You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated 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 endedDecember 31, 2020 (the "2020 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 2020 Annual Report and this Quarterly Report on Form 10-Q. Our historical results are not necessarily indicative of the results that may be expected for any period in the future. Except as otherwise noted, all references to 2020 refer to the year endedDecember 31, 2020 , references to 2019 refer to the year endedDecember 31, 2019 , and references to 2018 refer to the year endedDecember 31, 2018 . OverviewAirbnb is a community based on connection and belonging-a community that was born in 2007 when two hosts welcomed three guests to theirSan Francisco home, and has since grown to 4 million hosts who have welcomed over 800 million guest arrivals to approximately 100,000 cities in almost every country and region across the globe. Hosts onAirbnb are everyday people who share their worlds to provide guests with the feeling of connection and being at home.Airbnb has five stakeholders and is 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 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. Impact of COVID-19 on our Business For almost a year, many travelers have avoided traveling long distance because of COVID-19 concerns, quarantines, and travel restrictions. During the first quarter of 2021, we continued to face lower demand for long distance travel and overall depressed Nights and Experiences Booked compared to 2019. While the outlook for the entire year is unclear, we are seeing signs of travel recovery as the rate of vaccinations increases and quarantine requirements and travel restrictions are lifted. For example, during the first quarter of 2021, we saw an increase in Nights and Experiences Booked compared to the same prior year period. According to a survey conducted by us earlier this year, more than half of the people surveyed said they either already booked travel, are currently planning to travel, or expect to travel in 2021. We are preparing for when travel rebounds as there will be a collective desire for two things: travel and human connection. Prior to the outbreak, we had seen strong year-over-year growth in Nights and Experiences Booked during the first three weeks of 2020. However, by the end ofMarch 2020 , COVID-19 had spread across the world and been declared a global pandemic. In order to protect our business from these near-term market disruptions and the prospect of a prolonged business impact, we raised$2.0 billion in the form of term loans inApril 2020 and took action to dramatically reduce our operating expenses, which included suspending substantially all discretionary marketing program spend, reducing full-time employee headcount by approximately 25%, and suspending all facilities build-outs and significantly reducing capital expenditures. These incremental funds and our rapid management of expenses, in addition to our existing cash position, helped us to prudently manage our business through the effects of the COVID-19 pandemic during 2020. While COVID-19 still plagues the world, for the three months endedMarch 31, 2021 , GBV and revenue were$10.3 billion and$886.9 million , respectively, which were both higher compared to the same prior year period. These improvements were driven by fewer cancellations and stronger results inNorth America , in particular with resilience in domestic and short-distance travel, with more people gravitating towardAirbnb stays within driving distance of their homes. Buoyed by the increased confidence in travel and overall market in the first few months of 2021 compared to the same prior year period when the global pandemic was announced, we were able to issue$2.0 billion aggregate principal amount of 0% convertible senior notes due 2026 inMarch 2021 . In connection with the pricing of the notes, we also entered into privately negotiated capped call transactions. The net proceeds from issuance of the notes, together with existing cash, were used to repay the remaining principal amount outstanding under the term loans entered into inApril 2020 . We believe that the recovery in GBV that we experienced in the first quarter of 2021 was attributable to the renewed ability and willingness for guests to travel, fewer cancellations, the resilience of our hosts, and relative strength of our business model. While we witnessed the way people travel 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. The extent and duration of the impact of the COVID-19 pandemic over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19, the extent and effectiveness of containment actions taken, including mobility restrictions, the timing, availability, and effectiveness of vaccines, and the impact of these and other factors on travel behavior in general, and on our business in particular. 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 GAAP ("non-GAAP financial measures") to evaluate our 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. These key business metrics 25 -------------------------------------------------------------------------------- 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 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 GAAP is provided under the subsection titled "- Adjusted EBITDA" and "- Free Cash Flow" below. Key Business Metrics We review the following key business metrics to measure our performance, identify trends, formulate financial projections, and make strategic decisions. We are not aware of any uniform standards for calculating these key metrics, which may hinder comparability with other companies that may calculate similarly titled metrics in a different way. 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 onFebruary 15 would be reflected in Nights and Experiences Booked for our quarter endedMarch 31 . If, in the example, the booking were canceled onMay 15 , Nights and Experiences Booked would be reduced by the cancellation for our quarter endedJune 30 . A night can include one or more guests and can be for a listing with one or more bedrooms. 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. In the first quarter of 2021, we had 64.4 million Nights and Experiences Booked, a 13% increase from 57.1 million Nights and Experiences Booked in the same prior year period. Nights and Experiences Booked grows as we attract new hosts and guests to our platform and as repeat guests increase their activity on our platform. Our Nights and Experiences Booked increased from prior levels primarily as a result of continued increase in domestic travel on our platform. This improvement was largely driven by stronger results inNorth America , in particular with resilience in domestic and short-distance travel, with more people gravitating towardAirbnb stays within driving distance of their homes. 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 hosts and guests and reflects growth in Nights and Experiences Booked. In the first quarter of 2021, our GBV was$10.3 billion , a 52% increase from$6.8 billion in the same prior year period. The increase in our GBV was primarily due to continued increase in domestic travel on our platform. Similar to Nights and Experiences Booked, this improvement was largely driven by stronger results inNorth America , in particular with resilience in domestic and short-distance travel, with more people gravitating towardAirbnb stays within driving distance of their homes. On a constant currency basis, the increase in GBV was 48%.
