Airbnb’s operating loss more than doubled in the first quarter to $306 million from the year-earlier period, previously undisclosed financial data shows, a result in part of a sharply increased investment in marketing. While that spending could bring in a lot of new business, prospective investors could be unnerved if subsequent quarters show similar losses. That could pose an issue for Airbnb, which is preparing to go public sometime next year.
Airbnb boosted investment into sales and marketing to $367 million in the first three months of this year, a 58% increase from the same period last year, according to figures viewed by The Information. The spending increase was bigger than for any other category, such as product development, which grew by 51%. Operations and support, which includes customer service, climbed 30%.
• Airbnb’s loss more than doubled in Q1
• Higher spending on marketing led expenses
• Results could pose issue ahead of going public
It isn’t uncommon for companies to ramp up marketing spending ahead of public debuts. But investors are particularly sensitive right now about loss-making tech companies going public. The IPOs of Uber and Lyft turned sour partly because of investor worries that neither company had a path to profitability, while WeWork had to abandon its IPO over similar issues. Airbnb was thought to have turned profitable: In fact, the company posted an $18.7 million operating profit for the full year of 2018, before the impact of interest and taxes.
While it is difficult to draw conclusions based on data from one or two quarters, the numbers reveal a company intent on plowing cash into areas that can fuel quick growth.
The marketing acceleration appears to have had an impact. Airbnb has said its revenue “substantially” topped $1 billion in the second quarter of 2019. That represented an increase of about $300 million from the same quarter a year earlier, a person familiar with the matter said, while total expenses climbed by about $400 million.
In the first quarter, typically the slowest for online travel businesses, revenue grew by 31% compared with a year earlier, to $839 million. But expenses in the first quarter grew by 47%.
As a private company, Airbnb hasn’t revealed detailed financial statements so far. That will change if the company goes public, as it has said it will do next year.
Online travel companies often open the advertising spigot to draw new customers. Two of Airbnb’s main rivals, Booking Holdings and Expedia, shelled out a combined $10 billion on marketing last year.
In Airbnb’s case, spending on sales and marketing this year is poised to surpass the $1.1 billion spent in 2018. That total covers all types of advertising, including television and online, as well as paying for staff that oversee marketing and public relations efforts. The company said last month it would launch a multimillion-dollar marketing campaign on TV and online to promote the benefits of hosting travelers in people’s homes.
In addition to traditional advertising, Airbnb at times has sought more unusual ways to promote itself, such as starting its own print travel magazine and producing documentaries. But the company has cut down on some of its more extravagant promotions, such as a multiday festival for rental hosts in Los Angeles in 2016 where Lady Gaga performed.
In a statement, an Airbnb spokesperson said: “We can’t comment on the figures, but 2019 is a big investment year in support of our hosts and guests.”
The surge in marketing spending is likely to pull in more consumers looking to rent out their homes or book places to stay. But what’s less clear is whether the boost in business will be enough to justify the increase in cost.
Kevin Kopelman, a senior analyst at Cowen and Co., said public investors often scrutinize how much advertising cuts into the profits of online travel businesses. “You want to understand how fast [the companies] are growing, but also how much is driven by repeat direct customers versus just pushing on the advertising side,” Kopelman said.
In general, he said, greater dependence on advertising creates more risk of a slowdown in the business, though he cautioned that he couldn’t speak directly to Airbnb’s advertising outlays until a fuller picture of the company’s finances emerges when it goes public.
A jump in advertising spending might be a sign that Airbnb is having a harder time keeping existing customers engaged. One of Airbnb’s advantages over Booking and other established online travel companies has been the loyalty of its customer base. Airbnb has a higher share of direct traffic to its website in Europe and North America than either Booking or Expedia, which depend more on web users clicking through on ads, according to a study this year by SimilarWeb.
Airbnb also is growing revenue much faster than those companies, which are both more than two decades old. Airbnb told investors earlier this year that it expected to pull in between $4.6 billion and $5 billion in revenue this year, which would represent a growth rate between 28% and 39%, The Information previously reported. In 2018, Airbnb’s revenue overall grew by 42% year over year.
Investors selling Airbnb’s private stock on the secondary market have been anticipating faster growth and fatter margins. Amakor Capital, a London-based investment firm, projected in a May report to prospective investors that Airbnb’s revenue growth would hit 41% this year and its profit margin before taxes, interest, depreciation and amortization would reach 25% by 2021. It’s unclear if those were reasonable projections. Amakor said in the report that it “has very little access to the company’s information.”
Amakor in May was selling Airbnb shares at a per-share price that would value the company at $44 billion. The company last raised new equity capital in 2016 at a $31 billion valuation, and its internal valuation done for accounting purposes earlier this year was $38 billion, according to Recode.
Airbnb under CEO Brian Chesky has been largely immune from many of the cash pressures from other high-flying consumer startups of its era. Airbnb also has plenty of cash, cash equivalents and marketable securities on its balance sheet—roughly $3.5 billion as of March 31. It has started to use its war chest on acquisitions, including a March purchase of HotelTonight for roughly $400 million in cash and stock.
That healthy balance sheet gives the company the flexibility to go public through a direct listing, which would allow existing shareholders to sell stock immediately, but prevents the company from raising more equity capital right away.
Aside from spending on general and administrative expenses, the other big spending category for Airbnb in the first quarter was product development. That incorporates spending on a technical infrastructure overhaul that is expected to make it easier for Airbnb to launch new business lines, The Information reported earlier this year.
For years, the company has wavered on how much to spend on customer service—a big cost driver that has strategic importance because it can dictate whether a traveler or host bolts for a competitor. Spending growth on operations and support, which encompasses customer service, slowed somewhat in the first quarter to 30%. Between 2017 and 2018, Airbnb’s operations and support grew 51%, faster than any other category.
The Wall Street Journal previously reported some details of Airbnb’s first-quarter financials. Breakdowns of individual spending categories, and its increased losses, haven’t been previously reported.