Tripadvisor Inc
TRIP
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TRIPADVISOR : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/08/2017 | 10:12 pm


The information included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
our unaudited condensed consolidated financial statements and the accompanying
notes included in this Quarterly Report on Form 10-Q, and the consolidated
financial statements and accompanying notes, as well as Management's Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 2016.

This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. 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. Actual results could differ materially from those
contained in these forward-looking statements for a variety of reasons,
including, but not limited to, those discussed in this Quarterly Report on Form
10-Q for the six months ended June 30, 2017, Part II, Item 1A, "Risk Factors."
Other unknown or unpredictable factors also could have a material adverse effect
on our business, financial condition and results of operations. Accordingly,
readers should not place undue reliance on these forward-looking statements. The
use of words such as "anticipates," "estimates," "expects," "intends," "plans"
and "believes," among others, generally identify forward-looking statements;
however, these words are not the exclusive means of identifying such statements.
In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. These forward-looking statements are inherently subject to
uncertainties, risks and changes in circumstances that are difficult to predict.
We are not under any obligation to, and do not intend to, publicly update or
review any of these forward-looking statements, whether as a result of new
information, future events or otherwise, even if experience or future events
make it clear that any expected results expressed or implied by those
forward-looking statements will not be realized. Please carefully review and
consider the various disclosures made in this report and in our other reports
filed with the SEC that attempt to advise interested parties of the risks and
factors that may affect our business, prospects and results of operations.


Overview




TripAdvisor, Inc., by and through its subsidiaries, owns and operates a
portfolio of leading online travel brands. TripAdvisor, our flagship brand, is
the world's largest travel site, and its mission is to help people around the
world plan, book and experience the perfect trip. We accomplish this by, among
other things, aggregating millions of travelers' reviews and opinions about
destinations, accommodations, activities and attractions, and restaurants
worldwide, thereby creating the foundation for a unique platform that enables
users to research and plan their travel experiences. Our platform also enables
users to compare real-time pricing and availability for these experiences as
well as to book hotels, flights, cruises, vacation rentals, tours, activities
and attractions, and restaurants, either on a TripAdvisor site or app, or on the
site or app of one of our travel partner sites.

Our TripAdvisor-branded websites include tripadvisor.com in the United States
and localized versions of the TripAdvisor website in 48 markets and 28 languages
worldwide. Our TripAdvisor-branded websites reached nearly 415 million average
monthly

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unique visitors during the quarter ended June 30, 2017, according to our
internal log files. We currently feature over 535 million reviews and opinions
on 7.1 million places to stay, places to eat and things to do - including 1.1
million hotels and accommodations and 800,000 vacation rentals, 4.4 million
restaurants and 830,000 activities and attractions worldwide. In addition to the
flagship TripAdvisor brand, we now manage and operate the following 20 other
travel media brands, connected by the common goal of providing users the most
comprehensive travel-planning and trip-taking resources in the travel industry:
www.airfarewatchdog.com, www.bookingbuddy.com, www.citymaps.com,
www.cruisecritic.com, www.familyvacationcritic.com, www.flipkey.com,
www.thefork.com (including www.lafourchette.com, www.eltenedor.com, www.iens.nl,
and www.dimmi.com.au), www.gateguru.com, www.holidaylettings.co.uk,
www.holidaywatchdog.com, www.housetrip.com,
www.jetsetter.com, www.niumba.com, www.onetime.com, www.oyster.com,
www.seatguru.com, www.smartertravel.com, www.tingo.com,
www.vacationhomerentals.com, and www.viator.com.

Our reporting structure includes two reportable segments: Hotel and Non-Hotel.
Our Non-Hotel reportable segment consists of three operating segments, which
includes our Attractions, Restaurants and Vacation Rentals businesses. The
segments are determined based on how the chief operating decision maker
regularly assesses information and evaluates performance for operating
decision-making purposes, including allocation of resources.


Executive Summary and Trends




As the largest online travel platform, we believe we are an attractive marketing
channel for advertisers-including hotel chains, independent hoteliers, online
travel agencies, or OTAs, destination marketing organizations, and other
travel-related and non-travel related product and service providers- who seek to
sell their products and services to our large user base. We offer users the
ability to do real-time price comparison through our metasearch product, as well
as the ability to book hotels, flights, cruises, vacation rentals, tours,
activities and attractions, and restaurants directly on our website through our
instant booking product. The key drivers of our financial results are described
below, including a summary of our growth strategy, current trends affecting our
business, and our segment information.


Our Growth Strategy




We leverage significant investments in technology, operations, brand-building,
and relationships with advertisers and other partners to expand our business and
enhance our global competitive position. We continue to focus on the following
areas to grow our business:


• Delivering a Great User Experience. In 2016, we completed the global



instant booking rollout to all users on all devices worldwide, which



enabled us to continue our progress in creating end-to-end travel



solutions on our platform and making it easier for users to find the



lowest room prices and book directly on our site. During the first half of



2017, we launched a simplified, more engaging hotel shopping interface,



which we believe will result in better user experiences, and ultimately



drive higher conversion to transactions for our partners and higher



revenue per hotel shopper for our hotel segment. Our innovative culture



supports bringing product enhancements to market at speed. In doing so, we



believe that we can continue to improve the user experience and engagement



by growing, among other things, high-quality content, best room price
availability on hotel listings, in-destination bookable supply, and
real-time email and push notifications, thereby also enhancing our
competitive positioning.



• Increasing Traffic to Our Platform. We seek to amplify our global brand



and products through various online and offline performance-based



marketing channels in order to increase the number of users who navigate



to our site either directly, also known as domain direct traffic, or from



other marketing channels. We utilize a number of offline advertising



channels, including permanent branding campaigns such as TripAdvisor



branded campaigns (such as awards, certificates, stickers and badges) and



television advertising. We also leverage a number of online advertising



channels, including: customer relationship management, or CRM, email



campaigns; social networks; search engine marketing, or SEM, which



promotes websites by increasing their visibility in search engine results



through paid placements, contextual advertising, and paid inclusions; and



retargeting, which targets consumers based on their search behavior. In



addition, for sources of user traffic, we also rely on search engine



optimization, or SEO, which promotes websites with relevant and current



content that rank well in "organic," or unpaid search engine results, as



well as referrals from partners whose sites contain links to TripAdvisor



content. In order to continue growing unique visitors to our websites and



enhancing the quality of those visits, we intend to invest in, some or all
of, the aforementioned channels, as well as any new channels that we may
identify in the future.