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe the following non-GAAP measures are useful in evaluating our operating performance. We use the following non-GAAP financial information, collectively, to evaluate our ongoing operations and for internal planning and forecasting purposes. 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 GAAP results. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly titled non-GAAP measures used by other companies. A reconciliation of each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP is provided below. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measures. 26 --------------------------------------------------------------------------------
The following table summarizes our non-GAAP financial measures, along with the most directly comparable GAAP measure, for each period presented below.
Three Months Ended March 31, 2020 2021 (in thousands) Net loss$ (340,605) $ (1,172,211) Adjusted EBITDA$ (334,271) $ (58,638) Net cash provided by (used in) operating activities$ (569,830) $ 494,368 Free Cash Flow$ (585,497) $ 486,662 Adjusted EBITDA We define Adjusted EBITDA as net income or loss adjusted for (i) provision for (benefit from) income taxes; (ii) interest income, interest expense, and other income (expense), net; (iii) depreciation and amortization; (iv) stock-based compensation expense and stock-settlement obligations related to the IPO; (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 also excludes certain items related to transactional tax matters, for which management believes it is probable that we may be held jointly liable with hosts in certain jurisdictions, and we urge investors to review the detailed disclosure regarding these matters included in the subsection titled "-Critical Accounting Policies and Estimates-Lodging Tax Obligations," as well as the notes to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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 GAAP. These limitations include the following:
•Adjusted EBITDA does not reflect interest income (expense) and other income (expense), net, which include loss on extinguishment of debt and unrealized and realized gains and losses on foreign currency exchange, investments, and financial instruments, including the warrants issued in connection with a term loan agreement entered into inApril 2020 . We amended the anti-dilution feature in the warrant agreements inMarch 2021 . The balance of the warrants of$1.3 billion was reclassified from liability to equity as the amended warrants met the requirements for equity classification and are no longer remeasured at each reporting period; •Adjusted EBITDA excludes certain recurring, non-cash charges, such as depreciation of property and equipment and amortization of intangible assets, and although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect all cash requirements for such replacements or for new capital expenditure requirements; •Adjusted EBITDA excludes stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy as well as stock-settlement obligations, which represent employer and related taxes related to the IPO; •Adjusted EBITDA excludes acquisition-related impacts consisting of gains (losses) recognized on changes in the fair value of contingent consideration arrangements. The contingent consideration, which was in the form of equity, was valued as of the acquisition date and is marked-to-market at each reporting period based on factors including our stock price. The changes in fair value of contingent consideration were insignificant prior to the fourth quarter of 2020; •Adjusted EBITDA does not reflect net changes to reserves for lodging taxes for which management believes it is probable that we may be held jointly liable with hosts for collecting and remitting such taxes; and •Adjusted EBITDA does not reflect restructuring charges, which include severance and other employee costs, lease impairments, and contract amendments and terminations.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net loss and our other GAAP results.
For the three months endedMarch 31, 2021 , Adjusted EBITDA was$(58.6) million compared to Adjusted EBITDA for the three months endedMarch 31, 2020 of$(334.3) million . This favorable change was due to several factors including higher average daily rates ("ADRs"). Supporting our ADRs were a continuation of trends that we saw in 2020, such as the strength of bookings inNorth America , where ADRs tend to be higher than other parts of the world. This was also supported by more guests booking entire homes, relative to private or shared rooms, as well as booking in non-urban and low-density urban areas, where ADRs tend to be higher. In addition, during the three months endedMarch 31, 2021 , there were fewer cancellations and a decrease in amounts paid to customers compared to the same prior year period. In the first 27 -------------------------------------------------------------------------------- quarter of 2020, due to the global pandemic, we had elevated cancellations and we applied our extenuating circumstances policy to cancellations resulting from COVID-19, which resulted in a significant reduction to revenue inMarch 2020 . Lastly, during the three months endedMarch 31, 2021 , we reduced overall fixed and variable costs, particularly our performance marketing expense as compared to the same prior year period. Adjusted EBITDA Reconciliation The following is a reconciliation of Adjusted EBITDA to the most comparable GAAP measure, net loss: Three Months Ended March 31, 2020 2021 (in thousands, except percentages) Revenue $ 841,830$ 886,936 Net loss$ (340,605) $ (1,172,211) Adjusted to exclude the following: Provision for (benefit from) income taxes (16,485) 6,309 Other (income) expense, net 46,760 300,098 Interest expense (1,510) 421,911 Interest income (13,649) (3,052) Depreciation and amortization 33,872 38,252 Stock-based compensation expense(1) 41,626
229,485
Acquisition-related impacts -
7,989
Net changes in lodging tax reserves (84,280) 599 Restructuring charges - 111,982 Adjusted EBITDA$ (334,271) $ (58,638) Adjusted EBITDA as a percentage of Revenue (40) %
(7) %
(1)Excludes stock-based compensation related to restructuring, which is included in restructuring charges in the table above.
