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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements (“financial statements”) and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Annual Report”). This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” of our 2022 Annual Report. Our historical results are not necessarily indicative of the results that may be expected for any period in the future.
Overview
We are a community based on connection and belonging—a community that was born in 2007 when two Hosts welcomed three guests to their San Francisco home, and has grown to over 4 million Hosts who have welcomed over 1.5 billion guest arrivals to over 100,000 cities and towns in almost every country and region across the globe. Hosts on Airbnb are everyday people who share their worlds to provide guests with the feeling of connection and being at home. We have five stakeholders and are designed with all of them in mind. Along with employees and shareholders, we serve Hosts, guests, and the communities in which they live. We intend to make long-term decisions considering all of our stakeholders because their collective success is key for our business to thrive.
We operate a global marketplace, where Hosts offer guests stays and experiences on our platform. Our business model relies on the success of Hosts and guests (collectively referred to as “customers”) who join our community and generate consistent bookings over time. As Hosts become more successful on our platform and as guests return over time, we benefit from the recurring activity of our community.
Third Quarter Financial Highlights
For the three months ended September 30, 2023, revenue grew by 18% to $3.4 billion, compared to the same period in the prior year, primarily due to a 14% increase in Nights and Experiences Booked of 13.5 million driving a 17% increase in Gross Booking Value (“GBV”) of $2.7 billion and a modest increase in Average Daily Rate (“ADR”). The growth in revenue demonstrated the continued strong travel demand. On a constant-currency basis, revenue increased 14% for the three months ended September 30, 2023, compared to the same period in the prior year.
Net income for the three months ended September 30, 2023 increased by 260% to $4.4 billion, compared to the same period in the prior year, driven by our revenue growth, increased interest income, discipline in managing our cost structure, and the release of a significant portion of our valuation allowance on deferred tax assets of $2.8 billion (see Note 10, Income Taxes to our financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for further details).
Our net cash provided by operating activities was $1.3 billion for the three months ended September 30, 2023, compared to $964 million, in the same period in the prior year. We generated Free Cash Flow1 of $1.3 billion for the three months ended September 30, 2023, compared to $958 million, in the same period in the prior year. The increase was primarily driven by growth in revenue, unearned fees and net income.
During the three months ended September 30, 2023, we repurchased 3.7 million shares of Class A common stock for $500 million, leaving $1.5 billion available to repurchase under our share repurchase program.
Key Business Metrics and Non-GAAP Financial Measures
We track the following key business metrics and financial measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) (“non-GAAP financial measures”) to evaluate our operating performance, identify trends, formulate financial projections, and make strategic decisions. Accordingly, we believe that these key business metrics and non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team. We believe that non-GAAP financial information, when taken collectively, may be helpful to investors because it provides consistency and comparability with past financial performance, and assists in comparisons with other companies, some of which use similar non-GAAP financial information to supplement their U.S. GAAP results.
These key business metrics and non-GAAP financial measures are presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with U.S. GAAP, and may be different from similarly titled metrics or measures presented by other companies. A reconciliation of each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP is provided under the subsection titled “— Adjusted EBITDA” and “— Free Cash Flow” below. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.
1 A reconciliation of non-generally accepted accounting principles financial measures to the most comparable generally accepted accounting principles financial measures is provided under the subsection titled “Key Business Metrics and Non-GAAP Financial Measures— Free Cash Flow” below.
Nights and Experiences Booked
Nights and Experiences Booked is a key measure of the scale of our platform, which in turn drives our financial performance. Nights and Experiences Booked on our platform in a period represents the sum of the total number of nights booked for stays and the total number of seats booked for experiences, net of cancellations and alterations that occurred in that period. For example, a booking made on February 15 would be reflected in Nights and Experiences Booked for our quarter ended March 31. If, in the example, the booking were canceled on May 15, Nights and Experiences Booked would be reduced by the cancellation for our quarter ended June 30. A night can include one or more guests and can be for a listing with one or more bedrooms. Nights and Experiences Booked grows as we attract new customers to our platform and as repeat guests increase their activity on our platform. A seat is booked for each participant in an experience. Substantially all of the bookings on our platform to date have come from nights. We believe Nights and Experiences Booked is a key business metric to help investors and others understand and evaluate our results of operations in the same manner as our management team, as it represents a single unit of transaction on our platform.
