Edgar Filing: Expedia Group, Inc.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-37429

EXPEDIA GROUP, INC.

(Exact name of registrant as specified in its charter)



Delaware		20-2705720
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

333 108th Avenue NE

Bellevue, WA 98004

(Address of principal executive office) (Zip Code)

(425) 679-7200

(Registrant’s telephone number, including area code)

__________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.0001 par value	EXPE	The Nasdaq Global Select Market
Expedia Group, Inc. 2.500% Senior Notes due 2022	EXPE22	New York Stock Exchange

The number of shares outstanding of each of the registrant’s classes of common stock as of April 19, 2019 was:



Common stock, $0.0001 par value per share	136,007,689	shares
Class B common stock, $0.0001 par value per share	12,799,999	shares

Table of Contents

Expedia Group, Inc.

Form 10-Q

For the Quarter Ended March 31, 2019

Contents




Part I	Financial Information

Item 1	Consolidated Financial Statements

	Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)	2

	Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2019 and 2018 (unaudited)	3

	Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	4

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	5

	Consolidated Statements of Stockholders Equity for the Three Months Ended March 31, 2019 and 2018 (unaudited)	6

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3	Quantitative and Qualitative Disclosures about Market Risk	46

Item 4	Controls and Procedures	47

Part II	Other Information

Item 1	Legal Proceedings	48

Item 1A	Risk Factors	49

Item 6	Exhibits	50
Signature		52

Table of Contents

Part I. Item 1. Consolidated Financial Statements

EXPEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share and per share data)

(Unaudited)



	Three months ended March 31,
	2019			2018

Revenue	$	2,609		$	2,508
Costs and expenses:
Cost of revenue ⁽¹⁾	513			487
Selling and marketing ⁽¹⁾	1,535			1,516
Technology and content⁽¹⁾	429			396
General and administrative ⁽¹⁾	191			199
Amortization of intangible assets	52			72
Legal reserves, occupancy tax and other	10			3
Restructuring and related reorganization charges	10			—
Operating loss	(131		)	(165		)
Other income (expense):
Interest income	11			11
Interest expense	(41		)	(51		)
Other, net	20			36
Total other expense, net	(10		)	(4		)
Loss before income taxes	(141		)	(169		)
Provision for income taxes	41			20
Net loss	(100		)	(149		)
Net (income) loss attributable to non-controlling interests	(3		)	12
Net loss attributable to Expedia Group, Inc.	$	(103	)	$	(137	)

Loss per share attributable to Expedia Group, Inc. available to common stockholders:
Basic	$	(0.69	)	$	(0.91	)
Diluted	(0.69		)	(0.91		)
Shares used in computing loss per share (000's):
Basic	147,882			151,817
Diluted	147,882			151,817

_______



(1) Includes stock-based compensation as follows:
Cost of revenue	$	3	$	2
Selling and marketing	11		11
Technology and content	19		15
General and administrative	23		22

See accompanying notes.

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EXPEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)



	Three months ended March 31,
	2019			2018
Net loss	$	(100	)	$	(149	)
Currency translation adjustments, net of tax⁽¹⁾	(5		)	38
Comprehensive loss	(105		)	(111		)
Less: Comprehensive loss attributable to non-controlling interests	(5		)	(1		)
Comprehensive loss attributable to Expedia Group, Inc.	$	(100	)	$	(110	)


(1)	Currency translation adjustments include tax expense of $3 million associated with net investment hedges for the three months ended March 31, 2019 and a tax benefit of $5 million for the three months ended March 31, 2018.

See accompanying notes.

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EXPEDIA GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except number of shares which are reflected in thousands and par value)



	March 31, 2019			December 31, 2018
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,708		$	2,443
Restricted cash and cash equivalents	447			259
Short-term investments	466			28
Accounts receivable, net of allowance of $40 and $34	2,617			2,151
Income taxes receivable	146			24
Prepaid expenses and other current assets	318			292
Total current assets	7,702			5,197
Property and equipment, net	1,828			1,877
Operating lease right-of-use assets	537			—
Long-term investments and other assets	804			778
Deferred income taxes	47			69
Intangible assets, net	1,936			1,992
Goodwill	8,109			8,120
TOTAL ASSETS	$	20,963		$	18,033
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable, merchant	$	1,736		$	1,699
Accounts payable, other	1,033			788
Deferred merchant bookings	6,612			4,327
Deferred revenue	533			364
Income taxes payable	25			74
Accrued expenses and other current liabilities	787			808
Total current liabilities	10,726			8,060
Long-term debt	3,704			3,717
Deferred income taxes	66			69
Operating lease liabilities	472			—
Other long-term liabilities	332			506
Redeemable non-controlling interests	29			30
Commitments and contingencies
Stockholders’ equity:
Common stock $.0001 par value	—			—
Authorized shares: 1,600,000
Shares issued: 233,294 and 231,493; Shares outstanding: 135,938 and 134,334
Class B common stock $.0001 par value	—			—
Authorized shares: 400,000
Shares issued and outstanding: 12,800 and 12,800
Additional paid-in capital	9,694			9,549
Treasury stock - Common stock, at cost	(5,767		)	(5,742		)
Shares: 97,356 and 97,159
Retained earnings	373			517
Accumulated other comprehensive income (loss)	(217		)	(220		)
Total Expedia Group, Inc. stockholders’ equity	4,083			4,104
Non-redeemable non-controlling interests	1,551			1,547
Total stockholders’ equity	5,634			5,651
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	20,963		$	18,033

See accompanying notes.

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EXPEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Three months ended March 31,
	2019			2018
Operating activities:
Net loss	$	(100	)	$	(149	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of property and equipment, including internal-use software and website development	176			167
Amortization of stock-based compensation	56			50
Amortization of intangible assets	52			72
Deferred income taxes	17			88
Foreign exchange (gain) loss on cash, restricted cash and short-term investments, net	5			(5		)
Realized gain on foreign currency forwards	(7		)	(8		)
Gain on minority equity investments, net	(22		)	(37		)
Other	(7		)	(3		)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable	(468		)	(345		)
Prepaid expenses and other assets	(23		)	(57		)
Accounts payable, merchant	39			(127		)
Accounts payable, other, accrued expenses and other liabilities	146			38
Tax payable/receivable, net	(169		)	(178		)
Deferred merchant bookings	2,285			2,027
Deferred revenue	169			143
Net cash provided by operating activities	2,149			1,676
Investing activities:
Capital expenditures, including internal-use software and website development	(274		)	(192		)
Purchases of investments	(438		)	(867		)
Sales and maturities of investments	—			317
Other, net	6			14
Net cash used in investing activities	(706		)	(728		)
Financing activities:
Purchases of treasury stock	(25		)	(202		)
Payment of dividends to stockholders	(47		)	(46		)
Proceeds from exercise of equity awards and employee stock purchase plan	91			20
Other, net	2			(8		)
Net cash provided by (used in) financing activities	21			(236		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents	(11		)	17
Net increase in cash, cash equivalents and restricted cash and cash equivalents	1,453			729
Cash, cash equivalents and restricted cash and cash equivalents at beginning of period	2,705			2,917
Cash, cash equivalents and restricted cash and cash equivalents at end of period	$	4,158		$	3,646
Supplemental cash flow information
Cash paid for interest	$	71		$	86
Income tax payments, net	105			67

See accompanying notes.

