NOTE 4: STOCK BASED AWARDS AND OTHER EQUITY INSTRUMENTS

Stock-Based Compensation Expense

The following table presents the amount of stock-based compensation expense related to stock-based awards, primarily stock options and restricted stock units (“RSUs”), on our unaudited consolidated statements of operations during the periods presented:

	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013
	(in millions)						(in millions)
Selling and marketing	$	4		$	3		$	10		$	7
Technology and content		7			5			19			16
General and administrative		6			3			17			12
Total stock-based compensation		17			11			46			35
Income tax benefit from stock-based compensation		(6	)		(4	)		(17	)		(14	)
Total stock-based compensation, net of tax effect	$	11		$	7		$	29		$	21

Stock-Based Award Activity and Valuation

2014 Stock Option Activity

During the nine months ended September 30, 2014, we issued 658,332 of service-based non-qualified stock options primarily from the TripAdvisor, Inc. 2011 Stock and Incentive Plan, as amended (the “2011 Plan”). These stock options generally have a term of ten years from the date of grant and generally vest equitably over a four-year requisite service period. We will amortize the fair value of the 2014 grants, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.

A summary of the status and activity for stock option awards relating to our common stock for the nine months ended September 30, 2014, is presented below:

				Weighted		Weighted
				Average		Average
				Exercise		Remaining		Aggregate
	Options			Price Per		Contractual		Intrinsic
	Outstanding			Share		Life		Value
	(in thousands)					(in years)		(in millions)
Options outstanding at January 1, 2014		9,470		$	40.18
Assumed options from acquisition		101		$	16.36
Granted		557			96.42
Exercised (1)		(1,139	)		33.67
Cancelled or expired		(234	)		45.05
Options outstanding at September 30, 2014		8,755		$	44.21		5.3	$	416
Exercisable as of September 30, 2014		3,845		$	31.68		2.9	$	230
Vested and expected to vest after September 30, 2014		8,203		$	43.38		5.1	$	396

(1)

Inclusive of 613,261 options which were not converted into shares due to net share settlement in order to cover the aggregate exercise price and the minimum amount of required employee withholding taxes. Potential shares that had been convertible under stock options that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited consolidated statements of cash flows.

Aggregate intrinsic value represents the difference between the closing stock price of our common stock and the exercise price of outstanding, in-the-money options. Our closing stock price as reported on NASDAQ as of September 30, 2014 was $91.42. The total intrinsic value of stock options exercised for the nine months ended September 30, 2014 and 2013 was $71 million and $45 million, respectively.

The fair value of stock option grants under the 2011 Plan has been estimated at the date of grant using the Black–Scholes option pricing model with the following weighted average assumptions for the periods presented:

	Three months ended						Nine months ended
	September 30,						September 30,
	2014			2013			2014			2013
Risk free interest rate		1.76	%		1.83	%		1.93	%		1.40	%
Expected term (in years)		5.77			5.80			6.27			6.05
Expected volatility		46.09	%		49.62	%		47.70	%		50.81	%
Expected dividend yield	— %			— %			— %			— %

The weighted-average grant date fair value of options granted, excluding assumed acquisition-related options, was $47.03 and $28.11 for the nine months ended September 30, 2014 and 2013, respectively. The weighted-average grant date fair value of assumed acquisition-related options granted was $80.31 for the three and nine months ended September 30, 2014. There were no assumed acquisition-related options granted for the three and nine months ended September 30, 2013. The total fair value of stock options vested for the nine months ended September 30, 2014 and 2013 was $27 million and $23 million, respectively.

2014 RSU Activity

During the nine months ended September 30, 2014, we issued 617,693 RSUs under the 2011 Plan for which the fair value was measured based on the quoted price of our common stock on the date of grant. These RSUs generally vest over a four-year requisite service period. We will amortize the fair value of the 2014 grants, net of estimated forfeitures, as stock-based compensation expense over the vesting term on a straight-line basis, with the amount of compensation expense recognized at any date at least equaling the portion of the grant-date fair value of the award that is vested at that date.

The following table presents a summary of RSU activity on our common stock during the nine months ended September 30, 2014:

				Weighted
				Average
				Grant-		Aggregate
	RSUs			Date Fair		Intrinsic
	Outstanding			Value Per Share		Value
	(in thousands)					(in millions)
Unvested RSUs outstanding as of January 1, 2014		1,135		$	49.64
Granted		618			96.15
Vested and released (1)		(265	)		46.36
Cancelled		(106	)		66.09
Unvested RSUs outstanding as of September 30, 2014		1,382		$	69.79	$	126

(1)

Inclusive of 94,445 RSUs withheld to satisfy employee minimum tax withholding requirements due to net share settlement. Potential shares which had been convertible under RSUs that were withheld under net share settlement remain in the authorized but unissued pool under the 2011 Plan and can be reissued by the Company. Total payments for the employees’ tax obligations to the taxing authorities due to net share settlements are reflected as a financing activity within the unaudited consolidated statements of cash flows.

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized stock-based compensation expense, net of estimated forfeitures, and the weighted average remaining amortization period at September 30, 2014 related to our non-vested stock options and RSU awards is presented below (in millions):

	Stock
	Options		RSUs
Unrecognized compensation expense (net of forfeitures)	$	87	$	57
Weighted average period remaining (in years)		2.9		3.0