leverage ratio covenant at any particular time, and our ability to borrow under the revolving credit facility depends on compliance with the 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 covenant.
In March 2022, we repaid $1.1 billion on the maturity of senior notes with an interest rate of 0.8% and aggregate principal amount of 1.0 billion Euros. In September 2021, in connection with the maturity of Convertible Senior Notes due September 2021, we paid $1.0 billion to satisfy the aggregate principal amount due and 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 senior notes issued in March 2021 were used to redeem the Senior Notes due April 2025 and the Senior Notes due April 2027, which we paid $2.0 billion to redeem in April 2021.
See Note 9 to our 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, 2022, we repurchased 2,166,720 shares of our common stock for an aggregate cost of $4.3 billion. At September 30, 2022, we had a remaining aggregate amount of $6.2 billion authorized by our Board of Directors to repurchase our common stock. We expect to complete repurchases under the authorization in about two years from when we resumed repurchases in January 2022, assuming the travel recovery continues and we remain in compliance with the maximum leverage ratio covenant then in effect under the credit facility amendment. See Note 9 to our
Unaudited Consolidated Financial Statements for a description of the impact of the 2020 credit facility amendment on our ability to repurchase shares. In October 2022, we repurchased approximately $595 million of our common stock.
In November 2021, the Company entered into an agreement to acquire global flight booking provider Etraveli Group for approximately 1.6 billion Euros ($1.6 billion). Completion of the acquisition is subject to certain closing conditions, including regulatory approvals.
As of December 31, 2021, the Company had a remaining obligation of 15 million Euros ($17 million) related to the turnkey agreement for the construction of Booking.com's future headquarters in the Netherlands, which has been substantially paid as of September 30, 2022. In addition to the turnkey agreement, the Company had remaining obligations of 67 million Euros ($66 million) at September 30, 2022 to be paid over the remaining initial term of the acquired land lease, which expires in 2065. The Company has made and will continue to make additional capital expenditures to fit out and furnish the office space. At September 30, 2022, the Company had 12 million Euros ($12 million) of outstanding commitments to vendors to fit out and furnish the office space.
At September 30, 2022 and December 31, 2021, we had lease obligations of $468 million and $561 million, respectively. Additionally, at September 30, 2022 and December 31, 2021, we had, in the aggregate, $368 million and $154 million, respectively, of non-cancellable purchase obligations individually greater than $10 million. Such purchase obligations relate to agreements to purchase goods and services that are enforceable and legally binding, that specify all significant terms, including the quantities to be purchased, price provisions, and the approximate timing of the transaction.
At September 30, 2022 and December 31, 2021, there were $439 million and $511 million, respectively, of standby letters of credit and bank guarantees issued on our behalf. These are obtained primarily for regulatory purposes.
See Note 13 to our Unaudited Consolidated Financial Statements for additional information related to our commitments and contingencies.
We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures, and other obligations through at least the next twelve months. However, if 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, 2022 was $4.4 billion, resulting from net income of $1.8 billion, a favorable impact from adjustments for non-cash items of $1.8 billion, and a favorable net change in working capital and long-term assets and liabilities of $767 million. Non-cash items were principally associated with net losses on equity securities, depreciation and amortization, stock-based compensation expense and other stock-based payments, deferred income tax benefit, provision for expected credit losses and chargebacks, and operating lease amortization. For the nine months ended September 30, 2022, deferred merchant bookings and other current liabilities increased by $3.6 billion, and accounts receivable increased by $1.4 billion, primarily due to increases in business volumes.
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 used in investing activities for the nine months ended September 30, 2022 was $1.0 billion principally resulting from purchases of investments of $751 million, primarily in various corporate and government debt securities (see Note 5), as well as from purchases of property and equipment of $293 million. 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 used in financing activities for the nine months ended September 30, 2022 was $5.4 billion, almost entirely resulting from payments for the repurchase of common stock of $4.3 billion and payments on the maturity of debt of $1.1 billion. Net cash used in financing activities for the nine months ended September 30, 2021 was $1.2 billion, almost entirely resulting from payments on the redemption and maturity 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.
Contingencies
For information related to the French and other tax assessments and other tax matters, see Note 13 to our Unaudited Consolidated Financial Statements and Part I, Item IA, Risk Factors - "We may have exposure to additional tax liabilities" in our Annual Report on Form 10-K for the year ended December 31, 2021.
For information related to the pension matter and our other contingent liabilities, see Note 13 to our Unaudited Consolidated Financial Statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements. These forward-looking statements reflect our views regarding current expectations and projections about future events and conditions 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 including the Risk Factors identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021; therefore, our 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," and "continue," reflecting something other than historical fact are intended to identify forward-looking statements. 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, 2021, our subsequent Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K.
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