Earnings Call Transcript - ABNB Q3 2022

Operator, Operator

Good afternoon and thank you for joining Airbnb’s Earnings Conference Call for the Third Quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead.

Ellie Mertz, VP of Finance

Good afternoon and welcome to Airbnb’s third quarter of 2022 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2022. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we will make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian.

Brian Chesky, CEO

Alright. Well, thank you, Ellie and good afternoon, everyone. Thanks for joining. Q3 was another record quarter despite macroeconomic headwinds. We had nearly 100 million Nights and Experiences Booked, which is up 25% year-over-year. Gross booking value was $15.6 billion. This is up 31% year-over-year. Revenue grew 29% year-over-year to $2.9 billion, our highest ever. And when you exclude foreign exchange, our revenue increased 36% year-over-year. Now, we also had our most profitable quarter ever. Net income was $1.2 billion, and this is up $400 million from a year ago. Now, this represents a 42% net income margin. Adjusted EBITDA was $1.5 billion, also our highest ever and we generated $960 million of free cash flow. In fact, over the last 12 months, we have generated $3.3 billion in free cash flow. What our Q3 results demonstrate is that Airbnb continues to drive growth and profitability at scale. And even with the macroeconomic uncertainties, we believe that we are well positioned for the road ahead. Now why is this? Well, new use cases such as long-term stays and non-urban travel are here to stay. And this is because millions of people now have the flexibility that they didn’t have before the pandemic. At the same time, we have seen recovery in urban and cross-border travel, two of our strongest segments before the pandemic. And just like during the Great Recession in 2008, when everything started, people today are especially interested in earning extra income through hosting. Now during the quarter, we saw a number of positive business trends. First, guest demand on Airbnb remains strong. Globally, we exceeded 90 million guest arrivals during the quarter and this is another record. Now even with macroeconomic headwinds, Nights and Experiences Booked increased 25%. And during the quarter, we also continued to see longer lead times, supporting a stronger backlog for Q4. Second, guests are increasingly returning to cities and crossing borders. Both segments continue to accelerate. Cross-border gross nights booked increased 58% compared to a year ago. High density urban nights booked grew 27%. And now even as these two segments return, demand for domestic and non-urban travel remains strong. Third, guests continue to stay longer on Airbnb. Over the last year, we have seen many companies require their employees to return to the office. And at the same time, long-term stay remains 20% of our total gross nights booked on Airbnb. And finally, four, our host community continues to grow. We believe there are several factors that are driving this growth. The first reason is the demand drives supply. For instance, in Q3, as guests were returning to cities, we saw urban supply accelerate. Second, since Airbnb began in 2008, hosts have consistently turned to Airbnb to earn extra income. In fact, since 2008, hosts on Airbnb have earned $180 billion through our platform. Third, over the last year, we made several product improvements to help onboard and support our hosts, but we are not stopping there. On November 16, we are going to introduce an all-new, super easy way for millions of people to turn their homes into Airbnb listings as part of our winter release. We are also delivering a major upgrade to AirCover that provides even more top-down protection for every host. Now with these upgrades and more, we aim to unlock the next generation of hosts and improve the experience for more than 4 million people that are already hosting. To recap, we had a record Q3, Nights and Experiences Booked were our highest Q3 ever, revenue and adjusted EBITDA were record highs, and free cash flow was $960 million. In the last 12 months, we have generated $3.3 billion in free cash flow. So with that, Dave and I look forward to answering your questions.

Operator, Operator

Thank you. And we will take our first question from Lloyd Walmsley at UBS.

Lloyd Walmsley, Analyst

Thanks. Two, if I can. First, just the classic kind of macro question, anything you guys are seeing globally, any pockets where you are seeing weaker trends in bookings or ADRs that would be kind of early warning signs that you would flag heading into next year? And then second, you guys have talked a little bit about starting to invest again in Experiences. I guess if we step back, how should we think about the cost growth outlook heading into 2023? And are you – is there anything you are doing in light of just questions around macro to kind of keep a lid on costs heading into next year? Thanks.

