Earnings Call Transcript - ABNB Q1 2023

Operator, Operator

Good afternoon, and thank you for joining Airbnb's earnings conference call for the First Quarter of 2023. 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 First Quarter of 2023 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 first quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks, and then spend the remainder of the time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll 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 IR 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

All right. Good afternoon, everyone. Thanks for joining. I'm excited to share our Q1 results with you now. We had a strong start to 2023. We had over 120 million Nights and Experiences Booked in Q1. This was a record high for a first quarter. Our revenue increased 24% year-over-year. Net income was $117 million, making this our most profitable Q1 on a GAAP basis. And free cash flow for the quarter was $1.6 billion. In fact, on a trailing 12-month basis, our free cash flow was $3.8 billion. This represented a trailing 12-month free cash flow margin of 44%. Because of our strong balance sheet, we were able to repurchase $2 billion of our stock in the last nine months. Today, we're pleased to announce that our Board just approved a new repurchase authorization for up to $2.5 billion of our Class A common stock. During the quarter, we saw a number of really positive business trends. First, more guests are traveling on Airbnb than ever before. Nights and Experiences Booked increased 19% in Q1 compared to a year ago, and we've seen our highest number of active bookers despite continued macroeconomic uncertainties. During the quarter, we also saw guests booking trips further in advance, supporting a strong backlog for Q2. Second, more guests are traveling overseas and returning to cities. Cross-border gross nights booked increased 36% in Q1 compared to last year. We were especially encouraged by the continued recovery of Asia Pacific as nights booked in Q1 increased more than 40% year-over-year. Additionally, international travel from other regions to Asia Pacific increased 160% during the quarter compared to this time last year. Cross-border nights booked to North America also increased, with 34% of year-over-year growth in Q1 relative to 31% last quarter. We also saw high-density urban nights booked increased 20% year-over-year. Third, guests continue to use Airbnb for longer stays. In Q1, long-term stays were 18% of total gross nights booked. Over the past three years, we've seen new use cases emerge as guests across all regions and age groups use Airbnb for long-term stays. Finally, supply growth continued to accelerate. In Q1, we grew supply 18% year-over-year, up from 16% in Q4. We saw double-digit supply growth around the world with the fastest growth in North America and Latin America. Urban and non-urban supply growth both grew 18%. Looking ahead, we remain focused on our three strategic priorities. First, we're making hosting mainstream. We want hosting to be as popular as traveling on Airbnb. To do this, we're raising awareness around hosting, making it easier to get started and providing even better tools for our hosts. In fact, in every quarter since we went public, we have seen acceleration in the year-over-year growth of our total active listings. Second, we're perfecting our core service. We want people to love our service, and that means obsessing over every detail. Last week, we introduced over 50 new features and upgrades as part of our 2023 Summer Release, all based on direct feedback from our guests and hosts. This included pricing tools, transparent checkout instructions, faster customer service, and more. We also introduced Airbnb Rooms, an all-new take on the original Airbnb. Finally, we are expanding beyond our core. We have some big ideas for where to take Airbnb next, building the foundation for new products and services that we plan to launch in 2024 and beyond. At the same time, Airbnb is still under-penetrated in many markets, and we are increasing our focus on these less mature markets, already seeing positive results, such as in Germany and Brazil, which are now two of our fastest-growing markets. Before we go to questions, I want to talk about our 2023 Summer Release. Last week, we introduced the most extensive set of improvements ever to Airbnb based on feedback from our community. We took a design-driven approach to perfecting our core service. We created a blueprint of the entire experience: every screen, every policy, every interaction with customer service. We then analyzed millions of calls and thousands of social media posts. And we hosted listening sessions with guests and hosts all over the world. We mapped all this feedback against our blueprint and prioritized the most common issues. On May 3, we introduced Airbnb Rooms and unveiled over 50 new features and upgrades for guests and hosts. Let me share a few highlights. First, guests can now view the total price with fees before taxes across the entire app. Secondly, hosts can now see how other Airbnbs are priced in their area, including listings that are in high demand and those that are not. Lastly, we introduced simple ways for hosts to add discounts and promotions. Longer stays can be expensive; we’re reducing our fees after three months. U.S. guests can save money by paying with their bank account, and hosts can set monthly discounts and offer flexible cancellations. Most importantly, every Airbnb Room comes with a host passport, helping guests get to know their host before they book. Our 2023 Summer Release has exceeded our expectations with overwhelmingly positive press coverage and significant social media engagement. The crucial takeaway is that our guests and hosts feel like we're listening to their top concerns.

Operator, Operator

We'll go first to Eric Sheridan at Goldman Sachs.

Eric Sheridan, Analyst

I want to come back to the Summer Release from a couple of days ago and come back to the concept of room. Can you help us better understand what you think that will do in terms of generating supply growth and coupled with it generating demand and new traveler growth to the platform as you look out over the next 12, 18 months?