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 investment in our business and for acquisitions as well as to strengthen 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 hosts and guests and amounts payable to our hosts and guests 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 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. For the three months endedMarch 31, 2021 , Free Cash Flow was$486.7 million , representing 55% of revenue, compared to$(585.5) million for the three months endedMarch 31, 2020 . Free Cash Flow increased for the three months endedMarch 31, 2021 primarily due to the increase in Nights and Experiences Booked and GBV supported by people yearning to travel and the rollout of vaccines, combined with higher revenue and cost reductions. 28 --------------------------------------------------------------------------------
Free Cash Flow Reconciliation
The following is a reconciliation of Free Cash Flow to the most comparable GAAP cash flow measure, net cash provided by (used in) operating activities:
Three Months EndedMarch 31, 2020 2021 (in thousands, except percentages) Revenue $
841,830
Net cash provided by (used in) operating activities$ (569,830) $ 494,368 Purchases of property and equipment (15,667) (7,706) Free Cash Flow $
(585,497)
Free Cash Flow as a percentage of Revenue (70) % 55 % Other cash flow components: Net cash provided by (used in) investing activities $ 2,259$ (1,172,286) Net cash provided by (used in) financing activities$ (339,202) $ 1,567,534 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 forNorth 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. 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 Flow is typically negative. As our business matures, other seasonal trends may develop, or these existing seasonal trends may become more extreme. 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. While we expect this impact on seasonality to continue as long as COVID-19 is impacting travel patterns globally, we have seen the time between when guests make their bookings on our platform and when they expect to complete their stays increase and return to pre-COVID levels. Typically, booking lead times sequentially lengthen from the fourth quarter to the first quarter when guests start to book travel for later in the year. Even taking normal seasonal patterns into consideration, we have seen lead times lengthen during the first quarter of 2021. InMarch 2021 , lead times were almost on par with those of the same period in 2019.
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$173.1 million and$25.9 million for the three months endedMarch 31, 2020 and 2021, respectively, representing 21% and 3% of revenue, respectively. The elevated level of incentives and refunds provided to customers during the three months endedMarch 31, 2020 was 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 29 -------------------------------------------------------------------------------- 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 expense as a percentage of revenue in the first half of 2021 will be higher than that of the second half, as we continue to invest in trust and safety programs and scale our frontline community support staff in preparation for the travel rebound. 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 incurred additional operations and support expense during 2020, specifically the fourth quarter of 2020 when we completed our IPO, as a result of the stock-based compensation expense associated with our RSUs and anticipate additional stock-based compensation expense going forward. 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. We incurred additional product development expense during 2020, specifically the fourth quarter of 2020 when we completed our IPO, as a result of the stock-based compensation expense associated with our RSUs and anticipate 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 expect that sales and marketing expense as a percentage of revenue in the first half of 2021 will be higher than that of the second half. This is partially due to the marketing campaign that we began running inFebruary 2021 in advance of the summer travel season. We incurred additional sales and marketing expense during 2020, specifically the fourth quarter of 2020 when we completed our IPO, as a result of the stock-based compensation expense associated with our RSUs and anticipate 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 theSEC 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 incurred additional general and administrative expense during 2020, specifically the fourth quarter of 2020 when we completed our IPO, as a result of the stock-based compensation expense associated with our RSUs and anticipate additional stock-based compensation expense going forward. Restructuring Charges Restructuring charges primarily consist of costs associated with a global workforce reduction inMay 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. Interest Expense Interest expense consists primarily of 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 "2016 Credit Facility"), interest expense and 30 -------------------------------------------------------------------------------- amortization of debt issuance costs associated with our term loan agreements entered into inApril 2020 , and the loss on extinguishment of debt related to the repayment of the first and second lien loans inMarch 2021 . 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 inApril 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 byAirbnb , 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 theU.S. dollar. The effects of these derivative contracts are reflected in other income (expense), net. Provision for (Benefit from) Income Taxes We are subject to income taxes inthe United States and foreign jurisdictions in which we do business. Foreign jurisdictions have different statutory tax rates than those inthe United States . Additionally, certain of our foreign earnings may also be taxable inthe 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, tax credits, 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 inthe United States . We recognize accrued interest and penalties related to unrecognized tax benefits in the provision for (benefit from) income taxes. 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 limited. The most recent analysis of our historical ownership changes was completed throughMarch 31, 2021 . 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 may create such a limitation. We are currently under examination for income taxes by the Internal Revenue Service ("IRS") for the years 2013, 2016, 2017, and 2018. InDecember 2020 , we received a Notice of Proposed Adjustment from theIRS 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 ourU.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$1.0 billion . We intend to vigorously contest theIRS's proposed adjustment, including through all administrative and, if necessary, judicial remedies which may include: entering into administrative settlement discussions with theIRS Independent Office of Appeals ("IRS Appeals ") in 2021, and if necessary petitioning theU.S. Tax Court ("Tax Court") for redetermination if an acceptable outcome cannot be reached withIRS Appeals , and finally, and if necessary, appealing the Tax Court's decision to the appropriate appellate court. If theIRS prevails in the assessment of additional tax due based on its position and such tax and related interest and penalties, if any, exceeds our current reserves, such outcome could have a material adverse impact on our financial position and results of operations, and any assessment of additional tax could require a significant cash payment and have a material adverse impact on our cash flow. 31 -------------------------------------------------------------------------------- Results of Operations The following table sets forth our results of operations for the periods presented: Three Months Ended March 31, 2020 2021 (in thousands) Revenue$ 841,830 $ 886,936 Costs and expenses: Cost of revenue 277,772 254,515 Operations and support(1) 221,787 185,436 Product development(1) 258,819 363,061 Sales and marketing(1) 317,179 229,125 General and administrative(1) 91,762 189,762 Restructuring charges(1) - 111,982 Total costs and expenses 1,167,319 1,333,881 Loss from operations (325,489) (446,945) Interest income 13,649 3,052 Interest expense 1,510 (421,911) Other income (expense), net (46,760)