Brian Chesky, CEO

Alright. Thanks, Lloyd. Dave, why don’t I answer these and then you can go at a high level? You can go specifically into the booking side question. But Lloyd, what I am going to do is answer it at a little more of a high level. So one of the things that we have seen is, despite a lot of consumers pulling back on spending, the one area that I haven’t seen them pull back on as much is travel. And in particular, travel where you can go and see your friends and family, more inspirational types of travel, in other words, meaningful travel and not just mass travel. I think the reason why is that many people are now working from home, the mall is now Amazon, the movie theater is now Netflix, and people still want to get out of their houses. They still want to have memories. They still want to have meaningful experiences. I think that’s why they continue to turn to Airbnb. Just like people continue to travel this quarter, we expect really strong demand for Airbnb next year. Again, the new use cases are sticking. In other words, a fifth of our nights booked are for longer than a month and half of our nights booked are longer than a week. This has basically been a boon because of the flexibility that people have in being able to work from home or have a hybrid work lifestyle. At the same time, our urban and cross-border businesses are incredibly strong because of the value we provide. We think that having great deals will be a key driver as the economy slows down. On the supply side, I just want to remind everyone that we started Airbnb in 2008 during the Great Recession. At that time, many people were turning to Airbnb to earn extra income. We think this will be a great time for millions of people to consider hosting which is why we are focused on this on November 16. So we are feeling really positive about the path forward. With regard to Experiences, to answer your question very simply, the great thing about Experiences is we don’t have to have very much incremental investment to make this work. It’s really just a matter of incorporating Experiences more into our existing marketing and existing products. So I don’t think you will see that in the P&L from a cost perspective next year at all. Dave, feel free to take anything else you want to add.

Dave Stephenson, CFO

No, I will just double-click on a few areas. We are doing incredibly well despite the macroeconomic environment. We saw continued strength in Q3. The Q3 nights and experiences grew 25% year-over-year and our revenue grew 29% year-over-year. As we stated, it’s actually 36% growth year-over-year, excluding the impact of foreign exchange. What we are seeing in Q4 is not seeing any overall changes in booking behaviors from our guests. Four weeks in this quarter, we are seeing really strong promising trends in cross-border, renewed interest in urban stays, stabilizing cancellations, and just strong future bookings. That we included in our guidance here. On our guidance for Q4, we are anticipating revenue growth between 17% and 23%. That’s 23% to 29%, excluding the impact of foreign exchange. Maybe I will just take a minute to double-click here, because one of the things we are seeing is the difference in the behavior that we had last year. If you actually go back to 2019 at historic rates, we are actually seeing stable to increasing demand for bookings here from Q3 into Q4. The deceleration we see from Q3 into Q4 is really a hard comp on Q4 last year, where we had really strong demand after Delta and before Omicron. This is really kind of a hard year-over-year comp. If you go back and compare back to 2019, we are seeing stable to increasing demand across the globe. An area to highlight is that APAC had some of the strongest growth, 65% growth in APAC. Excluding China, APAC is now above 2019 levels. So that’s been kind of the last major region to return to 2019.

Lloyd Walmsley, Analyst

Okay, thank you.

Operator, Operator

We will move next to Naved Khan at Truist Securities.

Naved Khan, Analyst

Yes, thanks a lot. Is there anything worth calling out in terms of incremental demand for European sales from travelers outside of Europe, given the decline in the currencies in that area? And then the other question I had is just on advertising, can you share anything in terms of ROI on the advertising dollars? Are you seeing more opportunities to deploy these more broadly?

Brian Chesky, CEO

Yes, Naved. Why don’t Dave – you take these? I can round out the answers.

Dave Stephenson, CFO

Sure. In terms of European demand, we are seeing strong European demand from places like the U.S., where the dollar is stronger than the euro. It’s not a material part of the business. It’s hard to see it impact the overall materiality given just the size of our business being in 220 countries and regions around the world. Conversely, European travel will be maybe less likely to come say to the U.S. where the U.S. dollar is so strong. There is some offset there. Overall, the impact of foreign exchange isn’t as large on the business because of the regional impacts. More people travel either domestically or within their own regions. In terms of advertising ROI, we are really pleased with our approach to the marketing strategy that we have had. Our brand marketing results are delivering excellent overall results with a strong rate of return. It’s been so successful that we are actually expanding to more countries. That’s what you will be seeing over the course of this next year to support our brand advertising.

Naved Khan, Analyst

Great. Thank you.

Operator, Operator

We’ll go next to Nick Jones at JMP Securities.

Nick Jones, Analyst

Great. Thanks for taking the questions. I guess first, when we look at U.S. to international travel, is the strength in U.S. dollar maybe helping drive more interest in going overseas? And then the second question on durability of kind of ADRs, as elevated home prices may be making hosts less likely to lower the rate at which they are willing to take kind of from here. I mean, are these going to be maybe more durable than we think? Thanks.

Brian Chesky, CEO

Dave, why don’t you take the first question? I can take the second.

Dave Stephenson, CFO

Yes. As I just said, on the U.S. international, we clearly do have a strong U.S. dollar, which enables Americans to travel abroad quite well and we are seeing nice strength there. And again, that part of the business is not too large as to have a material impact on the overall business, because you also have some of the offsets of weaker currencies, not necessarily travel in the U.S. Again, more of the travel is domestic and intra-regional, that’s what’s really going to drive things and more of the foreign exchange issues are not as pronounced within the given region.