For the third quarter of 2023, we had 113.2 million Nights and Experiences Booked, a 14% increase from 99.7 million for the same prior year period. For the nine months ended September 30, 2023, we had 349.4 million Nights and Experiences Booked, a 14% increase from 305.5 million for the same prior year period. The increase in our Nights and Experiences Booked was driven by strong growth across all regions, in particular Europe and North America.
Gross Booking Value
GBV represents the dollar value of bookings on our platform in a period and is inclusive of Host earnings, service fees, cleaning fees, and taxes, net of cancellations and alterations that occurred during that period. The timing of recording GBV and any related cancellations is similar to that described in the subsection titled “— Key Business Metrics and Non-GAAP Financial Measures — Nights and Experiences Booked” above. Revenue from the booking is recognized upon check-in; accordingly, GBV is a leading indicator of revenue. The entire amount of a booking is reflected in GBV during the quarter in which booking occurs, whether the guest pays the entire amount of the booking upfront or elects to use our Pay Less Upfront program. Growth in GBV reflects our ability to attract and retain customers and reflects growth in Nights and Experiences Booked.
For the third quarter of 2023, our GBV was $18.3 billion, a 17% increase from $15.6 billion for the same prior year period. For the nine months ended September 30, 2023, our GBV was $57.8 billion, a 16% increase from $49.7 billion for the same prior year period. The increase in our GBV was primarily due to an increase in Nights and Experiences Booked, combined with a modest increase in ADR. Similar to Nights and Experiences Booked, our GBV improvement was driven by growth in bookings in all regions.
Non-GAAP Financial Measures
Our non-GAAP financial measures include Adjusted EBITDA, Free Cash Flow, and revenue growth rates in constant currency, which are described below. A reconciliation of each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with U.S. GAAP is provided below. Investors are encouraged to review the related U.S. GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable U.S. GAAP financial measures.
The following table summarizes our non-GAAP financial measures, along with the most directly comparable U.S. GAAP measure, for each period presented below (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Net income | $ | 1,214 | $ | 4,374 | $ | 1,574 | $ | 5,141 | |||||||||
| Adjusted EBITDA | $ | 1,457 | $ | 1,834 | $ | 2,397 | $ | 2,915 | |||||||||
| Net cash provided by operating activities | $ | 964 | $ | 1,325 | $ | 2,967 | $ | 3,821 | |||||||||
| Free Cash Flow | $ | 958 | $ | 1,310 | $ | 2,950 | $ | 3,791 |
Adjusted EBITDA
We define Adjusted EBITDA as net income or loss adjusted for (i) provision for (benefit from) income taxes; (ii) other income (expense), net, interest expense, and interest income; (iii) depreciation and amortization; (iv) stock-based compensation expense; (v) acquisition-related impacts consisting of gains (losses) recognized on changes in the fair value of contingent consideration arrangements; (vi) net changes to the reserves for lodging taxes for which management believes it is probable that we may be held jointly liable with Hosts for collecting and remitting such taxes; and (vii) restructuring charges.
The above items are excluded from our Adjusted EBITDA measure because these items are non-cash in nature, or because the amount and timing of these items is unpredictable, not driven by core results of operations and renders comparisons with prior periods and competitors less meaningful. We believe Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations, as well as provides a useful measure for period-to-period comparisons of our business performance. Moreover, we have included Adjusted EBITDA in this Quarterly Report on Form 10-Q because it is a key measurement used by our management internally
to make operating decisions, including those related to operating expenses, evaluating performance, and performing strategic planning and annual budgeting.