Brian Chesky, CEO

I'm very excited about Airbnb Rooms because Airbnb Rooms is one of the most affordable ways to travel on Airbnb. We've been doing a lot of listening to guests on Airbnb. They told us that, especially in this economic environment, they are looking for affordable ways to travel on Airbnb. The average price of Airbnb Rooms is $67 a night, making it an incredible value. We aim to capture this affordability segment that an increasing number of people will be interested in, especially among the next generation of travelers. We've learned that during the pandemic, people weren't comfortable staying with one another, so we’ve introduced the Airbnb Host Passport to help guests understand who they’re staying with before they book. We also added new privacy features, and we think all these features will help Airbnb Rooms succeed. Additionally, we have a major brand campaign coming this summer to promote Airbnb Rooms, which we believe will bring in a new cohort of younger travelers.

Operator, Operator

Next, we'll move to Justin Patterson at KeyBanc.

Justin Patterson, Analyst

So if I can, first, to follow up on Eric's question around the Summer Release. Brian, you recently made some comments about AI being a meaningful opportunity for Airbnb going forward. Could you talk about how that just reshapes or helps you reimagine the travel experience going forward and some of the initiatives you might lean into around AI? And then Dave, I appreciate you only give guideposts on the full year versus explicit guidance. Given the room night comp and expense shift in Q2 as well as the dynamic around new pricing tools in the Summer Release, could you help us understand a little bit more about some of the assumptions that go into the second half and about flattish year-over-year margin?

Brian Chesky, CEO

This is certainly the biggest revolution since I came to Silicon Valley. It's as significant as the Internet, and it could potentially be even bigger. Our approach is to build on base models like GPT-4 and to design interfaces on top of AI. I believe Airbnb can be quite different by building robust profiles about our users and asking fundamental questions about who they are and what they want. We aim to build the ultimate AI concierge, which can understand our users and customize their experiences accordingly. One of the biggest benefits of AI for Airbnb is in customer service. AI can enhance our service quality, making it faster and cheaper, augmenting our agents. We're also focused on improving the user interface, ensuring it is multimodal and immersive for travel experiences. Additionally, our investment in AI will significantly increase the productivity of our developers, allowing greater throughput. I'm very excited about both the short-term and long-term potential that AI brings to Airbnb.

David Stephenson, CFO

We're proud of the progress we've made in operating efficiency. During COVID, we made difficult choices to streamline the company and focus on our core competencies, which has improved our profitability. We've reduced our headcount by 25%, and we continue to make improvements in our marketing efficiency and operating costs. We anticipate stabilization in our average daily rates (ADRs), and our ongoing improvements in community support and infrastructure will offset any pressures from ADRs that we expect.

Operator, Operator

We'll go next to Mark Mahaney of Evercore ISI.

Mark Mahaney, Analyst

I have two questions. Firstly, in the online travel space, marketing costs appear to be more front-end loaded this year. Dave, could you share your thoughts on why that is? Secondly, Brian, could you elaborate on the examples from Brazil and Germany that you mentioned? It would be helpful to understand any specific actions you took that led to those markets becoming two of your fastest-growing regions, as this could inform our approach in other markets.

David Stephenson, CFO

In terms of the front-loading of marketing costs this year, it’s about learning how to operate better. We have seen great success in our brand marketing campaigns and want to get ahead of our peak travel summer season. We decided to increase our marketing spend earlier in the year to maximize our investment for the full year. Our marketing expenses as a percentage of revenue will remain largely the same in 2023 as they were in 2022.

Brian Chesky, CEO

Airbnb operates in 220 countries. Years ago, we developed a comprehensive playbook for international expansion. This includes PR, localized products, and a robust brand marketing campaign. Our international expansion strategy was temporarily sidelined during the pandemic. Now, with our increased profitability, we are ready to focus on global markets like Germany and Brazil, utilizing our full-funnel approach which includes PR and collaboration with influencers. This has resulted in these countries becoming two of our fastest-growing markets. We're looking to replicate this playbook in other regions, especially Asia and Latin America.

David Stephenson, CFO

The playbook has been very effective for us. We organized our traffic to be primarily direct and unpaid, which has been the case since COVID and continues to support our growth.

Operator, Operator

We'll move next to Richard Clarke at Sanford Bernstein.

Richard Clarke, Analyst

Two, if I may. I guess the full year results, you mentioned how you control supply against the demand. I guess at this point, you're talking about supply growing at about 18%, but you're pointing to Q2 demand growing maybe more like 10% to 12%. Which one of those numbers is the right way to think about growth going forward? Should we be extrapolating the 18% or the 10% to 12%? And then just very quickly, you obviously shifted to showing the hold prices. Any impact you've seen from that? Is that impacting conversions? Is that impacting supply? What's been the impact of that change?