Brian Chesky, CEO

Regarding elevated home prices and what that does to average daily rate on Airbnb, I mean just to zoom out, people come to Airbnb because they can find a great value. You can often get significantly more for your money than a hotel room. You can often get an entire home with a lot of amenities. Continuing to deliver value is going to be really important for the next travel season. That means we need to make sure we have really competitive prices. That means we need to give tools for hosts, more tools for them to be able to better price their listings. One of the things we are doing is moving towards a more all-in pricing structure, where instead of seeing more of a nightly rate, you are going to see a fully loaded rate. Our search ranking is going to prioritize great value for the fully loaded price. I think this will really help hosts understand what they are charging, and we will give them more tools so they can see and understand what their all-in pricing is for guests, and provide more discount tools and other features to allow hosts to remain competitive. If we do all these things, I believe we will be even more competitive from a pricing standpoint than we are today.

Nick Jones, Analyst

Great. Thanks, Brian.

Operator, Operator

We will take our next question from Brian Fitzgerald at Wells Fargo.

Brian Fitzgerald, Analyst

Thanks, guys. I think you will have more to say about supply with the upcoming winter release, but just wondering if you could talk about what you see as continuing pain points for hosts, Brian, maybe you can speak to that a little bit and maybe also structural drivers around supply like local regulations and zoning? Thanks.

Brian Chesky, CEO

Yes, yes. Let me dive into this, because this is a pretty important topic. Just to zoom out, we have a global network where demand drives supply. That means that where we see our highest growth of bookings is also typically where we see our highest growth of supply. Just to give you an example, this past quarter, approximately 35% of our new available hosts had started as guests. So this is a really strong network where guests become hosts, and hosts as they get more bookings tend to tell their friends about it, and then we get more supply that way. This is one of the things that’s really important. Beyond that, obviously, we want to be aggressive about recruiting more hosts to Airbnb because this is a great time. Because of the softening economy, we think increasingly now more than ever, people are interested in putting their homes on Airbnb to make supplemental income. So to answer your question, what are the pain points? I would highlight two. As we’ve talked to people considering hosting, they have told us two things. The first thing they want is for it to be easier to get started. They need help getting started becoming a host. The second thing is they are a little nervous about having strangers in their house. We are tackling both of these. On November 16, as part of our winter release, we are going to unveil an all-new super easy way for millions of people to put their home on Airbnb. I’m very excited about this. We have been working on this for quite a while. Second, to make people feel comfortable having other people in their home, which will unlock a lot more everyday people putting their real homes on Airbnb, we will be providing major upgrades and improvements to AirCover for hosts. If we do these two things, I think we are going to unlock significantly greater amounts of supply, which is already on top of the momentum we have seen in Q3. Finally, to add supply on Airbnb, the Holy Grail is pointing demand to where we have supply. We know that globally, Airbnb properties are hardly ever close to 100% occupied. It’s just a matter of pointing demand to the supply we have. This is the whole theory around Airbnb categories— instead of hoping people type in the place you have available supply in the search box, you can have more of a browse experience highlighting homes that are available. This is our holistic strategy. As far as pain points from a regulatory standpoint, I mean, one of the things we’ve seen is a redistribution away from very large cities. Many cities and local communities have been reaching out to us because they can see the economic opportunity we provide. We are working closely with these markets, and we feel very optimistic about our supply for 2023.

Dave Stephenson, CFO

Let me just double-click on a couple of Brian’s points, because I think they are important. Because of these partnerships we’ve had with local governments, especially on tax collection, we have delivered more than $6 billion in tourism-related taxes to local governments. I mean, this is a material amount of money. We do it in over 30,000 jurisdictions around the globe. I think in terms of zoning regulations, we believe that reasonable regulation actually normalizes hosting. When you normalize hosting, it can provide a foundation for future growth. We believe that this can actually be a tailwind to growth in the future.

Brian Fitzgerald, Analyst

Got it. Thanks, guys.

Operator, Operator

Next, we will move to Brian Nowak at Morgan Stanley.

Brian Nowak, Analyst

Thanks for taking my question. I have two. First one, just to maybe try to cut the business a little bit differently. What can you tell us about your growth in active bookers versus spend per booker that’s driving the business right now? How have those cohorts that came in during COVID aged versus cohorts you had prior to COVID? The second one, Brian, you’ve made many improvements to the platform over the years from flexibility and trying to load balance supply and demand, etcetera. What can you tell us about the conversion of traffic now versus where it was, say, in 2019?