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EXPEDIA GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In millions, except share and per share data)

(Unaudited)



	Common stock			Class B common stock			Additional paid-in capital			Treasury stock				Retained earnings (deficit)			Accumulated other comprehensive income (loss)			Non-redeemable non-controlling interest			Total
	Shares	Amount		Shares	Amount					Shares	Amount
Balance as of December 31, 2017	228,467,355	$	—	12,799,999	$	—	$	9,163		89,528,255	$	(4,822	)	$	331		$	(149	)	$	1,606		$	6,129
Net loss (excludes $0 of net income attributable to redeemable non-controlling interest)														(137		)				(12		)	(149		)
Other comprehensive income (loss), net of taxes																	27			11			38
Payment of dividends to stockholders (declared at $0.30 per share)														(46		)							(46		)
Proceeds from exercise of equity instruments and employee stock purchase plans	794,632	—					20																20
Withholding taxes for stock options							(2		)														(2		)
Issuance of common stock in connection with acquisitions	175,040	—					—																—
Treasury stock activity related to vesting of equity instruments										112,948	(12		)										(12		)
Common stock repurchases										1,786,800	(191		)										(191		)
Other changes in ownership of non-controlling interests							(2		)											8			6
Impact of adoption of new accounting guidance														(31		)	(3		)				(34		)
Stock-based compensation expense							49																49
Balance as of March 31, 2018	229,437,027	$	—	12,799,999	$	—	$	9,228		91,428,003	$	(5,025	)	$	117		$	(125	)	$	1,613		$	5,808



	Common stock			Class B common stock			Additional paid-in capital			Treasury stock				Retained earnings (deficit)			Accumulated other comprehensive income (loss)			Non-redeemable non-controlling interest			Total
	Shares	Amount		Shares	Amount		Additional paid-in capital			Shares	Amount			Retained earnings (deficit)			Accumulated other comprehensive income (loss)			Non-redeemable non-controlling interest			Total
Balance as of December 31, 2018	231,492,986	$	—	12,799,999	$	—	$	9,549		97,158,586	$	(5,742	)	$	517		$	(220	)	$	1,547		$	5,651
Net income (loss) (excludes $0 of net loss attributable to redeemable non-controlling interest)														(103		)				3			(100		)
Other comprehensive income (loss), net of taxes																	3			(8		)	(5		)
Payment of dividends to stockholders (declared at $0.32 per share)														(47		)							(47		)
Proceeds from exercise of equity instruments and employee stock purchase plans	1,801,048	—					91																91
Treasury stock activity related to vesting of equity instruments										197,122	(25		)										(25		)
Other changes in ownership of non-controlling interests							(3		)											9			6
Impact of adoption of new accounting guidance														6									6
Stock-based compensation expense							56																56
Other							1																1
Balance as of March 31, 2019	233,294,034	$	—	12,799,999	$	—	$	9,694		97,355,708	$	(5,767	)	$	373		$	(217	)	$	1,551		$	5,634

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Notes to Consolidated Financial Statements

March 31, 2019

(Unaudited)

Note 1 – Basis of Presentation

Description of Business

Expedia Group, Inc. and its subsidiaries provide travel services to leisure and corporate travelers in the United States and abroad as well as various media and advertising offerings to travel and non-travel advertisers. These travel services are offered through a diversified portfolio of brands including: Brand Expedia®, Hotels.com®, Expedia® Partner Solutions, Vrbo®, Egencia®, trivago®, HomeAway®, Orbitz®, Travelocity®, Hotwire®, Wotif®, ebookers®, CheapTickets®, Expedia Group™ Media Solutions, Expedia Local Expert®, CarRentals.com^TM, Expedia® CruiseShipCenters®, Classic Vacations®, Traveldoo®, VacationRentals.com and SilverRail^TM. In addition, many of these brands have related international points of sale. In the first quarter of 2019, we renamed the HomeAway segment Vrbo. We refer to Expedia Group, Inc. and its subsidiaries collectively as “Expedia Group,” the “Company,” “us,” “we” and “our” in these consolidated financial statements.

Basis of Presentation

These accompanying financial statements present our results of operations, financial position and cash flows on a consolidated basis. The unaudited consolidated financial statements include Expedia Group, Inc., our wholly-owned subsidiaries, and entities we control, or in which we have a variable interest and are the primary beneficiary of expected cash profits or losses. We have eliminated significant intercompany transactions and accounts.

We have prepared the accompanying unaudited consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting. We have included all adjustments necessary for a fair presentation of the results of the interim period. These adjustments consist of normal recurring items. Our interim unaudited consolidated financial statements are not necessarily indicative of results that may be expected for any other interim period or for the full year. These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018, previously filed with the Securities and Exchange Commission. trivago is a separately listed company on the Nasdaq Global Select Market and, therefore is subject to its own reporting and filing requirements, which could result in possible differences that are not expected to be material to Expedia Group.

Accounting Estimates

We use estimates and assumptions in the preparation of our interim unaudited consolidated financial statements in accordance with GAAP. Our estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our interim unaudited consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. Our actual financial results could differ significantly from these estimates. The significant estimates underlying our interim unaudited consolidated financial statements include revenue recognition; recoverability of current and long-lived assets, intangible assets and goodwill; income and transactional taxes, such as potential settlements related to occupancy and excise taxes; loss contingencies; deferred loyalty rewards; acquisition purchase price allocations; stock-based compensation and accounting for derivative instruments.

Reclassifications

We have reclassified certain amounts related to our prior period results to conform to our current period presentation.

Seasonality

We generally experience seasonal fluctuations in the demand for our travel services. For example, traditional leisure travel bookings are generally the highest in the first three quarters as travelers plan and book their spring, summer and winter holiday travel. The number of bookings typically decreases in the fourth quarter. Because revenue for most of our travel services, including merchant and agency hotel, is recognized as the travel takes place rather than when it is booked, revenue typically lags bookings by several weeks for our hotel business and can be several months or more for our alternative accommodations business. Historically, Vrbo has seen seasonally stronger bookings in the first quarter of the year, with the relevant stays occurring during the peak summer travel months. The seasonal revenue impact is exacerbated with respect to income by the nature of our variable cost of revenue and direct sales and marketing costs, which we typically realize in closer alignment to booking volumes, and the more stable nature of our fixed costs. Furthermore, operating profits for our primary advertising business, trivago, have typically been experienced in the second half of the year, particularly the fourth quarter, as

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Notes to Consolidated Financial Statements – (Continued)

selling and marketing costs offset revenue in the first half of the year as we typically increase marketing during the busy booking period for spring, summer and winter holiday travel. As a result on a consolidated basis, revenue and income are typically the lowest in the first quarter and highest in the third quarter. The continued growth of our international operations, advertising business or a change in our product mix, including the growth of Vrbo, may influence the typical trend of the seasonality in the future, and there may also be business or market driven dynamics that result in short-term impacts to revenue or profitability that differ from the typical seasonal trends.

Note 2 – Summary of Significant Accounting Policies

Recently Adopted Accounting Policies

Leases. As of January 1, 2019, we adopted the Accounting Standards Updates (“ASU”) amending the guidance related to accounting and reporting guidelines for leasing arrangements using the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.

The new guidance required entities that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of financial statements to better understand the amount, timing and uncertainty of cash flows arising from leases.

We elected certain of the available transition practical expedients, including those that permit us to not reassess 1) whether any expired or existing contracts are or contain leases, 2) the lease classification for any expired or exiting leases, and 3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The standard had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated statements of operations or statements of cash flows. The most significant impact was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases. Additionally, we removed the assets and liabilities previously recorded pursuant to build-to-suit lease guidance resulting in an increase to retained earnings of approximately $6 million.

Hedge Accounting. As of January 1, 2019, we adopted the new guidance amending the accounting guidance for hedge accounting. The new guidance requires expanded hedge accounting for both non-financial and financial risk components and refines the measurement of hedge results to better reflect an entity’s hedging strategies. The new guidance also amends the presentation and disclosure requirements on a prospective basis as well as changes how entities assess hedge effectiveness. The adoption of this new guidance had no impact on our consolidated financial statements.

Recent Accounting Policies Not Yet Adopted

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued new guidance on the measurement of credit losses for financial assets measured at amortized cost, which includes accounts receivable, and available-for-sale debt securities. The new guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

Cloud Computing Arrangements. In August 2018, the FASB issued new guidance on the accounting for implementation costs incurred for a cloud computing arrangement that is a service contract. The update conforms the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the accounting guidance that provides for capitalization of costs incurred to develop or obtain internal-use-software. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements.

Fair Value Measurements. In August 2018, the FASB issued new guidance related to the disclosure requirements on fair value measurements, which removes, modifies or adds certain disclosures. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. We are in the process of evaluating the impact of adopting this new guidance on our consolidated financial statements disclosures.