• Enhancing Our Mobile Phone Offerings. Innovating and improving our mobile



phone products is a key priority as mobile phone devices continue to



proliferate and consumers increasingly conduct more internet searches and



commerce on these devices. During the quarter ended June 30, 2017,
approximately half of our average monthly unique visitors came from mobile
phone, growing 33% year-over-year, according to our log files. We



anticipate that the growth rate in mobile phone visitors will continue to



exceed the growth rate of our overall monthly unique visitors, resulting



in an


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increased proportion of users continuing to use their mobile phone devices



to access the full range of services available on our websites and



applications. We are investing significant resources to improve the



features, functionality, engagement, and commercialization of our travel



products on our mobile websites and applications.



• Growing Our Attractions, Restaurants and Vacation Rentals Businesses. A



significant percentage of our users visit our websites to review content



related to the 830,000 activities and attractions, 4.4 million



restaurants, and 800,000 vacation rentals on our platform, and we believe



that continuing to grow the number of listings and bookable products,



especially in our in-destination Attractions and Restaurants businesses,



gives us a unique opportunity to delight users in more moments during more



trips. We believe continuing to invest in improving the product



experience, especially on mobile phone, enhancing our supply network and



growing demand via online marketing channels will generate increased



demand, repeat usage, bookings and revenue.



Current Trends in Our Business



Hotel Segment




During the second quarter of 2017, we continued to improve and streamline our
hotel shopping experience, most notably through the launch of our redesigned
website and applications, which makes it easier for our users to find the lowest
prices for the right hotel. On the user experience side, we have and will
continue to seek new ways to provide a better end-to-end hotel shopping
experience, including by improving room-level content, optimizing the room
selection process and helping users book with our hotelier and OTA partners. On
the supply side, we continue to seek to on-board more partners that have unique
brand, supply or room pricing to provide consumers a more comprehensive
selection of accommodations in an effort to achieve repeat usage and higher
conversion rates on our platform.

The market to provide services to users looking to book hotels online is
significant, continues to grow and remains highly competitive. We compete with
other travel companies and search engines for traffic, or hotel shoppers. Over
time, increased competition has caused hotel shoppers visiting our websites and
applications from paid marketing channels to grow faster than traffic from
unpaid channels. Hotel shoppers from unpaid channels, such as users that
navigate directly to our homepage or applications through branded search queries
on search engines, are of the highest value to our business. In pursuit of our
objective to grow traffic faster from unpaid channels than from paid channels,
following the launch of our new hotel shopping experience, we launched what we
anticipate to be a multi-year television advertising campaign in June 2017 aimed
to increase user awareness and usage of TripAdvisor as a place to find and book
the best hotels at the lowest prices. We also continue to leverage a number of
other marketing channels, both paid and unpaid, to achieve this objective,
including online efforts such as SEO, SEM, social media, and CRM campaigns, as
well as offline efforts such as TripAdvisor branded campaigns. We will continue
our television advertising campaign and to adjust our marketing efforts and
spend among the different marketing channels, in each case as we think are
appropriate based on the relative growth opportunity, the expected returns and
the competitive environment in which we operate. These marketing efforts have
reduced, and may continue to reduce, our hotel segment marketing efficiencies
and operating margins. However, we believe that over the long-term, as more of
these users visit TripAdvisor to find the lowest hotel prices before they book,
we will be able to drive revenue, marketing efficiency and profit growth.

Another key objective is to grow the number of hotel shoppers on our platforms.
In the second quarter of 2017, our average monthly unique hotel shoppers
increased 11%, when compared to the same period in 2016, according to our log
files. The increase is primarily due to the success in our online marketing
strategy as well as the general trend of an increasing number of hotel shoppers
visiting our websites and apps on mobile phones. During the second quarter of
2017, hotel shoppers that visited our websites and apps on mobile phones
continued to grow significantly faster than traffic from desktop and tablet
devices. Mobile phones currently generate significantly lower revenue per hotel
shopper compared to desktop and tablet devices. We believe this monetization
difference is due to a number of factors, including the reduced ability to
achieve marketing attribution on the mobile phone for facilitating traffic to
partner websites and applications; our limited advertising opportunities on
smaller screen devices; and general consumer purchasing patterns on the mobile
phone resulting in lower booking intent, lower conversion to a booking, lower
cost-per-click, lower average gross booking value and our established consumer
brand as a place to read reviews. As a result, the growth in hotel shoppers on
mobile phones has remained a headwind against our revenue per hotel shopper and
our TripAdvisor-branded click-based and transaction revenue. In addition, the
general trend of increasing traffic to our websites and apps on mobile phones
reduces our ability to grow TripAdvisor-branded display-based advertising
revenue, as we believe prioritizing and preserving a cleaner user experience
over increasing advertising units on smaller screen devices is the most
appropriate way to engage and delight more users on our mobile phone
products. We continue to align product and marketing in mobile and invest in
product development to improve the user experience as well as mobile phone
traffic acquisition to increase our user base. We believe this will result in
increased usage and engagement, conversion of hotel shoppers to bookings for our
hotel advertising partners and higher monetization rates over the long-term for
us.

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Non-Hotel Segment




Our ongoing product efforts to deliver an end-to-end user experience extends to
our Non-hotel segment, which includes our Attractions, Restaurants, and Vacation
Rentals businesses. Our key growth strategies have been to grow users, improve
our products and grow bookable supply. We continued to deliver on those
objectives in the second quarter of 2017, as monthly unique users to these pages
on our websites and applications continued to grow rapidly, we enhanced our
product experience on all devices, and we grew the number of suppliers and
bookable products on our platform. Notably, we have been able to increasingly
leverage strong user growth on the TripAdvisor-branded platform to drive
increased bookings, particularly in our Attractions business. Additionally, our
Attractions and Restaurants businesses have both experienced increased
engagement bookings on mobile phones.

Continued successful execution of our key growth strategies and increased
marketing efficiencies primarily contributed to this segment's revenue growth
and profit growth in the second quarter of 2017, as compared to the same period
in 2016. Ongoing strategic objectives are to continue to enhance the user
experience, drive increased engagement, traffic and bookable products, and
bookings in these businesses.


Segments



Refer to "Note 12: Segment Information" in the notes to the unaudited condensed
consolidated financial statements in this Quarterly Report on Form 10-Q for
financial information and additional descriptive information related to our
segments.



Employees




As of June 30, 2017, we had 3,291 employees. Of these employees, 51% were based
in the United States. We believe we have good relationships with our employees,
including relationships with employees represented by international works
councils or other similar organizations.