Brian Chesky, CEO

Alright. Yes, Dave, do you want to take the first question?

Dave Stephenson, CFO

Yes, in terms of the active bookers, I think you kind of step back and look at the marketing approach that we’ve had since pre-COVID and that has accelerated during COVID. It has been to continue to focus on the overall brand of Airbnb and to be less reliant on search engine marketing. We’ve been incredibly effective at that; 90% of our traffic remains direct or unpaid, which is driving a great return on investment for new active bookers. The return that we’re getting on new has been quite good. In terms of the cohorts of new, we’re actually seeing that the cohorts that are coming in since COVID are as strong, if not stronger than they were prior to COVID. The people willing to travel right now and experience Airbnb have been really sticky, and the cohorts are as strong, if not stronger than we saw previously.

Operator, Operator

We will go next to the...

Brian Chesky, CEO

Alright. Sorry, I just want to answer about conversion of traffic. So yes, at a high level, conversion on a year-over-year basis is up. I would generally say, Brian, that we actually think about it even more broadly. When we launched Airbnb Categories, for example, one of the goals was not just to increase conversion, but actually to increase traffic. There is a scenario where you can increase traffic, and initially, conversion can go down because you are a little bit more in the inspiration business. There were people who came and were dreaming and planning travel. You need to look at conversion over a more extended period. We have metronomic improvement in our conversion rate. Stays in Airbnb Categories since we launched on May 11 have been viewed more than 300 million times, with homes they would have never otherwise known existed. We are really excited about the progress we’re making between Airbnb Categories, which is bringing more traffic to Airbnb, plenty of demand where we have half supply, and AirCover for guests, which is making people feel more assured about their experience and allowing a more consistent form of reliability. I think that we will continue to see a step change in improvement in the product from a guest experience, and this will continue to lead to greater conversion.

Brian Nowak, Analyst

Great. Thank you, both.

Operator, Operator

We will go next to Doug Anmuth from JPMorgan.

Doug Anmuth, Analyst

Thanks for taking the questions. I have two. First, Brian, I know you talked about strong growth in new hosts and a lot of them seeing new income opportunities. But within that, is the macro environment and interest rates putting any pressure on second homes in your view? Secondly, if you could talk about the early returns on the spring update categories. Is there anything you can add just around conversion rates or what you might be seeing in incremental bookings? Thanks.

Brian Chesky, CEO

Yes, Doug, I mean, I’ll let Dave fill in more detail. But at the highest level, I think it’s pretty simple. As the economy slows down, I think people are looking for more ways to earn supplemental income or get greater yield on the assets they have. We see a slowing economy as a moment when more people are presumably turning to Airbnb for hosting. Whether it’s second homes or primary homes, I think there is going to be a pretty big opportunity for us. We just want to ensure we provide great tools for people so they continue to list on Airbnb. As far as the metrics we’ve seen, again, conversion has steadily picked up. Homes and Airbnb experiences have been viewed more than 300 million times. We continue to spread out bookings to more and more markets, which is the Holy Grail to point demand to where we have supply. With AirCover for guests, which is another very important upgrade we made because this addresses the variability in Airbnb. AirCover provides protection in case a host cancels, or if you get to a home and it’s not as described. Since we launched AirCover for guests, NPS is up, and more importantly, rebooking rates when guests are dissatisfied are also up. If we do these two things: on the front end, continue to inspire people, point demand to existing supply; on the back end, ensure that Airbnbs meet your expectations; and in rare events, make it right, then we will unlock significant growth for us in the year ahead.

Dave Stephenson, CFO

Just to double-check on the strong second home impact question. If you think about the 4 million hosts, we have a very different business. This is because 90% of those hosts are individual hosts. They are people that own a primary home or maybe a secondary home. The big strength of our business, we saw this during COVID; people even during an economic shock period, tended not to sell their primary or secondary homes. This is very different from professional hosts that may do an arbitrage of exact cost of ownership and return on the investment they can get on that specific property. This helps buffer any impacts on our businesses, specifically within the individual host community.

Doug Anmuth, Analyst

Thank you.

Operator, Operator

We will move next to Justin Post at Bank of America.

Justin Post, Analyst

Great, thanks. One quick one. When you say ADRs could face some pressure. Is that quarter-over-quarter or year-over-year in Q4? And then much bigger picture, solid bookings for 31% growth. Guidance probably implies well over 20 in Q4. How do we think about the backlog for ‘23 on revenues or associate that with potential revenue growth next year? Thank you.

Brian Chesky, CEO

Alright, Dave, I think you can take this one.

