Stock Based Awards and Other Equity Instruments

12 Months Ended

Dec. 31, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Based Awards and Other Equity Instruments

NOTE 6: 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 RSUs, on our consolidated statements of operations during the periods presented:

	Year ended December 31,
	2018			2017			2016
	(in millions)
Cost of revenue	$	1		$	-		$	-
Selling and marketing		21			21			20
Technology and content		51			40			40
General and administrative		45			35			25
Total stock-based compensation expense		118			96			85
Income tax benefit from stock-based compensation    expense		(27	)		(28	)		(31	)
Total stock-based compensation expense, net of    tax effect	$	91		$	68		$	54

We capitalized $13 million, $13 million and $12 million of stock-based compensation expense as internal-use software and website development costs during the years ended December 31, 2018, 2017 and 2016, respectively.  

Stock and Incentive Plans

On December 20, 2011, our 2011 Stock and Annual Incentive Plan (the “2011 Plan”) became effective and we filed Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (File No. 333-178637) (the “Prior Registration Statement”) with the SEC, registering a total of 17,500,000 shares of our common stock, of which 17,400,000 shares were issuable in connection with grants of equity-based awards under our 2011 Plan (7,400,000 of which shares were originally registered on the Form S-4 and 10,000,000 of which shares were first registered on the Prior Registration Statement) and 100,000 shares were issuable under our Deferred Compensation Plan for Non-Employee Directors (refer to “Note 15: Employee Benefit Plans” below for information on our Deferred Compensation Plan for Non-Employee Directors). At our annual meeting of stockholders held on June 28, 2013, our stockholders approved an amendment to our 2011 Plan to, among other things, increase the aggregate number of shares of common stock authorized for issuance thereunder by 15,000,000 shares.

On June 21, 2018, our stockholders approved the 2018 Stock and Annual Incentive Plan (the “2018 Plan”) primarily for the purpose of providing sufficient reserves of shares of our common stock to ensure our ability to continue to provide new hires, employees and management with equity incentives. The number of shares reserved and available for issuance under the 2018 Plan is 6,000,000 plus the number of shares available for issuance (and not subject to outstanding awards) under the 2011 Plan, as of the effective date of the 2018 Plan. Both plans provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards to our directors, officers, employees and consultants, although no additional awards will be granted pursuant to the 2011 Plan. The summary of the material terms of both the 2018 Plan and its predecessor, the 2011 Plan, is qualified in its entirety by the full texts of the 2018 Plan and 2011 Plan previously filed.

As of December 31, 2018, the total number of shares reserved for future stock-based awards under the 2018 Plan is approximately 13.5 million shares. All shares of common stock issued in respect of the exercise of options or other equity awards have been issued from authorized, but unissued common stock.

Stock Based Award Activity and Valuation

2018 Stock Option Activity

During the year ended December 31, 2018, we have issued 762,124 service-based non-qualified stock options under both the 2018 Plan and the 2011 Plan. Our stock options generally have a term of ten years from the date of grant and typically vest equally over a four-year requisite service period.

A summary of our stock option activity 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 as of December 31, 2015		5,720		$	53.71
Granted		1,064			63.43
Exercised (1)		(733	)		31.58
Cancelled or expired		(233	)		70.76
Options outstanding as of December 31, 2016		5,818			57.60
Granted (2)		2,333			40.03
Exercised (1)		(496	)		29.37
Cancelled or expired		(802	)		65.13
Options outstanding as of December 31, 2017		6,853			52.78
Granted		762			43.53
Exercised (1)		(1,162	)		37.26
Cancelled or expired		(412	)		61.46
Options outstanding as of December 31, 2018		6,041		$	54.00		6.5	$	47
Exercisable as of December 31, 2018		3,217		$	61.85		4.7	$	15
Vested and expected to vest after December 31, 2018 (3)		6,041		$	54.00		6.5	$	47

(1) Inclusive of 814,635, 294,410, and 318,773 options as of December 31, 2018, 2017 and 2016, respectively, 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 which had been convertible under stock options that were withheld under net share settlement remain in the authorized but unissued pool under the 2018 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 consolidated statements of cash flows.

(2) Inclusive of 780,000 stock options awarded to our Chief Executive Officer and President, or CEO, during November 2017. The estimated grant-date fair value per option, using a Black-Scholes option pricing model was $17.33. These stock options shall vest in equal installments on each of August 1, 2021 and August 1, 2022, subject to the CEO’s continuous employment with, or performance of services for, the Company. The estimated grant-date fair value of this award will be amortized on a straight-line basis over the requisite service period through August 1, 2022.

(3) 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 NASDAQ as of December 31, 2018 was $53.94. The total intrinsic value of stock options exercised for the years ended December 31, 2018, 2017 and 2016 were $20 million, $8 million, and $24 million, respectively.

The fair value of stock option grants 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:

	December 31,
	2018			2017			2016
Risk free interest rate		2.70	%		2.02	%		1.20	%
Expected term (in years)		5.45			6.13			4.85
Expected volatility		41.86	%		42.14	%		41.81	%
Expected dividend yield	—  %			—  %			—  %

The weighted-average grant date fair value of options granted was $18.11, $16.50, and $22.95 for the years ended December 31, 2018, 2017 and 2016, respectively. The total fair value of stock options vested for the years ended December 31, 2018, 2017 and 2016 were $38 million, $40 million, and $28 million, respectively. Cash received from stock option exercises for the years ended December 31, 2018, 2017 and 2016 were $6 million, $3 million, and $7 million, 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 CEO. The amendment provided 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 was recognized to stock-based compensation expense on a straight-line basis over the remaining vesting term, or through August 2018, in general and administrative expense on the consolidated statement of operations.