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Notes to Consolidated Financial Statements – (Continued)

Significant Accounting Policies

Below are the significant accounting policies updated during 2019 as a result of the recently adopted accounting policies noted above as well as certain other accounting policies with interim disclosure requirements. For a comprehensive description of our accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2018.

Revenue

Deferred Merchant Bookings. We classify cash payments received in advance of our performance obligations as deferred merchant bookings. At December 31, 2018, $3.627 billion of cash advance cash payments was reported within deferred merchant bookings, $2.458 billion of which was recognized resulting in $343 million of revenue during the three months ended March 31, 2019. At March 31, 2019, the related balance was $5.896 billion.

At December 31, 2018, $700 million of deferred loyalty rewards was reported within deferred merchant bookings, $167 million of which was recognized within revenue during the three months ended March 31, 2019. At March 31, 2019, the related balance was $716 million.

Deferred Revenue. At December 31, 2018, $364 million was recorded as deferred revenue, $172 million of which was recognized as revenue during the three months ended March 31, 2019. At March 31, 2019, the related balance was $533 million.

Practical Expedients and Exemptions. We have used the portfolio approach to account for our loyalty points as the rewards programs share similar characteristics within each program in relation to the value provided to the traveler and their breakage patterns. Using this portfolio approach is not expected to differ materially from applying the guidance to individual contracts. However, we will continue to assess and refine, if necessary, how a portfolio within each rewards program is defined.

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Cash, Restricted Cash and Cash Equivalents

Restricted cash includes cash and cash equivalents that is restricted through legal contracts, regulations or our intention to use the cash for a specific purpose. Our restricted cash primarily relates to certain traveler deposits and to a lesser extent collateral for office leases. The following table reconciles cash, cash equivalents and restricted cash reported in our consolidated balance sheets to the total amount presented in our consolidated statements of cash flows:



	March 31, 2019		December 31, 2018
	(in millions)
Cash and cash equivalents	$	3,708	$	2,443
Restricted cash and cash equivalents	447		259
Restricted cash included within long-term investments and other assets	3		3
Total cash, cash equivalents and restricted cash and cash equivalents in the consolidated statement of cash flow	$	4,158	$	2,705

Leases

We determine if an arrangement is a lease at inception. Operating leases are primarily for office space and data centers and are included in operating lease ROU assets, accrued expenses and other current liabilities, and operating lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

For operating leases with a term of one year or less, we have elected to not recognize a lease liability or ROU asset on our consolidated balance sheet. Instead, we recognize the lease payments as expense on a straight-line basis over the lease term. Short-term lease costs are immaterial to our consolidated statements of operations and cash flows.

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Notes to Consolidated Financial Statements – (Continued)

We have office space and data center lease agreements with insignificant non-lease components and have elected the practical expedient to combine and account for lease and non-lease components as a single lease component.

Note 3 – Fair Value Measurements

Financial assets measured at fair value on a recurring basis as of March 31, 2019 are classified using the fair value hierarchy in the table below:



	Total		Level 1		Level 2
	(In millions)
Assets
Cash equivalents:
Money market funds	$	64	$	64	$	—
Time deposits	1,170		—		1,170
Derivatives:
Foreign currency forward contracts	9		—		9
Investments:
Time deposits	466		—		466
Marketable equity securities	143		143		—
Total assets	$	1,852	$	207	$	1,645

Financial assets measured at fair value on a recurring basis as of December 31, 2018 are classified using the fair value hierarchy in the table below:



	Total		Level 1		Level 2
	(In millions)
Assets
Cash equivalents:
Money market funds	$	35	$	35	$	—
Time deposits	624		—		624
Derivatives:
Foreign currency forward contracts	22		—		22
Investments:
Time deposits	28		—		28
Marketable equity securities	119		119		—
Total assets	$	828	$	154	$	674

We classify our cash equivalents and investments within Level 1 and Level 2 as we value our cash equivalents and investments using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Valuation of the foreign currency forward contracts is based on foreign currency exchange rates in active markets, a Level 2 input.

As of March 31, 2019 and December 31, 2018, our cash and cash equivalents consisted primarily of prime institutional money market funds with maturities of three months or less, time deposits as well as bank account balances.

We also hold time deposit investments with financial institutions. Time deposits with original maturities of less than three months are classified as cash equivalents and those with remaining maturities of less than one year are classified within short-term investments.

Our marketable equity securities consist of our investment in Despegar, a publicly traded company, which is included in long-term investments and other assets in our consolidated balance sheets. During the three months ended March 31, 2019 and 2018, we recognized a gain of approximately $24 million and $36 million within other, net in our consolidated statements of operations related to the fair value changes of this equity investment.

Derivative instruments are carried at fair value on our consolidated balance sheets. We use foreign currency forward contracts to economically hedge certain merchant revenue exposures, foreign denominated liabilities related to certain of our loyalty programs and our other foreign currency-denominated operating liabilities. Our goal in managing our foreign exchange risk is to reduce, to the extent practicable, our potential exposure to the changes that exchange rates might have on our earnings, cash flows and financial position. Our foreign currency forward contracts are typically short-term and, as they do not

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Notes to Consolidated Financial Statements – (Continued)

qualify for hedge accounting treatment, we classify the changes in their fair value in other, net. As of March 31, 2019, we were party to outstanding forward contracts hedging our liability and revenue exposures with a total net notional value of $3.4 billion. We had a net forward asset of $9 million and $22 million recorded in prepaid expenses and other current assets as of March 31, 2019 and December 31, 2018. We recorded $(6) million and $14 million in net gains (losses) from foreign currency forward contracts during the three months ended March 31, 2019 and 2018.

Assets Measured at Fair Value on a Non-recurring Basis

Our non-financial assets, such as goodwill, intangible assets and property and equipment, as well as equity method investments, are adjusted to fair value when an impairment charge is recognized or the underlying investment is sold. Such fair value measurements are based predominately on Level 3 inputs. We measure our minority investments that do not have readily determinable fair values at cost less impairment, adjusted by observable price changes with changes recorded within other, net on our consolidated statements of operations.

Minority Investments without Readily Determinable Fair Values. As of March 31, 2019 and December 31, 2018, the carrying values of our minority investments without readily determinable fair values totaled $474 million and $476 million. During the three months ended March 31, 2019 and 2018, we had no material gains or losses recognized related to these minority investments.

Note 4 – Debt

The following table sets forth our outstanding debt:



	March 31, 2019		December 31, 2018
	(In millions)
5.95% senior notes due 2020	$	749	$	748
2.5% (€650 million) senior notes due 2022	725		740
4.5% senior notes due 2024	496		496
5.0% senior notes due 2026	743		742
3.8% senior notes due 2028	991		991
Long-term debt⁽¹⁾	$	3,704	$	3,717

_______________


(1)	Net of applicable discounts and debt issuance costs.

Long-term Debt

Our $750 million in registered senior unsecured notes outstanding at March 31, 2019 are due in August 2020 and bear interest at 5.95% (the “5.95% Notes”). The 5.95% Notes were issued at 99.893% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in February and August of each year. We may redeem the 5.95% Notes at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium, in whole or in part.

Our Euro 650 million in registered senior unsecured notes outstanding at March 31, 2019 are due in June 2022 and bear interest at 2.5% (the “2.5% Notes”). The 2.5% Notes were issued at 99.525% of par resulting in a discount, which is being amortized over their life. Interest is payable annually in arrears in June of each year. We may redeem the 2.5% Notes at our option, at whole or in part, at any time or from time to time. If we elect to redeem the 2.5% Notes prior to March 3, 2022, we may redeem them at a specified “make-whole” premium. If we elect to redeem the 2.5% Notes on or after March 3, 2022, we may redeem them at a redemption price of 100% of the principal plus accrued and unpaid interest. Subject to certain limited exceptions, all payments of interest and principal for the 2.5% Notes will be made in Euros.