(300,098)
Loss before income taxes (357,090)
(1,165,902)
Provision for (benefit from) income taxes (16,485) 6,309 Net loss$ (340,605) $ (1,172,211)
(1)Includes stock-based compensation expense as follows:
Three Months Ended March 31, 2020 2021 (in thousands) Operations and support $ 949$ 11,412 Product development 22,436 143,715 Sales and marketing 6,048 25,901 General and administrative 12,193 48,457 Restructuring charges - (11) Stock-based compensation expense$ 41,626 $ 229,474 32 -------------------------------------------------------------------------------- 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 March 31, 2020 2021 Revenue 100 % 100 % Costs and expenses: Cost of revenue 33 29 Operations and support 26 21 Product development 31 41 Sales and marketing 38 26 General and administrative 11 21 Restructuring charges - 12 Total costs and expenses 139 150 Loss from operations (39) (50) Interest income 2 - Interest expense - (48) Other income (expense), net (5) (33) Loss before income taxes (42) (131) Provision for (benefit from) income taxes (2) 1 Net loss (40) % (132) % Comparison of the Three Months EndedMarch 31, 2020 and 2021 Revenue Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Revenue$ 841,830 $ 886,936 5 % Revenue increased$45.1 million , or 5%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , primarily due to higher ADRs, partially offset by a decrease in the number of check-ins related to Nights and Experiences Booked on our platform. In addition, during the three months endedMarch 31, 2020 , we had higher reductions to revenue largely attributable to payments made to customers related to our extenuating circumstances policy for cancellations resulting from COVID-19 totaling$106.5 million , the majority of which was recorded as reduction to revenue. Service fees as a percentage of booking value, exclusive of taxes, increased marginally as compared to the same prior year period. On a constant currency basis, revenue increased 3% compared to the three months endedMarch 31, 2020 . Cost of Revenue Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Cost of revenue $ 277,772$ 254,515 (8) % Percentage of revenue 33 % 29 % Cost of revenue decreased$23.3 million , or 8%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily due to a$14.1 million decrease in the cost of data hosting services, a$11.9 million decrease in chargebacks and a$10.1 million decrease in third-party outside support services, partially offset by a$8.8 million increase in amortization expense for internally developed software and acquired technology and a$5.3 million increase in merchant fees. For the three months endedMarch 31, 2020 and 2021, payment processing costs, consisting of merchant fees and chargebacks, totaled$191.9 million and$185.3 million , respectively, which represented 3% and 2% of GBV, respectively. The decrease in data hosting primarily resulted from lower usage. The decrease in payment processing costs resulted from lower chargeback expense attributable to elevated chargeback activity related to COVID-19 during the three months endedMarch 31, 2020 . 33 --------------------------------------------------------------------------------
Operations and Support Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Operations and support $ 221,787$ 185,436 (16) % Percentage of revenue 26 % 21 % Operations and support expense decreased$36.4 million , or 16%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily due to a$53.9 million decrease in third-party community support personnel and customer relations costs, partially offset by a$14.3 million increase in payroll-related expenses, predominantly comprised of stock-based compensation related to RSUs. The decrease in spending on third-party community support personnel and customer relations costs was largely due to fewer check-ins. Product Development Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Product development $ 258,819$ 363,061 40 % Percentage of revenue 31 % 41 % Product development expense increased$104.2 million , or 40%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily due to a$129.6 million increase in payroll-related expenses, predominantly comprised of stock-based compensation related to RSUs, partially offset by a decrease in allocated costs for facilities and information technology of$16.7 million primarily due to the reduction in headcount. Sales and Marketing Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Brand and performance marketing $ 217,848$ 119,208 (45) % Field operations and policy 99,331 109,917 11 % Total sales and marketing $ 317,179$ 229,125 (28) % Percentage of revenue 38 % 26 % Sales and marketing expense decreased$88.1 million , or 28%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily due to a$71.7 million decrease in marketing activities and a$9.3 million decrease in expenses for third-party service providers, partially offset by a$17.8 million increase in payroll-related expenses, predominantly comprised of stock-based compensation related to RSUs. Total brand and performance marketing decreased$98.6 million , driven by a reduction of performance marketing, partially offset by an increase in brand marketing. InMarch 2020 , driven by COVID-19, we paused our sales and marketing investments in new initiatives and our performance marketing spend. We implemented a marketing strategy that shifted our marketing mix towards brand marketing spend and away from spending on performance marketing. During the three months endedMarch 31, 2021 , we launched our Made possible by Hosts television and digital channels campaign in five of our largest markets. We also launched an accompanying digital campaign focused on recruiting new hosts. Total field operations and policy expense increased$10.6 million from the same period in 2020, which included$3.0 million of changes in the fair value of contingent consideration arrangements related to an acquisition completed in 2019. 34 --------------------------------------------------------------------------------
