We expect continued volatility in these trends and fluctuations from month to month as the continued impact from COVID-19 is not linear across geographies, as some countries and cities have recently enacted new lockdowns and prohibitions on travel, and as COVID-19 is continuing to materially adversely affect our business and financial results.
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Multiple Resilient Categories Were Less Impacted and Showed Strong Recovery
We believe that the recovery in the second and third quarters of 2020 is attributable to the renewed ability and willingness for guests to travel, the resilience of our hosts, and relative strength of our business model. From December 31, 2019 through September 30, 2020, active listings remained stable at approximately 5.6 million despite the decline in booking activity on our platform due to COVID-19. Against an otherwise highly negative travel backdrop, there are several areas of our business that have shown resilience, notably, domestic travel, short-distance travel, travel outside of our top 20 cities, and long-term stays. While we believe that travel will change as a result of COVID-19, the adaptability of our business suggests that we are well-positioned to serve this dynamic market as it continues to evolve and recover.
To provide additional information on the impact of the COVID-19 pandemic on our business, we have included below year-over-year comparisons of monthly booking trends in the fourth quarter of 2019 and the first nine months of 2020.
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Domestic travel represents travel within the same country, when the guest’s origin country is the same as the destination country. Our business historically has been weighted toward cross-border travel, which accounted for 49% of nights in 2019 relative to our estimate for the travel industry that 20% of total overnight paid trips come from cross-border travel. While air and cross-border international travel has been significantly impacted by COVID-19, domestic travel around the world has been extremely resilient. In September 2020, global domestic nights and experiences booked were 77% of our gross nights and experiences booked compared to 52% in January 2020, and domestic nights and experiences grew 14% year-over-year. Taking into account the higher daily rate during this period, domestic Gross Booking Value before cancellations and alterations grew 35% year over year in September 2020. |
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Short-distance travel within 50 miles of guest origin has been highly resilient, even at the peak of the business interruption in April. Short-distance stays were one of the fastest growing categories prior to the COVID-19 pandemic. This growth was further bolstered by the COVID-19 pandemic, as many guests chose short-distance trips instead of long-distance travel. From May through September 2020, this category grew year over year. We have also seen stays between 50 miles and 500 miles from guest origin recover and return to year-over-year growth since June 2020. Taking into account the higher gross daily rate during this period, Gross Booking Value before cancellations and alterations for travel distance under 500 miles grew 38% year over year in September 2020. |
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Travel outside of our top 20 cities (based on 2019 GBV) has been more resilient than those booked in our top 20 cities. While gross nights and experiences booked in our top 20 cities by 2019 GBV were down 52% in September 2020 compared to September 2019, those booked outside of our top 20 cities based on 2019 GBV were down only 19%. Taking into account the higher gross daily rate during this period, Gross Booking Value before cancellations and alterations for travel booked outside of our top 20 cities was flat year over year in September 2020. During a period of travel restrictions, community lockdowns and social distancing, smaller destinations have seen relative strength, as guests seek more remote destinations outside crowded urban centers. We believe this demonstrates the strength of our global network and the diversification of our business. |
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Long-term stays are stays on our platform of at least 28 nights. Long-term stays were one of our fastest growing categories in 2019 as guests increasingly chose Airbnb listings to meet their need for stays of greater length. We believe the long-term stays category represents a different use case than leisure travel, and as a result, was not as impacted as dramatically by COVID-19. While the category of one to 27 nights (short-term stays) was down 81% year over year in April, long-term stays were down only 13% year over year and saw year-over-year growth from May through September 2020. Taking into account the higher gross daily rate during this period, Gross Booking Value before cancellations and alterations for long-term stays was up 50% year over year in September 2020. |
Recent Developments Note: Table totals may not properly sum from components due to rounding
Overall, the historical mix of gross nights and experiences booked by travel distance, corridor, and top 20 cities is similar to the historical mix of revenue by those categories. Because long-term stays have lower GBV per night and lower service fees, the revenue by trip length is weighted more toward short-term stays.
COVID-19 Cost Reductions Position Our Business for Improved Financial Performance
In response to the spread of COVID-19 and the resulting material decrease in GBV, we undertook an internal review of our cost structure, ultimately making changes to improve the strength of our business in the long term. Specifically, we significantly reduced our fixed and variable costs, which we believe will result in improved operating leverage as we emerge from COVID-19. We rapidly made changes to manage our expenses in a period of material business interruption, which included the following, among others:
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Suspending substantially all discretionary marketing program spend; |
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Reducing full-time employee headcount by approximately 25%; |
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Setting expectation for the potential of no employee bonuses for 2020 and reducing executive team member salaries for six months; |
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Significantly reducing all discretionary spend; |
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Suspending all facilities build-outs and significantly reducing capital expenditures; and |
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Significantly reducing our contingent workforce. |
These headcount reductions and other restructuring actions are expected to result in charges for 2020 ranging between $135 million and $150 million. In conjunction with these actions, we have realigned our organizational priorities to further increase our focus on individual hosts and brand marketing, while pausing our investments in newer areas such as transportation and content and reducing performance marketing. We have done this to sharpen our focus on investments that directly strengthen our community and to increase the efficiency of our operations as the travel industry begins to recover from the COVID-19 pandemic. We believe these changes should allow us to more effectively manage our business and improve our financial operating results.
Key Factors Affecting Our Performance
Ability to Attract and Retain Hosts
Two of our founders, Brian and Joe, were our first hosts, and hosts are the foundation of our community. We are focused on continuing to grow and retain the number of hosts who choose to list their spaces and experiences on our platform, which is critical to our long-term success. We believe that we have the largest collection of unique listings available for guests to book, based on our host surveys and our analysis of public information of listings available on other platforms.
We grow our GBV by attracting new hosts who add listings to our platform and by increasing the number of nights and experiences that are available to book. As of December 31, 2019, we had 4.0 million hosts on our platform and 5.7 million active listings, compared to 3.3 million hosts and 4.4 million active listings as of December 31, 2018 and 2.7 million hosts and 3.3 million active listings as of December 31, 2017. This represents a 20% increase in hosts and 29% increase in active listings in 2019 as compared to 2018 and a 23% increase in hosts and 32% increase in active listings in 2018 as compared to 2017. From December 31, 2019 through September 30, 2020, active listings remained stable at approximately 5.6 million despite the decline in booking activity on our platform due to the global COVID-19 pandemic. We believe this stability in active listings highlights the high retention of our host community and the resilience of our business model, which does not require us to make significant investments in fixed assets and physical real estate.
In particular, our platform unlocks the potential for individual hosts to share their unique spaces and earn income in a way that was previously not possible and for guests to visit places and book unique spaces that were difficult to access before Airbnb. We have designed our platform to specifically serve individual hosts who list their spaces, including private rooms, primary homes, or vacation homes on Airbnb. As of December 31, 2019, 90% of our hosts were individual hosts, and 79% of those hosts had just a single listing. Additionally, as of December 31, 2019, 72% of our nights booked were with individual hosts. For individual hosts who had at least one listing in 2019, the average number of listings was 1.3. To calculate these statistics, we count individual hosts as those who onboard and activate their spaces on Airbnb directly through our List Your Space flow, which takes hosts through the process of creating a listing.
We attract new individual hosts predominantly through organic channels such as word of mouth and our strong brand recognition. We focus on describing the benefits of hosting to existing and potential
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individual hosts and making onboarding of their listings as seamless as possible. We enable individual hosts to increase bookings by empowering them with information and tools to optimize their listings, including scheduling, merchandising, integrated payments, community support, host protection programs, pricing recommendations, and reviews.
We also attract listings from professional hosts, including property management companies, serviced apartment providers, and boutique hotels that leverage our platform and tools to run their hospitality businesses. These hosts expand the types of listings available to our guests. We provide professional hosts with information and tools to optimize their listings, including scheduling, merchandising, integrated payments, community support, host protection programs, pricing recommendations, and reviews. We onboard these hosts through application programming interfaces and third-party channel managers.
We attract new hosts to our platform every year and track their success on Airbnb and the associated revenue that we earn from their hosting activity on our platform. We define a host cohort as a group of hosts whose first guest check-in occurs in a specific calendar year. We calculate the revenue associated with those hosts in Year 1 based on revenue recognized during the subsequent one-year period. We then calculate revenue associated with those hosts based on revenue generated in each subsequent one-year period to compare against Year 1. The table below displays the revenue retention of each calendar year cohort and demonstrates our strong host revenue retention.
| Host Cohort Revenue Retention | ||||||||||||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||||||||||||||||
| 2014 Cohort |
100 | % | 93 | % | 95 | % | 98 | % | 100 | % | ||||||||||
| 2015 Cohort |
100 | % | 95 | % | 93 | % | 93 | % |
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| 2016 Cohort |
100 | % | 90 | % | 88 | % |
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| 2017 Cohort |
100 | % | 90 | % |
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| 2018 Cohort |
100 | % |
Our host retention has been consistent across cohorts. This loyal host behavior strengthens our community. In 2019, 84% of our revenue resulted from stays with existing hosts who had completed at least one guest check-in on or before December 31, 2018, up from 82% in 2018. We track revenue from existing hosts based on revenue before adjustments for incentives and refunds, as we do not track contra-revenue adjustments by host cohort. We believe such revenue generated from stays is the best available indicator of host retention. The size of each host cohort has also grown every year, and our 2018 cohort was nearly four times larger than our 2014 cohort.
While active listings remained stable between December 31, 2019 and September 30, 2020, host revenue retention will deteriorate across all host cohorts in 2020 due to the decline in revenue resulting from COVID-19. However, as the travel industry recovers, we believe the historic strength of our host revenue retention should return.
Ability to Attract and Retain Guests
Our first-ever guests, Michael, Kat, and Amol, traveled to San Francisco looking for a place to stay during a design conference in 2007. Today, guests from almost every country in the world are welcomed by our hosts. We have demonstrated an ability to continue to grow the number of guests who are active on our platform; during 2019, we had 54 million active bookers, which represented 30% growth compared to 41 million active bookers in 2018, which represented 40% growth compared to 30 million active bookers in 2017. During 2019, we also had 247 million guest arrivals, which represented 33% growth compared to 185 million guest arrivals in 2018, which represented 43% growth compared to 129 million guest arrivals in 2017.
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We grow GBV by attracting new guests to book stays and experiences on our platform and through past guests who return to our platform to make new bookings. We attract most guests to Airbnb directly or through unpaid channels. During the nine months ended September 30, 2020, approximately 91% of all traffic to Airbnb came organically through direct or unpaid channels, reflecting the strength of our brand. We have also used paid performance marketing, for example on search terms including “Airbnb,” to attract guests. Our strategy is to increase brand marketing and use the strength of our brand to attract more guests via direct or unpaid channels and to decrease our performance marketing spend relative to 2019.
We attract new guests to our platform every year and track their activity on Airbnb and the associated revenue that we earn from their activity on our platform. We define a guest cohort as a group of unique bookers whose first check-in occurs in a specific calendar year. We calculate the revenue associated with those guests in Year 1 based on revenue recognized during the subsequent one-year period. We then calculate revenue associated with those guests based on revenue generated in each subsequent one-year period to compare against Year 1. The table below displays the revenue retention of each calendar year cohort and demonstrates our strong guest revenue retention.
| Guest Cohort Revenue Retention | ||||||||||||||||||||
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | ||||||||||||||||
| 2014 Cohort |
100 | % | 36 | % | 41 | % | 45 | % | 47 | % | ||||||||||
| 2015 Cohort |
100 | % | 40 | % | 44 | % | 45 | % | ||||||||||||
| 2016 Cohort |
100 | % | 39 | % | 41 | % | ||||||||||||||
| 2017 Cohort |
100 | % | 36 | % | ||||||||||||||||
| 2018 Cohort |
100 | % |
Because travel purchases are not typically made with high frequency but instead are often episodic, we see lower guest cohort revenue retention in year 2, compared to year 1. As guests return to Airbnb and use our platform more often, their retention increases in Year 3 and beyond. In addition, growth in our global network and continued product innovation attracts guests back to Airbnb for travel. As a result, for each annual guest cohort, revenue retention has increased every year following Year 2. We believe the guest revenue retention of our community is higher than the customer retention of OTA distribution platforms in the United States, based on available third-party credit card data.
As a result of strong guest loyalty, we have a growing number of repeat guests on Airbnb. Guest revenue retention and increasing repeat guests have grown due to our brand and community. As a result, 69% of our revenue in 2019 was generated from stays in that year by repeat guests, defined as guests with at least one prior booking, up from 66% in 2018. We track revenue from guests based on revenue before adjustments for incentives and refunds, as we do not track contra-revenue adjustments by guest cohort. We believe such revenue generated from stays is the best available indicator of guest retention.