Adjusted EBITDA has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with U.S. GAAP. These limitations include the following:
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Adjusted EBITDA does not reflect interest income (expense) and other income (expense), net, which include unrealized and realized gains and losses on foreign currency exchange, investments, and financial instruments;
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Adjusted EBITDA excludes certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets, and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect all cash requirements for such replacements or for new capital expenditure requirements;
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Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;
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Adjusted EBITDA excludes acquisition-related impacts consisting of gains (losses) recognized on changes in the fair value of contingent consideration arrangements. The contingent consideration, which was in the form of equity, was valued as of the acquisition date and is marked-to-market at each reporting period based on factors including our stock price;
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Adjusted EBITDA does not reflect net changes to reserves for lodging taxes for which management believes it is probable that we may be held jointly liable with Hosts for collecting and remitting such taxes; and
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Adjusted EBITDA does not reflect restructuring charges, which include severance and other employee costs, lease impairments, and contract amendments and terminations.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income (loss) and our other U.S. GAAP results.
Adjusted EBITDA Reconciliation
The following is a reconciliation of Adjusted EBITDA to the most comparable U.S. GAAP measure, net income (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Revenue | $ | 2,884 | $ | 3,397 | $ | 6,497 | $ | 7,699 | |||||||||
| Net income | $ | 1,214 | $ | 4,374 | $ | 1,574 | $ | 5,141 | |||||||||
| Adjusted to exclude the following: | |||||||||||||||||
| Provision (benefit) for income taxes | 56 | (2,695) | 71 | (2,656) | |||||||||||||
| Other (income) expense, net | (13) | 3 | (13) | 46 | |||||||||||||
| Interest expense | 5 | 6 | 19 | 12 | |||||||||||||
| Interest income | (59) | (192) | (84) | (529) | |||||||||||||
| Depreciation and amortization | 13 | 8 | 68 | 28 | |||||||||||||
| Stock-based compensation expense | 234 | 286 | 676 | 830 | |||||||||||||
| Acquisition-related impacts | 1 | 3 | (10) | — | |||||||||||||
| Net changes in lodging tax reserves | 6 | 41 | 7 | 43 | |||||||||||||
| Restructuring charges | — | — | 89 | — | |||||||||||||
| Adjusted EBITDA | $ | 1,457 | $ | 1,834 | $ | 2,397 | $ | 2,915 | |||||||||
| Adjusted EBITDA as a percentage of revenue | 51 | % | 54 | % | 37 | % | 38 | % |
The increase in Adjusted EBITDA for the three and nine months ended September 30, 2023, compared to the same periods in the prior year, was primarily driven by the continued strength in our business, a modest increase in ADR, and discipline in managing our cost structure. Adjusted EBITDA margins for the three and nine months ended September 30, 2023 were relatively flat compared to the same periods in the prior year.
During the third quarter of 2023, we released $2.8 billion of our valuation allowance related to our U.S. deferred tax assets (see Note 10, Income Taxes to our financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for further details).
Free Cash Flow
We define Free Cash Flow as net cash provided by (used in) operating activities less purchases of property and equipment. We believe that Free Cash Flow is a meaningful indicator of liquidity that provides information to our management and investors about the amount of cash generated from operations, after purchases of property and equipment, that can be used for strategic initiatives, including continuous investment in our business, growth through acquisitions, and strengthening our balance sheet. Our Free Cash Flow is impacted by the timing of GBV because we collect our service fees at the time of booking, which is generally before a stay or experience occurs. Funds held on behalf of our customers and amounts payable to our customers do not impact Free Cash Flow, except interest earned on these funds. Free Cash Flow has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of other U.S. GAAP financial measures, such as net cash provided by (used in) operating activities. Free Cash Flow does not reflect our ability to meet future contractual commitments and may be calculated differently by other companies in our industry, limiting its usefulness as a comparative measure.
