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When Airbnb’s initial public registration statement hit the tape on Monday night, many were quick to point out a shocking fact — the homesharing giant had managed to turn a profit in the third quarter. But do not be fooled by this quarterly performance. It is a bit of an accounting illusion. We still expect that over the course of the full year, Airbnb will spill plenty of red ink.
Airbnb reported adjusted third quarter adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), a measure of operating profitability, of $501 million. What’s more, that was a margin of 37 percent, impressive by any standards, and outright spectacular in the midst of the worst crisis in the history of the travel industry.
But looking at that figure in isolation ignores Airbnb’s historical seasonality. For all intents and purposes, Airbnb generates its full year of profits in the third quarter alone as guests travel during the peak summer months. In pretty much every other quarter, Airbnb loses money.
This also means that any margin analysis done in just a single quarter will lead one astray. Because all the profit falls in just one period, the margins look spectacular for that one period, but falter in others.
In the third quarter of 2018, for instance, Airbnb earned a 28 percent adjusted EBITDA margin. Impressive! But that huge gain had to tide Airbnb over into the leaner winter months where it lost $144 million in the fourth quarter of 2018, a negative 17 percent adjusted EBITDA margin. All told, in 2018 Airbnb managed to eke out a 5 percent margin for the full year 2018.
By contrast, industry-leader Booking Holdings generates far more consistent quarter-to-quarter margins. In it is worst quarter of 2018 it earned the same margin as Airbnb’s best — a 28 percent EBITDA margin. For the full year 2018 Booking Holdings earned a 40 percent EBITDA margin.
Because of this seasonality effect, we can safely say that Airbnb will not a turn a profit in 2020.
The fourth quarter is Airbnb’s worst historically. That’s not likely to change this year with the company warning that, “we expect greater year-over-year decline in Nights and Experiences Booked and GBV [gross booking value] in the fourth quarter of 2020 than in the third quarter of 2020 and greater year-over-year increases in cancellations and alterations in the fourth quarter of 2020 than in the third quarter of 2020.”
That means Airbnb needs to be showing a profit for the first nine months of the year if it hopes to end the year in the green. It is not. Cumulatively, Airbnb has lost $230 million in EBITDA year-to-date. It will be worse by year end.
Why so Volatile?
Why are Airbnb’s profits so seasonal? If we examine the company’s gross bookings by quarter, there is a clear dip in the fourth quarter, but nothing so dramatic as the profit swings already discussed. The key here is the difference between when a guest makes a reservation and when their stay begins.
When a guest makes a reservation, Airbnb recognizes the booking and collects the cash upfront on behalf of the host. Gross bookings go up, but accounting rules prevent Airbnb from recognizing that reservation as revenue until the guest checks into their accommodation. That is also the time when Airbnb remits cash to the host.
This means that the gross bookings values are smoother because they reflect a slow and steady run up of people planning and booking their summer vacations in advance. But this is not so for revenues, which all come in the front door in a giant flood during the July and August when guest actually hit the road and check into their homes.
This effect occurs at all online travel agencies but is especially pronounced at Airbnb because of the type of accommodation it offers. Hotels tend to have far more consistent year-round demand, so the difference is less notable at hotel focused online travel agencies. Plus, Airbnb’s tend to have longer average booking windows — the average guest in 2019 booked 37 days in advance — and the greater that gap, the more of a disconnect there will be between bookings and revenues.
The final component is operating leverage. Airbnb notes that its, “Our costs are relatively fixed across quarters.” Because the costs are consistent, and because it is operating on a small margin to begin with, a gain or decline in revenue leads to a far more pronounced swing in profits.
Seasonality is amplified at each stage in the process. Slight seasonality in bookings due to the market and type of product, leads to larger seasonality in revenue, which is at last magnified into massive swings in profit.
Cash Rules Everything around me
This process also creates a major swing in cash flows. We mentioned in our initial coverage that Airbnb is free cash flow positive, a major achievement for a startup. We expect management will heavily emphasize this figure and that investors will rely on it to value the company.
Understanding the timing gap between when bookings are collected and when they are remitted to hosts is key to understanding Airbnb’s cash flow.
The first half of the year is a cash cow for Airbnb as it collects guest’s payments in advance of stays. The third quarter is no longer the sweet spot as, though many people are booking for winter holidays, hosts are now collecting as summer guests finally check in.
Winter is a terrible drag on cash as payments are remitted to hosts for winter holiday bookings, but most travelers are not ready to start booking travel in the new year.
Airbnb might be the most seasonal company in travel
All told Airbnb might just be the most seasonal company in all of travel. Or at least the most seasonal publicly listed name.
We compared the seasonality that Airbnb experiences to Vrbo, Booking Holdings, Marriott, and Southwest Airlines. We normalized all figures to remove the underlying units and look only at changes in seasonality indexed to a zero point which represents no seasonality.
Starting with revenue we see immediately that the online travel agencies as a group experience far more seasonal changes than either Marriott or Southwest do. Vrbo, in particular stands out as quite volatile which makes sense given that its inventory — in primarily beach and mountain vacation destinations — has a strong seasonal component that Airbnb and Booking — which are more urban-oriented do not have.
But moving down the income statement to look at EBITDA profits, it becomes clear that Airbnb’s seasonality is massive and overwhelms any competition.
That the overwhelming volatility comes from earnings, not revenue tells us that a part of the issue is operating leverage. And so, we would expect this impact to fade as the company grows. But even so there is clearly something intrinsic to Airbnb’s business that creates these trends. Seasonality is a nuanced issue that will require special attention from Airbnb investors.
Get more context by reading Skift’s full Airbnb IPO (initial public offering) coverage.