Guest revenue retention will deteriorate across all cohorts in 2020 due to the decline in travel from COVID-19. However, as the travel industry recovers, we believe the historic strength of our guest revenue retention should return. Although we suspended substantially all discretionary marketing program spend at the end of the first quarter of 2020 in response to the business impact of COVID-19, we have seen both direct and unpaid traffic, as well as Gross Booking Value, meaningfully rebound in the third quarter of 2020. We believe the strength of our brand and resilience of our guest demand powered this rebound. Even during the first nine months of 2020, we attracted over 14 million new active bookers to our platform.
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Investments in Technology
We are investing significant resources in our technology architecture and infrastructure. These improvements enable our engineers to use the latest tools and technologies to build new products and features. Beginning in 2019, we made significant investments to enhance the underlying architecture and scalability of our platform by upgrading our systems and moving to a new service-oriented architecture. Our continued improvement of our technology platform and product experience is paramount to our user experience, driving our ability to attract and retain hosts and guests, improve the rate of booking for new and returning guests, and generate revenue. As such, we will continue to invest in our technology platform.
Geographic Mix
Our operations are global, and certain trends in our business, such as Nights and Experiences Booked, Gross Booking Value, revenue, Gross Booking Value per Night and Experience Booked, and Nights per Booking vary by geography.
We measure Nights and Experiences Booked by region based on the location of the listing. EMEA and North America represented our largest regions by Nights and Experiences Booked, GBV, and revenue in 2019, followed by Asia Pacific and Latin America.
As a result of COVID-19, the geographic mix of Nights and Experiences Booked, GBV, and revenue during the first nine months of 2020 reflected a shift toward North America, where we have seen the strongest recovery. For the first nine months of 2020, Nights and Experiences Booked were 56.4 million, or 38% of the total, in North America compared to 55.3 million, or 38%, in EMEA, 20.2 million, or 14%, in Asia Pacific, and 15.0 million, or 10%, in Latin America. For the first nine months of 2020, GBV was $9.7 billion, or 54% of the total, in North America compared to $5.6 billion, or 31%, in EMEA, $1.6 billion, or 9%, in Asia Pacific, and $1.1 billion, or 6%, in Latin America. Similarly, for the first nine months of 2020, revenue was $1.3 billion, or 50% of the total, in North America compared to $0.9 billion, or 34%, in EMEA, $0.2 billion, or 9%, in Asia Pacific, and $0.1 billion, or 7%, in Latin America.
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GBV per Night and Experience Booked is highest in North America, followed by EMEA, Asia Pacific, and Latin America. Length of stay, or the number of nights attributable to a given booking, is highest in Latin America, followed by North America, EMEA, and Asia Pacific, and we expect that our blended global average nights per booking will fluctuate based on our geographic mix and changes in traveler behaviors.
Additionally, we saw an increase in GBV per Night and Experience Booked in the first nine months of 2020 compared to 2019, in part because our geographic mix has shifted to these higher GBV per Night and Experience Booked regions. North America saw an increase in GBV per Night and Experience Booked as larger entire homes have been in greater demand. The average nights per booking also increased globally in the first nine months of 2020, reflecting demand for longer stays. Specifically, GBV per Night and Experience Booked in the first nine months of 2020 was $172.97 for North America compared to $100.80 for EMEA, $78.98 for Asia Pacific, and $71.00 for Latin America, with a total global GBV per Night and Experience Booked of $122.47. Average nights per booking, excluding experiences, for the first nine months of 2020 were 4.3 for both North America and EMEA, 2.9 for Asia Pacific, and 4.4 for Latin America, with a total average of 4.0.
Seasonality
Our business is seasonal, reflecting typical travel behavior patterns over the course of the calendar year. In a typical year, the first, second, and third quarters have higher Nights and Experiences Booked than the fourth quarter, as guests plan for travel during the peak travel season, which is in the third quarter for North America and EMEA. Our GBV and Adjusted EBITDA can also be impacted by the timing of holidays and other events. For example, the Easter holiday was celebrated on April 1, 2018 and bookings during the quarter ended March 31, 2018 were favorably impacted by this timing relative to the first quarters of 2017 and 2019 when Easter was celebrated in the second half of April, resulting in more bookings in the second quarter. We experience seasonality in our GBV that is consistent with the seasonality of Nights and Experiences Booked. Revenue and Adjusted EBITDA have historically been, and are expected to continue to be, highest in the third quarter when we have the most check-ins, which is the point at which we recognize revenue. Seasonal trends in our GBV impact Free Cash Flow for any given quarter. We track our TTM Adjusted EBITDA (total dollars and as a percentage of revenue) to account for the seasonality of our revenue, and TTM Free Cash Flow (total dollars and as a percentage of revenue) to account for the timing difference in when we receive cash from service fees, which is at the time of booking. TTM Adjusted EBITDA and Free Cash Flow provide a view of our business that is not impacted by seasonality.
Our costs are relatively fixed across quarters or vary in line with the volume of transactions, and we historically achieve our highest GBV in the first and second quarters of the year with comparatively lower check-ins. As a result, increases in unearned fees make our Free Cash Flow and Free Cash Flow as a percentage of revenue the highest in the first two quarters of the year. We typically see a slight decline in GBV and a peak in check-ins in the third quarter, which results in a decrease in unearned fees and lower sequential level of Free Cash Flow, and a greater decline in GBV in the fourth quarter, where Free Cash
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Flow is typically negative. As our business matures, other seasonal trends may develop, or these existing seasonal trends may become more extreme.
The effect of seasonality, among other factors, on our quarterly key business metrics and non-GAAP financial measures in a typical year is illustrated by our results in 2019 as follows:
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In 2020, we have seen COVID-19 overwhelm the historical patterns of seasonality in our GBV, revenue, Adjusted EBITDA, and Free Cash Flow as a result of travel restrictions and changing travel preferences relating to the COVID-19 pandemic. We expect this impact on seasonality to continue as long as COVID-19 is impacting travel patterns globally.
Regulations Permitting or Limiting Our Offerings
Regulations that permit or limit our hosts’ ability to provide their listings impact our growth and penetration in certain geographies. In particular, among other regulations governing our short-term rentals, many large cities have placed night caps on short-term rentals of certain types of properties, limited short-term rentals to primary residences, or limited the length of a stay. A discussion of short-term rental regulations in our top 10 cities by revenue in 2019 is included in the section titled “Business—Regulatory Considerations in Our Largest Cities.” None of our top 10 cities represented more than 2.5% of our revenue before adjustments for incentives and refunds or 1.5% of our active listings during 2019 and the nine months ended September 30, 2020. An increase in short-term rental regulations could harm our business and negatively impact our financial performance. See the section titled “Risk Factors—Laws, regulations, and rules that affect the short-term rental and home sharing business may limit the ability or willingness of hosts to share their spaces over our platform and expose our hosts or us to significant penalties, which could have a material adverse effect on our business, results of operations, and financial condition.”
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Components of Results of Operations
Revenue
Our revenue consists of service fees, net of incentives and refunds, charged to our customers. We consider both hosts and guests to be our customers. For stays, service fees, which are charged to customers as a percentage of the value of the booking, excluding taxes, vary based on factors specific to the booking, such as booking value, the duration of the booking, geography, and host type. For experiences, we only earn a host fee. Substantially all of our revenue comes from stays booked on our platform. Incentives include our referral programs and marketing promotions to encourage the use of our platform and attract new customers, while our refunds to customers are part of our customer support activities.
We experience a difference in timing between when a booking is made and when we recognize revenue, which occurs upon check-in. We record the service fees that we collect from customers prior to check-in on our balance sheet as unearned fees. Revenue is net of incentives and refunds provided to customers totaling $138.0 million, $221.5 million, $274.5 million, $209.7 million, and $347.2 million in 2017, 2018, 2019, and the nine months ended September 30, 2019 and 2020, respectively, representing 5%, 6%, 6%, 6%, and 14% of revenue, respectively. The elevated level of incentives and refunds provided to customers during the nine months ended September 30, 2020 is related to payments made to support hosts impacted by increased guest cancellations and COVID-19 related guest cancellation coupons.
Cost of Revenue
Cost of revenue includes payment processing costs, including merchant fees and chargebacks, costs associated with third-party data centers used to host our platform, and amortization of internally developed software and acquired technology. Because we act as the merchant of record, we incur all payment processing costs associated with our bookings, and we have chargebacks, which arise from account takeovers and other fraudulent activities. We expect our cost of revenue will continue to increase on an absolute dollar basis for the foreseeable future to the extent that we continue to see growth on our platform. Cost of revenue may vary as a percentage of revenue from year to year based on activity on our platform and may also vary from quarter to quarter as a percentage of revenue based on the seasonality of our business and the difference in the timing of when bookings are made and when we recognize revenue.
Operations and Support
Operations and support expense primarily consists of personnel-related expenses and third-party service provider fees associated with community support provided via phone, email, and chat to hosts and guests; customer relations costs, which include refunds and credits related to customer satisfaction and expenses associated with our host protection programs; and allocated costs for facilities and information technology. We expect that operations and support expense will continue to increase on an absolute dollar basis for the foreseeable future to the extent that we continue to see growth on our platform. We also expect operations and support to increase in the near-term as a percentage of revenue, as we continue to invest in trust and safety programs. We are also investing in the near-term in initiatives to reduce customer contact rates and improve the operational efficiency of our operations and support organization, which we expect will decrease operations and support expense as a percentage of revenue over the longer term. We anticipate additional operations and support expense during the year in which we complete our initial public offering as a result of the stock-based compensation expense associated with our RSUs as described in the subsection titled “— Critical Accounting Policies and Estimates — Stock-Based Compensation — Restricted Stock Units,” as well as additional stock-based compensation expense going forward.
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Product Development
Product development expense primarily consists of personnel-related expenses and third-party service provider fees incurred in connection with the development of our platform, and allocated costs for facilities and information technology. We expect that our product development expense will increase on an absolute dollar basis and will vary from period to period as a percentage of revenue for the foreseeable future as we continue to invest in product development activities relating to ongoing improvements to and maintenance of our technology platform and other programs, including the hiring of personnel to support these efforts. In addition, we anticipate additional product development expense during the year in which we complete our initial public offering as a result of the stock-based compensation expense associated with our RSUs as described in the subsection titled “— Critical Accounting Policies and Estimates — Stock-Based Compensation — Restricted Stock Units,” as well as additional stock-based compensation expense going forward.
Sales and Marketing
Sales and marketing expense primarily consists of brand and performance marketing, personnel-related expenses, including those related to our field operations, policy and communications, portions of referral incentives and coupons, and allocated costs for facilities and information technology.
We expect our sales and marketing expense will vary from period to period as a percentage of revenue for the foreseeable future, and over the long term, we expect it will decline as a percentage of revenue relative to 2019. We anticipate additional sales and marketing expense during the year in which we complete our initial public offering as a result of the stock-based compensation expense associated with our RSUs as described in the subsection titled “— Critical Accounting Policies and Estimates — Stock-Based Compensation — Restricted Stock Units,” as well as additional stock-based compensation expense going forward.
General and Administrative
General and administrative expense primarily consists of personnel-related expenses for management and administrative functions, including finance and accounting, legal, and human resources. General and administrative expense also includes certain professional services fees, general corporate and director and officer insurance, allocated costs for facilities and information technology, indirect taxes, including lodging tax reserves for which we may be held jointly liable with hosts for collecting and remitting such taxes, and bad debt expense. We expect to incur additional general and administrative expense as a result of operating as a public company, including expenses to comply with the rules and regulations of the SEC and Listing Rules of Nasdaq, as well as higher expenses for corporate insurance, director and officer insurance, investor relations, and professional services. Overall, we expect our general and administrative expense will vary from period to period as a percentage of revenue for the foreseeable future. We anticipate additional general and administrative expense during the year in which we complete our initial public offering as a result of the stock-based compensation expense associated with our RSUs as described in the subsection titled “— Critical Accounting Policies and Estimates — Stock-Based Compensation — Restricted Stock Units,” as well as additional stock-based compensation expense going forward.
Restructuring Charges
Restructuring charges primarily consist of costs associated with a global workforce reduction in May 2020, lease impairments, and costs associated with amendments and terminations of contracts, including commercial agreements with service providers.
Interest Income
Interest income consists primarily of interest earned on our cash, cash equivalents, marketable securities, and amounts held on behalf of customers.
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Interest Expense
Interest expense consists primarily of expense related to financing lease obligations in 2017 and 2018 before the adoption of Accounting Standards Codification 842, Leases (“ASC 842”), interest associated with various indirect tax reserves, amortization of debt issuance costs associated with our $1.0 billion five-year unsecured revolving Credit and Guarantee Agreement (the “Credit Facility”), as well as interest expense and amortization of debt issuance costs associated with our term loan agreements entered into in April 2020.