Free Cash Flow Reconciliation
The following is a reconciliation of Free Cash Flow to the most comparable U.S. GAAP cash flow measure, net cash provided by operating activities (in millions, except percentages):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Revenue | $ | 2,884 | $ | 3,397 | $ | 6,497 | $ | 7,699 | |||||||||
| Net cash provided by operating activities | $ | 964 | $ | 1,325 | $ | 2,967 | $ | 3,821 | |||||||||
| Purchases of property and equipment | (6) | (15) | (17) | (30) | |||||||||||||
| Free Cash Flow | $ | 958 | $ | 1,310 | $ | 2,950 | $ | 3,791 | |||||||||
| Free Cash Flow as a percentage of revenue | 33 | % | 39 | % | 45 | % | 49 | % | |||||||||
| Other cash flow components: | |||||||||||||||||
| Net cash provided by (used in) investing activities | $ | (56) | $ | (364) | $ | 115 | $ | (567) | |||||||||
| Net cash provided by (used in) financing activities | $ | (3,574) | $ | (3,712) | $ | 75 | $ | (1,259) |
The increase in Free Cash Flow for the three and nine months ended September 30, 2023, compared to the same periods in the prior year, was primarily driven by increased income from operations and interest income driven by increased interest rates on higher cash balances.
Constant Currency
In addition to revenue growth rates derived from revenue presented in accordance with U.S. GAAP, we disclose below the percentage change in our current period revenue from the corresponding prior period by comparing results using constant currencies. We present constant currency revenue growth rate information to provide a framework for assessing how our underlying revenue performed excluding the effect of changes in exchange rates. We use the percentage change in constant currency revenues for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe the presentation of revenue on a constant currency basis in addition to the U.S. GAAP presentation helps improve the ability to understand our performance because it excludes the effects of foreign currency volatility that are not indicative of our core operating results. We calculate the percentage change in constant currency by determining the change in the current period revenue over the prior comparable period where current period foreign currency revenue is translated using the exchange rates of the comparative period.
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 business metrics, including GBV and Adjusted EBITDA, can also be impacted by the timing of holidays and other events. We experience seasonality in our GBV that is generally 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. A significant portion of 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 typically 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 a lower sequential decrease in Free Cash Flow, and a greater decline in GBV in the fourth quarter, where Free Cash Flow is typically lower. As our business matures and travel continues to recover post the COVID-19 pandemic, other seasonal trends may develop, or these existing seasonal trends may become more extreme.
Results of Operations
The following table sets forth our results of operations for the periods presented (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Revenue | $ | 2,884 | $ | 3,397 | $ | 6,497 | $ | 7,699 | |||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of revenue | 401 | 459 | 1,154 | 1,319 | |||||||||||||
| Operations and support(1) | 290 | 316 | 781 | 915 | |||||||||||||
| Product development(1) | 366 | 419 | 1,104 | 1,290 | |||||||||||||
| Sales and marketing(1) | 384 | 403 | 1,108 | 1,339 | |||||||||||||
| General and administrative(1) | 240 | 304 | 694 | 822 | |||||||||||||
| Restructuring charges(1) | — | — | 89 | — | |||||||||||||
| Total costs and expenses | 1,681 | 1,901 | 4,930 | 5,685 | |||||||||||||
| Income from operations | 1,203 | 1,496 | 1,567 | 2,014 | |||||||||||||
| Interest income | 59 | 192 | 84 | 529 | |||||||||||||
| Interest expense | (5) | (6) | (19) | (12) | |||||||||||||
| Other income (expense), net | 13 | (3) | 13 | (46) | |||||||||||||
| Income before income taxes | 1,270 | 1,679 | 1,645 | 2,485 | |||||||||||||
| Provision for (benefit from) income taxes | 56 | (2,695) | 71 | (2,656) | |||||||||||||
| Net income | $ | 1,214 | $ | 4,374 | $ | 1,574 | $ | 5,141 |
(1)Includes stock-based compensation expense as follows (in millions):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Operations and support | $ | 18 | $ | 17 | $ | 47 | $ | 51 | |||||||||
| Product development | 135 | 175 | 398 | 515 | |||||||||||||
| Sales and marketing | 28 | 33 | 78 | 97 | |||||||||||||
| General and administrative | 53 | 61 | 153 | 167 | |||||||||||||