General and Administrative Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) General and administrative $ 91,762$ 189,762 107 % Percentage of revenue 11 % 21 % General and administrative expense increased$98.0 million , or 107%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily due to a prior year$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, and an increase of$46.6 million in payroll-related expenses, predominantly comprised of stock-based compensation related to RSUs. These movements were partially offset by a$19.8 million decrease in bad debt expense and a$13.3 million reduction in certain employee benefits and related employment taxes and associated penalties, resulting from a settlement agreement. Restructuring Charges Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Restructuring charges $ - $ 111,982 * Percentage of revenue - % 12 % * Not meaningful Restructuring charges totaled$112.0 million for the three months endedMarch 31, 2021 . During the period, we ceased use of a leased office and made available for sublease resulting in an additional lease impairment. Interest Income and Expense Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Interest income$ 13,649 $ 3,052 (78) % Percentage of revenue 2 % - % Interest expense $ 1,510$ (421,911) * Percentage of revenue - % (48) % *Not meaningful Interest income decreased$10.6 million , or 78%, for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The decrease was primarily due to a decline in interest rates and our investment portfolio mix, which was largely invested in short-term, high-quality bonds. Interest expense increased$423.4 million for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 primarily due to the interest of$41.5 million owed on the term loans issued inApril 2020 and the$377.2 million loss on extinguishment of debt resulting from retirement of these term loans inMarch 2021 . Refer to the section titled "Liquidity and Capital Resources - Loan Agreements" below for further information. 35 --------------------------------------------------------------------------------
Other Income (Expense), Net
Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages)
Other income (expense), net
* Percentage of revenue (5) % (33) % *Not meaningful Other expense, net increased$253.3 million for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 . The change was primarily driven by$292.0 million of fair value remeasurement on our warrants issued in connection with our second lien loan and a$36.7 million increase in net realized and unrealized foreign exchange losses, partially offset by a$26.2 million increase in net realized and unrealized gains on our investments and impairment charges recorded during 2020 totaling$45.6 million . During the quarter endedMarch 31, 2021 , the warrants issued in connection with our second lien loan were reclassified to equity and will no longer require fair value remeasurement. Provision for (Benefit from) Income Taxes Three Months Ended March 31, 2020 to 2021 % 2020 2021 Change (in thousands, except percentages) Provision for (benefit from) income taxes$ (16,485) $ 6,309 * *Not meaningful The provision for income taxes in the three months endedMarch 31, 2021 increased$22.8 million , compared to the same period in 2020, primarily due to the benefit recognized in the prior year quarter from the five-year net operating loss carryback provision of the CARES Act and increased foreign taxes. Liquidity and Capital Resources InDecember 2020 , upon the completion of our IPO, we received net proceeds of$3.7 billion after deducting underwriting discounts and commissions of$79.3 million and offering expenses of$9.8 million . We used a portion of these net proceeds to satisfy the tax withholding and remittance obligations of approximately$1.6 billion related to the settlement of our outstanding RSUs in connection with our IPO. As ofMarch 31, 2021 , our principal sources of liquidity were cash and cash equivalents and marketable securities totaling$6.6 billion . As ofMarch 31, 2021 , cash and cash equivalents of$4.5 billion included$1.4 billion 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. As ofMarch 31, 2021 , marketable securities of$2.1 billion included an immaterial amount held by foreign subsidiaries. Marketable securities consist of corporate debt securities, mutual funds, highly-liquid debt instruments of theU.S. government and its agencies, and certificates of deposit. These amounts do not include funds of$4.0 billion as ofMarch 31, 2021 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 outsidethe 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 marketable securities balances inthe United States are sufficient to fund our working capital needs inthe United States .
Convertible Senior Notes
On
The 2026 Notes are senior unsecured obligations and will not bear regular
interest. The 2026 Notes mature on
The initial conversion rate for the 2026 Notes is 3.4645 shares of our Class A common stock per$1,000 principal amount of 2026 Notes, which is equivalent to an initial conversion price of approximately$288.64 per share of the Class A common stock. The conversion rate is subject to adjustment under certain circumstances in accordance with the terms of the Indenture. 36 -------------------------------------------------------------------------------- The 2026 Notes will be convertible at the option of the holders prior to the close of business on the business day immediately precedingMarch 15, 2026 only under the following circumstances: •during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending onJune 30, 2021 , if the last reported sale price per share of our common stock exceeds 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter; •during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the "measurement period") if the trading price per$1,000 principal amount of notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price per share of our common stock on such trading day and the conversion rate on such trading day; •upon the occurrence of certain corporate events or distributions on our common stock, as described in this offering memorandum; •or if we call such notes for redemption; and •at any time from, and including,December 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date. Upon conversion, we may satisfy our conversion obligation by paying or delivering, as applicable, cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election, based on the applicable conversion rate. Holders of the 2026 Notes who convert their 2026 Notes in connection with certain corporate events that constitute a make-whole fundamental change (as defined in the Indenture) are, under certain circumstances, entitled to an increase in the conversion rate. Additionally in the event of a corporate event constituting a fundamental change (as defined in the Indenture), holders of the 2026 Notes may require us to repurchase all or a portion of their 2026 Notes at a repurchase price equal to 100% of the principal amount of the Notes being repurchased.
Capped Calls
OnMarch 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$100.2 million . The Capped Calls cover, subject to anti-dilution adjustments, the number of shares of Class A common stock initially underlying the 2026 Notes sold in the offering. By entering into the Capped Calls, we expect to reduce the potential dilution to our common stock (or, in the event a conversion of the 2026 Notes is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion of the 2026 Notes our common stock price exceeds the conversion price of the 2026 Notes. The cap price of the Capped Calls will initially be$360.80 per share of Class A common stock, which represents a premium of 100% over the last reported sale price of the Class A common stock of$180.40 per share onMarch 3, 2021 , and is subject to certain customary adjustments under the terms of the Capped Call Transactions.
The Capped Calls meet the criteria for classification in equity, are not remeasured each reporting period and included as a reduction to additional paid-in-capital within stockholders' equity.