Other Income (Expense), Net
Other income (expense), net consists primarily of realized and unrealized gains and losses on foreign currency transactions and balances, the change in fair value of investments and financial instruments, including the warrants issued in connection with a term loan agreement entered into in April 2020, and our share of income or loss from our equity method investments.
Our platform generally enables guests to make payments in the currency of their choice to the extent that the currency is supported by Airbnb, which may not match the currency in which the host elects to be paid. As a result, in those cases, we bear the currency risk of both the guest payment as well as the host payment due to timing differences in such payments. In 2019, we began entering into derivative contracts to offset a portion of our exposure to the impact of movements in currency exchange rates on our transactional balances denominated in currencies other than the U.S. dollar. The effects of these derivative contracts are reflected in other income (expense), net.
Provision for Income Taxes
We are subject to income taxes in the United States and foreign jurisdictions in which we do business. Foreign jurisdictions have different statutory tax rates than those in the United States. Additionally, certain of our foreign earnings may also be taxable in the United States. Accordingly, our effective tax rate is subject to significant variation due to several factors, including variability in our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, intercompany transactions, changes in how we do business, acquisitions, investments, tax audit developments, changes in our deferred tax assets and liabilities and their valuation, foreign currency gains and losses, changes in statutes, regulations, case law, and administrative practices, principles, and interpretations related to tax, including changes to the global tax framework, competition, and other laws and accounting rules in various jurisdictions, and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can vary based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
We have a valuation allowance for our net deferred tax assets, including federal and state net operating loss carryforwards and intangible assets. We expect to maintain these valuation allowances until it becomes more likely than not that the benefit of our deferred tax assets will be realized by way of expected future taxable income in the United States and Ireland. We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for income taxes.
As of December 31, 2018 and 2019, we had net operating loss carryforwards for federal income tax purposes of $15.9 million and $116.7 million, respectively. These federal net operating loss carryforwards will expire, if not utilized, beginning in 2034. As of December 31, 2018 and 2019, we had net operating loss carryforwards for state income tax purposes of $136.3 million and $167.6 million, respectively. These state net operating loss carryforwards will expire, if not utilized, beginning in 2033.
In the event that we experience an ownership change within the meaning of Section 382 of the Internal Revenue Code, our ability to utilize net operating losses, tax credits, and other tax attributes may be
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limited. The most recent analysis of our historical ownership changes was completed through December 31, 2019. Based on the analysis, we do not anticipate a permanent limitation on the existing tax attributes under Section 382, although subsequent changes in our ownership structure as a result of this offering or otherwise may create such a limitation.
We are currently under examination for income taxes by the Internal Revenue Service (“IRS”) for the years 2013 and 2016. We are continuing to respond to inquiries related to these examinations. While we have not yet received a Revenue Agent’s Report generally issued at the conclusion of an IRS examination, in September 2020, we received a Draft Notice of Proposed Adjustment from the IRS for the 2013 tax year relating to the valuation of our international intellectual property which was sold to a subsidiary in 2013. The notice proposes an increase to our U.S. taxable income that could result in additional income tax expense and cash tax liability of $1.35 billion, plus penalties and interest, which exceeds our current reserve recorded in our consolidated financial statements by more than $1.0 billion. A formal Notice of Proposed Adjustment is expected from the IRS by the end of 2020. Following formal receipt of the Revenue Agent’s adjustment which is anticipated late in the fourth quarter of 2020, we intend to vigorously contest the IRS’s proposed adjustment, including through all administrative and, if necessary, judicial remedies which may include: entering into administrative settlement discussions with the IRS Independent Office of Appeals (“IRS Appeals”) in 2021, and if necessary petitioning the U.S. Tax Court (“Tax Court”) for redetermination if an acceptable outcome cannot be reached with IRS Appeals, and finally, and if necessary, appealing the Tax Court’s decision to the appropriate appellate court. If the IRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow.
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Results of Operations
The following table sets forth our results of operations for the periods presented:
| Year Ended December 31, | Nine Months Ended September 30, |
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| 2017 | 2018 | 2019 | 2019 | 2020 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue |
$ | 2,561,721 | $ | 3,651,985 | $ | 4,805,239 | $ | 3,698,443 | $ | 2,518,935 | ||||||||||
| Costs and expenses: |
||||||||||||||||||||
| Cost of revenue |
647,690 | 864,032 | 1,196,313 | 902,695 | 666,295 | |||||||||||||||
| Operations and support(1) |
395,739 | 609,202 | 815,074 | 600,788 | 548,369 | |||||||||||||||
| Product development(1) |
400,749 | 579,193 | 976,695 | 693,796 | 690,677 | |||||||||||||||
| Sales and marketing(1) |
871,749 | 1,101,327 | 1,621,519 | 1,184,506 | 545,510 | |||||||||||||||
| General and administrative(1) |
327,156 | 479,487 | 697,181 | 490,262 | 421,082 | |||||||||||||||
| Restructuring charges(1) |
— | — | — | — | 136,969 | |||||||||||||||
| Total costs and expenses |
2,643,083 | 3,633,241 | 5,306,782 | 3,872,047 | 3,008,902 | |||||||||||||||
| Income (loss) from operations |
(81,362 | ) | 18,744 | (501,543 | ) | (173,604 | ) | (489,967 | ) | |||||||||||
| Interest income |
32,102 | 66,793 | 85,902 | 68,661 | 23,830 | |||||||||||||||
| Interest expense |
(16,403 | ) | (26,143 | ) | (9,968 | ) | (6,801 | ) | (107,548 | ) | ||||||||||
| Other income (expense), net |
6,564 | (12,361 | ) | 13,906 | 42,130 | (115,751 | ) | |||||||||||||
| Income (loss) before income taxes |
(59,099 | ) | 47,033 | (411,703 | ) | (69,614 | ) | (689,436 | ) | |||||||||||
| Provision for income taxes |
10,947 | 63,893 | 262,636 | 253,187 | 7,429 | |||||||||||||||
| Net loss |
$ | (70,046 | ) | $ | (16,860 | ) | $ | (674,339 | ) | $ | (322,801) | $ | (696,865) |
| (1) |
Includes stock-based compensation expense as follows: |
| Year Ended December 31, | Nine Months Ended September 30, |
|||||||||||||||||||
| 2017 | 2018 | 2019 | 2019 |
2020 |
||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Operations and support |
$ | 1,841 | $ | 1,968 | $ | 817 | $ | 283 | $ | 2,869 | ||||||||||
| Product development |
20,309 | 33,895 | 56,632 | 44,991 | 64,088 | |||||||||||||||
| Sales and marketing |
5,997 | 12,465 | 23,919 | 17,074 | 11,979 | |||||||||||||||
| General and administrative |
10,210 | 5,565 | 16,179 | 9,962 | 31,689 | |||||||||||||||
| Restructuring charges |
— | — | — | — | (1,849 | ) | ||||||||||||||
| Total stock-based compensation expense |
$ | 38,357 | $ | 53,893 | $ | 97,547 | $ | 72,310 | $ | 108,776 |
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The following table sets forth the components of our consolidated statements of operations for each of the periods presented as a percentage of revenue:
| Year Ended December 31, | Nine Months Ended September 30, |
|||||||||||||||||||
| 2017 | 2018 | 2019 | 2019 |
2020 |
||||||||||||||||
| Revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
| Costs and expenses: |
||||||||||||||||||||
| Cost of revenue |
25 | 24 | 25 | 25 | 26 | |||||||||||||||
| Operations and support |
15 | 17 | 17 | 16 | 22 | |||||||||||||||
| Product development |
16 | 16 | 20 | 19 | 27 | |||||||||||||||
| Sales and marketing |
34 | 30 | 34 | 32 | 22 | |||||||||||||||
| General and administrative |
13 | 12 | 14 | 13 | 17 | |||||||||||||||
| Restructuring charges |
— | — | — | — | 5 | |||||||||||||||
| Total costs and expenses |
103 | 99 | 110 | 105 | 119 | |||||||||||||||
| Income (loss) from operations |
(3 | ) | 1 | (10 | ) | (5 | ) | (19 | ) | |||||||||||
| Interest income |
1 | 2 | 2 | 2 | 1 | |||||||||||||||
| Interest expense |
(1 | ) | (1 | ) | (1 | ) | 0 | (4 | ) | |||||||||||
| Other income (expense), net |
0 | 0 | 0 | 1 | (5 | ) | ||||||||||||||
| Income (loss) before income taxes |
(3 | ) | 2 | (9 | ) | (2 | ) | (27 | ) | |||||||||||
| Provision for income taxes |
0 | 2 | 5 | 7 | 1 | |||||||||||||||
| Net loss |
(3 | )% | 0 | % | (14 | )% | (9 | )% | (28 | )% |
Comparison of the Nine Months Ended September 30, 2019 and 2020
Revenue
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Revenue |
$ | 3,698,443 | $ | 2,518,935 | (32 | )% |
Revenue decreased $1.2 billion, or 32%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019, primarily due to a 42% decrease in the number of check-ins related to Nights and Experiences Booked on our platform due to the COVID-19 pandemic, partially offset by a 4% increase in GBV per Night and Experience Booked. Service fees as a percentage of booking value, exclusive of taxes, remained relatively flat compared to the same prior year period. Also, contributing to the change was a $137.5 million increase in the reduction to revenue recorded primarily due to payments to hosts and coupons issued to guests resulting from elevated cancellations related to COVID-19. On a constant currency basis, revenue decreased 32% compared to the nine months ended September 30, 2019.
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Cost of Revenue
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Cost of revenue |
$ | 902,695 | $ | 666,295 | (26 | )% | ||||||
| Percentage of revenue |
25 | % | 26 | % |
|
|
|
Cost of revenue decreased $236.4 million, or 26%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to a $185.6 million reduction in payment processing costs, consisting of merchant fees and chargebacks, and a $63.5 million decrease in the cost of data hosting services, partially offset by a $12.7 million increase in amortization expense for internally developed software and acquired technology. For the nine months ended September 30, 2019 and 2020, payment processing costs totaled $640.3 million and $454.7 million, respectively, which represented 2% and 3% of GBV, respectively. The decrease in payment processing costs resulted from the decreased dollar value of payments processed through our platform associated with the reduction in GBV, while decreases in data hosting resulted from better contract management and utilization of our third-party cloud services.
Operations and Support
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Operations and support |
$ | 600,788 | $ | 548,369 | (9 | )% | ||||||
| Percentage of revenue |
16 | % | 22 | % |
|
|
|
Operations and support expense decreased $52.4 million, or 9%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to a $40.8 million decrease in customer relations costs and a $37.6 million decrease in spending on third-party community support personnel, partially offset by a $23.8 million increase in insurance-related costs. The decrease in spending on third-party community support personnel and customer relations costs was largely the result of the reduction in GBV and associated check-ins in the period.
Product Development
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Product development |
$ | 693,796 | $ | 690,677 | 0 | % | ||||||
| Percentage of revenue |
19 | % | 27 | % |
|
|
|
Product development expense decreased $3.1 million, or less than 1%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to an $11.7 million decrease in allocated costs for facilities and information technology, an $11.5 million
155
decrease in spend for consultants and service providers, and a $10.4 million decrease in travel-related expenses, partially offset by a $35.4 million increase in personnel-related expenses to support our underlying architecture and scalability of our platform by upgrading our systems and moving to a new service-oriented architecture.
Sales and Marketing
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Brand and performance marketing |
$ | 842,241 | $ | 294,753 | (65 | )% | ||||||
| Field operations and policy |
342,265 | 250,757 | (27 | )% | ||||||||
| Total sales and marketing |
$ | 1,184,506 | $ | 545,510 | (54 | )% | ||||||
| Percentage of revenue |
32 | % | 22 | % |
Sales and marketing expense decreased $639.0 million, or 54%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to a $530.3 million decrease in marketing spend, a $44.1 million decrease in expense related to coupons issued to customers, a $30.5 million decrease in expenses for third-party service providers, an $18.2 million decrease in travel and entertainment-related expenses, and a $17.1 million decrease in personnel-related expenses. The overall decrease in sales and marketing expense described above was driven by our response to COVID-19, which included suspending substantially all discretionary marketing program spend starting late in the first quarter of 2020.
General and Administrative
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| General and administrative |
$ | 490,262 | $ | 421,082 | (14 | )% | ||||||
| Percentage of revenue |
13 | % | 17 | % |
|
|
|
General and administrative expense decreased $69.2 million, or 14%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to a $100.1 million decrease in lodging and business tax expense and a $40.9 million decrease in spend for consultants and service providers, partially offset by a $37.9 million increase in bad debt expense largely driven by the impact of COVID-19, a $26.1 million increase in allocated costs for facilities and information technology, and a $20.4 million increase in payroll-related expenses resulting from an increase in headcount. The decrease in lodging and business tax expense resulted largely from a $81.7 million reduction in our reserve for lodging taxes in jurisdictions in which management no longer believed a liability was probable following a favorable outcome in a related legal proceeding.