Seasonality




Traveler expenditures in the global travel market tend to follow a seasonal
pattern. As such, expenditures by travel advertisers to market to potential
travelers and, therefore, our financial performance, or revenue and profits,
tend to be seasonal as well. As a result, our financial performance tends to be
seasonally highest in the second and third quarters of a year, as it is a key
period for leisure travel research and trip-taking, which includes the seasonal
peak in traveler hotel and vacation rental stays, and tours and attractions
taken, compared to the first and fourth quarters which represent seasonal low
points. Further significant shifts in our business mix or adverse economic
conditions could result in future seasonal patterns that are different from
historical trends.


Critical Accounting Policies and Estimates




Critical accounting policies and estimates are those that we believe are
important in the preparation of our consolidated financial statements because
they require that management use judgment and estimates in applying those
policies. We prepare our consolidated financial statements and accompanying
notes in accordance with GAAP. Preparation of the consolidated financial
statements and accompanying notes requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the
consolidated financial statements as well as revenue and expenses during the
periods reported. Management bases its estimates on historical experience, when
applicable and other assumptions that it believes are reasonable under the
circumstances. Actual results may differ from estimates under different
assumptions or conditions.


There are certain critical estimates that we believe require significant
judgment in the preparation of our consolidated financial statements. We
consider an accounting estimate to be critical if:



• It requires us to make an assumption because information was not available



at the time or it included matters that were highly uncertain at the time
we were making the estimate; and



• Changes in the estimate or different estimates that we could have selected



may have had a material impact on our financial condition or results of
operations.



There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2016.



Significant Accounting Policies and New Accounting Pronouncements



See "Note 2: Significant Accounting Policies" in the notes to our unaudited
condensed consolidated financial statements in this



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Quarterly Report on Form 10-Q for an overview of new accounting pronouncements
that we have adopted or that we plan to adopt that have had or may have an
impact on our financial statements.






There have been no material changes to our significant accounting policies since
December 31, 2016. For additional information about our accounting policies and
estimates, refer to "Note 2: Significant Accounting Policies" in the notes to
our consolidated financial statements in Item 8 of our Annual Report on Form
10-K for the year ended December 31, 2016.

Results of Operations

Selected Financial Data

(in millions, except percentages)



Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
Revenue $ 424 $ 391 8 % $ 796 $ 743 7 %

Costs and expenses:
Cost of revenue 20 20 0 % 37 36 3 %
Selling and marketing 229 202 13 % 436 374 17 %
Technology and content 64 63 2 % 123 124 (1 )%
General and administrative 38 34 12 % 73 72 1 %
Depreciation 19 17 12 % 38 33 15 %
Amortization of intangible assets 8 8 0 % 16 15 7 %
Total costs and expenses: 378 344 10 % 723 654 11 %
Operating income 46 47 (2 )% 73 89 (18 )%
Other income (expense):
Interest expense (4 ) (3 ) 33 % (7 ) (6 ) 17 %
Interest income and other, net 2 - 100 % 3 - 100 %
Total other income (expense), net (2 ) (3 ) (33 )% (4 ) (6 ) (33 )%
Income before income taxes 44 44 0 % 69 83 (17 )%
Provision for income taxes (17 ) (10 ) 70 % (29 ) (19 ) 53 %
Net income $ 27 $ 34 (21 )% $ 40 $ 64 (38 )%

Other Financial Data:
Adjusted EBITDA (1) $ 101 $ 95 6 % $ 174 $ 180 (3 )%




(1) See "Adjusted EBITDA" discussion below for more information.


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Revenue and Segment Information




Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
Revenue by Segment: (in millions) (in millions)
Hotel $ 326 $ 316 3 % $ 640 $ 619 3 %
Non-Hotel 98 75 31 % 156 124 26 %
Total revenue $ 424 $ 391 8 % $ 796 $ 743 7 %
Adjusted EBITDA by
Segment (1):
Hotel $ 84 $ 105 (20 )% $ 172 $ 211 (18 %)
Non-Hotel 17 (10 ) 270 % 2 (31 ) 106 %
Total Adjusted EBITDA $ 101 $ 95 6 % $ 174 $ 180 (3 %)
Adjusted EBITDA
Margin by Segment
(2):
Hotel 26 % 33 % 27 % 34 %
Non-Hotel 17 % (13 )% 1 % (25 )%






(1) Included in Adjusted EBITDA is a general and administrative expense



allocation for each segment, which is based on the segment's percentage of



our total personnel costs, excluding stock-based compensation. See "Note 12:



Segment Information" in the notes to our unaudited condensed consolidated



financial statements for more information.
(2) We define "Adjusted EBITDA Margin by Segment", as Adjusted EBITDA by segment



divided by revenue by segment.



Hotel Segment




Our Hotel segment revenue increased by $10 million and $21 million during the
three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016, primarily due to a $13 million and $34 million increase in
TripAdvisor-branded click-based and transaction revenue during the three and six
months ended June 30, 2017, respectively, primarily offset by a decrease of $5
million
and $12 million in other hotel revenue, during the three and six months
ended June 30, 2017, respectively, all of which are discussed below.

Adjusted EBITDA in our Hotel segment decreased $21 million and $39 million
during three and six months ended June 30, 2017, respectively, when compared to
the same periods in 2016, primarily due to increased SEM and other online
traffic costs, and increased offline marketing costs related to our television
campaign which launched in June 2017, partially offset by an increase in
revenue. Our Hotel segment adjusted EBITDA margin decreased during the three and
six months ended June 30, 2017, respectively, when compared to the same periods
in 2016, primarily due to an increase in online and offline marketing costs to
support long-term growth.

The following is a detailed discussion of the revenue sources within our Hotel
segment:

Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)
Hotel:
TripAdvisor-branded
click-based and
transaction $ 214 $ 201 6 % $ 424 $ 390 9 %
TripAdvisor-branded
display-based
advertising and
subscription 74 72 3 % 139 140 (1 %)
Other hotel revenue 38 43 (12 %) 77 89 (13 %)
Total Hotel revenue $ 326 $ 316 3 % $ 640 $ 619 3 %



TripAdvisor-branded Click-based and Transaction Revenue




TripAdvisor-branded click-based and transaction revenue includes
cost-per-click-based advertising revenue from our TripAdvisor-branded websites
as well as transaction-based revenue from our hotel instant booking feature. For
both the three and six months ended June 30, 2017, 66% of our total Hotel
segment revenue came from our TripAdvisor-branded click-based and transaction
revenue. For the three and six months ended June 30, 2016, 64% and 63%,
respectively, of our total Hotel segment revenue was derived from our
TripAdvisor-branded click-based and transaction revenue. TripAdvisor-branded
click-based and transaction revenue during the three and six months ended June
30, 2017
increased $13 million and $34 million, respectively, when compared to
the same periods in 2016, primarily due to an increase of 11% and 10%,
respectively, in average monthly unique hotel shoppers during the three and six
months ended June 30, 2017, which is explained below.