Loan Agreements
InApril 2020 , we entered into a$1.0 billion FirstLien Credit and Guaranty Agreement (the "First Lien Credit Agreement," and the loans thereunder, the "FirstLien Loan "), resulting in proceeds of$961.4 million , net of debt discount and issuance costs. The loan is due and payable inApril 2025 . The underlying loan can be repaid in whole or in part prior toApril 2025 at our option, subject to applicable prepayment premiums and make-whole premiums. Beginning inSeptember 2020 , we are required to repay the FirstLien Loan in quarterly installments equal to 0.25% of the$1.0 billion aggregate principal amount of the FirstLien Loan , with the remaining principal amount payable on the maturity date. InApril 2020 , we entered into a$1.0 billion SecondLien Credit and Guaranty Agreement (the "Second Lien Credit Agreement," and the loans thereunder, the "SecondLien Loan "), resulting in proceeds of$967.5 million , net of debt discount and issuance costs. The loan is due and payable inJuly 2025 . The underlying loan can be repaid in whole or in part prior toJuly 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. In connection with the SecondLien 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 SecondLien Loan lenders. The warrants expire onApril 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 condensed consolidated balance sheet, and the warrant liability is 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 condensed consolidated statements of operations. As ofDecember 31, 2020 , the fair value of the warrant totaled$985.2 million . We amended the anti-dilution feature in the warrant agreements inMarch 2021 , which resulted in a change in classification from liability to equity. Accordingly, we recorded$292.0 million in other expense throughMarch 30, 2021 , the modification date. The balance of$1.3 billion was then reclassified from liability to equity as the amended warrants met the requirements for equity classification. The First Lien Credit Agreement and Second Lien Credit Agreement included 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 ofDecember 31, 2020 , we were in compliance with all covenants of the First Lien Credit Agreement and Second Lien Credit Agreement. 37 --------------------------------------------------------------------------------
On
2020 Credit Facility
InNovember 2020 , we entered into a$500.0 million five-year senior secured revolving Credit and Guarantee Agreement (the "Revolving Credit Agreement"), which provides for an initial borrowing commitment by a group of lenders led byMorgan Stanley Senior Funding, Inc. of$500.0 million (the "2020 Credit Facility"). The 2020 Credit Facility provides a$200.0 million sub-limit for the issuance of letters of credit. The 2020 Credit Facility has a commitment fee of 0.15% per annum on any undrawn amounts, payable quarterly in arrears. Interest on borrowings is equal to (i) in the case of LIBOR borrowings, 1.5% plus LIBOR, subject to a floor of 0%, or (ii) in the case of base rate borrowings, 0.5% plus the greatest of (a) the federal funds effective rate plus 0.5%, (b) the prime rate, and (c) LIBOR for a one-month period plus 1%, in each case subject to a floor of 1%. The Revolving Credit Agreement includes customary conditions to borrowing, events of default, and covenants, including a minimum liquidity covenant requiring us to have liquidity of at least$200.0 million as of the last day of each fiscal quarter and 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, subject to certain exceptions.
As of
2016 Credit Facility
InApril 2020 , we terminated our 2016 Credit Facility, which provided an initial borrowing commitment by a group of lenders led byBank of America, N.A . of$1.0 billion . The 2016 Credit Facility also provided a$100.0 million sub-limit for the issuance of letters of credit. As ofDecember 31, 2019 , there were no borrowings outstanding on the 2016 Credit Facility and outstanding letters of credit totaled$53.0 million . The 2016 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. OnApril 17, 2020 , we terminated the 2016 Credit Facility. Certain letters of credit under the 2016 Credit Facility were transferred to new issuers upon the termination of the 2016 Credit Facility. As ofMarch 31, 2021 , letters of credit formerly under the 2016 Credit Facility totaled$19.3 million and were collateralized by$19.9 million of restricted cash on the condensed consolidated balance sheet. We believe that our current available cash, cash equivalents, and marketable securities will be sufficient to meet our operational cash needs for the foreseeable future. Our future capital requirements, however, will depend on many factors, including, but not limited to our growth, headcount, ability to attract and retain hosts and guests on our platform, capital expenditures, acquisitions, introduction of new products and offerings, timing and extent of spending to support our efforts to develop our platform, and expansion of sales and marketing activities. Additionally, we may in the future raise additional capital or incur additional indebtedness to continue to fund our strategic initiatives. In the event that additional financing is required from outside sources, we may seek to raise additional funds at any time through equity, equity-linked arrangements, and/or debt, which may not be available on favorable terms, or at all. If we are unable to raise additional capital when desired and at reasonable rates, our business, results of operations, and financial condition could be materially adversely affected. We expect our capital expenditures in 2021 will be higher than that of 2020, but significantly lower than 2019. The majority of our expected investments are related to offices inNorth America , many of which were delayed in 2020. Cash Flows The following table summarizes our cash flows for the periods indicated: Three Months Ended March 31, 2020 2021 (in thousands) Net cash provided by (used in) operating activities$ (569,830) $ 494,368 Net cash provided by (used in) investing activities 2,259 (1,172,286) Net cash provided by (used in) financing activities
(339,202) 1,567,534 Effect of exchange rate changes on cash, cash equivalents and restricted cash
(97,117) (72,287) Net increase (decrease) in cash, cash equivalents and restricted cash $
(1,003,890)
Cash Provided by (Used in) Operating Activities Net cash provided by operating activities for the three months endedMarch 31, 2021 was$494.4 million . Our net loss for the three months endedMarch 31, 2021 was$1.2 billion , adjusted for non-cash charges, primarily consisting of$377.2 million of loss on extinguishment of debt,$292.0 million of fair value remeasurement on warrants issued in connection with a term loan agreement entered into inApril 2020 ,$229.5 million of stock-based compensation expense,$112.5 million of impairment of long-lived assets, and$38.3 million of depreciation and 38 -------------------------------------------------------------------------------- amortization. Additional cash was provided by changes in working capital, including a$538.3 million increase in unearned fees resulting from significantly higher bookings. Net cash used in operating activities for the three months endedMarch 31, 2020 was$569.8 million . Our net loss for the three months endedMarch 31, 2020 was$340.6 million , adjusted for non-cash charges, primarily consisting of$45.6 million of impairment charges of investments,$41.6 