Airbnb Inc. (ABNB, Financial), a leading online platform facilitating accommodation bookings and rentals, showed robust recovery trends in its first-quarter earnings report.
Last week, the company reported it benefited from a surge in demand for domestic travel, longer-term stays and popularity of rural destinations, which helped it surpass analysts' projections in terms of both earnings and revenue.
Although it showed resilience amid the evolving travel landscape, the company was cautious in its guidance for the second quarter. Airbnb cited challenging comparisons due to the unprecedented pent-up demand witnessed during the post-pandemic recovery period in 2022 as one of the main reasons behind the lackluster guidance. As a result, the stock fell 10%.
Domestic travel and long-term stays drive growth
Airbnb recorded net income of $117 million compared to a net loss of $19 million during the same period in 2022. This marked the first time the company achieved profitability in the first quarter of a fiscal year on a GAAP basis.
Revenue grew 20% year over year, reaching $1.82 billion, with the U.S. accounting for 48% of total global revenue. The growth was driven by domestic travel, longer-term stays and the rising popularity of rural destinations, while profitability was boosted by reduced fixed costs and variable marketing expenses.
Exhibit 1: Quarterly net income
Source: Airbnb’s shareholder letter
In terms of booking activity, Airbnb experienced solid growth in nights and experiences booked, along with stable average daily rates. The ADR was $168 and the company reported 121.1 million nights and experiences booked, reflecting a 19% increase year over year. Long-term stays, which are 28 nights or longer, accounted for 18% of total gross nights booked during the quarter. With an increase in returning guests and first-time bookers, the company recorded a gross booking value of $20.4 billion. This highlights the increasing customer loyalty and the expansion of Airbnb’s customer base.
Future demand remains strong, with the company reporting a backlog of nights and experiences booked approximately 25% stronger than the previous year. Cross-border travel also saw significant growth with a 36% increase. This was driven by the recovery of the Asia Pacific region, which registered a 40% increase in nights booked compared to the previous year. Additionally, cross-border nights booked in North America showed sequential growth of 34% in the first quarter. Urban destinations also experienced growth, with a 20% year-over-year increase in high-density urban nights booked.
Airbnb demonstrated consistent growth in its supply, achieving an 18% increase in supply compared to the previous year. This growth was observed across all regions and market types, with North America and Latin America experiencing the fastest growth. Both urban and non-urban supply saw an 18% year-over-year increase.
Its financial performance was also bolstered by strong cash flow. The company recorded its highest-ever free cash flow of $1.6 billion, which was primarily driven by revenue and booking expansion, as well as an increase in the net margin.
While Airbnb had a solid financial performance and positive market trends, it issued a warning regarding second-quarter results. The company expects unfavorable year-over-year comparisons due to the surge in bookings that occurred in 2022 after the Omicron variant of the Covid-19 subsided. Consequently, the company projected its second-quarter revenue to be between $2.35 billion and $2.45 billion, slightly below the average forecast of $2.42 billion. To address this challenge and maintain its growth trajectory, Airbnb plans to invest more in product innovation and marketing during the second half of the year.
The company expressed optimism about the strong start it had in 2023 and looks forward to another robust summer travel season. In line with this initiative, Airbnb aims to continue attracting more guests and expand its loyal customer base.
Airbnb's decision to exit the Chinese market and focus on outbound travel
The company decided to suspend its domestic business in mainland China last July and refocus its efforts on outbound travel, recognizing the potential in this market.
Airbnb's exit from the Chinese market aligns with a trend among several Western internet platforms with challenges related to the transfer of data. The complexity and high costs associated with operating in China, exacerbated by the pandemic and the Chinese government's efforts to curb the spread of the virus, have led to business disruptions and strategic decisions to withdraw from the market. Despite accounting for approximately 1% of Airbnb's overall business, suspending its domestic operations in China could have a notable influence on the company's growth in the Asian region. This is particularly significant considering China's position as one of the top 10 most visited countries in Asia. However, in an earnings presentation in 2022, CEO Brian Chesky said, "China is primarily an outbound business. People go to China but primarily they travel to China and they go to other communities, especially around Asia."
According to McKinsey, China was the leading global market for outbound travel, with an impressive 150 million outbound travelers who collectively spent $255 billion on their journeys in 2019. Among these travelers, leisure travel accounted for 65% of the total. However, due to the pandemic and China's zero-Covid policy, significant challenges arose, including cross-city travel restrictions, border closures and quarantine requirements for international arrivals. Nevertheless, as of January, these restrictions were lifted, marking the beginning of a rebound in demand.
Recent travel data indicates a substantial increase in outbound bookings from mainland China in the first quarter, with a remarkable 331% increase compared to the previous year. However, these numbers only represent 21% of the outbound booking levels recorded in 2019. On the brighter side, a recent survey by McKinsey revealed significant pent-up demand for outbound travel from mainland China, with 40% of respondents expressing their desire to travel internationally for their next trip.