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Our largest source of Hotel segment revenue is click-based advertising revenue
from our TripAdvisor-branded websites, which includes links to our partners'
sites and contextually-relevant branded and related text links. Click-based
advertising is generated primarily through our metasearch auction, a description
of which follows. Our click-based advertising partners are predominantly OTAs,
and direct suppliers in the hotel product category. Click-based advertising is
generally priced on a cost-per-click, or CPC, basis, with payments from
advertisers based on the number of users who click on each type of link, or in
other words a conversion of a hotel shopper to a paid click. CPC is the price
that partners are willing to pay for a hotel shopper lead, and is determined in
a competitive process that enables our partners to use our proprietary,
automated bidding system to submit CPC bids to have their rates and availability
listed on our site. When a partner submits a CPC bid, they are agreeing to pay
the amount of that bid each time a user subsequently clicks on the link to the
partner's website. Bids can be submitted periodically - as often as daily- on a
property-by-property basis. Primary factors used to determine the placement of
partner links on our site include, but are not limited to the size of the bid
relative to other bids, room night price, and other variables. CPCs are
generally lower in markets outside the U.S. market, and hotel shoppers visiting
via mobile phones currently monetize at a significantly lower rate than hotel
shoppers visiting via desktop or tablet.

Our hotel transaction-based revenue is comprised of revenue from our hotel
instant booking feature, which enables the merchant of record, generally an OTA
or hotel partner, to pay a commission to TripAdvisor for a user that completes a
hotel reservation on our website. Instant booking revenue is currently
recognized under two different models: the transaction model and the consumption
model. Our transaction model commission revenue is recorded at the time a
traveler books a hotel reservation on our site with one of our transaction
partners. Our transaction partners are liable for commission payments to us upon
booking and the partner assumes the cancellation risk. When a traveler makes a
hotel reservation on our site with one of our consumption partners, which
comprises the majority of our instant booking revenue, revenue is not recorded
until the traveler completes the stay as our consumption partners are liable for
commission payment only upon the completion of stay by the traveler. OTA and
hotel partner placement, as well as comparative hotel prices available to the
traveler in the booking process under both models, are determined by a bidding
process within our proprietary automated bidding system, based on a number of
variables, primarily hotel room prices, but also including other factors, such
as conversion rates and commission rates, depending on the specific hotel
selected. Instant booking commissions are primarily a function of average gross
booking value generated from hotel reservations, cancellation rates experienced,
and commission rates negotiated with each of our partners.

The key drivers of TripAdvisor-branded click-based and transaction revenue
include average monthly unique hotel shopper growth and revenue per hotel
shopper growth, which measures how effectively we convert our hotel shoppers
into revenue. We measure performance by calculating revenue per hotel shopper on
an aggregate basis, dividing total TripAdvisor-branded click-based and
transaction revenue by total average monthly unique hotel shoppers on
TripAdvisor-branded websites for the periods presented.

While we believe total traffic growth, or growth in monthly visits from unique
visitors, is reflective of our overall brand growth, we also track and analyze
sub-segments of our traffic and their correlation to revenue generation and
utilize data regarding hotel shoppers as one of the key indicators of revenue
growth. Hotel shoppers are visitors who view either a listing of hotels in a
city or a specific hotel page. The number of hotel shoppers tends to vary based
on seasonality of the travel industry and general economic conditions, as well
as other factors outside of our control. Given these factors, as well as the
trend towards increased usage on mobile phones and international expansion,
quarterly and annual hotel shopper growth is a difficult metric to forecast.

The below table summarizes our revenue per hotel shopper calculation and growth
rate, in aggregate, for the periods presented (in millions, except calculated
revenue per hotel shopper and percentages):

Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
Revenue per hotel
shopper:
TripAdvisor-branded
click-based and
transaction revenue $ 214 $ 201 6 % $ 424 $ 390 9 %
Divided by: Total
average monthly
unique hotel
shoppers for the
quarter 460 416 11 % 908 827 10 %
$ 0.47 $ 0.48 (2 %) $ 0.47 $ 0.47 0 %


Our overall revenue per hotel shopper decreased 2% and was flat during the three
and six months ended June 30, 2017, respectively, when compared to the same
periods in 2016, according to our internal log files, which was primarily driven
by a greater percentage of hotel shoppers visiting TripAdvisor-branded websites
and apps on mobile phones, as well as reallocation of online marketing spend to
our television campaign in the month of June 2017, dilution from product testing
related to the launch of our redesigned website and applications during the
second quarter of 2017, foreign currency fluctuations and the timing of our
instant

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booking feature rollout in certain non-U.S. markets during the first half of
2016.




Our aggregate average monthly unique hotel shoppers on TripAdvisor-branded
websites increased by 11% and 10% during the three and six months ended June 30,
2017
, respectively, when compared to the same periods in 2016, according to our
log files. The increase in hotel shoppers for the three and six months ended
June 30, 2017 is primarily due to the success in our online marketing strategy
as well as the general trend of an increasing number of hotel shoppers visiting
our websites and apps on mobile phones, as well as higher growth in our non-US
markets.


TripAdvisor-branded Display-based Advertising and Subscription Revenue




For the three and six months ended June 30, 2017, 23% and 22%, respectively, of
our Hotel segment revenue came from our TripAdvisor-branded display-based
advertising and subscription revenue, which primarily consists of revenue from
display-based advertising and subscription-based hotel advertising revenue (or
Business Advantage). For both the three and six months ended June 30, 2016, 23%
of our Hotel segment revenue was derived from our TripAdvisor-branded display
based advertising and subscription revenue.

Our TripAdvisor-branded display-based advertising and subscription revenue
increased by $2 million or 3%, during the three months ended June 30, 2017, when
compared to the same period in 2016. Display-based advertising revenue increased
marginally primarily due to an increase in impressions sold and pricing,
partially offset by the general trend of increasing traffic visiting our
websites and apps on mobile phones. While we continue to focus on new product
initiatives to drive growth, our subscription revenue decreased marginally
primarily as a result of slowing growth due to the maturation of this business,
as well as hotel industry consolidation. Our TripAdvisor-branded display-based
advertising and subscription revenue decreased slightly by $1 million or 1%,
during the six months ended June 30, 2017, when compared to the same period in
2016.

