Inspirato Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 7 speakers on the call.

Operator

And thank you for standing by. Welcome to the Inspirato Third Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. You will then hear an automated message advising that your hand is raised.

Operator

Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your first speaker today, Kyle Sork, Investor Relations. Please go ahead.

Speaker 1

Thank you, and good morning. On today's call, we have CEO, Eric Grossa and CFO, Robert Capon. Yesterday afternoon, we issued our press release announcing our Q3 2023 results, which is available on the Investor Relations page of our website at investor. Inspirado.com. Before we begin our formal remarks, we remind everyone that some of today's comments are forward looking statements, including, but not limited to, our expectations of future operating results and financial position, guidance and growth prospects, Business strategy and plans and market position and potential market opportunities.

Speaker 1

These statements are based on assumptions, and we assume no obligation to update them. Actual results could differ materially. We refer you to our SEC filings for a more detailed discussion of additional risks. In addition, during the call, management will discuss non GAAP measures, which are useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP.

Speaker 1

Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release. With that, I'll turn the call over to our CEO, Eric Brookstone?

Speaker 2

Thanks, Kyle, and good morning, everyone. It's a privilege to speak with you for the first time as CEO. While I've spent the past several months deeply engaging with employees, shareholders and members about our financial and operating plans, I've been a member of Insprada's Board for 2 years, so I'm familiar with our broader successes as well as challenges. In my career, I've spent a lot of time in the online trial space, Namely as Co Founder of Bob Wire and President of Expedia Worldwide. I've seen firsthand what it takes to become a market leader and household name in the travel space And developed a deep appreciation for creating exceptional and truly differentiated travel experiences.

Speaker 2

And in Sperrato, I see a strong customer value proposition supported by a world class luxury residence portfolio and a passionate team dedicated to delivering members With the certainty, service and value that creates the magical travel experiences Inspirato is known for. To ensure we have a compelling path to build on. And as we move forward, our decisions will be based on continuing to deliver wonderful member experiences while also becoming operationally more efficient. We deliver certainty through our portfolio of world class homes. Our amazing residences enable family and friends to travel together in a more natural and familiar way that creates lasting memories.

Speaker 2

While we also offer our members fantastic cruises, safaris and custom travel experiences, it's the ski in ski out mountain home in Colorado, The rustic bill of the Rolling Hills Company and hundreds of other homes, each with their own special touch that are in Frata's true calling card. Currently, we We continue to iterate on our portfolio to make sure we are providing our members with the highest quality properties at the most desirable and popular destination. While we've been trimming our portfolio in recent months, when the time comes in the future to once again grow our portfolio, my commitment is to do so thoughtfully with member feedback top of mind. On the service side, our pre trip planners are dedicated to ensuring travelers experience A remarkable vacation, while our on-site concierge staff are local experts uniquely capable of putting the finishing touches On a great trip. While we excel in handling expected requests like making dinner reservations at the best restaurants, arranging for private chefs, Booking box treatments at tea time, we also pride ourselves on delighting our members by delivering services that are more unique to hemp's product.

Speaker 2

Examples include stocking residence refrigerators and groceries requested by members ahead of travel as well as ensuring Our on-site concierge services are available across our resident portfolio to make sure member trips are truly personalized and unique. Beyond delivering the certainty and service associated with our residences and travel experiences, we've also redoubled our efforts to provide greater value In June, we rolled out rate reductions across the board and in August launched our reward program that provides up to 25% savings To our most frequent travelers and loyal members, these recent initiatives, when combined with existing programs like CHON, Provide great value to our members across the Inspirado portfolio. Over the years, we've worked tirelessly to build a loyal group of members Absolutely love Inspirato. This is demonstrated through our Net Promoter Score, which has consistently been at industry leading levels. While we've had some turnover in parts of our subscriber base, our core group remains strong as evidenced by resiliency in our nice book per subscriber.

Speaker 2

We have a strong action plan to address churn, which includes Avid's evaluating each of our travel offerings and subscriber cohorts with the end goal of improving what we deliver and how we deliver. While we've weathered tremendous change In a variety of challenges over the past few years, we've never wavered in our member centric approach, which is built on a foundation of world class properties And 5 star service. We will continue to invest in our members and in our strategic partnerships, including our recently signed agreement with Capital One, Through partnerships like Capital One and others that we have in development, we expect to increase intraoral awareness With the luxury traveler, which is an important initial step as we look ahead to grow and to broaden. While I'm confident we can make these investments and rebuild our long term revenue momentum, we must first have an intentional focus on the short term by strengthening our fundamentals Improving our operating efficiency and financial position by controlling costs, improving margin and strengthening our liquidity. These efforts are well underway, and we expect to begin realizing some of the benefits in the 4th quarter.

Speaker 2

During the past few quarters, on these calls, we've articulated our plan to optimize our portfolio, primarily from a cost standpoint to help reach our profitability goals. I'm pleased to announce that these actions are progressing very well with a large portion of impacted leases rolling off at the end of the year. In addition, we've also further reduced our workforce earlier in the Q3 to help make us more nimble and better positioned for improved results. From a liquidity standpoint, our strategic partnership with Capital One Included a $25,000,000 investment in its product. As a result, we have greater resources and liquidity to better serve our members, both today and over the long term.