156
Restructuring Charges
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Restructuring charges |
— | $ | 136,969 | * | ||||||||
| Percentage of revenue |
— | 5 | % |
|
|
|
| * |
Not meaningful |
Restructuring charges totaled $137.0 million for the nine months ended September 30, 2020. In May 2020, we announced a reduction in force of approximately 25% of employees, and the resulting restructuring charges primarily included severance and other employee-related costs, lease impairments, and contract amendments and terminations.
Interest Income and Expense
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Interest income |
$ | 68,661 | $ | 23,830 | (65 | )% | ||||||
| Percentage of revenue |
2 | % | 1 | % |
|
|
| |||||
| Interest expense |
$ | (6,801 | ) | $ | (107,548 | ) | * | |||||
| Percentage of revenue |
0 | % | (4 | )% |
|
|
|
| * |
Not meaningful |
Interest income decreased $44.8 million, or 65%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to lower average interest rates. Interest expense increased $100.7 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The increase was primarily related to the interest expense associated with the $2.0 billion in term loans we entered into in April 2020.
Other Income (Expense), Net
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Other income (expense), net |
$ | 42,130 | $ | (115,751 | ) | (375 | )% | |||||
| Percentage of revenue |
1 | % | (5 | )% |
|
|
|
Other expense, net was $115.8 million for the nine months ended September 30, 2020 compared to other income, net of $42.1 million for the nine months ended September 30, 2019. The change was primarily driven by $82.1 million of impairment charges related to non-marketable equity investments in privately-held companies, $42.8 million of net realized and unrealized losses on our investments, and a $41.2 million loss on the fair value remeasurement of our warrants issued in connection with our second lien loan. In
157
addition, a $24.6 million gain related to an equity method investment that was acquired by a third party was recorded during the nine months ended September 30, 2019. Partially offsetting these items was an increase of $28.9 million in net realized and unrealized foreign exchange gains.
Provision for Income Taxes
| Nine Months Ended September 30, | ||||||||||||
| 2019 | 2020 | 2019 to 2020 % Change |
||||||||||
| (in thousands, except percentages) | ||||||||||||
| Provision for income taxes |
$ | 253,187 | $ | 7,429 | (97 | )% |
The provision for income taxes decreased $245.8 million, or 97%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. The decrease was primarily due to a remeasurement of uncertain tax positions relating to the valuation of our international intellectual property that was previously sold to a subsidiary during the nine months ended September 30, 2019. See Note 14 to our consolidated financial statements included elsewhere in this prospectus for further details.
Comparison of the Years Ended December 31, 2017, 2018, and 2019
Revenue
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Revenue |
$ | 2,561,721 | $ | 3,651,985 | $ | 4,805,239 | 43 | % | 32 | % |
2019 Compared to 2018. Revenue increased $1.2 billion, or 32%, in 2019 compared to 2018, almost entirely due to a 33% increase in the number of check-ins related to Nights and Experiences Booked on our platform. GBV per Night and Experience Booked and service fees as a percentage of booking value, exclusive of taxes, remained relatively flat compared to the prior year. On a constant currency basis, revenue increased 35% compared to 2018.
2018 Compared to 2017. Revenue increased $1.1 billion, or 43%, in 2018 compared to 2017, primarily due to a 42% increase in the number of check-ins related to Nights and Experiences Booked on our platform, and to a lesser extent, a 4% increase in GBV per Night and Experience Booked. Service fees as a percentage of booking value, exclusive of taxes, remained relatively flat compared to the prior year. On a constant currency basis, revenue increased 41% compared to 2017.
Cost of Revenue
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Cost of revenue |
$ 647,690 | $ 864,032 | $ 1,196,313 | 33% | 38% | |||||||||||||||
| Percentage of revenue |
25% | 24% | 25% |
|
|
|
|
|
|
158
2019 Compared to 2018. Cost of revenue increased $332.3 million, or 38%, in 2019 compared to 2018. The increase was primarily due to a $193.0 million increase in payment processing costs, consisting of merchant fees and chargebacks, a $90.2 million increase in the cost of data hosting services, and a $29.4 million increase in spend with other third-party service providers and technologies to support our platform. In 2019 and 2018, payment processing costs totaled $837.0 million and $644.0 million, respectively, which represented 2% of GBV for both periods. The increase in payment processing costs resulted from the increased dollar value of payments processed through our platform associated with the growth in GBV, while increases in data hosting and third-party service providers resulted from the associated growth in traffic on our platform. A portion of our increase in data hosting services was related to costs associated with our migration to a service-oriented architecture.
2018 Compared to 2017. Cost of revenue increased $216.3 million, or 33%, in 2018 compared to 2017. The increase was primarily due to a $140.5 million increase in payment processing costs, a $64.4 million increase in the cost of data hosting services, and a $10.6 million increase in spend with other third-party service providers and technologies to support our platform. In 2018 and 2017, payment processing costs totaled $644.0 million and $503.5 million, which represented 2% of GBV for both periods. The increase in payment processing costs resulted from the increased dollar value of payments processed through our platform associated with the growth in GBV, while increases in data hosting and third-party service provider costs resulted from the associated growth in traffic on our platform.
Operations and Support
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Operations and support |
$ 395,739 | $ 609,202 | $ 815,074 | 54 | % | 34 | % | |||||||||||||
| Percentage of revenue |
15 | % | 17 | % | 17 | % |
|
|
|
|
|
|
2019 Compared to 2018. Operations and support expense increased $205.9 million, or 34%, in 2019 compared to 2018. The increase was primarily due to a $125.8 million increase in spending on third-party community support personnel, a $33.0 million increase in customer relations costs, a $21.7 million increase in personnel-related expenses, and a $15.9 million increase in allocated costs for facilities and information technology, which are allocated based on headcount. The increase in spending on third-party community support personnel and customer relations costs was largely the result of growth in GBV and associated check-ins in the period.
2018 Compared to 2017. Operations and support expense increased $213.5 million, or 54%, in 2018 compared to 2017. The increase was primarily due to a $119.2 million increase in spending on third-party community support personnel, a $49.9 million increase in customer relations costs, a $20.0 million increase in personnel-related expenses, and an $11.6 million increase in allocated costs for facilities and information technology. The increase in spending on third-party community support personnel and customer relations costs was largely the result of growth in GBV and associated check-ins in the period.
159
Product Development
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Product development |
$ 400,749 | $ 579,193 | $ 976,695 | 45 | % | 69 | % | |||||||||||||
| Percentage of revenue |
16 | % | 16 | % | 20 | % |
|
|
|
|
|
|
2019 Compared to 2018. Product development expense increased $397.5 million, or 69%, in 2019 compared to 2018. The increase was primarily due to a $271.7 million increase in personnel-related expenses driven by an increase in product development headcount as we invested in existing offerings, new initiatives, including our China offering, Airbnb Experiences, Airbnb Plus, hotels, and Airbnb Luxe, and platform enhancements, a $58.1 million increase in allocated costs for facilities and information technology, a $26.1 million increase in spend for consultants and service providers, and a $23.0 million increase in spend for software, maintenance, and equipment. The growth in employee headcount supported our efforts to enhance the underlying architecture and scalability of our platform by upgrading our systems and moving to a new service-oriented architecture.
2018 Compared to 2017. Product development expense increased $178.4 million, or 45%, in 2018 compared to 2017. The increase was primarily due to a $134.6 million increase in personnel-related expenses driven by an increase in product development headcount as we invested in new offerings and our technology infrastructure, a $25.9 million increase in allocated costs for facilities and information technology, and a $12.8 million increase in software, maintenance and equipment. The growth in employee headcount in engineering, design, product management, and other technical functions supported our efforts to continue development of our platform, new offerings, and improvements to existing offerings.
Sales and Marketing
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Brand and performance marketing |
$ | 584,303 | $ | 666,455 | $ | 1,140,366 | 14 | % | 71 | % | ||||||||||
| Field operations and policy |
287,446 | 434,872 | 481,153 | 51 | % | 11 | % | |||||||||||||
| Total sales and marketing |
$ | 871,749 | $ | 1,101,327 | $ | 1,621,519 | 26 | % | 47 | % | ||||||||||
| Percentage of revenue |
34 | % | 30 | % | 34 | % |
2019 Compared to 2018. Sales and marketing expense increased $520.2 million, or 47%, in 2019 compared to 2018. The increase was primarily due to a $358.8 million increase in marketing activities, a $77.8 million increase in personnel-related expenses, a $49.2 million increase in expenses for third-party service providers, and a $15.4 million increase in allocated costs for facilities and information technology. Total brand and performance marketing increased $473.9 million, of which $314.2 million was related to performance marketing, and $159.7 million was related to brand marketing. These increases were primarily due to our efforts to optimize our performance marketing bidding and to support the expansion of our China offering, Airbnb Experiences, Airbnb Plus, hotels, and Airbnb Luxe. In 2020, we reduced our investments in these initiatives as well as reduced our overall performance marketing spend.
160
2018 Compared to 2017. Sales and marketing expense increased $229.6 million, or 26%, in 2018 compared to 2017. The increase was primarily due to a $154.6 million increase in marketing activities, a $47.6 million increase in personnel-related expenses, and an $18.2 million increase in expenses for third-party service providers. Total brand and performance marketing increased $82.2 million driven by increased costs related to performance marketing bidding and search engine marketing for key terms.
General and Administrative
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| General and administrative |
$ 327,156 | $ 479,487 | $ 697,181 | 47 | % | 45 | % | |||||||||||||
| Percentage of revenue |
13 | % | 12 | % | 14 | % |
|
|
|
|
|
|
2019 Compared to 2018. General and administrative expense increased $217.7 million, or 45%, in 2019 compared to 2018. The increase was primarily due to a $116.4 million increase in payroll-related expenses resulting from an increase in headcount as we prepared to become a public company, a $29.9 million increase in lease expense related to our build-to-suit leases due to the adoption of ASC 842 in 2019 whereby lease expense is reported as a component of costs and expenses rather than interest expense, a $28.0 million increase in bad debt expense, and a net $17.5 million increase in lodging and business tax expense.
2018 Compared to 2017. General and administrative expense increased $152.3 million, or 47%, in 2018 compared to 2017. The increase was primarily due to a $44.7 million increase in professional and consulting fees, a $32.2 million increase in reserves for withholding tax liabilities, a $26.3 million increase in legal settlements, a $23.4 million increase in personnel-related expenses resulting from increased headcount, and an $18.2 million increase in bad debt expense.
Interest Income and Expense
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Interest income |
$ | 32,102 | $ | 66,793 | $ | 85,902 | 108 | % | 29 | % | ||||||||||
| Percentage of revenue |
1 | % | 2 | % | 2 | % |
|
|
|
|
|
| ||||||||
| Interest expense |
$ | (16,403 | ) | $ | (26,143 | ) | $ | (9,968 | ) | 59 | % | (62 | )% | |||||||
| Percentage of revenue |
(1 | )% | (1 | )% | (1 | )% |
|
|
|
|
|
|
2019 Compared to 2018. Interest income increased $19.1 million, or 29%, in 2019 compared to 2018. The increase was primarily due to higher invested balances and average interest rates. Interest expense decreased $16.2 million, or 62%, in 2019 compared to 2018. The decrease was primarily due to the adoption of ASC 842 in 2019 whereby a component of lease expense for build-to-suit leases was no longer recorded in interest expense, but rather, as a component of general and administrative expense. In 2018, we recorded $13.5 million of lease expense related to certain build-to-suit leases within interest expense.
161
2018 Compared to 2017. Interest income increased $34.7 million, or 108%, in 2018 compared to 2017. The increase was primarily due to higher invested balances and interest rates. Interest expense increased $9.7 million, or 59%, in 2018 compared to 2017. The increase was primarily due to interest associated with various indirect tax reserves and certain financing lease obligations.
Other Income (Expense), Net
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Other income (expense), net |
$ | 6,564 | $ | (12,361 | ) | $ | 13,906 | * | * | |||||||||||
| Percentage of revenue |
0 | % | 0 | % | 0 | % |
|
|
|
|
|
|
| * |
Not meaningful |
2019 Compared to 2018. Other income, net was $13.9 million in 2019 compared to other expense, net of $12.4 million in 2018. The change was primarily driven by $28.3 million of net realized and unrealized gains on our investments and other income and expense, including our share of income or loss from our equity method investments, as well as a $24.6 million gain related to an equity method investment that was acquired by a third party in 2019. Partially offsetting these amounts were impairment charges of $27.8 million recorded during 2019.
2018 Compared to 2017. Other expense, net was $12.4 million in 2018 compared to other income, net of $6.6 million in 2017. During 2018, other expense, net primarily consisted of foreign currency exchange losses largely related to the strengthening of the U.S. dollar. During 2017, other income, net primarily consisted of foreign currency gains largely related to the weakening of the U.S. dollar.