Other Hotel Revenue

For both the three and six months ended June 30, 2017, 12% of our Hotel segment
revenue came from other hotel revenue. For both the three and six months ended
June 30, 2016, 14% of our Hotel segment revenue was derived from other hotel
revenue. Our other hotel revenue primarily includes revenue from non-TripAdvisor
branded websites, such as bookingbuddy.com, cruisecritic.com, and onetime.com,
including click-based advertising revenue, display-based advertising revenue and
room reservations sold through these websites. Our other hotel revenue decreased
by $5 million and $12 million during the three and six months ended June 30,
2017
, when compared to the same periods in 2016, primarily due to increased
focus on return on marketing spend from paid marketing channels within this
revenue stream.


Non-Hotel Segment




Our Non-Hotel segment revenue increased by $23 million or 31%, and $32 million
or 26% during the three and six months ended June 30, 2017, respectively, when
compared to the same periods in 2016, primarily driven by increased bookable
supply, user demand, and increased bookings in our Attractions and Restaurants
businesses.

Revenue growth in our Attractions business has been driven by growth in bookable
products and traffic from free and paid sources, and conversion on our platform.
We also continue to enhance user experience from the introduction of new
features, such as attractions instant booking for mobile phone, which enables
users to purchase tickets and tours seamlessly without leaving the mobile
app. These factors are all contributing to more consumer choice, increased
conversion, and continued revenue growth as a result of increased bookings. In
our Restaurants business, we have experienced continued revenue growth due to
increased bookings in our most established markets, in addition to an increase
in bookable supply of restaurant listings during the three and six months ended
June 30, 2017, respectively, when compared to the same periods in 2016.

Non-Hotel segment Adjusted EBITDA increased $27 million and $33 million during
the three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016. This increase was primarily due to increased revenue
growth in free online marketing channels and increased efficiencies in paid
online marketing channels in our Attractions business, partially offset
primarily by increased personnel and overhead costs for the three and six months
ended June 30, 2017.

31



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Revenue by Geography



The following table presents our consolidated revenue by geographic region.
Revenue by geography is based on the geographic location of our websites.




Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)



Revenue by geographic
region(1):
United States $ 244 $ 218 12 % $ 454 $ 402 13 %
Europe 110 104 6 % 207 206 0 %
ROW 70 69 1 % 135 135 0 %
Total $ 424 $ 391 8 % $ 796 $ 743 7 %





(1) In the first quarter of 2017, we reclassified Canada, Middle East, Africa,



Asia-Pacific ("APAC") and Latin America ("LATAM") into rest of world



("ROW") when presenting our revenue by geographic region. Prior period



amounts were reclassified to conform to the current presentation. This
change had no effect on our consolidated financial statements in any
reporting period.


Our U.S. revenue increased $26 million or 12%, and $52 million or 13%, during
the three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016. U. S. revenue represented 58% and 57%, of total revenue
during the three and six months ended June 30, 2017, respectively, and
represented 56% and 54%, of total revenue during the three and six months ended
June 30, 2016, respectively. This increase was due to an increase in U.S.
TripAdvisor-branded click-based and transaction revenue, driven by growth in
U.S. revenue per hotel shopper during the three and six months ended June 30,
2017
, when compared to the same periods in 2016, as well as due to growth in our
Attractions business. Revenue outside of the U.S., or non-U.S. revenue,
increased $7 million, or 4%, and $1 million or 0%, during the three and six
months ended June 30, 2017, respectively, when compared to the same periods in
2016, primarily due to growth in our Restaurants business. Non-U.S. revenue
represented 42% and 43%, of total revenue during the three and six months ended
June 30, 2017, respectively, and represented 44% and 46%, of total revenue
during the three and six months ended June 30, 2016. The decline in our non-U.S.
revenue, as a percentage of total revenue during these periods, was primarily
due to non-US hotel shoppers continuing to monetize at a lower rate than hotel
shoppers in the U.S. market, as well as the general trend of an increasing
number of hotel shoppers visiting TripAdvisor-branded websites and apps on
mobile phones, foreign currency fluctuations and the timing of our instant
booking feature rollout in certain non-U.S. markets during the first half of
2016.

Consolidated Expenses

Cost of Revenue

Cost of revenue consists of expenses that are directly related or closely
correlated to revenue generation, including direct costs, such as ad serving
fees, flight search fees, credit card fees and other transaction costs, and data
center costs. In addition, cost of revenue includes personnel and overhead
expenses, including salaries, benefits, stock-based compensation and bonuses for
certain customer support personnel who are directly involved in revenue
generation.



Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)



Direct costs $ 15 $ 15 0 % $ 27 $ 26 4 %
Personnel and overhead 5 5 0 % 10 10 0 %
Total cost of revenue $ 20 $ 20 0 % $ 37 $ 36 3 %
% of revenue 4.7 % 5.1 % 4.6 % 4.8 %


Cost of revenue remained flat during the three months ended June 30, 2017, when
compared to the same period in 2016, while cost of revenue increased $1 million
during the six months ended June 30, 2017, when compared to the same period in
2016, primarily due to increased direct costs from merchant credit card and
transaction fees in our Non-Hotel segment, as a result of revenue growth.

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Selling and Marketing




Selling and marketing expenses primarily consist of direct costs, including
traffic generation costs from SEM and other online traffic acquisition costs,
syndication costs and affiliate program commissions, social media costs, brand
advertising, television and other offline advertising, and public relations. In
addition, our sales and marketing expenses consist of indirect costs such as
personnel and overhead expenses, including salaries, commissions, benefits,
stock-based compensation and bonuses for sales, sales support, customer support
and marketing employees.



Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)
Direct costs $ 176 $ 148 19 % $ 331 $ 271 22 %
Personnel and
overhead 53 54 (2 %) 105 103 2 %
Total selling and
marketing $ 229 $ 202 13 % $ 436 $ 374 17 %
% of revenue 54.0 % 51.7 % 54.8 % 50.3 %


Direct selling and marketing costs increased $28 million and $60 million during
the three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016, driven primarily by increased traffic acquisition costs in
our Hotel segment. Direct selling and marketing costs increased during the three
and six months ended June 30, 2017 when compared to the same periods in 2016,
primarily due to an increase in SEM and other online traffic acquisition costs
of $13 million and $44 million, respectively, driven by our Hotel segment, as
well as $16 million in costs incurred in the second quarter of 2017 related to
the launch of our television campaign, which is recorded in our Hotel segment.


Technology and Content




Technology and content expenses consist primarily of personnel and overhead
expenses, including salaries and benefits, stock-based compensation and bonuses
for salaried employees and contractors engaged in the design, development,
testing, content support, and maintenance of our websites and mobile apps. Other
costs include licensing, maintenance expense, computer supplies, telecom costs,
content translation costs, and consulting costs.



Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)
Personnel and
overhead $ 58 $ 54 7 % $ 111 $ 107 4 %
Other 6 9 (33 %) 12 17 (29 %)
Total technology and
content $ 64 $ 63 2 % $ 123 $ 124 (1 %)
% of revenue 15.1 % 16.1 % 15.5 % 16.7 %


Technology and content costs increased $1 million and decreased $1 million
during the three and six months ended June 30, 2017, respectively, when compared
to the same periods in 2016. Personnel and overhead costs increased $4 million
during both the three and six months ended June 30, 2017, respectively, when
compared to the same period in 2016, primarily due to an increase in personnel
to support business growth, and mobile phone and website initiatives, including
an increase in stock-based compensation of $2 million during the three months
ended June 30, 2017. Other costs decreased by $3 million and $5 million during
the three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016, primarily due to a decrease in content translation costs.


General and Administrative




General and administrative expenses consist primarily of personnel and related
overhead costs, including personnel engaged in executive leadership, finance,
legal, and human resources, including stock-based compensation. General and
administrative costs also include professional service fees and other fees
including audit, legal, tax and accounting, and other costs including bad debt
expense, non-income taxes and charitable contributions.

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Three months ended June 30, % Change Six months ended June 30, % Change
2017 2016 2017 vs. 2016 2017 2016 2017 vs. 2016
(in millions) (in millions)



Personnel and
overhead $ 29 $ 25 16 % $ 57 $ 51 12 %
Professional service
fees and other 9 9 0 % 16 21 (24 %)
Total general and
administrative $ 38 $ 34 12 % $ 73 $ 72 1 %
% of revenue 9.0 % 8.7 % 9.2 % 9.7 %


General and administrative costs increased $4 million and $1 million during the
three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016. Personnel and overhead costs increased $4 million and $6
million
during the three and six months ended June 30, 2017, when compared to
the same periods in 2016, primarily related to an increase in stock-based
compensation of $2 million and $4 million, respectively. Professional service
fees and other decreased $5 million during the six months ended June 30, 2017,
when compared to the same period in 2016, primarily due to a decrease in
consulting costs and non-income taxes, partially offset by an increase in bad
debt costs.

Depreciation



Depreciation expense consists of depreciation on computer equipment, leasehold
improvements, furniture, office equipment and other assets, our corporate
headquarters building and amortization of capitalized software and website
development costs.




Three months ended June 30, Six months


ended June 30,



2017 2016 2017 2016
(in millions) (in millions)
Depreciation $ 19 $ 17 $ 38 $ 33
% of revenue 4.5 % 4.3 % 4.8 % 4.4 %


Depreciation expense increased $2 million and $5 million during the three and
six months ended June 30, 2017, respectively, when compared to the same periods
in 2016 primarily due to increased amortization related to capitalized software
and website development costs.


Amortization of Intangible Assets



Amortization consists of the amortization of purchased definite-lived
intangibles.




Three months ended June 30,


Six months ended June 30,



2017 2016 2017 2016
(in millions) (in millions)
Amortization of intangible
assets $ 8 $ 8 $ 16 $ 15
% of revenue 1.9 % 2.0 % 2.0 % 2.0 %



Amortization of intangible assets did not materially change during both the
three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016.




Interest Expense

Interest expense primarily consists of interest incurred, commitment fees and
debt issuance cost amortization related to our 2015 Credit Facility, 2016 Credit
Facility, and Chinese Credit Facilities, as well as interest on our financing
obligation related to our corporate headquarters.



Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
(in millions) (in millions)
Interest expense $ (4 ) $ (3 ) $ (7 ) $ (6 )



Interest expense increased $1 million during both the three and six months ended
June 30, 2017, respectively, when compared to the same periods in 2016,
primarily due to an increase in interest incurred due to higher average
outstanding borrowings and



34

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effective interest rates during the first six months of 2017. Refer to "Note 6:
Debt" in the notes to our unaudited condensed consolidated financial statements
in this Quarterly Report on Form 10-Q for additional information on our 2015
Credit Facility, 2016 Credit Facility, and Chinese Credit Facilities.


Interest Income and Other, Net



Interest income and other, net primarily consists of interest earned and
amortization of discounts and premiums on our marketable securities, net foreign
exchange gains and losses, and gains and losses on sales of our marketable
securities and sale of businesses.






Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
(in millions) (in millions)
Interest income and other, net $ 2 $ - $ 3 $ -


Interest income and other, net increased $2 million and $3 million during the
three and six months ended June 30, 2017, respectively, when compared to the
same periods in 2016, primarily due higher transaction gains and losses as a
result of the fluctuation of foreign exchange rates.


Provision for Income Taxes




Three months ended June 30,


Six months ended June 30,



2017 2016 2017 2016
(in millions) (in millions)
Provision for income taxes $ 17 $ 10 $ 29 $ 19
Effective tax rate 38.6 % 22.7 % 42.0 % 22.9 %



Our effective tax rate increased during the three and six months ended June 30,
2017
over the same periods in 2016, primarily due to increased valuation
allowances on losses in jurisdictions outside the United States and a lower
stock price resulting in stock compensation shortfalls.



For the three and six months ended June 30, 2017, the effective tax rate is
greater than the federal statutory rate primarily due to valuation allowances on
losses in jurisdictions outside the United States and recognition of stock
compensation shortfalls.



Adjusted EBITDA




To provide investors with additional information regarding our financial
results, we also disclose Adjusted EBITDA, which is a non-GAAP financial
measure. A "non-GAAP financial measure" refers to a numerical measure of a
company's historical or future financial performance, financial position, or
cash flows that excludes (or includes) amounts that are included in (or excluded
from) the most directly comparable measure calculated and presented in
accordance with GAAP in such company's financial statements.

Adjusted EBITDA is our segment profit measure and a key measure used by our
management and board of directors to understand and evaluate the operating
performance of our business and on which internal budgets and forecasts are
based and approved. In particular, the exclusion of certain expenses in
calculating Adjusted EBITDA can provide a useful measure for period-to-period
comparisons of our core business. Accordingly, we believe that Adjusted EBITDA
provides useful information to investors and others in understanding and
evaluating our operating results in the same manner as our management and board
of directors. We define Adjusted EBITDA as net income (loss) plus: (1) provision
for income taxes; (2) other income (expense), net; (3) depreciation of property
and equipment, including amortization of internal use software and website
development; (4) amortization of intangible assets; (5) stock-based compensation
and other stock-settled obligations; (6) goodwill, long-lived asset and
intangible asset impairments; and (7) other non-recurring expenses and income.