The aggregate principal value of the 2.5% Notes is designated as a hedge of our net investment in certain Euro functional currency subsidiaries. The notes are measured at Euro to U.S. Dollar exchange rates at each balance sheet date and transaction gains or losses due to changes in rates are recorded in accumulated other comprehensive income (loss) (“AOCI”). The Euro-denominated net assets of these subsidiaries are translated into U.S. Dollars at each balance sheet date, with effects of foreign currency changes also reported in AOCI. Since the notional amount of the recorded Euro-denominated debt is less than the notional amount of our net investment, we do not expect to incur any ineffectiveness on this hedge.

Our $500 million in registered senior unsecured notes outstanding at March 31, 2019 are due in August 2024 and bear interest at 4.5% (the “4.5% Notes”). The 4.5% Notes were issued at 99.444% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in February and August of each year. We may redeem the 4.5% Notes at our option at any time in whole or from time to time in part. If we elect to redeem the 4.5% Notes prior to May 15,

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2024, we may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If we elect to redeem the 4.5% Notes on or after May 15, 2024, we may redeem them at a redemption price of 100% of the principal plus accrued interest.

Our $750 million in registered senior unsecured notes outstanding at March 31, 2019 are due in February 2026 and bear interest at 5.0% (the “5.0% Notes”). The 5.0% Notes were issued at 99.535% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in arrears in February and August of each year. We may redeem the 5.0% Notes at our option at any time in whole or from time to time in part. If we elect to redeem the 5.0% Notes prior to November 12, 2025, we may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If we elect to redeem the 5.0% Notes on or after November 12, 2025, we may redeem them at a redemption price of 100% of the principal plus accrued interest.

Our $1 billion in registered senior unsecured notes outstanding at March 31, 2019 are due in February 2028 and bear interest at 3.8% (the “3.8% Notes”). The 3.8% Notes were issued at 99.747% of par resulting in a discount, which is being amortized over their life. Interest is payable semi-annually in arrears in February and August of each year. We may redeem the 3.8% Notes at our option at any time in whole or from time to time in part. If we elect to redeem the 3.8% Notes prior to November 15, 2027, we may redeem them at a redemption price of 100% of the principal plus accrued interest, plus a “make-whole” premium. If we elect to redeem the 3.8% Notes on or after November 15, 2027, we may redeem them at a redemption price of 100% of the principal plus accrued interest.

The 5.95%, 2.5%, 4.5%, 5.0% and 3.8% Notes (collectively the “Notes”) are senior unsecured obligations issued by Expedia Group and guaranteed by certain domestic Expedia Group subsidiaries. The Notes rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations of Expedia Group and the guarantor subsidiaries. For further information, see Note 13 – Guarantor and Non-Guarantor Supplemental Financial Information. In addition, the Notes include covenants that limit our ability to (i) create certain liens, (ii) enter into sale/leaseback transactions and (iii) merge or consolidate with or into another entity or transfer substantially all of our assets. Accrued interest related to the Notes was $33 million and $65 million as of March 31, 2019 and December 31, 2018. The Notes are redeemable in whole or in part, at the option of the holders thereof, upon the occurrence of certain change of control triggering events at a purchase price in cash equal to 101% of the principal plus accrued and unpaid interest.

The following table sets forth the approximate fair value of our outstanding debt, which is based on quoted market prices in less active markets (Level 2 inputs):



	March 31, 2019		December 31, 2018
	(In millions)
5.95% senior notes due 2020	$	780	$	778
2.5% (€650 million) senior notes due 2022 ⁽¹⁾	767		771
4.5% senior notes due 2024	521		504
5.0% senior notes due 2026	797		760
3.8% senior notes due 2028	968		915

_______________


(1)	Approximately 683 million Euro as of March 31, 2019 and 674 million Euro as of December 31, 2018.

Credit Facility

Expedia Group maintains a $2 billion unsecured revolving credit facility with a group of lenders, which is unconditionally guaranteed by certain domestic Expedia Group subsidiaries that are the same as under the Notes and expires in May 2023. As of March 31, 2019 and December 31, 2018, we had no revolving credit facility borrowings outstanding. The facility bears interest based on the Company’s credit ratings, with drawn amounts bearing interest at LIBOR plus 125 basis points and the commitment fee on undrawn amounts at 17.5 basis points as of March 31, 2019. The facility contains covenants including maximum leverage and minimum interest coverage ratios.

The amount of stand-by letters of credit (“LOC”) issued under the facility reduces the credit amount available. As of March 31, 2019 and December 31, 2018, there was $15 million of outstanding stand-by LOCs issued under the facility.

In addition, one of our international subsidiaries maintains a Euro 50 million uncommitted credit facility, which is guaranteed by Expedia Group, that may be terminated at any time by the lender. As of March 31, 2019 and December 31, 2018, there were no borrowings outstanding.

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Note 5 – Leases

We have operating leases for office space and data centers. Our leases have remaining lease terms of one year to 19 years, some of which include options to extend the leases for up to ten years, and some of which include options to terminate the leases within one year.

Operating lease costs were $38 million for the three months ended March 31, 2019.

Supplemental cash flow information related to leases were as follows:



	Three Months Ended March 31, 2019
	(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	39
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	6

Supplemental consolidated balance sheet information related to leases were as follows:



	March 31, 2019
	(in millions)
Operating lease right-of-use assets	$	537

Current lease liabilities included within Accrued expenses and other current liabilities	$	112
Long-term lease liabilities included within Operating lease liabilities	472
Total operating lease liabilities	$	584

Weighted average remaining lease term	8.8 years
Weighted average discount rate	3.8		%

Maturities of lease liabilities are as follows:



	Operating Leases
	(in millions)
Year ending December 31,
2019 (excluding the three months ended March 31, 2019)	$	102
2020	106
2021	89
2022	72
2023	52
2024 and thereafter	278
Total lease payments	699
Less: imputed interest	(115		)
Total	$	584

As of March 31, 2019, we have additional operating lease payments, primarily for corporate offices, that have not yet commenced of approximately $210 million. These operating leases will commence between April 2019 and April 2021 with lease terms of 3 years to 11 years.

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Notes to Consolidated Financial Statements – (Continued)

Note 6 – Stockholders’ Equity

Dividends on our Common Stock

The Executive Committee, acting on behalf of the Board of Directors, declared the following dividends during the periods presented:



Declaration Date	Dividend Per Share		Record Date	Total Amount (in millions)		Payment Date
Three Months Ended March 31, 2019
February 6, 2019	$	0.32	March 7, 2019	$	47	March 27, 2019
Three Months Ended March 31, 2018
February 7, 2018	0.30		March 8, 2018	46		March 28, 2018

In addition, in May 2019, the Executive Committee, acting on behalf of the Board of Directors, declared a quarterly cash dividend of $0.32 per share of outstanding common stock payable on June 13, 2019 to stockholders of record as of the close of business on May 23, 2019. Future declarations of dividends are subject to final determination by our Board of Directors.

Stock-based Awards

Stock-based compensation expense relates primarily to expense for stock options and restricted stock units (“RSUs”). As of March 31, 2019, we had stock-based awards outstanding representing approximately 21 million shares of our common stock, consisting of options to purchase approximately 16 million shares of our common stock with a weighted average exercise price of $101.79 and weighted average remaining life of 4.2 years and approximately 5 million RSUs.

Annual employee stock-based award grants typically occur during the first quarter of each year and generally vest over four years. During 2019, we started issuing RSUs as our primary form of stock-based compensation, which vest 25% after one year and will then vest quarterly over the following three years. During the three months ended March 31, 2019, we granted approximately 3 million RSUs.

Accumulated Other Comprehensive Loss

The balance of accumulated other comprehensive loss as of March 31, 2019 and December 31, 2018 was comprised of foreign currency translation adjustments. These translation adjustments include foreign currency transaction losses at March 31, 2019 of $15 million ($20 million before tax) and $27 million ($35 million before tax) at December 31, 2018 associated with our 2.5% Notes. The 2.5% Notes are Euro-denominated debt designated as hedges of certain of our Euro-denominated net assets. See Note 4 – Debt for more information.

Note 7 – Earnings (Loss) Per Share

Basic earnings per share is calculated using our weighted-average outstanding common shares. The earnings per share amounts are the same for common stock and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation.