Dave Stephenson, CFO

Sure. On the year-over-year for Q4, the Q4 pressure on ADR is year-over-year. In terms of the backlog for ‘23, it’s a little early to tell, but really what we’re seeing is continued strong demand for travel overall. Like I said, when you look back to the historic levels of growth back to 2019, we’re seeing stable to increasing demand. We have strong bookings on the books for Q4, but then there will be fewer on the books, which tapers into 2023. It’s a little early to say, but we’re seeing no hints of a decline in people’s demand and willingness to travel. It’s just a little early to extrapolate much further.

Justin Post, Analyst

Great, thank you.

Operator, Operator

We will move next to Mario Lu at Barclays.

Mario Lu, Analyst

Thanks for taking the questions. First one is for Brian. You mentioned earlier that redesigning pricing and better transparency is a top priority for you. How much of an uplift could this be to conversion potentially? What changes should we expect to see?

Brian Chesky, CEO

Yes. Mario, yes. Just to give a little more context, pricing is currently displayed primarily on a nightly rate, and you can choose to add cleaning fees and service fees on top. We’ve heard from guests that they would like better transparency about what they are actually paying when they first look at Airbnb. We are working on redesigning how pricing works so people better understand the total price they will pay the moment they arrive at Airbnb, and it’s not a surprise for them. The North Star for us is transparency. I believe the benefit of this is also to make it easier for hosts to understand what they are charging. Sometimes hosts aren't aware of what guests are paying because we add a guest service fee on top of the price the host charges. We’re updating some tools to make it easier for hosts to understand what they are charging, which will allow them to be more competitive. In addition, we’re updating our search ranking algorithm, making refinements to prioritize homes that offer better value. When a guest checks out, they leave a 5-star rating. One of the questions we ask is on a scale of 1 to 5, how good of a value was this? Homes that offer great value will be prioritized higher in search results. We will also continue developing new discounting tools to make hosts more competitive. If we do all this, I believe our prices will become even more competitive. A big part of our strategy is making sure we remain disciplined on our expenses. We have several monetization opportunities going forward, and we don’t intend to increase the take rate, but we will be optimizing pricing and discounting structures in the coming future.

Mario Lu, Analyst

Great, thanks, Brian. Just one on the operational take rate, which I believe is still above 14% and hasn't changed much over the past few years. Is that correct? If so, what are your thoughts on adjusting it up or down in the future to drive demand?

Brian Chesky, CEO

Yes, it’s a great question, Mario. I’ll start and Dave, you feel free to jump in. We do not have an intention to increase take rate. In other words, we surpassed $1 billion in net income last quarter and nearly $1 billion of free cash flow. So I think there are a lot of levers to increase monetization on Airbnb, but I don’t think we have to increase take rate to do that. We have opportunities to add additional services for hosts that we could charge for, and we believe they will pay for that. There are areas where we could probably optimize and improve take rates and potentially lower them a little bit, like on long-term stays. If you’re booking a place for 2, 3, or 4 months, we think conversion rates might increase if we were to lower the take rate slightly. But I don’t think this would negatively impact our current business; rather, I believe it might keep more bookings on the platform. We will continue looking at optimization, but we believe we provide great value. If we’re going to charge more, we should provide more. That’s our North Star.

Operator, Operator

We will go next to Bernie McTernan at Needham & Company.

Bernie McTernan, Analyst

Great. Thank you for taking the question. I realize that you guys are saying you’re not seeing any negative impact yet from the macro on the consumer. But as you think about different scenarios playing out and the potential impact of a recessionary environment, is there any cohort or demographic data from your consumers that makes you think Airbnb could be more resilient than broader travel?

Brian Chesky, CEO

That’s a great question. One significant observation during the pandemic is that Airbnb has the most adaptable business model in all of travel. The reason is we’re not just dedicated to Europe; we don’t only serve North America. We’re a truly global business in 100,000 cities worldwide. We're not just a vacation rental service; we are also an urban and cross-border business. We're not confined to just family vacations; we're also popular with millennials, Gen Z, and retirees, offering a wide variety of price points. Therefore, however travel demand changes, we will adapt. This adaptability is a strength of our model. Guests become hosts, and most hosts are regular people that tell their friends about Airbnb. As market occupancy increases, it tends to create more supply by itself. So these are some reasons we feel very excited about our ability to continue adapting in this macroeconomic climate. Dave, if you want to add anything?

Dave Stephenson, CFO

I would like to say it’s just the great value that we provide that allows guests to pick anything from budget to luxury. If a person has any budget constraints, they may choose to look for slightly smaller places or locations farther from urban centers. This flexibility enables them to do it uniquely with us, which is very different than the limited flexibility they might encounter with hotels.

Operator, Operator

We will move next to James Lee at Mizuho.

