Airbnb & Olo | Press Conference
When strong business have to explain why their business is... Strong.
As September is kicking off, our favorite CEOs & management are finally taking the mic again to give some more data between quarters. Last week was all about Airbnb’s CFO, Ellie Mertz, and Olo’s CEO & CFO, Noah Glass & Peter Benavides.
If you do not know the companies… You have some reading to do, they’re worth it.
Let’s review what was said.
Airbnb.
Ellie started by a small retrospective which sounded like a pitch a new company could make to investors, talking about their strong finances, growth, profitability & cash generation… Which put them in a perfect spot to start their new chapter.
Competitive Advantages.
She talked again about lots of aspects which make Airbnb the strong company it is today, and it’s always nice to remember them - all of them are detailed on the Investment Case.
Airbnb’s supply has nothing to do with any of its competitors and consumers realized this during covid. The urban sites are more demanded in terms of volume, but the non-urban demand has grown exponentially during the lockdowns & kept growing after.
“But we also have listings pretty much anywhere that you would want to go around the world and in most cases in markets where there is not a hotel alternative. And so that differentiated aspect of our platform has really persisted despite the overall normalization of travel.”
The long-term stays have followed the same tendency.
“I would say the same in terms of a segment we call long term stays, so stays of 28 days or longer. That was a segment that had a really big accelerant in the early days of COVID. And I think a lot of bears thought that, that segment would unravel as we emerged and people went back to work. And yet what we see today is that that segment is not growing as fast as short term rentals. But on nominal terms, it's approximately double the size that it was pre pandemic and continues to be a very significant portion of our business.”
This shows that traveling has changed since covid and confirms that Airbnb is uniquely positioned to answer this new demand.
We’ve also talked during the last semester of the capacity given by Airbnb for cities to expand the hosting supply temporarily, something impossible without comparable services - in the case of the Olympics in Paris for example.
“[…] we can be helpful and prevent the need for incremental infrastructure that would not have a persistent usage.”
But we now have some feedback as some hosts kept their listing, after the Olympics. A constant growth in supply & new users hooked.
Quality & Supply.
The quality of Airbnb’s product & service is a core differentiation from competition. And they’re working to make it better, which annoyed some investors during the last quarter as it means a slower growing supply.
“When we think about experiences on Airbnb, we know from the data on our platform that the vast majority of guest experiences on Airbnb are incredibly positive. But we also know we have some very small fraction where we don't meet the expectations of the guest. And a portion of that is due to supply that simply does not meet quality expectations. And so what we've done of late is be more aggressive in terms of taking down those listings that will not meet the expectations and we don't feel are good for the brand.”
Focusing on quality is done through two levers: deleting the least qualitative supply & rewarding the most ones - which has been done through different incentives, the latest one being "the “Guests Favorites”, helping vacationers to instantly find the best of the best.
Promoted Listings
I personally do not like this, at all. It is one of Airbnb’s strengths to promote quality because the system is meant for good behaviors to be rewarded - with the “Guests Favorite” for example.
“I think some people presume that Airbnb is allergic to Promoter Listings. That is not the case. We just have not prioritized it yet.”
This would be a phenomenal source of revenue for Airbnb. But I believe it would break the virtuous cycle of the system - although I might be wrong. Until now, it isn’t prioritized and Ellie said nothing about focusing on it so… Empty words for now.
Potential.
Ellie also gave lots of colors on the potential of the company, through two levers: services & expansion.
Geography. We tend to forget that even if Airbnb is present in more than 220 countries, roughly 65% of its revenues come from only five: US, UK, France, Australia & Canada. The company is already rolling out its playbook in new markets & this will continue, rapidly thanks to their strong finances.
“And so what you've seen from us in the last couple of years is every year we're identifying what is that next single market or set of markets that we're going to turn our attention to. We will effectively turn on the marketing playbook, while simultaneously identifying what are those items about the product or the narrative or the messaging that need to be effectively tweaked such that we can drive differential growth in these markets.”
Things can go really fast from there if they are able to penetrate only one new market as efficiently as the core ones.
Actual Services. We talked about the experiences proposed by Airbnb during the Q2-24 review, a service no one really uses… For different reasons, one being that many aren’t aware of Airbnb’s service, another explained by Ellie:
“I think one of our learnings is while everybody in travel has this ambition of building out the entire trip, most consumers are not purchasing that entire trip in one go.“
This will be the big focus over the next quarters, to incentivize users to go back to their app & finish organizing their trip in-app, including activities.
New Services. Ellie confirms what Brad said already a few times, that things will take time because developing an AI software works differently than classic software. We’re talking years but some features will be upgraded before then.
“When I think about the applications that we are focused on internally, the one that I'm actually the most excited about is leveraging GenAI to improve our overall customer service.“
It’s not really what investors want to hear, but it has value without any doubts - mainly in term of reducing expenses.
The long-term ambition is unchanged: to make Airbnb your traveling concierge. It will just take longer than expected for the reason mentionned above but also because traveling is an activity generating less data - you travel less than you shop, hence having a very performant AI agent, trained on your consumption data, will take longer.
Actual Trends & Consumer.
About the “weak” guidance & the tendency the company was seeing in traveling lately, starting by a review of the first semester, a strong semester for Airbnb.
“overall travel demand, Q1 and Q2 were very stable, obviously at a lower growth rate than we saw in the preceding years given the boost in J curve we had in terms of the overall rebound, but very healthy levels of growth and in particular for us, delivering higher levels of growth in the broader industry and continuing to gain market share.”
The issue reflected in the guidance is due to travelers’ actual lead time - the time between the booking of holidays & the holidays themselves.
