NOTE 3: 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 condensed consolidated statements of operations during the periods presented:

	Three months ended						Nine months ended
	September 30,						September 30,
	2017			2016			2017			2016
	(in millions)						(in millions)
Selling and marketing	$	5		$	5		$	16		$	15
Technology and content		12			11			31			30
General and administrative		9			6			25			19
Total stock-based compensation		26			22			72			64
Income tax benefit from stock-based compensation		(9	)		(8	)		(27	)		(23	)
Total stock-based compensation, net of tax effect	$	17		$	14		$	45		$	41

During the three and nine months ended September 30, 2017, we capitalized $3 million and $10 million, respectively, of stock-based compensation expense as internal-use software and website development costs. During the three and nine months ended September 30, 2016, we capitalized $3 million and $9 million, respectively, of stock-based compensation expense as internal-use software and website development costs.

Stock-Based Award Activity and Valuation

2017 Stock Option Activity

During the nine months ended September 30, 2017, we have issued 1,529,127 service-based non-qualified stock options under the Company’s Amended and Restated 2011 Stock and Annual Incentive Plan (the “2011 Incentive Plan”). Generally our stock options have a term of ten years from the date of grant and generally vest equally over a four-year requisite service period.

The following table presents a summary of our stock option activity during the nine months ended September 30, 2017:

				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 December 31, 2016		5,818		$	57.60
Granted		1,529			42.81
Exercised (1)		(488	)		29.49
Cancelled or expired		(572	)		68.82
Options outstanding at September 30, 2017		6,287		$	55.16		6.4	$	7
Exercisable as of September 30, 2017		3,337		$	52.51		4.7	$	7
Vested and expected to vest after September 30, 2017 (2)		6,287		$	55.16		6.4	$	7

(1)

Inclusive of 288,751 of options which were not converted into shares due to net share settlement in order to cover the aggregate exercise price and the required amount of 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 Incentive 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 condensed consolidated statements of cash flows.

(2)

The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures as allowed under GAAP and therefore do not include a forfeiture rate in our vested and expected to vest calculation unless necessary for a performance condition award.

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 The NASDAQ Global Select Market as of September 30, 2017 was $40.53. The total intrinsic value of stock options exercised was $8 million and $23 million, for the nine months ended September 30, 2017 and 2016, respectively.

The fair value of stock option grants under the 2011 Incentive 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,
	2017			2016			2017			2016
Risk free interest rate		1.84	%		1.15	%		1.90	%		1.20	%
Expected term (in years)		5.32			5.17			5.35			4.85
Expected volatility		41.31	%		42.68	%		41.52	%		41.83	%
Expected dividend yield	— %			— %			— %			— %

The weighted-average grant date fair value of options granted was $15.49 and $17.16 for the three and nine months ended September 30, 2017, respectively. The weighted-average grant date fair value of options granted was $24.97 and $22.95 for the three and nine months ended September 30, 2016, respectively. The total fair value of stock options vested was $39 million and $27 million for the nine months ended September 30, 2017 and 2016, respectively. Cash received from stock option exercises was $3 million and $6 million for the nine months ended September 30, 2017 and 2016, respectively.

On June 5, 2017, the Section 16 Committee of our Board of Directors approved an amendment to the nonqualified stock option award (the “Option”) granted on August 28, 2013 to Stephen Kaufer, the Company’s President and Chief Executive Officer. The amendment provides that the Option will expire on the tenth anniversary, instead of the seventh anniversary, of the grant date. Vesting conditions under the Option were not affected by this amendment. As a result of the modification, incremental fair value of $5 million will be recognized to stock-based compensation expense on a straight-line basis over the remaining vesting term, which is through August 2018.

2017 RSU Activity

During the nine months ended September 30, 2017, we issued 4,241,561 RSUs under the 2011 Incentive 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.

The following table presents a summary of our RSU activity during the nine months ended September 30, 2017:

				Weighted
				Average
				Grant-		Aggregate
	RSUs			Date Fair		Intrinsic
	Outstanding			Value Per Share		Value
	(in thousands)					(in millions)
Unvested RSUs outstanding as of December 31, 2016		2,856		$	69.35
Granted		4,241			42.65
Vested and released (1)		(868	)		67.89
Cancelled		(641	)		55.02
Unvested RSUs outstanding as of September 30, 2017		5,588		$	50.84	$	226
Expected to vest after September 30, 2017 (2)		5,588		$	50.84	$	226

(1)

Inclusive of 251,082 RSUs withheld due to net share settlement to satisfy required employee tax withholding requirements. 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 Incentive 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 condensed consolidated statements of cash flows.

(2)

The Company accounts for forfeitures as they occur, rather than estimate expected forfeitures as allowed under GAAP and therefore do not include a forfeiture rate in our expected to vest calculation unless necessary for a performance condition award, respectively.

Total current income tax benefits associated with the exercise or settlement of TripAdvisor stock-based awards held by our employees were $1 million and $17 million for the three and nine months ended September 30, 2017, respectively. Total current income tax benefits associated with the exercise or settlement of TripAdvisor stock-based awards held by our employees was $2 million and $18 million for the three and nine months ended September 30, 2016.

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized stock-based compensation expense and the weighted average remaining amortization period at September 30, 2017 related to our non-vested stock options and RSU awards is presented below:

	Stock
	Options		RSUs
Unrecognized compensation expense	$	49	$	229
Weighted average period remaining (in years)		2.4		3.0