Provision for Income Taxes
| Year Ended December 31, | ||||||||||||||||||||
| 2017 | 2018 | 2019 | 2017 to 2018 % Change |
2018 to 2019 % Change |
||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||
| Provision for income taxes |
$ 10,947 | $ 63,893 | $ 262,636 | 484 | % | 311 | % | |||||||||||||
| Effective tax rate |
(19 | )% | 136 | % | (64 | )% |
|
|
|
|
|
|
2019 Compared to 2018. The provision for income taxes increased $198.7 million, or 311%, in 2019 compared to 2018. The increase was primarily due to a remeasurement of uncertain tax positions relating to the valuation of our international intellectual property that was previously sold to a subsidiary. See Note 14 to our consolidated financial statements included elsewhere in this prospectus for further details.
2018 Compared to 2017. The provision for income taxes increased $52.9 million, or 484%, in 2018 compared to 2017. The increase was primarily due to increased income taxes for our international subsidiaries.
162
Quarterly Results of Operations
The following table sets forth our unaudited quarterly consolidated results of operations for each of the quarterly periods for the years ended December 31, 2018 and 2019 and nine months ended September 30, 2020. These unaudited quarterly results of operations have been prepared on the same basis as our audited consolidated financial statements included elsewhere in this prospectus. In the opinion of management, the financial information set forth in the table below reflects all normal recurring adjustments necessary for the fair statement of results of operations for these periods. Our historical results are not necessarily indicative of the results that may be expected in the future, and the results of a particular quarter or other interim period are not necessarily indicative of the results for a full year. You should read the following unaudited quarterly consolidated results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.
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Quarterly Consolidated Statements of Operations
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, 2018 |
Dec 31, 2018 |
Mar 31, 2019 |
Jun 30, 2019 |
Sept 30, 2019 |
Dec 31, 2019 |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
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| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Revenue |
$ | 642,840 | $ | 903,431 | $ | 1,265,127 | $ | 840,587 | $ | 839,004 | $ | 1,213,678 | $ | 1,645,761 | $ | 1,106,796 | $ | 841,830 | $ | 334,774 | $ | 1,342,331 | ||||||||||||||||||||||
| Costs and expenses: |
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| Cost of revenue |
202,845 | 218,252 | 227,283 | 215,652 | 280,568 | 313,460 | 308,667 | 293,618 | 277,772 | 161,198 | 227,325 | |||||||||||||||||||||||||||||||||
| Operations and support(1) |
127,789 | 153,877 | 170,037 | 157,499 | 166,755 | 210,569 | 223,464 | 214,286 | 221,787 | 160,476 | 166,106 | |||||||||||||||||||||||||||||||||
| Product development(1) |
122,893 | 154,397 | 141,978 | 159,925 | 185,101 | 232,327 | 276,368 | 282,899 | 258,819 | 217,938 | 213,920 | |||||||||||||||||||||||||||||||||
| Sales and marketing(1) |
231,977 | 263,860 | 306,374 | 299,116 | 366,546 | 388,246 | 429,714 | 437,013 | 317,179 | 114,837 | 113,494 | |||||||||||||||||||||||||||||||||
| General and administrative(1) |
92,809 | 101,680 | 98,177 | 186,821 | 146,013 | 169,231 | 175,018 | 206,919 | 91,762 | 149,299 | 180,021 | |||||||||||||||||||||||||||||||||
| Restructuring charges |
— | — | — | — | — | — | — | — | — | 114,241 | 22,728 | |||||||||||||||||||||||||||||||||
| Total costs and expenses |
778,313 | 892,066 | 943,849 | 1,019,013 | 1,144,983 | 1,313,833 | 1,413,231 | 1,434,735 | 1,167,319 | 917,989 | 923,594 | |||||||||||||||||||||||||||||||||
| Income (loss) from operations |
(135,473 | ) | 11,365 | 321,278 | (178,426 | ) | (305,979 | ) | (100,155 | ) | 232,530 | (327,939 | ) | (325,489 | ) | (583,215 | ) | 418,737 | ||||||||||||||||||||||||||
| Interest income |
10,013 | 16,029 | 19,711 | 21,040 | 22,304 | 24,367 | 21,990 | 17,241 | 13,649 | 5,856 | 4,325 | |||||||||||||||||||||||||||||||||
| Interest expense |
(5,083 | ) | (5,653 | ) | (4,948 | ) | (10,459 | ) | (1,818 | ) | (2,450 | ) | (2,533 | ) | (3,167 | ) | 1,510 | (49,191 | ) | (59,867 | ) | |||||||||||||||||||||||
| Other income (expense), net |
(1,651 | ) | 166 | (5,724 | ) | (5,152 | ) | 6,531 | 6,284 | 29,315 | (28,224 | ) | (46,760 | ) | (12,848 | ) | (56,143 | ) | ||||||||||||||||||||||||||
| Income (loss) before income taxes |
(132,194 | ) | 21,907 | 330,317 | (172,997 | ) | (278,962 | ) | (71,954 | ) | 281,302 | (342,089 | ) | (357,090 | ) | (639,398 | ) | 307,052 | ||||||||||||||||||||||||||
| Provision for (benefit from) income taxes |
14,036 | 11,693 | (7,579 | ) | 45,743 | 13,065 | 225,470 | 14,652 | 9,449 | (16,485 | ) | (63,810 | ) | 87,724 | ||||||||||||||||||||||||||||||
| Net income (loss) |
$ | (146,230 | ) | $ | 10,214 | $ | 337,896 | $ | (218,740 | ) | $ | (292,027 | ) | $ | (297,424 | ) | $ | 266,650 | $ | (351,538 | ) | $ | (340,605 | ) | $ | (575,588 | ) | $ | 219,328 |
| (1) |
Includes stock-based compensation expense as follows: |
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, 2018 |
Dec 31, 2018 |
Mar 31, 2019 |
Jun 30, 2019 |
Sept 30, 2019 |
Dec 31, 2019 |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
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| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Operations and support |
$ | 1,084 | $ | 25 | $ | 29 | $ | 830 | $ | 31 | $ | 124 | $ | 128 | $ | 534 | $ | 949 | $ | 855 | $ | 1,065 | ||||||||||||||||||||||
| Product development |
9,934 | 7,894 | 7,927 | 8,140 | 6,711 | 7,995 | 30,285 | 11,641 | 22,436 | 20,716 | 20,936 | |||||||||||||||||||||||||||||||||
| Sales and marketing |
2,958 | 3,085 | 3,059 | 3,363 | 4,793 | 6,197 | 6,084 | 6,845 | 6,048 | 4,387 | 1,544 | |||||||||||||||||||||||||||||||||
| General and administrative |
(1,548 | ) | 2,357 | 2,385 | 2,371 | 2,528 | 3,733 | 3,701 | 6,217 | 12,193 | 13,608 | 5,888 | ||||||||||||||||||||||||||||||||
| Restructuring charges |
— | — | — | — | — | — | — | — | — | (1,776 | ) | (73 | ) | |||||||||||||||||||||||||||||||
| Total stock-based compensation expense |
$ | 12,428 | $ | 13,361 | $ | 13,400 | $ | 14,704 | $ | 14,063 | $ | 18,049 | $ | 40,198 | $ | 25,237 | $ | 41,626 | $ | 37,790 | $ | 29,360 |
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Quarterly Consolidated Statements of Operations, as a Percentage of Revenue
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, 2018 |
Dec 31, 2018 |
Mar 31, 2019 |
Jun 30, 2019 |
Sept 30, 2019 |
Dec 31, 2019 |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
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| Revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||||||
| Costs and expenses: |
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| Cost of revenue |
32 | 24 | 18 | 26 | 33 | 26 | 19 | 27 | 33 | 48 | 17 | |||||||||||||||||||||||||||||||||
| Operations and support |
20 | 17 | 13 | 19 | 20 | 17 | 14 | 19 | 26 | 48 | 12 | |||||||||||||||||||||||||||||||||
| Product development |
19 | 17 | 11 | 19 | 22 | 19 | 17 | 26 | 31 | 65 | 16 | |||||||||||||||||||||||||||||||||
| Sales and marketing |
36 | 29 | 24 | 36 | 44 | 32 | 26 | 39 | 38 | 34 | 9 | |||||||||||||||||||||||||||||||||
| General and administrative |
14 | 12 | 9 | 21 | 17 | 14 | 10 | 19 | 11 | 45 | 13 | |||||||||||||||||||||||||||||||||
| Restructuring charges |
— | — | — | — | — | — | — | — | — | 34 | 2 | |||||||||||||||||||||||||||||||||
| Total costs and expenses |
121 | 99 | 75 | 121 | 136 | 108 | 86 | 130 | 139 | 274 | 69 | |||||||||||||||||||||||||||||||||
| Income (loss) from operations |
(21 | ) | 1 | 25 | (21 | ) | (36 | ) | (8 | ) | 14 | (30 | ) | (39 | ) | (174 | ) | 31 | ||||||||||||||||||||||||||
| Interest income |
2 | 2 | 2 | 3 | 3 | 2 | 1 | 2 | 2 | 2 | 0 | |||||||||||||||||||||||||||||||||
| Interest expense |
(1 | ) | (1 | ) | 0 | (1 | ) | 0 | 0 | 0 | 0 | 0 | (15 | ) | (4 | ) | ||||||||||||||||||||||||||||
| Other income (expense), net |
(1 | ) | 0 | (1 | ) | (2 | ) | 0 | 0 | 2 | (3 | ) | (5 | ) | (4 | ) | (4 | ) | ||||||||||||||||||||||||||
| Income (loss) before income taxes |
(21 | ) | 2 | 26 | (21 | ) | (33 | ) | (6 | ) | 17 | (31 | ) | (42 | ) | (191 | ) | 23 | ||||||||||||||||||||||||||
| Provision for (benefit from) income taxes |
2 | 1 | (1 | ) | 5 | 2 | 19 | 1 | 1 | (2 | ) | (19 | ) | 7 | ||||||||||||||||||||||||||||||
| Net income (loss) |
(23 | )% | 1 | % | 27 | % | (26 | )% | (35 | )% | (25 | )% | 16 | % | (32 | )% | (40 | )% | (172 | )% | 16 | % |
Quarterly Trends
Revenue
Revenue in each of the quarters in 2019 was higher than revenue in the same quarter of the prior year primarily from an increase in the number of check-ins related to Nights and Experiences Booked on our platform. However, as revenue is recorded upon check-in, revenue is impacted significantly by seasonality. Revenue is typically lowest in the first quarter as guests plan for travel later in the year, and revenue is highest in the third quarter, or when we have the most check-ins, as the third quarter is the peak travel season for North America and EMEA. Revenue in the second quarter of 2020 significantly decreased as COVID-19 disrupted travel across the world and resulted in materially higher cancellations and fewer bookings. Revenue in the third quarter of 2020 improved as domestic travel rebounded, but was below revenue for the same period in 2019.
Cost of Revenue
On a quarterly basis, cost of revenue generally increased in 2019 compared to the corresponding quarterly periods of 2018 primarily due to the growth in GBV resulting in higher payment processing costs, with a slight seasonal decrease in the first and fourth quarters. Cost of revenue as a percentage of revenue for each quarter of 2019 remained relatively consistent when compared to the same quarter of the prior year. Cost of revenue decreased in each quarter of 2020 compared to the same period in 2019 as a result of a
165
decline in payment processing costs driven by fewer transactions on our platform due to the COVID-19 pandemic. As a percentage of revenue, cost of revenue in the second quarter of 2020 increased from the second quarter of 2019 primarily because costs represented a greater proportion of lower revenue recorded in the period due to the COVID-19 pandemic. In the third quarter of 2020, cost of revenue as a percentage of revenue was 17% compared to 19% in the third quarter of 2019 reflecting lower payment processing fees and a decrease in data center hosting costs.
Operations and Support
On a quarterly basis, operations and support expense generally increased in 2019 compared to the corresponding quarterly periods of 2018 primarily due to the growth in our business as we provided support to new products and markets, as well as enhanced the support experience for our hosts and guests, with a slight seasonal decrease in the first quarter. Operations and support as a percentage of revenue for each quarter of 2019 remained relatively consistent when compared to the same quarter of the prior year. Operations and support expense decreased in the second and third quarters of 2020 compared to the same periods in 2019 primarily due to a reduction in personnel-related expenses and third-party service provider fees associated with community support and lower costs resulting from fewer transactions on our platform due to the COVID-19 pandemic. As a percentage of revenue, operations and support expense in the first and second quarters of 2020 increased relative to the corresponding periods in 2019 primarily because many of our costs are relatively fixed across quarters, and for the second quarter of 2020, represented a greater proportion of lower revenue recorded in the period due to the COVID-19 pandemic. In the third quarter of 2020, operations and support expense represented 12% of revenue compared to 14% in the third quarter of 2019 reflecting cost reductions implemented in the second quarter of 2020.