| Stock-based compensation expense | $ | 234 | $ | 286 | $ | 676 | $ | 830 |
The following table sets forth the components of our condensed consolidated statements of operations for each of the periods presented as a percentage of revenue:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2023 | 2022 | 2023 | ||||||||||||||
| Revenue | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
| Costs and expenses: | |||||||||||||||||
| Cost of revenue | 14 | 14 | 18 | 17 | |||||||||||||
| Operations and support | 10 | 9 | 12 | 12 | |||||||||||||
| Product development | 13 | 12 | 17 | 17 | |||||||||||||
| Sales and marketing | 13 | 12 | 17 | 17 | |||||||||||||
| General and administrative | 8 | 9 | 11 | 11 | |||||||||||||
| Restructuring charges | — | — | 1 | — | |||||||||||||
| Total costs and expenses | 58 | 56 | 76 | 74 | |||||||||||||
| Income from operations | 42 | 44 | 24 | 26 | |||||||||||||
| Interest income | 2 | 6 | 1 | 7 | |||||||||||||
| Interest expense | — | — | — | — | |||||||||||||
| Other income (expense), net | — | — | — | — | |||||||||||||
| Income before income taxes | 44 | 50 | 25 | 33 | |||||||||||||
| Provision for (benefit from) income taxes | 2 | (79) | 1 | (34) | |||||||||||||
| Net income | 42 | % | 129 | % | 24 | % | 67 | % |
Comparison of the Three and Nine Months Ended September 30, 2023 with the Same Periods in 2022
Revenue
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Revenue | $ | 2,884 | $ | 3,397 | 18 | % | $ | 6,497 | $ | 7,699 | 19 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
Revenue increased $513 million, or 18%, for the three months ended September 30, 2023, compared to the same period in the prior year, primarily due to a 14% increase in Nights and Experiences Booked. On a constant-currency basis, revenue increased 14% compared to the same period in the prior year due to a weakened U.S. dollar against the Euro and British Pound.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
Revenue increased $1.2 billion, or 19%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to a 14% increase in Nights and Experiences Booked combined with a modest increase in ADR. On a constant-currency basis, revenue increased 18% compared to the same period in the prior year due to a weakened U.S. dollar against the Euro and British Pound.
Cost of Revenue
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Cost of revenue | $ | 401 | $ | 459 | 14 | % | $ | 1,154 | $ | 1,319 | 14 | % | |||||||||||
| Percentage of revenue | 14 | % | 14 | % | 18 | % | 17 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
Cost of revenue increased $58 million, or 14%, for the three months ended September 30, 2023, compared to the same period in the prior year, primarily due to an increase in merchant fees of $45 million largely due to an increase in pay-in volumes, and an increase in cloud computing costs of $13 million due to increased server and data storage usage.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
Cost of revenue increased $165 million, or 14%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to an increase in merchant fees of $136 million largely due to an increase in pay-in volumes, an increase of $16 million in chargebacks due to increased pay-in volumes, and an increase in cloud computing costs of $31 million due to increased server and data storage usage, partially offset by a decrease in amortization expense of $18 million.
Operations and Support
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Operations and support | $ | 290 | $ | 316 | 9 | % | $ | 781 | $ | 915 | 17 | % | |||||||||||
| Percentage of revenue | 10 | % | 9 | % | 12 | % | 12 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
Operations and support expense increased $26 million, or 9%, for the three months ended September 30, 2023, compared to the same period in the prior year, primarily due to an $18 million increase in third-party community support personnel and customer relations costs, a $5 million increase in insurance costs due to a higher Host Liability Insurance premiums resulting from higher overall nights, and a $3 million increase in payroll-related expenses primarily due to growth in headcount and increased compensation costs.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
Operations and support expense increased $134 million, or 17%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $100 million increase in third-party community support personnel and customer relations costs, a $21 million increase in payroll-related expenses primarily due to growth in headcount and increased compensation costs, and a $13 million increase in insurance costs due to a higher Host Liability Insurance premiums resulting from higher overall nights.