“And the interesting thing that we've seen this year is in Q1 and Q2, those lead times were effectively the same as they were in 2023 and frankly not far off where they were pre pandemic. And yet one thing that we noted in the numbers at the beginning of the summer leading into our Q3 guide was a bit of a changed behavior in terms of those lead times, how much in advance consumers were booking their travel. And what we noted was that the near term bookings, so think about last minute, it could be for tonight, it could be for a couple of weeks out. We've seen those be extremely strong.”
Lots of possible interpretations here but one thing for sure is that we will have a slower growth because even if some families decide to book holidays at the last minute, many just cancelled them. Might even explain why some other sectors of the economy are still very strong: No holidays mean some money available for other consumptions.
Olo.
Exactly as for Airbnb, Noah & Peter had to re-explain why & how strong their business was, so let’s take it from there with some up-to-date data.
Back to Fundamentals.
I’ll let Noah introduce the current state of his company.
“When you think about the scale of the business, we're now serving 82,000 restaurants across 700 brands, 85,000,000 guests that use Olo. On an annual basis, we process over 2,000,000 transactions every day through the platform. […] To my knowledge, that is the largest technology ecosystem in history within restaurant technology.”
Olo has grown rapidly because it proposes a demanded product with a fair mechanism, helping restaurants scale while charging on their performances. It’s important to understand the business model to realize how far can Olo go.
“I'd say fundamentally we charge on a per location per month basis a SaaS fee. And then we have additional products like dispatch and rails where we monetize on a per transaction fee. Subscription fees, the underlying subscription fees that we charge for the order suite, they scale up as transaction volumes grow, but the per cost of each transaction goes down. So we're really trying to incentivize brands to push as much volume through the platform as possible. If you look across all three product suites, we have 15 product modules now to sell across all three product suites. Today, we are on average providing about 3.5 product modules per location, so a lot of opportunity to expand within that base. And for the most part, that 3.5 is really most often within the order suite as pay is a relatively new product as is engaged.“
Olo is the only restaurant software treating fairly the restaurants’ clients’ data, returning it to them so they can use it to scale. They gain by doing so as this means growing volume passing through their software, hence more fees & more data, accelerating the wheel for both Olo & its clients.
“However, in those cases, when a guest is ordering from a marketplace, a DoorDash, an Uber Eats, a Grubhub, the restaurant brand is getting none of that guest data at all and they're paying a hefty commission.”
This is where Olo is different. And this is why they’ll take market share.
Olo Pay.
This is the big subject as they are finally ramping up their online & on-site payment systems. And after a few months, things are going very, very well.
“In terms of some other factors to think about in terms of scale, we last year processed over $26,000,000,000 of GMV on the platform, of which $2,500,000,000 of that was GPV, so meaning what portion of that was processed over our payments products.”
Data is great but the question is how will it evolve in terms of growth & most importantly, margins.
“That first year, we did about 6,000,000 of revenue. That grew to 30,000,000 of revenue last year, and now we're on pace to do mid-sixty million this year.”
Growth is strong because we’re talking of a new & demanded product, the tendency should continue. In terms of margin, we have a take rate of 1.2% if we base ourselves on last year’s GPV & revenues given by Peter - lower than most payment providers, but this is just Olo’s start.
To talk potential. We have different ways of paying but they usually are divided into two categories: card-present & card not present. The last one is proposed by Olo since some time now and management is working on scaling this part of their business. But they are releasing just now their card present service, and this is where the potential is.
“And industry wide, about 18% of transactions today are digital, which means there's about 6x more transactions that are non digital. So today, that $26,000,000,000 of GMV is really the card not present opportunity, which means there is a 6x opportunity just within the installed base that it would be addressable as card present comes online. So really the immediate SAM is more like $160,000,000,000. So while the $2,500,000,000 of GPV is a great trajectory, great milestone, it still represents a little over 2%-ish of the total SAM once card present is available.“
Serviceable Available Market (SAM): This narrows down Total Adressable Market (TAM) to the portion of the market that a company or product can realistically reach or serve.
If we want to extrapolate long-term, we could have a business getting 1.2% of $160,000,000,000 from OloPay - that’s $1.92B, or 8x FY-23 total revenues of the company or 2.4x its actual capitalization. Don’t make me say what I didn’t say: this isn’t happening tomorrow, and might never happen. This is a long-term potential in the best scenario where everything works. It just gives you an idea of the potential.
We also have to remember that each & every payment processed through OloPay will create data, fueling the virtuous cycle for both Olo & the franchises. So the demand for the product is accelerating - logically.
“I think earlier we said, 2,500,000,000 or around 2,500,000,000 of gross payments volume. That's what we're I think we're forecasting for this year around that, up from 1,000,000,000 last year and up from $250,000,000 of gross payment volume in 2022. So to your point, just growing rapidly. And it's growing rapidly not just because we're out there talking about it, but because brands are really seeing the value. […] I could pick anyone, but this uniquely provides me with more guest data and that is the currency of our time.”
Borderless.
I also want to talk about what Olo calls “Borderless” which is nothing different than… PayPal’s Fastlane - although used in different contexts.
“And one of the things that we had done in conjunction with the announcement of Olopay was develop a capability called Borderless, which allowed guests to store their information, including payment credentials […] And that did 2 things. 1, that really increased the cart conversion, so the ability for folks to convert faster and at a higher rate, as well as, allowed brands to know who that guest is.”
This pushes the virtuous cycle even further with always more data & a much better conversion rate, exactly as it does for PayPal. And exactly like them, it came out this year, so it will need time to ramp up but I think PayPal’s Fastlane will give us a good overview of how strong Borderless will be in the future.