Our use of Adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation or as a substitute for analysis of our results
reported in accordance with GAAP. Because of these limitations, you should
consider Adjusted EBITDA alongside other financial performance measures,
including net income and our other GAAP results.



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Some of these limitations are:




• Adjusted EBITDA does not reflect our cash expenditures or future
requirements for capital expenditures or contractual commitments;



• Adjusted EBITDA does not reflect changes in, or cash requirements for, our



working capital needs;


• Adjusted EBITDA does not reflect the interest expense, or cash



requirements necessary to service interest or principal payments on our
debt;



• Adjusted EBITDA does not consider the potentially dilutive impact of



stock-based compensation or other stock-settled obligations;



• Although depreciation and amortization are non-cash charges, the assets



being depreciated and amortized may have to be replaced in the future, and



Adjusted EBITDA does not reflect cash capital expenditure requirements for



such replacements or for new capital expenditure requirements;


• Adjusted EBITDA does not reflect tax payments that may represent a
reduction in cash available to us; and



• Other companies, including companies in our own industry, may calculate



Adjusted EBITDA differently than we do, limiting its usefulness as a
comparative measure.



The following table presents a reconciliation of Adjusted EBITDA to Net Income,
the most directly comparable financial measure calculated and presented in
accordance with GAAP, for the periods presented:




Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
(in millions)
Net income $ 27 $ 34 $ 40 $ 64
Add: Provision for income
taxes 17 10 29 19
Add: Other expense (income),
net 2 3 4 6
Add: Stock-based
compensation 28 23 47 43
Add: Amortization of
intangible assets 8 8 16 15
Add: Depreciation 19 17 38 33
Adjusted EBITDA $ 101 $ 95 $ 174 $ 180



Related Party Transactions




For information on our relationship with Liberty TripAdvisor Holdings, Inc.,
refer to "Note 11: Related Party Transactions" in the notes to our unaudited
condensed consolidated financial statements in this Quarterly Report on Form
10-Q. We had no related party transactions with LTRIP during the three and six
months ended June 30, 2017 and 2016, respectively.


Stock-Based Compensation




Refer to "Note 3: Stock Based Awards and Other Equity Instruments" in the notes
to our unaudited condensed consolidated financial statements in this Quarterly
Report on Form 10-Q for further information on current year equity award
activity, including the issuance of 1,502,240 service-based stock options with a
weighted average grant-date fair value per option of $17.19 and 4,001,615
service-based RSUs with a weighted average grant-date fair value of $42.88
during the six months ended June 30, 2017.


Liquidity and Capital Resources






Our principal source of liquidity is cash flows generated from operations and
cash, cash equivalents and marketable securities, although liquidity needs can
also be met through drawdowns under our 2015 Credit Facility, 2016 Credit
Facility, and Chinese Credit Facilities. As of June 30, 2017 and December 31,
2016
, we had $908 million and $746 million, respectively, of cash, cash
equivalents and short and long-term available-for-sale marketable securities. As
of June 30, 2017, approximately $687 million of our cash, cash equivalents and
short and long-term marketable securities are held by our subsidiaries outside
the United States. Cumulative undistributed earnings of foreign subsidiaries
that we intend to indefinitely reinvest outside of the United States totaled
approximately $845 million as of June 30, 2017. Should we distribute, or be
treated under certain U.S. tax rules as having distributed, the earnings of
foreign subsidiaries in the form of dividends or otherwise, we may be subject to
U.S. income taxes. To date, we have permanently reinvested our foreign earnings
outside of the United States and we currently do not intend to repatriate these
earnings to fund U.S. operations. Determination of the amount of any
unrecognized deferred income tax liability on this temporary difference is not
practicable because of the complexities of the hypothetical calculation. The
majority of cash on hand is denominated in U.S. dollars.

36

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During the six months ended June 30, 2017, we borrowed an additional $375
million
and repaid $206 million of outstanding borrowings under the 2015 Credit
Facility. These net borrowings during the year were primarily used to repurchase
shares of our outstanding common stock under the Company's share repurchase
program described below. As of June 30, 2017, we had outstanding borrowings of
$260 million in long-term debt, within our U.S. subsidiaries, and approximately
$937 million of borrowing capacity available under our 2015 Credit Facility,
which we are currently borrowing under a one-month interest period, which will
reset periodically. The weighted average rate of our outstanding borrowings
under the 2015 Credit Facility as of June 30, 2017 was 2.37% per annum. As of
June 30, 2017, we were in compliance with the covenants in our 2015 Credit
Facility. In addition, we had $73 million of additional borrowing capacity
available under our 2016 Credit Facility. The Company repaid all outstanding
borrowings under the 2016 Credit Facility during the three months ended March
31, 2017
. Finally, as of June 30, 2017, we had short-term borrowings of $7
million
and approximately $33 million of available borrowing capacity under our
Chinese Credit Facilities, which currently bear interest at a weighted average
rate of 4.47%. For further discussion on our credit facilities refer to "Note 6:
Debt" in the notes to our unaudited condensed consolidated financial statements
in this Quarterly Report on Form 10-Q.

In our Vacation Rentals free-to-list model and our Attractions business, we
receive cash from travelers at the time of booking and we record these amounts,
net of commissions, on our consolidated balance sheets as deferred merchant
payables. We pay the suppliers, or the vacation rental owners or tour providers,
respectively, after the travelers' use. Therefore, we receive cash from the
traveler prior to paying the supplier and this operating cycle represents a
working capital source or use of cash to us. Seasonal fluctuations in these
transactions affect the timing of our annual cash flows related to working
capital. During the first half of the year vacation rentals and attractions
bookings typically exceed stays and tour-taking, resulting in higher cash flow
related to working capital, while during the second half of the year,
particularly in the third quarter, this pattern reverses and cash flows from
these bookings are typically negative. While we expect the impact of seasonal
fluctuations to continue, further significant shifts in our business mix or
adverse economic conditions could result in future seasonal patterns that are
different from historical trends.

On January 25, 2017, our Board of Directors authorized the repurchase of $250
million
of our shares of common stock under a new share repurchase program. As
of June 30, 2017, we had repurchased a total of 6,079,003 shares of the
Company's outstanding common stock at an average share price of $41.13, or $250
million
in the aggregate, and completed this share repurchase program.

We believe that our available cash and marketable securities, combined with
expected cash flows generated by operating activities and available cash from
our credit facilities, will be sufficient to fund our foreseeable working
capital requirements, capital expenditures, existing business growth
initiatives, debt obligations, lease commitments, and other financial
commitments through at least the next twelve months. Our future capital
requirements may also include capital needs for acquisitions, share repurchases,
and/or other expenditures in support of our business strategy; thus potentially
reducing our cash balance and/or increasing our debt. We expect total capital
expenditures for 2017 to be comparable to our 2016 spending levels.