Product Development
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Product development | $ | 366 | $ | 419 | 14 | % | $ | 1,104 | $ | 1,290 | 17 | % | |||||||||||
| Percentage of revenue | 13 | % | 12 | % | 17 | % | 17 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
Product development expense increased $53 million, or 14%, for the three months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $52 million increase in payroll-related expenses due to growth in headcount and increased compensation costs.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
Product development expense increased $186 million, or 17%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $184 million increase in payroll-related expenses due to growth in headcount and increased compensation costs.
Sales and Marketing
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Brand and performance marketing | $ | 259 | $ | 264 | 2 | % | $ | 772 | $ | 932 | 21 | % | |||||||||||
| Field operations and policy | 124 | 139 | 12 | % | 336 | 407 | 21 | % | |||||||||||||||
| Total sales and marketing | $ | 383 | $ | 403 | 5 | % | $ | 1,108 | $ | 1,339 | 21 | % | |||||||||||
| Percentage of revenue | 13 | % | 12 | % | 17 | % | 17 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
Sales and marketing expense increased $20 million, or 5%, for the three months ended September 30, 2023, compared to the same period in the prior year. The increase was primarily due to a $17 million increase in payroll-related expenses due to growth in headcount and increased compensation costs.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
Sales and marketing expense increased $231 million, or 21%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $168 million increase in marketing activities associated with our Airbnb It, I’m Flexible, and Categories marketing campaigns and launches and our search engine marketing and advertising spend, and a $51 million increase in payroll-related expenses due to growth in headcount and increased compensation costs. Additionally, we had a $10 million benefit during the nine months ended September 30, 2022, from the change in the fair value of contingent consideration arrangements related to an acquisition completed in 2019.
General and Administrative
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| General and administrative | $ | 240 | $ | 304 | 27 | % | $ | 694 | $ | 822 | 18 | % | |||||||||||
| Percentage of revenue | 8 | % | 9 | % | 11 | % | 11 | % |
Three Months Ended September 30, 2023 Compared with the Same Period in 2022
General and administrative expense increased $64 million, or 27%, for the three months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $50 million increase in other business and operational taxes and an $18 million increase in payroll related expenses due to growth in headcount and increased compensation costs, partially offset by a $7 million reduction in professional services expenses.
Nine Months Ended September 30, 2023 Compared with the Same Period in 2022
General and administrative expense increased $128 million, or 18%, for the nine months ended September 30, 2023, compared to the same period in the prior year, primarily due to a $74 million increase in payroll related expenses due to growth in headcount and increased compensation costs, a $52 million increase in other business and operational taxes, a $9 million increase in bad debt expenses driven by higher volume of activity in 2023, and a $3 million increase in professional service fees, partially offset by a reduction in insurance expense of $14 million driven by reduced directors and officers insurance premiums.
Restructuring Charges
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Restructuring charges | $ | — | $ | — | — | % | $ | 89 | $ | — | (100) | % | |||||||||||
Three and Nine Months Ended September 30, 2023 Compared with the Same Periods in 2022
In the second quarter of 2022, we shifted to a remote work model, allowing our employees to work from anywhere in the country. The shift to a remote work model was in direct response to the change in how employees work due to the impact of COVID-19. As a result, we recorded restructuring charges of $89 million during the nine months ended September 30, 2022, which included $81 million relating to an impairment of both domestic and international operating lease right-of-use assets, and $8 million of related leasehold improvements. There were no restructuring charges during the three and nine months ended September 30, 2023.