million of stock-based compensation expense,$33.9 million of depreciation and amortization,$31.6 million of losses on investments, net, and$27.1 million of bad debt expense. Additional uses of cash flows resulted from changes in working capital, including a$225.6 million decrease in accrued expenses and other liabilities and$137.0 million decrease in prepaids and other assets. Cash Provided by (Used in) Investing Activities Net cash used in investing activities for the three months endedMarch 31, 2021 was$1.2 billion , which was primarily used to purchase marketable securities of$1.6 billion , partially offset by proceeds from sales and maturities of marketable securities of$248.2 million and$168.7 million , respectively. Net cash provided by investing activities for the three months endedMarch 31, 2020 was$2.3 million , which was primarily provided by proceeds from sales and maturities of marketable securities of$69.3 million and$225.5 million , respectively, partially offset by cash used to purchase marketable securities of$277.3 million and property and equipment of$15.7 million . Cash Provided by (Used in) Financing Activities Net cash provided by financing activities for the three months endedMarch 31, 2021 was$1.6 billion , primarily reflecting proceeds from the issuance of convertible senior notes, net of issuance costs, of$1,979 million and change in funds payable and amounts payable to customers of$1.9 billion , partially offset by the repayment of long-term debt and related prepayment penalty of$1,995 million and$212.9 million , respectively. Net cash used in financing activities for the three months endedMarch 31, 2020 was$339.2 million , primarily reflecting the change in funds payable and amounts payable to customers of$339.4 million . Effect of Exchange Rates The effect of exchange rate changes on cash, cash equivalents, and restricted cash on our condensed 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. For the three months endedMarch 31, 2020 and 2021, we recorded a$97.1 million and$72.3 million reduction in cash, cash equivalents, and restricted cash, respectively, primarily due to the strengthening of theU.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. Off-Balance Sheet Arrangements As ofMarch 31, 2021 , 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. Contractual Obligations and Commitments As ofMarch 31, 2021 , there were no material changes outside the ordinary course of business to the contractual obligations, as disclosed in our 2020 Annual Report, except for the repayment of the FirstLien Loan and SecondLien Loan and issuance of the 2026 Notes. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed 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 condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, 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 condensed consolidated financial condition, results of operations, and cash flows. Revenue Recognition We recognize revenue in accordance with ASC Topic 606, which we adopted as ofJanuary 1, 2018 on a full retrospective basis. We generate substantially all of our revenue from facilitating guest stays at accommodations offered by hosts on theAirbnb 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 39 -------------------------------------------------------------------------------- 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 condensed consolidated statements of operations. Lodging Tax Obligations Some states, cities, and localities inthe 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 29,800 jurisdictions on behalf of our hosts, and lodging taxes are primarily collected inthe United States . Such lodging taxes are generally remitted to tax jurisdictions within a 30 to 90-day period following the end of each month. In jurisdictions where we do not collect and remit lodging taxes, the responsibility for collecting and remitting these taxes, if applicable, generally rests with hosts. We estimate liabilities for a certain number of jurisdictions with respect to state, city, and local taxes related to lodging where we believe it is probable thatAirbnb could be held jointly liable with hosts for collecting and remitting such taxes and the related amounts can be reasonably estimated. Our accrued obligations related to lodging taxes, including estimated penalties and taxes, totaled$52.9 million and$53.7 million as ofDecember 31, 2020 andMarch 31, 2021 , respectively, and changes to this reserve are recorded in general and administrative expense in our condensed consolidated statements of operations. We are currently involved in a number of lawsuits brought by certain states and localities involving the payment of lodging taxes. These jurisdictions are asserting that we are liable or jointly liable with hosts to collect and remit lodging taxes. These lawsuits are in various stages and we continue to vigorously defend these claims. We believe that the statutes at issue impose a lodging tax obligation on the person exercising the taxable privilege of providing accommodations, our hosts. The ultimate resolution of these lawsuits cannot be determined at this time. Evaluating potential outcomes for lodging taxes is inherently uncertain and requires us to utilize various judgments, assumptions and estimates in determining our reserves. A variety of factors could affect our potential obligation for collecting and remitting such taxes which include, but are not limited to, whether we determine, or any tax authority asserts, that we have a responsibility to collect lodging and related taxes on either historic or future transactions; the introduction of new ordinances and taxes which subject our operations to such taxes; or the ultimate resolution of any historic claims that may be settled through negotiation. Accordingly, the ultimate resolution of lodging taxes may be greater or less than reserve amounts we have established. Income Taxes We are subject to income taxes inthe United States and foreign jurisdictions. We account for income taxes using the asset and liability method. We account for uncertainty in tax positions by recognizing a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination. Evaluating our uncertain tax positions, determining our provision for (benefit from) income taxes, and evaluating the impact of the Tax Cuts and Jobs Act, are inherently uncertain and require making judgments, assumptions, and estimates. While we believe that we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for (benefit from) income taxes and the effective tax rate in the period in which such determination is made. The provision for (benefit from) income taxes includes the impact of reserve provisions and changes to reserves as well as the related net interest and penalties. In addition, we are subject to the continuous examination of our income tax returns by theUnited States Internal Revenue Service and other tax authorities that may assert assessments against us. We regularly assess the likelihood of adverse outcomes resulting from these examinations and assessments to determine the adequacy of our provision for (benefit from) income taxes. 40 --------------------------------------------------------------------------------