Diluted earnings per share is calculated using our weighted-average outstanding common shares including the dilutive effect of stock awards as determined under the treasury stock method. In periods when we recognize a net loss, we exclude the impact of outstanding stock awards from the diluted loss per share calculation as their inclusion would have an antidilutive effect. For the three months ended March 31, 2019 and 2018, approximately 21 million and 23 million of outstanding stock awards have been excluded from the calculations of diluted earnings per share attributable to common stockholders because their effect would have been antidilutive.

Note 8 – Restructuring and Related Reorganization Charges

In connection with the centralization and migration of certain operational functions and systems, we recognized $10 million in restructuring and related reorganization charges during the three months ended March 31, 2019. The charges primarily related to severance and benefits and were unpaid as of March 31, 2019. Based on current plans, which are subject to change, we expect total reorganization charges in 2019 of up to $25 million. These costs could be higher or lower should we make additional decisions in future periods that impact our reorganization efforts and exclude any possible future acquisition, or other, integrations.

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Notes to Consolidated Financial Statements – (Continued)

Note 9 – Income Taxes

We determine our provision for income taxes for interim periods using an estimate of our annual effective tax rate. We record any changes affecting the estimated annual effective tax rate in the interim period in which the change occurs, including discrete tax items. For the three months ended March 31, 2019, the effective tax rate was a 29.2% benefit on a pre-tax loss, compared to a 12.0% benefit on pre-tax loss for the three months ended March 31, 2018. The change was primarily driven by the foreign rate differential, an increase in excess tax benefits related to share-based payments as well as other tax items.

We are subject to taxation in the United States and various other state and foreign jurisdictions. We are under examination by the Internal Revenue Service (“IRS”) for our 2009 through 2013 tax years. Subsequent years remain open to examination by the IRS. We do not anticipate a significant impact to our gross unrecognized tax benefits within the next 12 months related to these years. During 2017, the IRS issued proposed adjustments related to transfer pricing with our foreign subsidiaries for our 2009 to 2010 audit cycle. The proposed adjustments would increase our U.S. taxable income by $105 million, which would result in federal tax of approximately $37 million, subject to interest. We do not agree with the position of the IRS and are formally protesting the IRS position.

Note 10 – Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, we are a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Expedia Group. We also evaluate other potential contingent matters, including value-added tax, excise tax, sales tax, transient occupancy or accommodation tax and similar matters. We do not believe that the aggregate amount of liability that could be reasonably possible with respect to these matters would have a material adverse effect on our financial results; however, litigation is inherently uncertain and the actual losses incurred in the event that our legal proceedings were to result in unfavorable outcomes could have a material adverse effect on our business and financial performance.

Litigation Relating to Occupancy Taxes. One hundred one lawsuits have been filed by or against cities, counties and states involving hotel occupancy and other taxes. Fourteen lawsuits are currently active. These lawsuits are in various stages and we continue to defend against the claims made in them vigorously. With respect to the principal claims in these matters, we believe that the statutes or ordinances at issue do not apply to us or the services we provide and, therefore, that we do not owe the taxes that are claimed to be owed. We believe that the statutes or ordinances at issue generally impose occupancy and other taxes on entities that own, operate or control hotels (or similar businesses) or furnish or provide hotel rooms or similar accommodations. To date, forty-six of these lawsuits have been dismissed. Some of these dismissals have been without prejudice and, generally, allow the governmental entity or entities to seek administrative remedies prior to pursuing further litigation. Thirty-two dismissals were based on a finding that we and the other defendants were not subject to the local tax ordinance or that the local government lacked standing to pursue its claims. As a result of this litigation and other attempts by certain jurisdictions to levy such taxes, we have established a reserve for the potential settlement of issues related to hotel occupancy and other taxes, consistent with applicable accounting principles and in light of all current facts and circumstances, in the amount of $54 million and $46 million as of March 31, 2019 and December 31, 2018, respectively. Our settlement reserve is based on our best estimate of probable losses and the ultimate resolution of these contingencies may be greater or less than the liabilities recorded. An estimate for a reasonably possible loss or range of loss in excess of the amount reserved cannot be made. Changes to the settlement reserve are included within legal reserves, occupancy tax and other in the consolidated statements of operations.

Pay-to-Play. Certain jurisdictions may assert that we are required to pay any assessed taxes prior to being allowed to contest or litigate the applicability of the ordinances. This prepayment of contested taxes is referred to as “pay-to-play.” Payment of these amounts is not an admission that we believe we are subject to such taxes and, even when such payments are made, we continue to defend our position vigorously. If we prevail in the litigation, for which a pay-to-play payment was made, the jurisdiction collecting the payment will be required to repay such amounts and also may be required to pay interest.

Hawaii (General Excise Tax). During 2013, the Expedia Group companies were required to “pay-to-play” and paid a total of $171 million in advance of litigation relating to general excise taxes for merchant model hotel reservations in the State of Hawaii. In September 2015, following a ruling by the Hawaii Supreme Court, the State of Hawaii refunded the Expedia Group companies $132 million of the original “pay-to-play” amount. Orbitz also received a similar refund of $22 million from the State of Hawaii in September 2015. The amount paid, net of refunds, by the Expedia Group companies and Orbitz to the State of Hawaii in satisfaction of past general excise taxes on their services for merchant model hotel reservations was $44 million. The parties reached a settlement relating to Orbitz merchant model hotel tax liabilities, and on October 5, 2016, the Expedia Group companies paid the State of Hawaii for the tax years 2012 through 2015. The Expedia Group companies and Orbitz have now resolved all assessments by the State of Hawaii for merchant model hotel taxes through 2015.

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The Department of Taxation also issued final assessments for general excise taxes against certain Expedia Group companies, including Orbitz, dated December 23, 2015 for the time period 2000 to 2014 for hotel and car rental revenue for “agency model” transactions. Those assessments are currently under review in the Hawaii tax court, which has stayed proceedings in the agency hotel and car rental case pending the decision by the Hawaii Supreme Court in the merchant model car rental case addressed below.

Final assessments by the Hawaii Department of Taxation for general exercise taxes against certain Expedia Group companies, including Orbitz, relating to merchant car rental transactions during the years 2000 to 2014 are also under review. With respect to merchant model car rental transactions at issue for the tax years 2000 through 2013, the Hawaii tax court held on August 5, 2016 that general excise tax is due on the online travel companies’ services to facilitate car rentals. The court further ruled that for merchant model car rentals in Hawaii, the online travel companies are required to pay general excise tax on the total amount paid by consumers, with no credit for tax amounts already remitted by car rental companies to the State of Hawaii for tax years 2000 through 2013, thus resulting in a double tax on the amount paid by consumers to car rental companies for the rental of the vehicle. The court, however, ruled that when car rentals are paid for as part of a vacation package, tax is only due once on the amount paid by consumers to the car rental company for the rental of the vehicle. In addition, the court ruled that the online travel companies are required to pay interest and certain penalties on the amounts due. On April 25, 2017, the court entered a stipulated order and final judgment. On May 15, 2017, the Expedia Group companies paid under protest the full amount claimed due, or approximately $16.7 million, as a condition of appeal. The parties filed notices of cross-appeal from the order. On March 4, 2019, the Hawaii Supreme Court affirmed the tax court in part and reversed in part, finding that the defendant online travel companies are not obligated to pay tax on the amount paid by consumers to the car rental company for the rental of the vehicle; instead, for both package and standalone merchant model car rentals, they need only pay the tax on the amounts they charge for their services.

Other Jurisdictions. We are also in various stages of inquiry or audit with domestic and foreign tax authorities, some of which, including in the City of Los Angeles regarding hotel occupancy taxes and in the United Kingdom regarding the application of value added tax (“VAT”) to our European Union related transactions as discussed below, may impose a pay-to-play requirement to challenge an adverse inquiry or audit result in court.

The ultimate resolution of these contingencies may be greater or less than the pay-to-play payments made and our estimates of additional assessments mentioned above.