Product Development
On a quarterly basis, product development expense generally increased in 2019 compared to the corresponding quarterly periods of 2018 primarily as a result of higher headcount to migrate our technical stack to a service-oriented architecture, improve our platform performance, and support new product initiatives. Product development expense as a percentage of revenue on a quarterly basis trended higher in 2019 compared to the same quarters from the prior year due to the increased personnel-related costs. Product development expense decreased in the second and third quarters of 2020 compared to the same periods in 2019 primarily due to a reduction in personnel-related expenses. As a percentage of revenue, product development expense in the first and second quarters of 2020 increased relative to the corresponding periods in the prior year primarily because many of our costs are relatively fixed across quarters, and for the second quarter, represented a greater proportion of lower revenue recorded in the period due to the COVID-19 pandemic. In the third quarter of 2020, product development expense represented 16% of revenue compared to 17% in the third quarter of 2019 reflecting cost reductions implemented in the second quarter of 2020.
Sales and Marketing
On a quarterly basis, sales and marketing expense generally increased in 2019 compared to the corresponding quarterly periods of 2018 due to higher performance and brand marketing spend. Sales and marketing expense as a percentage of revenue on a quarterly basis trended higher in 2019 compared to the same quarters from the prior year due to increased marketing costs and varied on a quarterly basis depending on the season and timing of initiatives. Sales and marketing expense decreased significantly in
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the second and third quarters of 2020 as we suspended substantially all performance marketing efforts in response to the COVID-19 pandemic. As a percentage of revenue, sales and marketing expense decreased in the first quarter of 2020 compared to the first quarter of 2019 due to lower marketing expenses, while sales and marketing expense as a percentage of revenue in the second quarter of 2020 increased from 32% in the second quarter of 2019 to 34% as fixed costs represented a greater proportion of lower revenue recorded in the period due to the COVID-19 pandemic. In the third quarter of 2020, sales and marketing expense represented 9% of revenue compared to 26% in the third quarter of 2019 reflecting reduced spending on performance marketing and cost reductions implemented in the second quarter of 2020.
General and Administrative
On a quarterly basis, general and administrative expense increased for all quarters in 2019 compared to the corresponding quarterly periods of 2018 and fluctuated throughout 2018, primarily due to increases in personnel-related costs and other professional services. General and administrative expenses as a percentage of revenue varied on a quarterly basis with the fourth quarter of 2018 being higher primarily as a result of costs associated with legal settlements and certain tax reserves. General and administrative expense decreased in the first quarter of 2020 and as a percentage of revenue compared to the first quarter of 2019 primarily due to a reduction in our reserve for lodging taxes in jurisdictions in which management no longer believed a liability was probable following favorable outcomes in a related legal proceeding. General and administrative expense as a percentage of revenue increased in the second quarter of 2020 compared to the second quarter of 2019 because many of our costs are relatively fixed across quarters, and represented a greater proportion of lower revenue recorded in the period due to the COVID-19 pandemic. In the third quarter of 2020, general and administrative expense represented 13% of revenue compared to 10% in the third quarter of 2019 reflecting relatively fixed costs across quarters and an increase in reserves for withholding tax liabilities.
Restructuring Charges
Restructuring charges were recorded beginning in the second quarter of 2020 in connection with cost reduction actions created in response to the COVID-19 pandemic. Specifically, restructuring charges included those associated with a global workforce reduction in May 2020, lease impairments, and costs associated with amendments and terminations of contracts, including commercial agreements with service providers.
Provision for (Benefit from) Income Taxes
On a quarterly basis, provision for income taxes has remained relatively consistent as a percentage of revenue in 2018 and 2019, with the exception of the second quarter of 2019 during which a reserve was remeasured for uncertain tax positions relating to the valuation of our international intellectual property that was previously sold to a subsidiary. In the third quarter of 2020, we approved a restructuring plan to repatriate our intellectual property to the United States resulting in a reversal of tax benefits accrued in the first two quarters of 2020 (see Note 14 to our consolidated financial statements included elsewhere in this prospectus for additional information).
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Non-GAAP Financial Measures
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, 2018 |
Dec 31, 2018 |
Mar 31, 2019 |
Jun 30, 2019 |
Sept 30, 2019 |
Dec 31, 2019 |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
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| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) |
$ | (146,230 | ) | $ | 10,214 | $ | 337,896 | $ | (218,740 | ) | $ | (292,027 | ) | $ | (297,424 | ) | $ | 266,650 | $ | (351,538 | ) | $ | (340,605 | ) | $ | (575,588 | ) | $ | 219,328 | |||||||||||||||
| Adjusted EBITDA |
$ | (95,083 | ) | $ | 49,457 | $ | 360,005 | $ | (143,754 | ) | $ | (247,865 | ) | $ | (42,592 | ) | $ | 313,583 | $ | (276,386 | ) | $ | (334,271 | ) | $ | (397,326 | ) | $ | 501,443 | |||||||||||||||
| Net cash provided by (used in) operating activities |
$ | 319,233 | $ | 282,253 | $ | 96,229 | $ | (102,158 | ) | $ | 314,024 | $ | 151,634 | $ | (46,557 | ) | $ | (196,374 | ) | $ | (569,830 | ) | $ | (256,462 | ) | $ | 335,670 | |||||||||||||||||
| Free Cash Flow |
$ | 287,269 | $ | 268,111 | $ | 74,915 | $ | (125,362 | ) | $ | 277,086 | $ | 121,107 | $ | (78,370 | ) | $ | (222,548 | ) | $ | (585,497 | ) | $ | (262,648 | ) | $ | 328,034 |
Quarterly Trends in Non-GAAP Financial Measures
Our Adjusted EBITDA and Free Cash Flow have fluctuated based on our level of investment in new product and growth initiatives, as well as seasonality. We expect to incur Adjusted EBITDA loss and comparatively lower Free Cash Flow in the near term largely due to global economic pressures primarily driven by COVID-19. For additional information regarding seasonality, see the subsection titled “— Key Factors Affecting Our Performance — Seasonality” above.
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Quarterly Reconciliations of Non-GAAP Financial Measures
We use Adjusted EBITDA and Free Cash Flow to measure our performance and to identify trends, to formulate financial projections, and to make strategic decisions. The following table presents the reconciliations from the GAAP measure to the non-GAAP measure:
Adjusted EBITDA Reconciliation
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, 2018 |
Dec 31, 2018 |
Mar 31, 2019 |
Jun 30, 2019 |
Sept 30, 2019 |
Dec 31, 2019 |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
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| (in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||
| TTM Revenue |
$ | 3,651,985 | $ | 3,848,149 | $ | 4,158,396 | $ | 4,539,030 | $ | 4,805,239 | $ | 4,808,065 | $ | 3,929,161 | $ | 3,625,731 | ||||||||||||||||||||||||||||
| Net income (loss) |
$ | (146,230 | ) | $ | 10,214 | $ | 337,896 | $ | (218,740 | ) | $ | (292,027 | ) | $ | (297,424 | ) | $ | 266,650 | $ | (351,538 | ) | $ | (340,605 | ) | $ | (575,588 | ) | $ | 219,328 | |||||||||||||||
| Adjusted to exclude the following: |
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| Provision for (benefit from) income taxes |
14,036 | 11,693 | (7,579 | ) | 45,743 | 13,065 | 225,470 | 14,652 | 9,449 | (16,485 | ) | (63,810 | ) | 87,724 | ||||||||||||||||||||||||||||||
| Other (income) expense, net |
1,651 | (166 | ) | 5,724 | 5,152 | (6,531 | ) | (6,284 | ) | (29,315 | ) | 28,224 | 46,760 | 12,848 | 56,143 | |||||||||||||||||||||||||||||
| Interest expense |
5,083 | 5,653 | 4,948 | 10,459 | 1,818 | 2,450 | 2,533 | 3,167 | (1,510 | ) | 49,191 | 59,867 | ||||||||||||||||||||||||||||||||
| Interest income |
(10,013 | ) | (16,029 | ) | (19,711 | ) | (21,040 | ) | (22,304 | ) | (24,367 | ) | (21,990 | ) | (17,241 | ) | (13,649 | ) | (5,856 | ) | (4,325 | ) | ||||||||||||||||||||||
| Depreciation and amortization |
21,831 | 19,933 | 20,186 | 20,451 | 21,026 | 24,108 | 31,198 | 37,830 | 33,872 | 29,928 | 29,638 | |||||||||||||||||||||||||||||||||
| Stock-based compensation expense(1) |
12,428 | 13,361 | 13,400 | 14,704 | 14,063 | 18,049 | 40,198 | 25,237 | 41,626 | 39,566 | 29,433 | |||||||||||||||||||||||||||||||||
| Net changes in lodging tax reserves |
6,131 | 4,798 | 5,141 | (483 | ) | 23,025 | 15,406 | 9,657 | (11,514 | ) | (84,280 | ) | 2,154 | 907 | ||||||||||||||||||||||||||||||
| Restructuring charges |
— | — | — | — | — | — | — | — | — | 114,241 | 22,728 | |||||||||||||||||||||||||||||||||
| Adjusted EBITDA |
$ | (95,083 | ) | $ | 49,457 | $ | 360,005 | $ | (143,754 | ) | $ | (247,865 | ) | $ | (42,592 | ) | $ | 313,583 | $ | (276,386 | ) | $ | (334,271 | ) | $ | (397,326 | ) | $ | 501,443 | |||||||||||||||
| TTM Adjusted EBITDA |
$ | 170,625 | $ | 17,843 | $ | (74,206 | ) | $ | (120,628 | ) | $ | (253,260 | ) | $ | (339,666 | ) | $ | (694,400 | ) | $ | (506,540 | ) | ||||||||||||||||||||||
| TTM Adjusted EBITDA as a percentage of TTM Revenue |
5 | % | 0 | % | (2 | )% | (3 | )% | (5 | )% | (7 | )% | (18 | )% | (14 | )% |
| (1) |
Excludes stock-based compensation related to restructuring, which is included in restructuring charges in the table above. |
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Free Cash Flow Reconciliation
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||||||
| Mar 31, 2018 |
Jun 30, 2018 |
Sept 30, |
Dec 31, |
Mar 31, |
Jun 30, |
Sept 30, |
Dec 31, |
Mar 31, 2020 |
Jun 30, 2020 |
Sept 30, 2020 |
||||||||||||||||||||||||||||||||||
| (in thousands, except percentages) | ||||||||||||||||||||||||||||||||||||||||||||
| TTM Revenue |
$ | 3,651,985 | $ | 3,848,149 | $ | 4,158,396 | $ | 4,539,030 | $ | 4,805,239 | $ | 4,808,065 | $ | 3,929,161 | $ | 3,625,731 | ||||||||||||||||||||||||||||
| Net cash provided by (used in) operating activities |
$ | 319,233 | $ | 282,253 | $ | 96,229 | $ | (102,158 | ) | $ | 314,024 | $ | 151,634 | $ | (46,557 | ) | $ | (196,374 | ) | $ | (569,830 | ) | $ | (256,462 | ) | $ | 335,670 | |||||||||||||||||
| Purchases of property and equipment |
(31,964 | ) | (14,142 | ) | (21,314 | ) | (23,204 | ) | (36,938 | ) | (30,527 | ) | (31,813 | ) | (26,174 | ) | (15,667 | ) | (6,186 | ) | (7,636 | ) | ||||||||||||||||||||||
| Free Cash Flow |
$ | 287,269 | $ | 268,111 | $ | 74,915 | $ | (125,362 | ) | $ | 277,086 | $ | 121,107 | $ | (78,370 | ) | $ | (222,548 | ) | $ | (585,497 | ) | $ | (262,648 | ) | $ | 328,034 | |||||||||||||||||
| TTM Free Cash Flow |
$ | 504,933 | $ | 494,750 | $ | 347,746 | $ | 194,461 | $ | 97,275 | $ | (765,308 | ) | $ | (1,149,063 | ) | $ | (742,659 | ) | |||||||||||||||||||||||||
| TTM Free Cash Flow as a percentage of TTM Revenue |
14 | % | 13 | % | 8 | % | 4 | % | 2 | % | (16 | )% | (29 | )% | (20 | )% | ||||||||||||||||||||||||||||
| Other cash flow components: |
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| Net cash provided by (used in) investing activities |
$ | (193,965 | ) | $ | (255,062 | ) | $ | (42,835 | ) | $ | (176,309 | ) | $ | 41,645 | $ | (109,654 | ) | $ | 17,920 | $ | (297,066 | ) | $ | 2,259 | $ | (581,070 | ) | $ | (237,293 | ) | ||||||||||||||
| Net cash provided by (used in) financing activities |
$ | 1,538,053 | $ | 547,050 | $ | (1,755,023 | ) | $ | (189,564 | ) | $ | 1,479,831 | $ | 624,885 | $ | (1,420,518 | ) | $ | 170,381 | $ | (339,202 | ) | $ | 2,543,390 | $ | (1,029,981 | ) |
Liquidity and Capital Resources
As of September 30, 2020, our principal sources of liquidity were cash and cash equivalents of $2.7 billion and marketable securities of $1.8 billion, which included $1.2 billion and $0.2 billion, respectively, held by foreign subsidiaries. Cash and cash equivalents consist of checking and interest-bearing accounts and highly-liquid securities with an original maturity of 90 days or less. Marketable securities consist of corporate debt securities, mutual funds, highly-liquid debt instruments of the U.S. government and its agencies, and certificates of deposit. These amounts do not include cash of $2.4 billion as of September 30, 2020 that we held for bookings in advance of guests completing check-ins that we record separately on our balance sheet in funds receivable and amounts held on behalf of customers with a corresponding liability in funds payable and amounts payable to customers.