James Lee, Analyst

Great. Thanks for taking my questions. When we spoke with hoteliers in general, I think they are planning to keep the ADRs high with reduced staffing levels. So just curious, does that present an opportunity for you to price your product more dynamically to demand and gain share? Considering also, are you thinking about a pricing structure change that might charge guest fees given the tighter consumer budget? Thanks.

Brian Chesky, CEO

Yes, James. I think that as we give more tools to hosts to dynamically price, they can be more competitive. And as they are more competitive, I believe we will continue to gain more share. Aside from changing how pricing will be displayed to improve transparency and intuition, we’re not looking at a fundamental shift in our pricing structure.

Operator, Operator

We will move next to Richard Clarke at Bernstein.

Richard Clarke, Analyst

Alright. Thanks for taking my question. Wondering, based on your commentary, you're seeing urban travel coming back. How normal are we in that mix at the moment? Can you possible quantify what the ADR headwind might be as urban travel continues to rebound? Also, regarding your market mix, you're now more skewed to the North American market than pre-COVID. Is that because those use cases are a bigger factor in North America, or do you expect further changes in the geographical mix over time as well?

Brian Chesky, CEO

Yes, Dave, want to take this one?

Dave Stephenson, CFO

Sure. Regarding urban travel, it continues to constitute a higher percentage of our overall mix, though it’s not entirely back to what it was in 2019, and it may never quite be, because we see significant strength in our non-urban segment, but urban travel is strengthening each quarter. Across cross-border international travel, we’re not back to 2019 levels. Gross nights were like 48% were cross-border back in 2019, and it continues to represent a growing percentage each quarter without quite bouncing back to where we were in 2019.

Operator, Operator

We will move next to Mark Mahaney at Evercore ISI.

Mark Mahaney, Analyst

Okay, thanks. David, could I ask you to adjust the over-earning question that the free cash flow margins are truly very impressive. You’ve been at 40% plus for the last three quarters on a trailing 12-month basis. What would cause those margins to go materially higher or lower from here? Or is there a reason to think they are roughly sustainable? Can I just ask about Categories? I know someone asked about this earlier, but Brian, these features can sometimes take quite a long time to adopt broadly and doubt they can create a major impact. How long do you think it’s going to take for Categories to be widely used and effectively help people better match up that supply with demand?

Brian Chesky, CEO

Alright, so David, you can take the first one, and then I’ll take Categories.

Dave Stephenson, CFO

Excellent. Regarding free cash flow and margins, I am really proud of our delivery in free cash flow and free cash flow margin. It highlights substantial improvements in profitability. We’ve radically adjusted our marketing expenditures to be lower and made consistent improvements in variable costs. We are reaping gains in our fixed cost leverage and being incredibly disciplined in fixed cost growth, which will continue. All of these will serve as tailwinds to maintaining or increasing free cash flow margins over time. Average daily rates could moderate next year, but improvements in variable costs and fixed cost leverage should enable us to preserve or even boost free cash flow margins longer term. We may also see greater expansion in free cash flow margin from incremental services or activities that we add for guests or hosts over time. There aren’t immediate announcements to anticipate significant changes in ‘23, but we’re focused on that area and will drive revenue.

Brian Chesky, CEO

Yes, and regarding the timing for broader adoption of Airbnb Categories, it’s a great question. Customers of travel have been, as you know, trained over the last 25 years to search a certain way. This means going to a website, entering a search term, and refining results, comparing sites, and then making a booking. We believe this year will be a transition to retrain customers on how to search for travel on Airbnb. We expect to see real momentum on this next year, given that we are already seeing people discover homes they hadn’t previously known. There will be upgrades next week in November and beyond. We see this as a chance for us to enhance the browsing experience, and people becoming more flexible on travel leads us to believe they will be open to more ideas from Airbnb.

Operator, Operator

We will move to Stephen Ju at Credit Suisse.

Stephen Ju, Analyst

Okay. Thank you. Hi, Brian.

Brian Chesky, CEO

Hey.

Stephen Ju, Analyst

So, you took off the China supply, but maintained your outbound business. It’s probably a little too early to tell, and there probably isn’t a lot of outbound happening as of yet. But is there anything we should worry about from a customer acquisition funnel or retention standpoint? The Airbnb use case for the Chinese traveler is going to get reduced to international-only versus what was previously domestic plus international?