Our cash flows from/(used in) in operating, investing and financing activities
during the periods presented, as reflected in the unaudited condensed
consolidated statements of cash flows, are summarized in the following table:

Six months ended June 30,
2017 2016
(in millions)
Net cash provided by (used in):
Operating activities $ 355 $ 363
Investing activities 78 (76 )
Financing activities (167 ) (129 )


For the six months ended June 30, 2017, net cash provided by operating
activities decreased by $8 million or 2% when compared to the same period in
2016, primarily due to a decrease in net income of $24 million, offset by an
increase in non-cash items affecting cash flow of $13 million and a net increase
in working capital movements of $3 million. The increase in working capital
movements of $3 million was primarily related to an increase in operating cash
flow from deferred merchant payables primarily due to growth in our Attractions
business and timing of payments, partially offset by the timing of vendor
payments and collection of receivables.

For the six months ended June 30, 2017, net cash provided by investing
activities increased by $154 million when compared to the same period in 2016,
primarily due to a net increase in cash generated by the purchase, sales, and
maturities of our marketable securities.

For the six months ended June 30, 2017, net cash used in financing activities
increased by $38 million when compared to the same period in 2016, primarily due
to an increase of $238 million in cash used in the first six months of 2017 to
purchase shares of our common stock under authorized share repurchase programs
and repayment of our 2016 Credit Facility borrowings of $73 million in 2017,
partially offset by an increase in net borrowings under our 2015 Credit Facility
of $276 million for the first six months of 2017, when compared to the same
period in 2016.

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Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements




There have been no material changes outside the normal course of business to our
contractual obligations and commercial commitments since December 31, 2016. As
of June 30, 2017, other than our contractual obligations and commercial
commitments, we did not have any off-balance sheet arrangements as defined in
Item 303(a)(4)(ii) of Regulation S-K promulgated by the SEC. Refer to "Liquidity
and Capital Resources" in Part II, Item 7. -Management's Discussion and Analysis
of Financial Condition and Results of Operations of our Annual Report on Form
10-K for the year ended December 31, 2016 for a discussion of our contractual
obligations and commercial commitments.


Contingencies




In the ordinary course of business, we and our subsidiaries are parties to
regulatory and legal matters. These matters may relate to claims involving
alleged infringement of third-party intellectual property rights, defamation,
taxes, regulatory compliance and other claims. Periodically, we review the
status of all significant outstanding matters to assess the potential financial
exposure. When (i) it is probable that an asset has been impaired or a liability
has been incurred, and (ii) the amount of the loss can be reasonably estimated,
we record the estimated loss in our consolidated statements of operations. We
provide disclosure in the notes to the consolidated statements for loss
contingencies that do not meet both of these conditions if there is a reasonable
possibility that a loss may have been incurred that would be material to the
financial statements. Significant judgment is required to determine the
probability that a liability has been incurred and whether such liability is
reasonably estimable. We base accruals made on the best information available at
the time which can be highly subjective. Although occasional adverse decisions
or settlements may occur, the Company does not believe that the final
disposition of any of these matters will have a material adverse effect on the
business. However, the final outcome of these matters could vary significantly
from our estimates. Moreover, such claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources, divert
management's attention from the Company's business objectives and adversely
affect the Company's business, results of operations, financial condition and
cash flows. There may also be claims or actions pending or threatened against us
of which we are currently not aware and the ultimate disposition of which would
have a material adverse effect on us.

We are also under audit by the IRS and various other domestic and foreign tax
authorities with regards to income tax matters. We have reserved for potential
adjustments to our provision for income taxes that may result from examinations
by, or any negotiated agreements with, these tax authorities. Although we
believe our tax estimates are reasonable, the final determination of audits
could be materially different from our historical income tax provisions and
accruals. The results of an audit could have a material effect on our financial
position, results of operations, or cash flows in the period for which that
determination is made.

By virtue of previously filed consolidated income tax returns filed with
Expedia, we are currently under an IRS audit for the 2009, 2010, and 2011 tax
years, and have various ongoing state income tax audits. We are separately under
examination by the IRS for the 2012 and 2013 tax years and under an employment
tax audit by the IRS for the 2013 and 2014 tax years. These audits include
questioning of the timing and the amount of income and deductions and the
allocation of income among various tax jurisdictions. These examinations may
lead to proposed or ordinary course adjustments to our taxes. We are no longer
subject to tax examinations by tax authorities for years prior to 2009. As of
June 30, 2017, no material assessments have resulted, except as noted below
regarding our 2009 and 2010 IRS audit with Expedia.

In January 2017, we received Notices of Proposed Adjustment from the IRS for the
2009 and 2010 tax years. These proposed adjustments are related to certain
transfer pricing arrangements with our foreign subsidiaries, and would result in
an increase to our worldwide income tax expense in an estimated range totaling
$10 million to $14 million for those specific years, after consideration of
competent authority relief, exclusive of interest and penalties. We disagree
with the proposed adjustments and we intend to defend our position through
applicable administrative and, if necessary, judicial remedies. During the
quarter ended June 30, 2017, we filed a request for Mutual Agreement Procedure
consideration under Article 26 of the United States / United Kingdom Income Tax
Convention and Rev
. Proc. 2015-40, 2015-35 I.R.B. 236. Our policy is to review
and update tax reserves as facts and circumstances change. Based on our
interpretation of the regulations and available case law, we believe the
position we have taken with regard to transfer pricing with our foreign
subsidiaries is sustainable. In addition to the risk of additional tax for 2009
and 2010 transactions, if the IRS were to seek transfer pricing adjustments of a
similar nature for transactions in subsequent years, we could be subject to
significant additional tax liabilities.

Additionally, we continue to accumulate positive cash flows in foreign
jurisdictions, which we consider indefinitely reinvested. Any repatriation of
funds currently held in foreign jurisdictions may result in higher effective tax
rates and incremental cash tax payments. In addition, there have been proposals
to amend U.S. tax laws that would significantly impact the manner in which U.S.
companies are taxed on foreign earnings. Although we cannot predict whether or
in what form any legislation will pass, if enacted, it could have a material
adverse impact on our U.S. tax expense and cash flows.

38



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See "Note 7: Income Taxes" in the notes to our unaudited condensed consolidated
financial statements in this Quarterly Report on Form 10-Q for further
information on potential contingencies surrounding current audits by the IRS and
various other domestic and foreign tax authorities, and other income tax
matters.

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