2018 RSU Activity

During the year ended December 31, 2018, we granted 3,302,689 primarily service-based RSUs under the 2018 Plan and the 2011 Plan, which typically vest over a four-year requisite service period. A summary of our RSU activity is presented below:

				Weighted
				Average
				Grant-		Aggregate
	RSUs			Date Fair		Intrinsic
	Outstanding			Value Per Share		Value
	(in thousands)					(in millions)
Unvested RSUs outstanding as of December 31, 2015		1,750		$	79.02
Granted		2,016			63.71
Vested and released (1)		(627	)		76.02
Cancelled		(283	)		73.06
Unvested RSUs outstanding as of December 31, 2016		2,856			69.35
Granted (2)(3)		4,829			41.58
Vested and released (1)		(1,030	)		67.25
Cancelled		(853	)		52.64
Unvested RSUs outstanding as of December 31, 2017		5,802			48.81
Granted		3,302			43.04
Vested and released (1)		(1,617	)		54.22
Cancelled		(847	)		46.43
Unvested RSUs outstanding as of December 31, 2018		6,640		$	44.93	$	358
Expected to vest after December 31, 2018 (4)		6,640		$	44.93	$	358

(1) Inclusive of 424,848, 301,932, and 173,429 RSUs as of December 31, 2018, 2017 and 2016, respectively, 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 2018 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 consolidated statements of cash flows.

(2) Inclusive of 426,000 service-based RSUs awarded to our CEO during November 2017. The service-based RSU award provides for vesting in two equal annual installments on each of August 1, 2021 and August 1, 2022, subject to the CEO’s continuous employment with, or performance of services for, the Company. The estimated grant-date fair value per RSU, based on the quoted price of our common stock on the date of grant, was $34.71. The estimated grant-date fair value of this award will be amortized on a straight-line basis over the requisite service period through August 1, 2022.

(3)  Excludes from the 2017 RSU grants, a performance-based RSU grant for 213,000 shares awarded to our CEO during November 2017. This award provides for vesting based on the extent to which the Company achieves certain financial and/or the CEO achieves certain strategic performance metrics relative to the targets to be established by the Company’s Compensation Committee. One quarter of these RSUs may vest and settle annually based on actual performance relative to the targets established annually for each of the four fiscal years ending December 31, 2018, December 31, 2019, December 31, 2020, and December 31, 2021. The estimated grant-date fair value per RSU will be calculated upon the establishment of annual performance targets and each tranche will be amortized on a straight-line basis over its requisite service period. At any point in time during the vesting period, the award’s expense to date will at least equal the portion of the grant-date fair value that is expected to vest at that date. Based upon actual attainment relative to the target performance metrics, the CEO has the ability to receive up to 125% of the target number originally granted, or to be issued none at all.

(4) 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.

A summary of our RSU activity for MSUs is presented below:

			Weighted
			Average
			Grant-		Aggregate
	MSUs		Date Fair		Intrinsic
	Outstanding		Value Per Share		Value
	(in thousands)				(in millions)
Unvested MSUs outstanding as of December 31, 2016		-	$	-
Granted (1)		213		30.04
Vested and released		-
Cancelled		-
Unvested MSUs outstanding as of December 31, 2017		213		30.04
Granted (2)		71		59.40
Vested and released		-		-
Cancelled		-		-
Unvested MSUs outstanding as of December 31, 2018		284	$	37.41	$	15

(1) Represents 213,000 market-based RSU or MSUs awarded to the Company’s CEO in November 2017. The MSU award provides for vesting based upon the Company’s total shareholder return, or TSR, performance over the period commencing January 1, 2018 through December 31, 2020 relative to the TSR performance of the Nasdaq Composite Total Return Index. Based upon actual attainment relative to the target performance metric, the CEO has the ability to receive up to 125% of the target number of MSUs originally granted, or to be issued none at all.

(2) MSUs provide for vesting based upon the Company’s total shareholder return, or TSR, performance over the period commencing January 1, 2018 through December 31, 2020 relative to the TSR performance of the Nasdaq Composite Total Return Index. Based upon actual attainment relative to the target performance metric, the grantee has the ability to receive up to 200% of the target number of MSUs originally granted, or to be issued none at all. These MSUs were granted under the 2011 Plan.

A Monte-Carlo simulation model, which simulated the present value of the potential outcomes of future stock prices and TSR of the Company and the Nasdaq Composite Total Return Index over the performance period, was used to calculate the grant-date fair value of our MSU awards. The estimated grant-date fair value of these awards is being amortized on a straight-line basis over the requisite service period through December 31, 2020.

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized compensation expense and the weighted average remaining amortization period at December 31, 2018 related to our non-vested equity awards is presented below (in millions, except in years information):

	Stock
	Options		RSUs		MSUs
Unrecognized compensation expense	$	37	$	218	$	7
Weighted average period remaining (in years)		2.8		2.6		2.0