Interest Income and Expense
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Interest income | $ | 59 | $ | 192 | 225 | % | $ | 84 | $ | 529 | 530 | % | |||||||||||
| Interest expense | $ | (5) | $ | (6) | (20) | % | $ | (19) | $ | (12) | (37) | % | |||||||||||
Three and Nine Months Ended September 30, 2023 Compared with the Same Periods in 2022
Interest income increased $133 million and $445 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, primarily due to higher cash and investment balances and higher interest rates. Our investment portfolio was largely invested in money market funds and short-term, high-quality bonds.
Other Income (Expense), Net
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Other income (expense), net | $ | 13 | $ | (3) | (123) | % | $ | 13 | $ | (46) | (454) | % | |||||||||||
Three and Nine Months Ended September 30, 2023 Compared with the Same Periods in 2022
Other income (expense), net decreased $16 million and $59 million for the three and nine months ended September 30, 2023, respectively, compared to the same periods in the prior year, primarily due to foreign exchange losses.
Provision for (Benefit from) Income Taxes
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2023 | % Change | 2022 | 2023 | % Change | ||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 56 | $ | (2,695) | (4,913) | % | $ | 71 | $ | (2,656) | (3,841) | % |
Three and Nine Months Ended September 30, 2023 Compared with the Same Periods in 2022
The income tax benefit for the three and nine months ended September 30, 2023, was primarily due to the release of $2.8 billion of our valuation allowance related to our U.S. deferred tax assets, as a discrete tax benefit during the three months ended September 30, 2023. As of September 30, 2023, based on all available positive and negative evidence, having demonstrated sustained profitability which is objective and verifiable, and taking into account anticipated future earnings, we concluded that it is more likely than not that our U.S. federal and state deferred tax assets will be realizable, with the exception of California research and development credits, capital losses, and certain losses subject to the dual consolidated loss rules. We will continue to monitor the need for a valuation allowance against our deferred tax assets on a quarterly basis (see Note 10, Income Taxes to our financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for further details).
Liquidity and Capital Resources
Sources and Conditions of Liquidity
As of September 30, 2023, our principal sources of liquidity were cash, cash equivalents and short-term investments totaling $11.0 billion. As of September 30, 2023, cash and cash equivalents totaled $8.2 billion, which included $2.0 billion held by our 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. As of September 30, 2023, short-term investments totaled $2.8 billion. Short-term investments primarily consist of highly-liquid investment grade corporate debt securities, time deposits, commercial paper, certificates of deposit, U.S. government and government agency debt securities (“government bonds”), and mortgage-backed and asset-backed securities. These amounts do not include funds of $6.0 billion as of September 30, 2023, that we held for bookings in advance of guests completing check-ins that we record separately on our condensed consolidated balance sheet in funds receivable and amounts held on behalf of customers with a corresponding liability in funds payable and amounts payable to customers.
Our cash and cash equivalents are generally held at large global systemically important banks (or G-SIBs) which are subject to high capital requirements and must regularly perform stringent stress tests to prove their ability to absorb capital losses. Our cash, cash equivalents, and short-term investments held outside the United States may be repatriated, subject to certain limitations, and would be available to be used to fund our domestic operations. However, repatriation of such funds may result in additional tax liabilities. We believe that our existing cash, cash equivalents, and short-term investments balances in the United States are sufficient to fund our working capital needs in the United States.
We have access to $1.0 billion of commitments and a $200 million sub-limit for the issuance of letters of credit under the 2022 Credit Facility. As of September 30, 2023, no amounts were drawn under the 2022 Credit Facility and outstanding letters of credit totaled $28 million.
Material Cash Requirements
As of September 30, 2023, we had outstanding $2.0 billion in aggregate principal amount of indebtedness of our 0% convertible senior notes due in 2026. On March 3, 2021, in connection with the pricing of the 2026 Notes, we entered into privately negotiated capped call transactions (the “Capped Calls”) with certain of the initial purchasers and other financial institutions (the "option counterparties") at a cost of approximately $100 million. The cap price of the Capped Calls was $360.80 per share of Class A common stock, which represented a premium of 100% over the last reported sale price of the Class A common stock of $180.40 per share on March 3, 2021, subject to certain customary adjustments under the terms of the Capped Call Transactions.