Brian Chesky, CEO

Yes, Stephen, I mean, the crown jewel of our China business was always the outbound business. The reason is the take rate was higher for the outbound business than it was for the domestic business. The inventory is more unique. There is less competition, and the average daily rate is higher. The outbound business was always the ideal portion of our business. We are focused on that now. Not many people are leaving China right now, but we want to be prepared for when they do, which they will eventually. So, the two things we are doing to prepare is, number one, we are going to continue investing in our brand in China. Secondly, if people are traveling and leaving China, they’re likely going to nearby countries, such as Southeast Asia, Korea, and Japan. Eventually, they will travel further to Europe, and then presumably to the United States, especially coastal cities. This is how travel may recover. What we need to do is ensure there is enough supply in these areas and continue investing in our brand in China. By just focusing on the outbound business, we can concentrate all our investments and be more cost-efficient. I’ve learned that the more focused we are, the more likely we are to achieve results, so we feel confident about prospects for China.

Operator, Operator

We will move next to Eric Sheridan at Goldman Sachs.

Eric Sheridan, Analyst

Thanks for taking the question. Maybe a two-parter, if I can, on investment strategy. We have a lot of technology companies discussing the slowing hiring atmosphere, possibly pruning talent from their organizations. How do you think that positions you to upgrade talent within the organization, Brian? How are you considering hiring goals over the next 12-18 months? The second part is that a slowdown in the economy wouldn’t present an existential crisis like what travel experienced in Spring 2020. What’s your broader philosophy of investing through a soft patch in the economy or more closely aligning revenue growth with expense growth if you saw challenges over a couple of quarters? Thanks.

Brian Chesky, CEO

Yes. Hey Eric, it's good to talk to you. Yes, let me recap how we think about expense management and investments. Before the pandemic, we were nearly a breakeven business doing just under $250 million in loss from an EBITDA perspective. When the pandemic hit, we lost 80% of our business and completely changed our cost structure. Out of that, we made a decision that we wouldn’t wait for another crisis or recession to change our investment strategy or how we run the company; we would adopt a lean approach regardless of the economy. We aimed to transition from a Navy to a Navy Seal style of company—a small, elite crew. We are only slightly more than 6,000 people as of the start of this year. Prior to the recent economic turn, we had planned to add only 7% to 8% more employees to keep costs low and profits high. Our approach won't change regardless of the economy; a smaller team is more nimble and enables us to grow faster. We've actually become more productive than ever. Our 150 innovations across our core service show this commitment. We are aggressive in attracting talent, but that doesn’t equate to hiring more people. We embrace a lean organization, which is partly due to our functional structure. We do not have multiple marketing departments; we have one. This allows us to operate more efficiently. Regarding the economic outlook, our business model is adaptable. We have a very low expense base and effective marketing; we’ll run well regardless of economic conditions. And we learned lessons faster than many other tech companies because we suffered an early blow. The challenges made us a more focused and better company; we will not forget the lessons from the pandemic.

Dave Stephenson, CFO

As we announced our Live and Work Anywhere policy this year, it has enabled us to recruit the best talent worldwide, regardless of their location. This allows us to attract fewer, but more senior and expert hires.

Brian Chesky, CEO

The lessons we gleaned from the pandemic have helped us adapt and become significantly more efficient. The principles of discipline and focus are here to stay.

Operator, Operator

We will move next to Ron Josey at Citi.

Ron Josey, Analyst

Great. Thanks for taking the question. Perhaps a bigger picture question first, Brian, then for you, Dave, one on guidance. Brian, you discussed earlier how AirCover is a major initiative going forward. We'll hear more about this in the winter release. How might AirCover expand in the long-term as a franchise? We see it for guests, for hosts. But how do you envision it as a long-term franchise?

Brian Chesky, CEO

Yes, you ask an interesting question about the long-term strategy around AirCover. Let’s take an analogy—Amazon, for example. My recollection of Amazon goes back to 20 years ago when their core retail business was an incredible product with the widest selection online at the lowest prices. However, they faced an Achilles heel; they were competing partially against brick-and-mortar stores with immediate product access. Amazon Prime addressed this weakness, much like AirCover aims to address the Airbnb challenge of inconsistent inventories. AirCover lets us take potential inconsistencies off the table, much like Prime did with shipping. Our exceptional accommodation selection at great values can vary, thus, AirCover is the gold standard for the industry. AirCover for hosts is gaining popularity, evidenced by high NPS post-incident, and we are excited to extend that to guests as well. Looking at long-term potential, we want AirCover coverage to be compelling enough for users considering booking elsewhere to take direct bookings on Airbnb only. Upgrades will continue for AirCover, and eventually, we may see user-friendly membership options in the future, but that’s a long-term vision.

Operator, Operator

We will move next to Deepak Mathivanan at Wolfe Research.