Cash, cash equivalents, and marketable securities held outside the United States may be repatriated, subject to certain limitations, and would be available to be used to fund our domestic operations.
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However, repatriation of such funds may result in additional tax liabilities. We believe that our existing cash, cash equivalents, and marketable securities balances in the United States are sufficient to fund our working capital needs in the United States.
Loan Agreements
In April 2020, we entered into a $1.0 billion First Lien Credit and Guaranty Agreement (the “First Lien Credit Agreement,” and the loans thereunder, the “First Lien Loan”), resulting in proceeds of $961.4 million, net of debt discount and issuance costs. The loan is due and payable in April 2025. The underlying loan can be repaid in whole or in part prior to April 2025 at our option, subject to applicable prepayment premiums and make-whole premiums. Beginning in September 2020, we are required to repay the First Lien Loan in quarterly installments equal to 0.25% of the $1.0 billion aggregate principal amount of the First Lien Loan, with the remaining principal amount payable on the maturity date. Interest on the First Lien Loan is payable monthly or quarterly in arrears at our option depending on the chosen per annum interest rate equal to (i) in the case of LIBOR borrowings, 7.5% plus the London interbank offered rate (customarily defined, with LIBOR replacement provisions consistent with the April 2019 Alternative Reference Rates Commission recommended fallback language for syndicated loans, “LIBOR”), subject to a floor of 1%, or (ii) in the case of base rate borrowings, 6.5% plus the greatest of (a) the prime rate, (b) the federal funds effective rate plus 0.5%, and (c) LIBOR for a one-month period plus 1%, subject to a floor of 2%.
In April 2020, we entered into a $1.0 billion Second Lien Credit and Guaranty Agreement (the “Second Lien Credit Agreement,” and the loans thereunder, the “Second Lien Loan”), resulting in proceeds of $967.5 million, net of debt discount and issuance costs. The loan is due and payable in July 2025. The underlying loan can be repaid in whole or in part prior to July 2025 at our option, subject to applicable prepayment premiums and make-whole premiums and the priority of lenders under the First Lien Credit Agreement over any proceeds we receive from the sale of collateral. Interest on the Second Lien Loan is payable monthly or quarterly in arrears at our option depending on the chosen per annum interest rate equal to (i) in the case of LIBOR borrowings, 10% plus LIBOR, subject to a floor of 1%, or (ii) in the case of base rate borrowings, 9% plus the greatest of (a) the prime rate, (b) the federal funds effective rate plus 0.5%, and (c) LIBOR for a one-month period plus 1%, subject to a floor of 3%. In addition, at our election, payment-in-kind interest up to 5.5% per annum may be paid by increasing the principal amount of the Second Lien Loan by such amount.
In connection with the Second Lien Loan, we issued warrants to purchase 7,934,794 shares of Class A common stock with an initial exercise price of $28.355 per share, subject to adjustments upon the occurrence of certain specified events, to the Second Lien Loan lenders. The warrants expire on April 17, 2030 and the exercise price can be settled in cash or in net shares at the holder’s option. The fair value of the warrants of $116.6 million at issuance was recorded as a liability on the consolidated balance sheet, and the warrant liability will be subsequently remeasured to fair value at each reporting date as long as the warrants remain outstanding and unexercised with changes in fair value recorded in other income (expense), net in the consolidated statements of operations.
The First Lien Credit Agreement and Second Lien Credit Agreement include customary conditions to borrowing, events of default, and covenants, including those that restrict our and our subsidiaries’ ability to, among other things, incur additional indebtedness, create or incur liens, merge or consolidate with other companies, liquidate or dissolve, sell or transfer assets, pay dividends or make distributions, make acquisitions, investments, loans or advances, or payments and prepayments of junior or unsecured indebtedness, subject to certain exceptions. As of September 30, 2020, we were in compliance with all covenants of these loan agreements.
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As of September 30, 2020, the principal amount of the borrowings outstanding under the First Lien Loan and Second Lien Loan totaled $1,997.5 million. For additional information about the First Lien Loan and Second Lien Loan, see the section titled “Description of Certain Indebtedness.”
Credit Facility
In April 2020, we terminated our Credit Facility, which provided an initial borrowing commitment by a group of lenders led by Bank of America, N.A. of $1.0 billion. The Credit Facility also provided a $100.0 million sub-limit for the issuance of letters of credit. The Credit Facility had a commitment fee of 0.125% per annum on any undrawn amounts. Outstanding borrowings bore interest at a fluctuating rate per annum equal to the highest of (i) the federal funds effective rate plus one-half of 1.00%, (ii) the rate of interest in effect for such day by Bank of America as its “prime rate,” or (iii) the eurocurrency rate for one month plus 1.00%.
As of December 31, 2019, there were no borrowings outstanding on the Credit Facility and outstanding letters of credit totaled $53.0 million. The Credit Facility contained customary affirmative and negative covenants, including restrictions on our and certain of our subsidiaries’ ability to incur debt and liens, undergo fundamental changes, and pay dividends or other distributions, as well as certain financial covenants. We were in compliance with all covenants as of December 31, 2019. On April 17, 2020, we terminated the Credit Facility. Letters of credit under the Credit Facility were transferred to new issuers upon the termination of the Credit Facility. As of September 30, 2020, letters of credit totaled $55.6 million and were collateralized by $55.6 million of restricted cash on the consolidated balance sheet.
We believe that our current available cash, cash equivalents, and marketable securities will be sufficient to meet our operational cash needs for the foreseeable future. Our future capital requirements, however, will depend on many factors, including, but not limited to our growth, headcount, ability to attract and retain hosts and guests on our platform, capital expenditures, acquisitions, introduction of new products and offerings, timing and extent of spending to support our efforts to develop our platform, and expansion of sales and marketing activities. Additionally, we may in the future raise additional capital or incur additional indebtedness to continue to fund our strategic initiatives. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and/or debt, which may not be available on favorable terms, or at all. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition could be materially adversely affected. We expect our capital expenditures for the next twelve months to range between $85 million to $100 million.
Vesting of Restricted Stock Units
In connection with our RSUs as described in the subsection titled “— Critical Accounting Policies and Estimates — Stock-Based Compensation — Restricted Stock Units,” we are required to withhold taxes on the fair value at applicable minimum statutory rates. Accordingly, to satisfy these tax withholding obligations, we will withhold the number of shares necessary to satisfy the tax obligations based on the initial public offering price. We currently expect that the average of these withholding tax rates will be approximately %. We intend to use a portion of the net proceeds we receive from this offering to satisfy a portion of the anticipated tax withholding and remittance obligations of $ million during the quarter of related to the RSU Settlement based upon the assumed initial public offering price per share of $ , which is the midpoint of the price range set forth on the cover page of this prospectus. The amount of these obligations could be higher or lower, depending on the price of shares of our Class A
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common stock in this offering, and the actual number of pre-offering RSUs outstanding for which the service-based vesting condition has been satisfied on the initial settlement date.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Year Ended December 31, | Nine Months Ended September 30, |
|||||||||||||||||||
| 2017 | 2018 | 2019 | 2019 | 2020 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Net cash provided by (used in) operating activities |
$ | 251,225 | $ | 595,557 | $ | 222,727 | $ | 419,101 | $ | (490,622 | ) | |||||||||
| Net cash used in investing activities |
(788,944 | ) | (668,171 | ) | (347,155 | ) | (50,089 | ) | (816,104 | ) | ||||||||||
| Net cash provided by financing activities |
672,954 | 140,516 | 854,579 | 684,198 | 1,174,207 | |||||||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash |
227,172 | (158,919 | ) | (25,284 | ) | (77,021 | ) | 35,210 | ||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash |
$ | 362,407 | $ | (91,017 | ) | $ | 704,867 | $ | 976,189 | $ | (97,309 | ) |
Cash Provided by (Used in) Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2020 was $490.6 million. Our net loss for the nine months ended September 30, 2020 was $696.9 million, adjusted for non-cash charges, primarily consisting of $108.8 million of stock-based compensation expense, $93.4 million of depreciation and amortization, $85.5 million of bad debt expense, and $82.1 million of impairment charges of investments. Additional uses of cash resulted from changes in working capital, including a $215.1 million decrease in unearned fees resulting from fewer bookings on our platform due to COVID-19 and a $106.1 million decrease in accounts payable due to lower spending, partially offset by a $90.2 million increase in accrued expenses and other liabilities primarily due to the coupons issued to guests related to COVID-19 cancellations.
Net cash provided by operating activities for the nine months ended September 30, 2019 was $419.1 million. Our net loss for the nine months ended September 30, 2019 was $322.8 million, adjusted for non-cash charges, primarily consisting of $76.3 million of depreciation and amortization, $72.3 million of stock-based compensation expense, and $47.9 million of bad debt expense. Additional sources of cash flows resulted from changes in working capital, including a $547.5 million increase in accrued expenses and other liabilities resulting from increased spending and headcount growth, and a $166.9 million increase in unearned fees resulting from increased bookings on our platform. The primary use of operating cash was a $155.6 million increase in prepaids and other assets.
Net cash provided by operating activities in 2019 was $222.7 million. Our net loss for 2019 was $674.3 million, adjusted for non-cash charges, primarily consisting of $114.2 million of depreciation and amortization, $97.5 million of stock-based compensation expense, and $77.1 million of bad debt expense. Additional sources of cash flows resulted from changes in working capital, including a $547.7 million increase in accrued expenses and other liabilities resulting from increased spending and headcount growth, as well as a $176.3 million increase in unearned fees resulting from increased bookings on our platform. The primary use of operating cash was a $186.4 million increase in prepaids and other assets associated with the growth in our operations.
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Net cash provided by operating activities in 2018 was $595.6 million. Our net loss for 2018 was $16.9 million, adjusted for non-cash charges, primarily consisting of $82.4 million of depreciation and amortization, $53.9 million of stock-based compensation expense, and $49.0 million of bad debt expense. Additional sources of cash flows resulted from changes in working capital, including a $348.1 million increase in accrued expenses and other liabilities resulting from increased spending and headcount growth, as well as a $145.9 million increase in unearned fees resulting from increased bookings on our platform. The primary use of operating cash was a $102.8 million increase in prepaids and other assets associated with the growth in our operations.
Net cash provided by operating activities in 2017 was $251.2 million. Our net loss for 2017 was $70.0 million, adjusted for non-cash charges, primarily consisting of $79.3 million of depreciation and amortization, $38.4 million of stock-based compensation expense, and $30.9 million of bad debt. Additional sources of cash flows resulted from changes in working capital, including a $174.8 million increase in accrued expenses and other liabilities resulting from increased spending and headcount growth, as well as a $135.4 million increase in unearned fees resulting from increased bookings on our platform. The primary use of operating cash was a $138.8 million increase in prepaids and other assets associated with the growth in our operations.
Cash Used in Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2020 was $816.1 million, which was primarily used to purchase marketable securities of $2.0 billion and property and equipment of $29.5 million. These uses were partially offset by proceeds resulting from sales and maturities of marketable securities of $206.7 million and $1.0 billion, respectively.
Net cash used in investing activities for the nine months ended September 30, 2019 was $50.1 million, which was primarily used to purchase marketable securities of $561.7 million and property and equipment of $99.3 million, to fund acquisitions of $192.1 million, and to make equity investments in privately-held companies of $161.0 million. These uses were partially offset by proceeds resulting from sales and maturities of marketable securities of $535.9 million and $394.4 million, respectively.
Net cash used in investing activities in 2019 was $347.2 million, which was primarily used to purchase marketable securities of $1.0 billion and property and equipment of $125.5 million, to fund acquisitions of $192.1 million, and to make equity investments in privately-held companies of $208.2 million. These uses were partially offset by proceeds resulting from sales and maturities of marketable securities of $609.4 million and $551.6 million, respectively.