Brian Chesky, CEO

Our long-term growth will depend on our supply. When demand grows faster than supply, prices generally go up. This has raised concerns about affordability. Last year, we made accelerating supply growth a strategic priority to make Airbnb more accessible. We launched the initiative 'Mainstreaming Hosting' to make hosting as common as traveling. This year, we've seen the highest number of active listings, and our focus remains on ensuring pricing remains affordable. The total price display we implemented addresses the issue of transparency in pricing.

David Stephenson, CFO

The implementation of the total price display has gone well, resulting in a neutral impact overall on our business. Customers who prioritize seeing total pricing tend to select that option, while others can opt for the traditional pricing display. The 10% to 12% growth in nights is not our long-term ambition; it's influenced by the tough comparisons from last year.

Operator, Operator

We'll take our next question from Brian Nowak at Morgan Stanley.

Brian Nowak, Analyst

I have two. The first one, Brian, just to go back to your last answer about how affordability is an issue in the economy. On the Airbnb platform, have you seen any signs of trade down or shorter stays or price changes or lower traffic conversion impacts from a more price-sensitive user on the platform yet? That's the first one. Then the second one, Dave, actually, to go back to your last answer as well. I think in the past, you've spoken about how much moving pieces around the shape of the year, but 2022 was a reasonable way to think about the shape of the room nights or bookings for the year. How should we think about that now that sort of thinking through the comp structure and how the 2Q, 3Q comps are quite similar?

David Stephenson, CFO

It's challenging to perfectly predict the exact shape of demand, especially given past impacts like Omicron's effects on travel. We anticipate stable demand for the back half of the year, with 25% more bookings on the books at this time this year compared to this time last year.

Brian Chesky, CEO

Currently, the most price-sensitive guests are in the U.S. The lowest price listings have the highest occupancy, indicating a strong demand for lower-cost options. We believe our rates need to continue normalizing. The prospect for Airbnb Rooms is positive, as it caters to budget-conscious travelers, including younger generations who are first-time travelers.

Operator, Operator

Next, we'll go to Ron Josey at Citi.

Ronald Josey, Analyst

Brian, you talked about expanding the core. Can you provide insights into new products or services you're envisioning for the Airbnb economy? Also, how is the Experiences product progressing?

Brian Chesky, CEO

Before the pandemic, we were already focused on expanding beyond our core. We had divisions for Homes, Experiences, and more. The pandemic required us to streamline and perfect our core service first. Now, as we have strengthened our core service, we are prepared to expand. We have many exciting ideas for new products that we will be shipping beginning next year as part of the 2024 Summer Release. Our goal is to continue learning, building trust, and creating opportunities for expansion beyond our core offerings. As for Experiences, I believe there remains a significant opportunity for someone to build a robust product around it. We have taken time to re-evaluate and improve it to ensure it aligns with the current market demands.

Operator, Operator

We'll go next to Mario Lu at Barclays.

Mario Lu, Analyst

The first one is on ADRs. It came in better than expected in the first quarter. You mentioned that India saw 8% growth. Can you elaborate on that region's strength? Is full year growth still expected to be down mid-single digits?

David Stephenson, CFO

Average daily rates have stayed persistently high across the globe, particularly in North America. We have implemented several tools to enhance affordability for our guests. Full year expectations for ADR growth remain in the mid-single-digit range with no changes.

Brian Chesky, CEO

We believe the best loyalty program stems from people loving your products. Our strong direct traffic indicates that our guests appreciate the Airbnb experience. While we haven’t introduced a traditional loyalty program, we continuously consider innovative methods to reward our most loyal guests.

Operator, Operator

We'll take our next question from Nicholas Jones of JMP Securities.

Nicholas Jones, Analyst

You're adding a lot of great solutions for hosts and guests, and the outlook comments in the release sound like this is contributing to some ADR pressure. How do you balance the efforts to continue to increase supply while redistributing demand to available supply? Is there a risk of incremental ADR compression as a result of some of these efforts?

Brian Chesky, CEO

Our ability to balance supply and demand elegantly is part of our secret sauce. We believe fast-growing markets for supply will also attract increasing demand. Performance marketing allows us to effectively balance supply and demand globally. By adding more listings, we provide better value, which will naturally attract more demand.

Operator, Operator

We'll move next to Jed Kelly with Oppenheimer.

Jed Kelly, Analyst

Just going back to the comment in the Shareholder Letter of your current backlog of nights being approximately 25% stronger than it was a year ago, can you just reconcile that with the 2Q guide? And how should we expect normal seasonality trends going forward? And then my second question, Brian, is you've done a great job with apartments and rooms growing supply in the U.S. Can you take that apartments' initiative and implement it in Europe and other regions of the world?