Matters Relating to International VAT. We are in various stages of inquiry or audit in multiple European Union jurisdictions, including in the United Kingdom, regarding the application of VAT to our European Union related transactions. While we believe we comply with applicable VAT laws, rules and regulations in the relevant jurisdictions, the tax authorities may determine that we owe additional taxes. In certain jurisdictions, including the United Kingdom, we may be required to “pay-to-play” any VAT assessment prior to contesting its validity. While we believe that we will be successful based on the merits of our positions with regard to the United Kingdom and other VAT audits in pay-to-play jurisdictions, it is nevertheless reasonably possible that we could be required to pay any assessed amounts in order to contest or litigate the applicability of any assessments and an estimate for a reasonably possible amount of any such payments cannot be made.

Competition and Consumer Matters. Over the last several years, the online travel industry has become the subject of investigations by various national competition authorities (“NCAs”), particularly in Europe. Expedia Group companies are or have been involved in investigations predominately related to whether certain parity clauses in contracts between Expedia Group entities and accommodation providers, sometimes also referred to as “most favored nation” or “MFN” provisions, are anti-competitive.

In Europe, investigations or inquiries into contractual parity provisions between hotels and online travel companies, including Expedia Group companies, were initiated in 2012, 2013 and 2014 by NCAs in Austria, Belgium, Czech Republic, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Poland, Sweden and Switzerland. While the ultimate outcome of some of these investigations or inquiries remains uncertain, and the Expedia Group companies’ circumstances are distinguishable from other online travel companies subject to similar investigations and inquiries, we note in this context that on April 21, 2015, the French, Italian and Swedish NCAs, working in close cooperation with the European Commission, announced that they had accepted formal commitments offered by Booking.com to resolve and close the investigations against Booking.com in France, Italy and Sweden by Booking.com removing and/or modifying certain rate, conditions and availability parity provisions in its contracts with accommodation providers in France, Italy and Sweden as of July 1, 2015, among other commitments. Booking.com voluntarily extended the geographic scope of these commitments to accommodation providers throughout Europe as of the same date.

With effect from August 1, 2015, Expedia Group companies waived certain rate, conditions and availability parity clauses in agreements with European hotel partners for a period of five years. While the Expedia Group companies maintain that their parity clauses have always been lawful and in compliance with competition law, these waivers were nevertheless implemented as a positive step towards facilitating the closure of the open investigations into such clauses on a harmonized pan-European

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basis. Following the implementation of the Expedia Group companies’ waivers, nearly all NCAs in Europe have announced either the closure of their investigation or inquiries involving Expedia Group companies or a decision not to open an investigation or inquiry involving Expedia Group companies. Below are descriptions of additional rate parity-related matters of note in Europe.

The German Federal Cartel Office (“FCO”) has required another online travel company, Hotel Reservation Service (“HRS”), to remove certain clauses from its contracts with hotels. HRS’ appeal of this decision was rejected by the Higher Regional Court Düsseldorf on January 9, 2015. On December 23, 2015, the FCO announced that it had also required Booking.com by way of an infringement decision to remove certain clauses from its contracts with German hotels. Booking.com has appealed the decision and the appeal was heard by the Higher Regional Court Düsseldorf on February 8, 2017. Those proceedings remain ongoing.

The Italian competition authority’s case closure decision against Booking.com and Expedia Group companies has subsequently been appealed by two Italian hotel trade associations, i.e. Federalberghi and AICA. These appeals remain at an early stage and no hearing date has been fixed.

On November 6, 2015, the Swiss competition authority announced that it had issued a final decision finding certain parity terms existing in previous versions of agreements between Swiss hotels and each of certain Expedia Group companies, Booking.com and HRS to be prohibited under Swiss law. The decision explicitly notes that the Expedia Group companies’ current contract terms with Swiss hotels are not subject to this prohibition. The Swiss competition authority imposed no fines or other sanctions against the Expedia Group companies and did not find an abuse of a dominant market position by the Expedia Group companies. The FCO’s case against the Expedia Group companies’ contractual parity provisions with accommodation providers in Germany remains open but is still at a preliminary stage with no formal allegations of wrong-doing having been communicated to the Expedia Group companies to date.

The Directorate General for Competition, Consumer Affairs and Repression of Fraud (the “DGCCRF”), a directorate of the French Ministry of Economy and Finance with authority over unfair trading practices, brought a lawsuit in France against Expedia Group companies objecting to certain parity clauses in contracts between Expedia Group companies and French hotels. In May 2015, the French court ruled that certain of the parity provisions in certain contracts that were the subject of the lawsuit were not in compliance with French commercial law, but imposed no fine and no injunction. The DGCCRF appealed the decision and, on June 21, 2017, the Paris Court of Appeal published a judgment overturning the decision. The court annulled parity clauses contained in the agreements at issue, ordered the Expedia Group companies to amend their contracts, and imposed a fine. The Expedia Group companies have appealed the decision. The appeal will not stay payment of the fine.

Hotelverband Deutschland (“IHA”) e.V. (a German hotel association) brought proceedings before the Cologne regional court against Expedia, Inc., Expedia.com GmbH and Expedia Lodging Partner Services Sàrl. IHA applied for a ‘cease and desist’ order against these companies in relation to the enforcement of certain rate and availability parity clauses contained in contracts with hotels in Germany. On or around February 16, 2017, the court dismissed IHA’s action and declared the claimant liable for the Expedia Group defendants’ statutory costs. IHA appealed the decision and, on December 4, 2017, the Court of Appeals rejected IHA’s appeal. The Court of Appeals expressly confirmed that Expedia Group’s MFNs are in compliance both with European and German competition law. While IHA had indicated an intention to appeal the decision to the Federal Supreme Court, it has not lodged an appeal within the applicable deadline, with the consequence that the Court of Appeals judgment has now become final.

A working group of 10 European NCAs (Belgium, Czech Republic, Denmark, France, Hungary, Ireland, Italy, Netherlands, Sweden and the United Kingdom) and the European Commission has been established by the European Competition Network (“ECN”) at the end of 2015 to monitor the functioning of the online hotel booking sector, following amendments made by a number of online travel companies (including Booking.com and Expedia Group companies) in relation to certain parity provisions in their contracts with hotels. The working group issued questionnaires to online travel agencies including Expedia Group companies, metasearch sites and hotels in 2016. The underlying results of the ECN monitoring exercise were published on April 6, 2017.

Legislative bodies in France (July 2015), Austria (December 2016), Italy (August 2017) and Belgium (August 2018) have also adopted new domestic anti-parity clause legislation. Expedia Group believes each of these pieces of legislation violates both EU and national legal principles and therefore, Expedia Group companies have challenged these laws at the European Commission. A motion requesting the Swiss government to take action on narrow price parity has been adopted in the Swiss parliament. The Swiss government is now required to draft legislation implementing the motion. The Company is unable to predict whether and with what content legislation will ultimately be adopted and, if so, when this might be the case. It is not yet clear how any adopted domestic anti-parity clause legislations and/or any possible future legislation in this area may affect Expedia Group’s business.

Outside of Europe, a number of NCAs have also opened investigations or inquired about contractual parity provisions in contracts between hotels and online travel companies in their respective territories, including Expedia Group companies. A

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Brazilian hotel sector association -- Forum de Operadores Hoteleiros do Brasil -- filed a complaint with the Brazilian Administrative Council for Economic Defence (“CADE”) against a number of online travel companies, including Booking.com, Decolar.com and Expedia Group companies, on July 27, 2016 with respect to parity provisions in contracts between hotels and online travel companies. On September 13, 2016, the Expedia Group companies submitted a response to the complaint to CADE. On March 27, 2018, the Expedia Group companies resolved CADE’s concerns based on a settlement implementing waivers substantially similar to those provided to accommodation providers in Europe. In late 2016, Expedia Group companies resolved the concerns of the Australia and New Zealand NCAs based on implementation of the waivers substantially similar to those provided to accommodation providers in Europe (on September 1, 2016 in Australia and on October 28, 2016 in New Zealand). More recently, however, the Australian NCA has reopened its investigation. On and with effect from March 22, 2019, Expedia Group voluntarily and unilaterally waived certain additional rate parity provisions in agreements with Australian hotel partners. Expedia Group companies are in ongoing discussions with a limited number of NCAs in other countries in relation to their contracts with hotels. In April 2019, the Japan Fair Trade Commission (“JFTC”) launched an investigation into certain practices of a number of online travel companies, including Expedia Group companies. Expedia Group is cooperating with the JFTC in this investigation. Expedia Group is currently unable to predict the impact the implementation of the waivers both in Europe and elsewhere will have on Expedia Group’s business, on investigations or inquiries by NCAs in other countries, or on industry practice more generally.