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. We have one reporting unit. We test goodwill for impairment at least annually, in the fourth quarter, and whenever events or changes in circumstances indicate that goodwill might be impaired. As a result of the goodwill impairment assessment, management concluded goodwill was not impaired as ofDecember 31, 2020 and does not believe that its reporting unit is at risk of failing the impairment test since the fair value of the reporting unit substantially exceeded the carrying value. Long-lived assets that are held and used by us are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Determination of recoverability of long-lived assets is based on an estimate of the undiscounted cash flows resulting from the use of the asset group and its eventual disposition. If the carrying value of the long-lived asset group is not recoverable on an undiscounted cash flow basis, we recognize impairment to the extent that the carrying value exceeds its fair value. We determine fair value through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals. Any impairments to right-of-use ("ROU") assets, leasehold improvements, or other assets as a result of a sublease, abandonment, or other similar factor are initially recognized when a decision to do so is made and recorded as an operating expense. Similar to other long-lived assets, management tests ROU assets for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. For lease assets, such circumstances would include subleases that do not fully recover the costs of the associated leases or a decision to abandon the use of all or part of an asset. For the three months endedMarch 31, 2021 , we recorded$75.3 million of ROU asset impairment charges and$37.2 million leasehold improvements impairment charges within restructuring charges in the condensed consolidated statement of operations. Significant judgment and estimates are required in assessing impairment of goodwill and long-lived assets, including identifying whether events or changes in circumstances require an impairment assessment, estimating future cash flows, and determining appropriate discount rates. Our estimates of fair value are based on assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Recent Accounting Pronouncements See Note 2 to our condensed consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted. Item 3. Quantitative and Qualitative Disclosures About Market Risk Our substantial operations around the world expose us to various market risks. These risks primarily include foreign currency risk and investment risk. Foreign Currency Exchange Risk We offer the ability to transact on our platform in over 40 currencies, of which the most significant foreign currencies to our operations in the first quarter of 2021 were the Euro, British Pound, Australian Dollar, Canadian Dollar, Brazilian Real, Chinese Yuan and Mexican Peso. Our international revenue, as well as costs and expenses denominated in foreign currencies, expose us to the risk of fluctuations in foreign currency exchange rates against theU.S. dollar. Accordingly, we are subject to foreign currency risk, which may adversely impact our financial results. We have foreign currency exchange risks related primarily to: •revenue and cost of revenue associated with bookings on our platform denominated in currencies other than theU.S. dollar; •balances held as funds receivable and amounts held on behalf of customers and funds payable and amounts payable to customers; •unbilled amounts for confirmed bookings under the terms of our Pay Less Upfront program; and •intercompany balances primarily related to our payment entities that process customer payments. For revenue and cost of revenue associated with bookings on our platform outside ofthe United States , we generally receive net foreign currency amounts and therefore benefit from a weakening of theU.S. dollar and are adversely affected by a strengthening of theU.S. dollar. Movements in foreign exchange rates are recorded in other income (expense), net in our condensed consolidated statements of operations. Furthermore, our platform generally enables guests to make payments in the currency of their choice to the extent that the currency is supported byAirbnb , 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 foreign currency derivative contracts to protect against foreign exchange risks. Presently, these hedges are primarily designed to manage foreign exchange risk associated with balances held as funds payable and amounts payable to customers and unbilled amounts for confirmed bookings under the terms of our Pay Less Upfront program. These contracts reduce, but do not entirely eliminate, the impact of currency exchange rate movements on our assets and liabilities. We may choose not to hedge the risk associated with our foreign currency exposures, primarily if such exposure acts as a natural hedge for offsetting amounts denominated in the same currency or if the currency is too difficult or too expensive to hedge. 41 -------------------------------------------------------------------------------- We have experienced and will continue to experience fluctuations in foreign exchange gains and losses related to changes in exchange rates. If our foreign-currency denominated assets, liabilities, revenues, or expenses increase, our results of operations may be more significantly impacted by fluctuations in the exchange rates of the currencies in which we do business. If an adverse 10% foreign currency exchange rate change was applied to total net monetary assets and liabilities denominated in currencies other than the local currencies as ofMarch 31, 2021 , it would not have had a material impact on our consolidated financial statements. Investment and Interest Rate Risk We are exposed to interest rate risk related primarily to our investment portfolio and outstanding debt. Changes in interest rates affect the interest earned on our total cash, cash equivalents, and marketable securities and the fair value of those securities, as well as interest paid on our debt. We had cash and cash equivalents of$4.5 billion and marketable securities of$2.1 billion as ofMarch 31, 2021 , which consisted of corporate debt securities, mutual funds, highly-liquid debt instruments of theU.S. government and its agencies, and certificates of deposit. As ofMarch 31, 2021 , we had an additional$4.0 billion that we held for bookings in advance of guests completing check-ins, which we record separately on our condensed consolidated balance sheets as funds receivable and amounts held on behalf of customers. The primary objective of our investment activities is to preserve capital and meet liquidity requirements without significantly increasing risk. We invest primarily in highly-liquid, investment grade debt securities, and we limit the amount of credit exposure to any one issuer. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure. Because our cash equivalents and marketable securities generally have short maturities, the fair value of our portfolio is relatively insensitive to interest rate fluctuations. Due to the short-term nature of our investments, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. A hypothetical 100 basis points increase or decrease in interest rates would not have had a material impact on our consolidated financial statements as ofMarch 31, 2021 . As we repaid our floating-rate loans, subject to LIBOR floors, totaling$1,995.0 million inMarch 2021 , we are no longer exposed to the risk related to fluctuations in interest rates to the extent LIBOR exceeds the floors. 42
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