Asian countries and regions remain highly popular destinations for Chinese travelers, accounting for over 80% of the growth. Among these destinations, Thailand, Singapore and Malaysia are the top three choices in terms of outbound passenger trips from mainland China. However, the recovery of travel also hinges on the availability of airline capacity, which presents its own set of challenges. The international airline capacity, according to OAG, stood at 37% of its availability in April 2019. Nonetheless, McKinsey's report highlights that Chinese carriers have mostly operational or ready-to-be-redeployed widebody fleets, suggesting a positive outlook for outbound travel in Asia.
Exhibit 2: Fleet availability in China
Source: McKinsey & Company
The momentum for outbound travel from mainland China is expected to pick up further during the summer. A report by Mastercard (MA, Financial) indicates that compared to the period between January 2019 and March 2020, the average travel duration has increased from nine to 11 days. Additionally, the per capita budget for outbound tourists has risen by 16%, from 34,300 yuan to 39,800 yuan (approximately from $4,935 to $5,727).
Although there are mixed signals, the strong pent-up demand indicates a positive trajectory for the recovery of this important market segment. By focusing on outbound Asia travel, Airbnb hopes to tap into the growing demand for alternative accommodation and experiences among Chinese travelers, who are looking for more authentic and diverse options.
Three strategic priorities
The company outlined three strategic priorities to drive its business initiatives and enhance the user experience.
One of the priorities is to make hosting mainstream, just like traveling on Airbnb. The company aims to raise awareness about hosting, simplify the process of getting started as a host and provide improved tools for hosts. This focus has yielded positive results, with the year-over-year growth of total active listings (excluding China) accelerating in each quarter since the company went public. In the first quarter, total active listings grew by 18%, surpassing the growth rate of 16% in the previous quarter.
The second priority is to perfect the core service by incorporating user feedback. Management said affordability is important, especially in the current economic environment, and aims to provide affordable stays for guests. To address rising prices, the company introduced over 50 new features and upgrades as part of its 2023 Summer Release. One significant addition is Airbnb Rooms, which offers an alternative take on the original concept. Airbnb Rooms allows guests to book private bedrooms with access to shared spaces, such as the kitchen or living room. This new category includes over 1 million listings, redesigned filters and enhanced privacy features. In an interview with The Verge, Chesky said:
"There’s really two reasons. The first is actually just affordability. It’s pretty obvious that if you stay in a room, you’re not paying for the whole home. You get access to lots of the home. And the average price per night for a room on Airbnb is just $67 a night. And you know, we’ve been getting a lot of feedback from people and complaints that Airbnbs are expensive, and well, they’re not all expensive, especially these, if you’re willing to stay with people. And the second is I think that the pandemic has left a lot of people isolated. And I think there’s a lot of people who want to take a trip, they want to go to another city. And I think this has been one of the best ways to experience a new city like a local."
In anticipation of an exceptional travel season, Airbnb has taken significant steps to enhance the overall user experience based on valuable feedback from its community. These improvements are aimed at ensuring guests have a seamless and enjoyable booking process. Among the notable enhancements is the introduction of a total price display, which includes all applicable fees before taxes, across the entire Airbnb app. This transparency allows guests to have a clear understanding of the cost associated with their stay right from the beginning.
To further streamline the booking process, the company now provides transparent checkout instructions, improved map functionality and redesigned wishlists to offer a more intuitive and user-friendly interface. These recent enhancements build upon Airbnb's reputation for providing a great user interface and aim to boost the booking experience to new heights. Furthermore, the company has revealed its plan to integrate artificial intelligence features, including GPT-4, into its platform in the coming year to further improve the user experience and implement significant changes. During the earnings call, Chesky said, "We're going to be building GPT-4 into our interface, and I think that's the real opportunity for us. So, you should see some big changes next year with AI built into our app."
Recognizing the importance of flexibility, the company has also introduced more payment options to cater to the diverse needs of its users. Airbnb formed a partnership with Klarna, which will allow guests in the U.S. and Canada to pay for their stays in four interest-free installments over six weeks. Furthermore, for bookings exceeding $500, guests in the U.S. can apply to pay on a monthly basis, providing greater financial flexibility and convenience. The company plans to expand this payment feature to additional countries as the year progresses, extending its accessibility to even more guests worldwide.
In parallel with these guest-focused enhancements, Airbnb is launching 25 improvements for hosts. These updates include new pricing tools, a yearly view of the calendar for better planning and enhanced messaging features to facilitate efficient communication. These improvements aim to empower hosts with the tools and resources necessary to maximize their experience and provide exceptional stays for their guests.
The third strategic priority is to expand beyond the core business. While Airbnb operates in over 220 countries and regions, it recognizes that there is still untapped potential in many markets. Therefore, the company is increasing its focus and investments in less mature international markets. This approach has already proven to be successful, with Brazil and Germany becoming two of the fastest-growing markets for Airbnb with gross nights booked compared to 2019 growing by 114% and 70%.
Takeaway
Airbnb showed resilience in the first quarter with the implementation of its new strategic priorities. While the decision to suspend its domestic business in China may seem like a setback, it aligns with the evolving landscape of the Chinese market and allows its to concentrate on its global expansion efforts.
The second quarter may present some challenges due to the high comparison base of bookings in 2022, but the company remains optimistic about its long-term growth prospects. Its commitment to enhancing the guest and host experience, along with its dedication to global expansion and technological advancements, positions it for continued success.