In addition, regulatory authorities in Europe (including the UK Competition and Markets Authority, or “CMA”), Australia, and elsewhere have initiated legal proceedings and/or market studies, inquiries or investigations relating to online marketplaces and how information is presented to consumers using those marketplaces, including practices such as search results rankings and algorithms, discount claims, disclosure of charges, and availability and similar messaging.

On June 28, 2018, the CMA announced that it will be requiring hotel booking websites to take action to address concerns identified in the course of its ongoing investigation. After consulting with the CMA, on January 31, 2019, we agreed to offer certain voluntary undertakings with respect to the presentation of information on certain of our UK consumer-facing websites in order to address the CMA’s concerns. On February 4, 2019, the CMA confirmed that, as a result of the undertakings offered, it has closed its investigation without any admission or finding of liability. The undertakings become effective on September 1, 2019. On August 23, 2018, the Australian Competition and Consumer Commission, or “ACCC”, instituted proceedings in the Australian Federal Court against trivago. The ACCC alleged breaches of Australian consumer law relating to trivago’s advertisements in Australia concerning the hotel prices available on trivago’s Australian site and trivago’s strike-through pricing practice. A trial date is set for September 9, 2019 and an appropriate reserve has been accrued in respect of this matter.

We are cooperating with regulators in the investigations described above where applicable, but we are unable to predict what, if any, effect such actions will have on our business, industry practices or online commerce more generally. Other than described above, we have not accrued a reserve in connection with the market studies, investigations, inquiries or legal proceedings described above either because the likelihood of an unfavorable outcome is not probable or the amount of any loss is not estimable.

Note 11 – Related Party Transactions

Mr. Diller is the Chairman and Senior Executive of Expedia Group. Subject to the terms of an Amended and Restated Stockholders Agreement between Liberty Expedia Holdings, Inc. (“Liberty Expedia Holdings”) and Mr. Diller, as amended as of November 4, 2016 (the “Stockholders Agreement”), Mr. Diller also holds an irrevocable proxy to vote shares of Expedia common stock and Class B common stock beneficially owned by Liberty Expedia Holdings (the “Diller Proxy”), which proxy as of March 31, 2018 has been assigned by Mr. Diller to Liberty Expedia Holdings as described below.

On November 4, 2016, Qurate Retail, Inc. (f/k/a Liberty Interactive Corporation) (“Qurate”) redeemed a portion of the outstanding shares of its Liberty Ventures common stock in exchange for all of the outstanding shares of Liberty Expedia Holdings, which at that time was a wholly owned subsidiary of Liberty Interactive (the “Liberty Split-Off”). At the time of the Liberty Split-Off, Liberty Expedia Holdings’ assets included all of Liberty Interactive’s interest in Expedia Group. Pursuant to a Transaction Agreement among Mr. Diller, Liberty Interactive, Liberty Expedia Holdings, John C. Malone and Leslie Malone (collectively, the “Malone Group”), dated as of March 24, 2016 and amended and restated effective on September 22, 2016 and as of March 6, 2018 (the “Transaction Agreement”), at the time of the Liberty Split-Off, for a period ending not later than May 4, 2019 (i) Mr. Diller assigned the Diller Proxy to Liberty Expedia Holdings (the “Diller Assignment”) and (ii) the Malone Group granted Mr. Diller an irrevocable proxy to vote all shares of Liberty Expedia Holdings Series A common stock and Series B common stock beneficially owned by them upon completion of the Liberty Split-Off or thereafter (the “Malone Proxy”), in each case, subject to certain limitations. As a result, by virtue of the voting power associated with the Malone Proxy, the governance structure at Liberty Expedia Holdings and Mr. Diller’s continuing position as Chairman of Expedia Group’s Board of Directors, as of March 31, 2018 Mr. Diller indirectly controls Expedia Group until the termination or expiration of the Diller Assignment and Malone Proxy, at which point (and by virtue of the termination of the Diller Assignment), unless the Diller Assignment and Malone Proxy terminate as a result of Mr. Diller’s death or disability, Mr. Diller

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Notes to Consolidated Financial Statements – (Continued)

will have the power to vote directly all shares of Expedia Common Stock and Class B Common Stock beneficially owned by Liberty Expedia Holdings.

On April 15, 2019 and prior to the Company’s entry into the Merger Agreement as described below, Mr. Diller, Liberty Expedia Holdings, Qurate and the Malone Group entered into Amendment No. 2 to Amended and Restated Transaction Agreement, providing for the immediate termination of the Transaction Agreement, which automatically resulted in the termination of the Diller Assignment and the Malone Proxy.

See Note 14 – Subsequent Events for further information.

Note 12 – Segment Information

We have four reportable segments: Core OTA, trivago, Vrbo (previously referred to as our “HomeAway” segment) and Egencia. Our Core OTA segment, which consists of the aggregation of operating segments, provides a full range of travel and advertising services to our worldwide customers through a variety of brands including: Expedia.com and Hotels.com in the United States and localized Expedia and Hotels.com websites throughout the world, Expedia Partner Solutions, Orbitz, Travelocity, Wotif Group, ebookers, CheapTickets, Hotwire.com, CarRentals.com, Classic Vacations and SilverRail Technologies, Inc. Our trivago segment generates advertising revenue primarily from sending referrals to online travel companies and travel service providers from its hotel metasearch websites. Our Vrbo segment operates an online marketplace for the alternative accommodations industry. Our Egencia segment provides managed travel services to corporate customers worldwide.

We determined our operating segments based on how our chief operating decision makers manage our business, make operating decisions and evaluate operating performance. Our primary operating metric is Adjusted EBITDA. Adjusted EBITDA for our Core OTA and Egencia segments includes allocations of certain expenses, primarily cost of revenue and facilities, and our Core OTA segment includes the total costs of our global supply organizations and Core OTA and Vrbo include the realized foreign currency gains or losses related to the forward contracts hedging a component of our net merchant lodging revenue. We base the allocations primarily on transaction volumes and other usage metrics. We do not allocate certain shared expenses such as accounting, human resources, information technology and legal to our reportable segments. We include these expenses in Corporate and Eliminations. Our allocation methodology is periodically evaluated and may change.

Our segment disclosure includes intersegment revenues, which primarily consist of advertising and media services provided by our trivago segment to our Core OTA segment. These intersegment transactions are recorded by each segment at amounts that approximate fair value as if the transactions were between third parties, and therefore, impact segment performance. However, the revenue and corresponding expense are eliminated in consolidation. The elimination of such intersegment transactions is included within Corporate and Eliminations in the table below. In addition, when Vrbo properties are booked through our Core OTA websites and vice versa, the segments split the third-party revenue for management and segment reporting purposes with the majority of the third-party revenue residing with the website marketing the property or room.

Corporate and Eliminations also includes unallocated corporate functions and expenses. In addition, we record amortization of intangible assets and any related impairment, as well as stock-based compensation expense, restructuring and related reorganization charges, legal reserves, occupancy tax and other, and other items excluded from segment operating performance in Corporate and Eliminations. Such amounts are detailed in our segment reconciliation below.

The following tables present our segment information for the three months ended March 31, 2019 and 2018. As a significant portion of our property and equipment is not allocated to our operating segments and depreciation is not included in our segment measure, we do not report the assets by segment as it would not be meaningful. We do not regularly provide such information to our chief operating decision makers.