David Stephenson, CFO

The backlog's strength shows strong demand; however, it shifts earlier, indicating sustainable demand for the back half of the year. The total demand is higher, but that does not guarantee each period will show the same growth. Regarding the apartments initiative, we aim to expand our successful U.S. experience to international markets, adapting it as needed for new regions.

Brian Chesky, CEO

We believe this initiative can be expanded internationally. The U.S. has served as a proof of concept, and we plan to introduce similar models in Europe, Latin America, and Asia if results continue to meet expectations. Airbnb-friendly apartments are our entry to engage with landlords directly.

Operator, Operator

We'll move next to Justin Post at Bank of America.

Justin Post, Analyst

Great, a couple of questions. I guess the first thing about competition. As you move into Europe, you might see a big competitor in booking. Can you talk about your model where you charge both the host and the guest versus there's more heavily weighted to the host? Do you think that works well in Europe? And how do you think about the differences there? And then maybe for Dave, on the marketing spend, it definitely seems like the timing is different. How do you think about marketing ROIs this year versus prior years? How should we think about that?

David Stephenson, CFO

Our marketing strategy has been successful. Our traffic remains predominantly direct and unpaid. It signals the high returns we witness. Brand marketing continues to perform well, and we're maintaining high ROIs there.

Brian Chesky, CEO

Airbnb employs both guest and host fees, giving us a flexible approach in Europe. Since we have the total price display, the key focus for guests is the overall total cost of stay. As long as we maintain competitive pricing, we have not seen significant behavioral changes as a result of this structure.

Operator, Operator

We'll go next to Stephen Ju at Credit Suisse.

Stephen Ju, Analyst

Brian, can you talk about the eventual rollout plans for pay over time to other parts of the world like Brazil? Also, how do you view the potential demand changes as a result of the upcoming rollout of higher service levels for budget travelers?

Brian Chesky, CEO

We are focused on establishing our payment services in the U.S. before global expansion. Given that many countries have a culture of installment payments, we're investigating expanding this to Brazil and other emerging markets. The affordability strategies will indeed help unlock further demand, especially among the next generation of travelers.

Operator, Operator

We'll go next to John Colantuoni at Jefferies.

John Colantuoni, Analyst

Active listings have expanded more this quarter than in recent quarters. How do these new active listings compare to your existing portfolio? What portion of the hosts are individuals, urban versus suburban versus vacation destinations? Then on sales and marketing with front-end loaded spending on brand investments, could you walk through the shape of marketing throughout the year?

David Stephenson, CFO

Our marketing strategy is indeed more front-loaded this year, which is reflected in our investments. As for active listings, individual hosts continue to represent 90% of our hosts, reflecting continued interest from individuals entering the market. We actively cater to the needs of these hosts through our tools and support.

Brian Chesky, CEO

We're seeing the expansion of our active listings where there’s demand. Urban growth is balanced as cities regain popularity, leading to stable growth.

Operator, Operator

We'll move next to Doug Anmuth at JPMorgan.

Douglas Anmuth, Analyst

I just want to ask about long-term stays and if it moves down versus recent periods. Are long-term stays slowing more with normalization in the economy or is it more of a mix shift issue towards shorter stays?

Brian Chesky, CEO

Long-term stays have been our fastest-growing segment, a trend amplified by the pandemic. While some normalization is occurring, I remain very bullish on the long-term stay category. There will be more flexibility in how and where people work, too. We've introduced various affordability upgrades to support long-term stays, like flexible cancellations and better payment options. Our expectation is that new systems will increase long-term stays for Airbnb.

Operator, Operator

We'll move next to Lee Horowitz at Deutsche Bank.

Lee Horowitz, Analyst

Brian, could you elaborate on how the competitive landscape has evolved? What changes have you observed during the last 12 months?

Brian Chesky, CEO

Airbnb has gained considerable market share in the travel industry, becoming more than twice the size of many competitors. We see recovery in urban and cross-border markets, yet we remain focused on innovation and our unique offerings. We're committed to mainstreaming hosting, improving our core service, and reaching more customers through our focus on exclusive offerings.

David Stephenson, CFO

We are proud of maintaining strong margins while absorbing growth costs. Our operating structure is rigorously managed, and we will continue to invest while keeping profitability in mind for long-term yields.

Operator, Operator

And that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Brian Chesky for closing remarks.

Brian Chesky, CEO

Thank you for joining us today. We had a strong start to 2023. Revenue was $1.8 billion, which is 20% higher than a year ago. Net income and adjusted EBITDA were both records for Q1, and our trailing 12-month free cash flow was $3.8 billion, representing a free cash flow margin of 44%. I'm proud of the progress we made, particularly our product improvements and features launched last week. I'm excited for the road ahead. Thank you all, and we'll talk next quarter.

Operator, Operator

And that does conclude today's conference. Again, thank you for your participation. You may now disconnect.