Net cash used in investing activities in 2018 was $668.2 million, which was primarily used to purchase marketable securities of $1.3 billion and property and equipment of $90.6 million, to fund acquisitions of $31.3 million, and to make equity investments in privately-held companies of $28.9 million. These uses were partially offset by proceeds resulting from sales and maturities of marketable securities of $555.2 million and $201.3 million, respectively.
Net cash used in investing activities in 2017 was $788.9 million, which was primarily used to purchase marketable securities of $1.0 billion, to acquire property and equipment of $100.2 million, and to fund acquisitions of $172.6 million. These uses were partially offset by proceeds from the sales and maturities of marketable securities of $472.9 million and $55.3 million, respectively.
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Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2020 was $1.2 billion, primarily reflecting proceeds of $1.9 billion from the issuance of debt and warrants, net of issuance costs, partially offset by a decrease of $769.0 million in funds payable and amounts payable to customers.
Net cash provided by financing activities for the nine months ended September 30, 2019 was $684.2 million, reflecting the change in funds payable and amounts payable to customers of $678.5 million and proceeds from the exercise of stock options of $5.7 million.
Net cash provided by financing activities in 2019 was $854.6 million, reflecting the change in funds payable and amounts payable to customers of $848.7 million and proceeds from the exercise of stock options of $5.9 million.
Net cash provided by financing activities in 2018 was $140.5 million, primarily reflecting the change in funds payable and amounts payable to customers of $117.6 million, proceeds from the exercise of stock options of $16.0 million, and reimbursements for improvements we made at leased office facilities of $6.9 million.
Net cash provided by financing activities in 2017 was $673.0 million, primarily reflecting the change in funds payable and amounts payable to customers of $617.2 million and issuance of redeemable convertible preferred stock of $49.9 million.
Effect of Exchange Rates
The effect of exchange rate changes on cash, cash equivalents, and restricted cash on our consolidated statements of cash flows relates to certain of our assets, principally cash balances held on behalf of hosts and guests, that are denominated in currencies other than the functional currency of certain of our subsidiaries. During 2019 and 2018, we recorded a $25.3 million and a $158.9 million reduction in cash, cash equivalents, and restricted cash, respectively, primarily due to the strengthening of the U.S. dollar. During 2017, we recorded a $227.2 million increase in cash, cash equivalents, and restricted cash primarily due to the weakening of the U.S. dollar. During the nine months ended September 30, 2019 and 2020, we recorded a $77.0 million reduction in cash, cash equivalents, and restricted cash primarily due to the strengthening of the U.S. dollar and a $35.2 million increase in cash, cash equivalents, and restricted cash primarily due to the weakening of the U.S. dollar, respectively.
Off-Balance Sheet Arrangements
As of September 30, 2020, we did not have any off-balance sheet arrangements, as defined in Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.
Indemnification Agreements
In the ordinary course of business, we include limited indemnification provisions under certain agreements with parties with whom we have commercial relations of varying scope and terms. Under these contracts, we may indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with breach of the agreements, or intellectual property infringement claims made by a third party, including claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to its performance under the subject agreement. It is not possible to determine the maximum potential loss
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under these indemnification provisions due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
In addition, we have entered into indemnification agreements with our directors, executive officers and certain other employees that require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, executive officers, or employees.
Contractual Obligations and Commitments
The following table summarizes our contractual obligations and commitments as of December 31, 2019:
| Payments Due by Period(1) | ||||||||||||||||||||
| Total | Less than 1 Year |
1-3 Years | 3-5 Years | More than 5 Years |
||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Operating lease commitments(2) |
$ | 539,445 | $ | 57,220 | $ | 139,028 | $ | 135,763 | $ | 207,434 | ||||||||||
| Noncancelable purchase commitments(3) |
1,200,000 | 175,000 | 440,000 | 585,000 | — | |||||||||||||||
| Other commitments |
318,000 | 14,000 | 72,000 | 74,000 | 158,000 | |||||||||||||||
| Total contractual obligations |
$ | 2,057,445 | $ | 246,220 | $ | 651,028 | $ | 794,763 | $ | 365,434 |
| (1) |
Excludes income tax matters as we are not able to reasonably estimate the timing of future cash flows related to uncertain tax positions. For further discussion of income taxes, see Note 14 to our consolidated financial statements included elsewhere in this prospectus for additional information. |
| (2) |
Consists of future non-cancelable minimum rental payments under operating lease obligations, excluding short-term leases. See Note 9 to our consolidated financial statements included elsewhere in this prospectus for additional information. |
| (3) |
Noncancelable purchase commitments include amounts related to our commercial agreement with a data hosting services provider, pursuant to which we committed to spend an aggregate of at least $1.2 billion for vendor services through 2024. |
In April 2020, we entered into two separate loan agreements due in 2025 totaling an aggregate of $2.0 billion as described in the subsection titled “— Liquidity and Capital Resources — Term Loan Agreements.” Obligations under these loans are not included in the table above.
During the nine months ended September 30, 2020, we entered into an agreement to extend our commercial agreement with a data hosting services provider from 2024 to 2027, with the aggregate commitment unchanged. Obligations under this new timeline are not included in the table above.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, and expenses, and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that of our significant accounting policies, which are described in Note 2 to our consolidated financial statements included elsewhere in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition, results of operations, and cash flows.
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Revenue Recognition
We recognize revenue in accordance with ASC Topic 606, which we adopted as of January 1, 2018 on a full retrospective basis. We generate substantially all of our revenue from facilitating guest stays at accommodations offered by hosts on the Airbnb platform. We consider both hosts and guests to be our customers. Our revenue is comprised of service fees from our customers. Our single performance obligation is identified as the facilitation of a stay, which occurs upon the completion of a check-in event. Revenue is recognized at a point in time when the performance obligation is satisfied upon check-in.
We evaluate the presentation of revenue on a gross versus net basis based on whether or not we are the principal in the transaction (gross) or whether we arrange for other parties to provide the service to guests and are the agent (net) in the transaction. We determined that we do not control the right to use the accommodations provided by us either before or after completion of our service. Accordingly, we concluded that we are acting in an agent capacity and revenue is presented net reflecting the service fees received from our customers to facilitate a stay.
Revenue is presented net of certain payments we make to customers as part of our referral programs and marketing promotions, collectively referred to as our incentive programs, and refund activities. The payments are generally in the form of coupon credits to be applied toward future bookings or as cash refunds. We encourage the use of our platform and attract new customers through our incentive programs. Under the referral program, the referring party (“referrer”) earns a coupon when the new host or guest (“referee”) completes their first stay on our platform. We record the incentive as a liability at the time the incentive is earned by the referrer with the corresponding charge recorded to sales and marketing expense. Any amounts paid in excess of the fair value of the referral service received are recorded as a reduction of revenue. Through marketing promotions, we issue customer coupon credits to encourage the use of our platform. After a customer redeems such incentives, we record a reduction to revenue at the date we record the corresponding revenue transaction. From time to time, we issue refunds to customers in the form of cash or credits to be applied toward a future booking. We reduce the transaction price by the estimated amount of the payments by applying the most likely outcome method based on known facts and circumstances and historical experience. These refunds are recorded as a reduction to revenue.
We evaluate whether the cumulative amount of payments made to customers that are not in exchange for a distinct good or service received from a customer exceeds the cumulative revenue earned since inception of the customer relationship. Any cumulative payments in excess of cumulative revenue are presented as operating expenses in our consolidated statements of operations.
Stock-Based Compensation
We have granted stock-based awards consisting primarily of stock options, restricted common stock, and RSUs to employees, members of our board of directors, and non-employees. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires certain subjective inputs and assumptions, including the fair value of our common stock, the expected term, risk-free interest rates, expected stock price volatility, and expected dividend yield of our common stock. The fair value of stock options is recognized as stock-based compensation expense on a straight-line basis over the requisite service period. We account for forfeitures as they occur.
These assumptions used in the Black-Scholes option-pricing model, other than the fair value of our common stock (see the subsection titled “— Common Stock Valuations” below), are estimated as follows:
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Expected term. We estimate the expected term based on the simplified method. |
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| • |
Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. |
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Expected volatility. We estimate the volatility of our common stock on the date of grant based on the average historical stock price volatility of comparable publicly-traded companies as there has been no public market for our shares to date. |
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Expected dividend yield. Expected dividend yield is zero, as we have not paid and do not anticipate paying dividends on our common stock. |
We continue to use judgment in evaluating the expected volatility and expected term utilized in our stock-based compensation expense calculation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may refine our estimates of expected volatility and expected term, which could materially impact our future stock-based compensation expense.
Restricted Stock Units
The fair value of RSUs is estimated based on the fair value of our common stock on the date of grant. Substantially all of our RSUs vest upon the satisfaction of both a service-based vesting condition and a liquidity-based vesting condition. The service-based vesting condition for the majority of these awards is satisfied over four years. The liquidity-based vesting condition is satisfied upon the occurrence of a qualifying liquidity event.
We measure and recognize compensation expense for all stock-based awards based on the estimated fair value of the award. As of December 31, 2017, 2018, and 2019, no stock-based compensation expense had been recognized for RSUs because the liquidity-based vesting condition had not been probable of being satisfied. In the period in which our liquidity-based vesting condition becomes probable, we will begin recording stock-based compensation expense for these RSUs with a liquidity-based vesting condition using the accelerated attribution method, net of forfeitures, based on the grant-date fair value of the RSUs. As of September 30, 2020, 84.0 million RSUs with both service-based and liquidity-based vesting conditions were outstanding, of which 52.0 million had met their service-based vesting condition. If the liquidity-based vesting condition had become probable as of September 30, 2020, we would have recognized $2.7 billion of cumulative stock-based compensation expense related to RSUs then outstanding with both vesting conditions, for which the service-based vesting condition has been satisfied or partially satisfied. The remaining unrecognized stock-based compensation expense relating to these RSUs was $0.8 billion as of September 30, 2020, representing the remaining expense expected to be recognized had the liquidity-based and service-based vesting conditions been met on September 30, 2020. At the time of the offering, we expect to recognize stock-based compensation expense of approximately $ for which the service-based vesting condition was satisfied or partially satisfied and for which we expect the liquidity-based vesting condition to be satisfied in connection with this offering.
After the closing of this offering, we expect that approximately , , and RSUs will vest on , , and , respectively.
In November 2019, we also began granting RSUs with a service-based vesting condition only. As a result, we recorded stock-based compensation expense related to these awards on a straight-line basis, which totaled $12.0 million in 2019 and $81.6 million for the nine months ended September 30, 2020. As of December 31, 2019 and September 30, 2020, 5.9 million and 6.2 million, respectively, of these RSUs were outstanding.
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Common Stock Valuations
Prior to this offering, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock underlying the stock options and RSUs, including:
| • |
independent third-party valuations of our common stock; |
| • |
the prices at which others have purchased our redeemable convertible preferred stock in arm’s-length transactions; |
| • |
the rights, preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock; |
| • |
our financial condition, results of operations, and capital resources; |
| • |
the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the company, given prevailing market conditions; |
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the lack of marketability of our common stock; |
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our estimates of future financial performance; |
| • |
valuations of comparable companies; |
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the hiring or loss of key personnel; |
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the status of our development, product introduction, and sales efforts; |
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industry information, such as market growth and volume and macro-economic events; and |
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additional objective and subjective factors relating to our business. |
To determine the fair value of our common stock, we first determined our enterprise value and then allocated that enterprise value to our common stock and common stock equivalents. Our enterprise value was estimated using two generally accepted approaches: the income approach and the market approach. The income approach estimates enterprise value based on the estimated present value of future cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the risks associated with an investment in a similar company in a similar industry or having a similar history of revenue growth. The market approach measures the value of a business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to a group of our peer companies. In applying this method, valuation multiples are derived from historical operating data of the peer company group. We then apply multiples to our operating data to arrive at a range of indicated values of the company.
For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the income approach and market approach. The financial forecast considered our past results and expected future financial performance. The risk associated with achieving this forecast was assessed in selecting the appropriate discount rate. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.
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As an additional indicator of fair value, we provided weighting to arm’s-length transactions involving issuances of our securities near the respective valuation dates in connection with acquisitions.
Following the listing of our Class A common stock on the Nasdaq Global Select Market, it will not be necessary to determine the fair value of our common stock, as our shares will be traded in the public market.
Lodging Tax Obligations
Some states, cities, and localities in the United States and elsewhere in the world impose transient occupancy or lodging accommodations taxes (“lodging taxes”) on the use or occupancy of lodging accommodations or other traveler services. We collect and remit lodging taxes in more than 29,500 jurisdictions on behalf of our hosts, and lodging taxes are primarily collected in the United States. Such lodging taxes are generally remitted to tax jurisdictions within a 30 to 90-day period following the end of each month.