On May 9, 2023, we announced that our board of directors approved a new share repurchase program (“2023 Share Repurchase Program”) with authorization to purchase up to $2.5 billion of our Class A common stock at management’s discretion. Share repurchases under the 2023 Share Repurchase Program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades or accelerated share repurchase transactions or by any combination of such methods. Any such repurchases will be made from time to time subject to market and economic conditions, applicable legal requirements and other relevant factors. The 2023 Share Repurchase Program does not obligate us to repurchase any specific number of shares and may be modified, suspended or terminated at any time at our discretion.
During the three and nine months ended September 30, 2023, we repurchased and subsequently retired 3.7 million and 12.1 million shares of our Class A common stock for $500 million and $1.5 billion, respectively. As of June 30, 2023, we completed the repurchase of the $2.0 billion of shares of Class A common stock authorized for repurchase under the August 2022 share repurchase program. As of September 30, 2023, we had $1.5 billion available to repurchase shares of Class A common stock under the 2023 Share Repurchase Program.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in millions):
| Nine Months Ended September 30, | ||||||||
| 2022 | 2023 | |||||||
| Net cash provided by operating activities | $ | 2,967 | $ | 3,821 | ||||
| Net cash provided by (used in) investing activities | 115 | (567) | ||||||
| Net cash provided by (used in) financing activities | 75 | (1,259) | ||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (625) | (10) | ||||||
| Net increase in cash, cash equivalents, and restricted cash | $ | 2,532 | $ | 1,985 |
Net cash provided by operating activities for the nine months ended September 30, 2023 was $3.8 billion, which is primarily due to income from operations of $2.0 billion and interest income of $529 million from our investment portfolio, adjusted for non-cash items including stock-based compensation expense of $830 million.
Net cash used in investing activities for the nine months ended September 30, 2023 was $567 million, which was primarily due to purchases of short-term investments, partially offset by proceeds resulting from sales and maturities of short-term investments.
Net cash used in financing activities for the nine months ended September 30, 2023 was $1.3 billion, primarily due to the share repurchases of $1.5 billion, and an increase in the taxes paid related to net share settlement of equity awards of $1.0 billion, primarily driven from the taxes paid related to the cashless exercise of stock options (see Note 8, Stock-Based Compensation, to our financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for further details), partially offset by the decrease in funds payable and amounts payable to customers of $1.2 billion.
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 customers, that are denominated in currencies other than the functional currency of certain of our subsidiaries. For the nine months ended September 30, 2023, we recorded a $10 million decrease in cash, cash equivalents, and restricted cash, primarily due to the strengthening of the U.S. dollar. The impact of exchange rate changes on cash balances can serve as a natural hedge for the effect of exchange rates on our liabilities to our guests and Hosts.
We assess our liquidity in terms of our ability to generate cash to fund our short- and long-term cash requirements. As such, we believe that the cash flows generated from operating activities will meet our anticipated cash requirements in the short-term. In addition to normal working capital requirements, we anticipate that our short- and long-term cash requirements will include share repurchases, introduction of new products and offerings, timing and extent of spending to support our efforts to develop our platform, debt repayments, and expansion of sales and marketing activities. Our future capital requirements, however, will depend on many factors, including, but not limited to our growth, headcount, and ability to attract and retain customers on our platform. Additionally, we may in the future raise additional capital or incur additional indebtedness to continue to fund our strategic initiatives. On a long-term basis, we would rely on either our access to the capital markets or our credit facility for any long-term funding not provided by operating cash flows and cash on hand. 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. Our liquidity is subject to various risks including the risks identified in the section titled "Quantitative and Qualitative Disclosures about Market Risk" in Item 3.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2022 Annual Report for a discussion of the assumptions and judgments involved in our critical accounting estimates. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
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