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Notes to Consolidated Financial Statements – (Continued)



	Three months ended March 31, 2019
	Core OTA			trivago			Vrbo			Egencia			Corporate & Eliminations			Total
	(In millions)
Third-party revenue	$	2,037		$	152		$	267		$	153		$	—		$	2,609
Intersegment revenue	—			85			—			—			(85		)	—
Revenue	$	2,037		$	237		$	267		$	153		$	(85	)	$	2,609
Adjusted EBITDA	$	344		$	24		$	(40	)	$	29		$	(181	)	$	176
Depreciation	(92		)	(3		)	(23		)	(13		)	(45		)	(176		)
Amortization of intangible assets	—			—			—			—			(52		)	(52		)
Stock-based compensation	—			—			—			—			(56		)	(56		)
Legal reserves, occupancy tax and other	—			—			—			—			(10		)	(10		)
Restructuring and related reorganization charges	—			—			—			—			(10		)	(10		)
Realized (gain) loss on revenue hedges	(3		)	—			—			—			—			(3		)
Operating income (loss)	$	249		$	21		$	(63	)	$	16		$	(354	)	(131		)
Other expense, net																(10		)
Loss before income taxes																(141		)
Provision for income taxes																41
Net loss																(100		)
Net income attributable to non-controlling interests																(3		)
Net loss attributable to Expedia Group, Inc.																$	(103	)



	Three months ended March 31, 2018
	Core OTA			trivago			Vrbo			Egencia			Corporate & Eliminations			Total
	(In millions)
Third-party revenue	$	1,926		$	197		$	234		$	151		$	—		$	2,508
Intersegment revenue	—			122			—			—			(122		)	—
Revenue	$	1,926		$	319		$	234		$	151		$	(122	)	$	2,508
Adjusted EBITDA	$	323		$	(28	)	$	(21	)	$	27		$	(177	)	$	124
Depreciation	(83		)	(3		)	(14		)	(11		)	(56		)	(167		)
Amortization of intangible assets	—			—			—			—			(72		)	(72		)
Stock-based compensation	—			—			—			—			(50		)	(50		)
Legal reserves, occupancy tax and other	—			—			—			—			(3		)	(3		)
Realized (gain) loss on revenue hedges	3			—			—			—			—			3
Operating income (loss)	$	243		$	(31	)	$	(35	)	$	16		$	(358	)	(165		)
Other expense, net																(4		)
Loss before income taxes																(169		)
Provision for income taxes																20
Net loss																(149		)
Net loss attributable to non-controlling interests																12
Net loss attributable to Expedia Group, Inc.																$	(137	)

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Notes to Consolidated Financial Statements – (Continued)

Revenue by Business Model and Service Type

The following table presents revenue by business model and service type:



	Three months ended March 31,
	2019		2018
	(in millions)
Business Model:
Merchant	$	1,392	$	1,334
Agency	686		658
Advertising and media	264		282
Vrbo	267		234
Total revenue	$	2,609	$	2,508
Service Type:
Lodging	$	1,725	$	1,612
Air	248		242
Advertising and media	264		282
Other⁽¹⁾	372		372
Total revenue	$	2,609	$	2,508

___________________________________


(1)	Other includes car rental, insurance, destination services, cruise and fee revenue related to our corporate travel business, among other revenue streams, none of which are individually material.

Our Core OTA segment generates revenue from the merchant, agency and advertising and media business models as well as all service types. trivago segment revenue is generated through advertising and media. All Vrbo revenue is included within the lodging service type. Our Egencia segment generates revenue from similar business models and service types to Core OTA applied to the corporate traveler with the majority being agency revenue.

Note 13 – Guarantor and Non-Guarantor Supplemental Financial Information

Condensed consolidating financial information of Expedia Group, Inc. (the “Parent”), our subsidiaries that are guarantors of our debt facility and instruments (the “Guarantor Subsidiaries”), and our subsidiaries that are not guarantors of our debt facility and instruments (the “Non-Guarantor Subsidiaries”) is shown below. The debt facility and instruments are guaranteed by certain of our wholly-owned domestic subsidiaries and rank equally in right of payment with all of our existing and future unsecured and unsubordinated obligations. The guarantees are full, unconditional, and joint and several with the exception of certain customary automatic subsidiary release provisions. In this financial information, the Parent and Guarantor Subsidiaries account for investments in their wholly-owned subsidiaries using the equity method.

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Notes to Consolidated Financial Statements – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended March 31, 2019



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)
Revenue	$	—		$	2,058		$	638		$	(87	)	$	2,609
Costs and expenses:
Cost of revenue	—			376			143			(6		)	513
Selling and marketing	—			1,150			466			(81		)	1,535
Technology and content	—			294			135			—			429
General and administrative	—			107			84			—			191
Amortization of intangible assets	—			30			22			—			52
Legal reserves, occupancy tax and other	—			11			(1		)	—			10
Restructuring and related reorganization charges	—			—			10			—			10
Intercompany (income) expense, net	—			212			(212		)	—			—
Operating loss	—			(122		)	(9		)	—			(131		)
Other income (expense):
Equity in pre-tax losses of consolidated subsidiaries	(72		)	(29		)	—			101			—
Other, net	(40		)	52			(22		)	—			(10		)
Total other income (expense), net	(112		)	23			(22		)	101			(10		)
Loss before income taxes	(112		)	(99		)	(31		)	101			(141		)
Provision for income taxes	9			27			5			—			41
Net loss	(103		)	(72		)	(26		)	101			(100		)
Net (income) loss attributable to non-controlling interests	—			1			(4		)	—			(3		)
Net loss attributable to Expedia Group, Inc.	$	(103	)	$	(71	)	$	(30	)	$	101		$	(103	)
Comprehensive loss attributable to Expedia Group, Inc.	$	(100	)	$	(80	)	$	(38	)	$	118		$	(100	)

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Notes to Consolidated Financial Statements – (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three months ended March 31, 2018



	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
	(In millions)
Revenue	$	—		$	1,911		$	721		$	(124	)	$	2,508
Costs and expenses:
Cost of revenue	—			366			126			(5		)	487
Selling and marketing	—			1,048			587			(119		)	1,516
Technology and content	—			280			116			—			396
General and administrative	—			118			81			—			199
Amortization of intangible assets	—			45			27			—			72
Legal reserves, occupancy tax and other	—			3			—			—			3
Intercompany (income) expense, net	—			184			(184		)	—			—
Operating loss	—			(133		)	(32		)	—			(165		)
Other income (expense):
Equity in pre-tax losses of consolidated subsidiaries	(97		)	(16		)	—			113			—
Other, net	(52		)	52			(4		)	—			(4		)
Total other income (expense), net	(149		)	36			(4		)	113			(4		)
Loss before income taxes	(149		)	(97		)	(36		)	113			(169		)
Provision for income taxes	12			3			5			—			20
Net loss	(137		)	(94		)	(31		)	113			(149		)
Net loss attributable to non-controlling interests	—			1			11			—			12
Net loss attributable to Expedia Group, Inc.	$	(137	)	$	(93	)	$	(20	)	$	113		$	(137	)
Comprehensive income (loss) attributable to Expedia Group, Inc.	$	(110	)	$	(51	)	$	24		$	27		$	(110	)

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Notes to Consolidated Financial Statements – (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2019



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(In millions)
ASSETS
Total current assets	$	420	$	7,471	$	2,397	$	(2,586	)	$	7,702
Investment in subsidiaries	10,542		3,398		—		(13,940		)	—
Intangible assets, net	—		1,491		445		—			1,936
Goodwill	—		6,368		1,741		—			8,109
Other assets, net	—		2,124		1,121		(29		)	3,216
TOTAL ASSETS	$	10,962	$	20,852	$	5,704	$	(16,555	)	$	20,963
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total current liabilities	$	1,624	$	9,764	$	1,924	$	(2,586	)	$	10,726
Long-term debt	3,704		—		—		—			3,704
Other long-term liabilities	—		464		435		(29		)	870
Redeemable non-controlling interests	—		17		12		—			29
Stockholders’ equity	5,634		10,607		3,333		(13,940		)	5,634
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,962	$	20,852	$	5,704	$	(16,555	)	$	20,963

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2018



	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
	(In millions)
ASSETS
Total current assets	$	402	$	5,261	$	2,137	$	(2,603	)	$	5,197
Investment in subsidiaries	10,615		3,425		—		(14,040		)	—
Intangible assets, net	—		1,520		472		—			1,992
Goodwill	—		6,366		1,754		—			8,120
Other assets, net	—		1,840		913