Deepak Mathivanan, Analyst

Great. Thanks for taking the questions. First, there has been a lot of press recently about how occupancy on the platform is down for certain hosts. Is this just anecdotal, seasonal, or is there something more to it? Your Q4 guidance is strong, so just trying to get a sense of how much noise is out there. Secondly, Brian, long-term stays have stabilized near 20% of the mix on the platform, even as your room nights grow. You have talked about flexibility and lifestyle helping this growth, but are there broader macro drivers, such as hurdles in the rental markets, impacting this trend? I’m trying to understand how much you're reaching into addressable markets beyond travel currently.

Brian Chesky, CEO

I can take both, and then Dave can feel free to dive in, especially regarding bookings. To answer your question about whether bookings for hosts are down—on a macro level, they are not. The Q3 results speak for themselves. Anecdotes might indicate bookings for some hosts are down while others are up. This could be due to the diverse nature of travel trends. Our search rank algorithm prioritizing all-in pricing could also explain it slightly. Overall, bookings are up, representing a record quarter. As for long-term stays, I believe we have only scratched the surface. A fifth of our nights booked are for stays over a month, underscoring a key trend—flexibility is here to stay. More people will work remotely and adopt hybrid lifestyles. Increasingly, fewer individuals are expected to have traditional 1-year leases. Instead, they will value flexibility, which will manifest in choices to live in different locales periodically. We also anticipate seeing long-term cross-border opportunities. This is an area we can develop, providing the tools necessary for properties suited for longer-term stays.

Operator, Operator

Next, we will move to Lee Horowitz at Deutsche Bank.

Lee Horowitz, Analyst

Great. Thanks. Building on earlier comments about expense growth, given that your advertising strategy has moved away from solely demand-linked performance advertising towards longer-term ROI investments and brand advertising. How do you plan to flex your ad spend during tougher macro conditions versus investing into that environment to maintain customer education on your ever-expanding product set?

Brian Chesky, CEO

Dave, do you want to start with this?

Dave Stephenson, CFO

Sure. If you look at our advertising strategy and spend, it’s expected to remain generally flat from ‘22 over ‘21, and anticipate similar marketing spend as a percentage of revenue for ‘23. We can adjust spending in alignment with revenue, and we are mindful of that. We’re at a low rate already, so I wouldn’t expect a dramatic drop due to potential growth headwinds. Flexibility remains as we can adjust based on revenue for a few hundred basis points as needed.

Brian Chesky, CEO

Additionally, we don’t view marketing primarily as a way to buy customers since, as mentioned earlier, over 90% of our traffic is direct or organic. We take a full-funnel approach to marketing. The top of the funnel is PR and communication, which we believe is a substantial driver for traffic. Product marketing encourages understanding of our features, while performance marketing enables balance and responds to supply-demand dynamics.

Operator, Operator

We will take our final question from Brad Erickson at RBC Capital Markets.

Brad Erickson, Analyst

Hey. Thanks for the follow-ups. First, the number of nights booked came in just a bit lighter than expected. Is this softness leading hosts to adjust their prices or are you seeing your pricing tools influence their decisions? Are you looking to apply some elasticity in case of decreased bookings? Finally, Dave, I know you covered this earlier, but in a different light, do you see booking windows expanding beyond previous years as we head into Q4? Thanks.

Brian Chesky, CEO

Yes. Brad, I will take the first question. I think Dave can take the second one. To respond to your question: Yes, many hosts do adjust their prices as demand rises and falls. However, opportunities exist for us to offer more dynamic tools and more visibility for hosts to make their listings competitive. Hosts typically adjust their prices less frequently than hotels, which may lead to a slower response during periods when prices generally decline. With more dynamic tools, we aim to be even more competitive. I'll pass it to Dave for the next question.

Dave Stephenson, CFO

Yes, well, a couple of things to mention. Nights is an important measure that drives overall demand, but we focus on driving both nights and revenue growth. We want to maintain balance rather than solely optimize for nights. We’re pleased with Q3 results. We observe stable to increasing demand as guests remain willing to travel, as mentioned in our guidance. Booking windows have extended year-over-year; however, some seasonality indicates they’ve slightly decreased from Q3. Guests' confidence in traveling is steering the increased lead times.

Operator, Operator

And that concludes the question-and-answer session. At this time, I will turn the conference back over to Brian for any concluding remarks.

Brian Chesky, CEO

Alright. First of all, thank you all for joining today. I just want to recap and say we are incredibly proud of our results. I believe we are well positioned for the future ahead. I hope you join us in two weeks for the 2022 winter release. You can watch it on our homepage on Wednesday, November 16th, at 8 a.m. Eastern. Thank you all, and I will see you then.

Operator, Operator

And that concludes today’s conference call. Thank you for your participation. You may now disconnect.