Speaker 2

In closing, our near term plan is centered around improving our operating efficiencies and liquidity, which in turn positions us for a much stronger 2020. As we look ahead, it is important to note that we are not starting from scratch. We have our 3 P's, portfolio, people and partnerships in place to act as a foundation to achieve our goals. In future calls, I look forward to more specifically updating you on our plans to rebuild our revenue momentum, starting with our core products and partnerships. Before turning the call over to Robert to discuss our Q3 financial results, I'd like to personally thank our loyal members and homeowners for their support As well as pass along an ecstatic and heartfelt thank you to our employees for their continued passion, hard work and dedication to making Inspirado A magical destination for member travelers and one a type of experience they can't live without.

Speaker 2

With that, I'll turn the

Speaker 3

call over to Robert. Thanks, Eric. In the Q3, we generated $83,000,000 of total revenue, which was comprised of $33,000,000 of subscription revenue and $49,000,000 of travel revenue. While each of these metrics decreased on an annual basis, Travel revenue is up sequentially and we're encouraged by some early signs of success related to our travel revenue. As you recall, on our year end 2022 call in March, we highlighted travel behavior that was negatively impacting our travel revenue and gross margin, Namely, the mix between paid and half nights, residents and hotel nights, and the mix of nights in our leased hotel versus hotels with net rate agreements.

Speaker 3

We are focused on optimizing our travel mix to improve margins. Though it's early, we have begun to see signs of progress. In the Q3, we delivered approximately 46,400 total nights and from a mix perspective, 57% of total nights delivered were paid nights, our highest level since the Q2 of 2022. 64% of total nights delivered were in our residences, our highest level since the Q1 of 2022. Finally, our residents' ADR in the 3rd quarter was approximately $1600 while residents' occupancy was 73% compared to 81% in the Q3 of 2022 and up 1% from the Q2 of this year.

Speaker 3

We also believed earlier this year that average daily rates was elevated and negatively impacting the value proposition for our members. We saw this show up in our numbers with a more than 10% decline in the number of paid bookings for residences in Q2 2023 compared to the prior year. However, in June, we lowered our ADRs and we've seen this approach paying off as a number of nights booked in our residences And the Q3 remained consistent with the prior year despite a decrease in the number of subscribers. As Eric mentioned, Our residents have always been the flagship of our portfolio and deliver the highest economics and we are pleased with the reengagement in paid residences Bookings by our members in Q3. Again, it's early times, but these data points are encouraging and help contribute to an annual and sequential increase in travel revenue per subscriber.

Speaker 3

Unfortunately, solid travel performance was not enough to offset year over year Quarterly decreases in subscription revenue of 14% and 7%, respectively. We ended the quarter with 14,500 active subscriptions, Comprising approximately 11,800 club subscriptions and 2,700 past subscriptions. In each of the past four quarters, We've now seen PaaS subscriptions consistently decrease, resulting in a $5,000,000 year over year decrease in our subscription revenue attributable to PaaS. We're keeping close eye on this trend in evaluating future actions to take regarding past subscription sales. From a club perspective, we believe the macroeconomic environment and the perceived challenges of the business contributed to fewer than anticipated new sales, All these factors plus elevated ADRs in 2022 and the first half of twenty twenty three led to increased resignations.

Speaker 3

Importantly, an emphasis on multi year subscriptions has led to approximately 80% of new club sales in 2023 being for 2 or more years, which has helped drive improved club retention. In the Q3, our cost of revenue was $58,000,000 compared to $63,000,000 In the Q3 of 2022, the decrease in cost of revenue was in part due to reduced hotel booking fees between periods, a sign that another key initiative Better leveraging our leased hotels has begun to take hold. Strategically, net rate hotels continue to be a valuable lever at our disposal as we're able to both satisfy member demand and test new markets. Another factor contributing to the decrease in cost of revenue It was our portfolio optimization efforts that Eric touched on previously. As a reminder, due to the lag between when we entered to lease terminations And the expiration of those leases, those savings were planned to be modest in the 3rd and 4th quarters of 2023, followed by a more significant reduction in the Q1 of 2024.

Speaker 3

Consistent with our communications in the prior quarter, we anticipate at least $25,000,000 Annualized lease expense savings in 2024. From an expense standpoint, the Q3 included several non recurring charges, Primarily related to severance payments associated with the July reduction in force and changes in executive leadership that occurred in the quarter. This is part of our payroll reduction plan that we also discussed on our earnings call last quarter, targeting approximately $20,000,000 of annual payroll payments. As such, total operating expenses were $43,000,000 in the 3rd quarter Or 52 percent of revenue compared to $41,000,000 or 43 percent of total revenue in the Q3 of last year. Excluding severance related expenses and stock based compensation, our cash operating expenses were just under $33,000,000 compared to $38,000,000 in the Q3 of last year.

Speaker 3

From an adjusted EBITDA standpoint, we had a loss of $9,000,000 in the quarter compared to If not, for the severance expense I just mentioned, as well as a $2,000,000 reduction to revenue due to revenue recognition accounting for our recently launched Inspirato Gloist program. This is meaningfully better than our internal projections. In terms of cash and liquidity, in late September, we received a $25,000,000 investment from Capital One Ventures contributed to a cash balance of over $50,000,000 at the end of the 3rd quarter. We anticipate a free cash flow deficit in the Q4 before more significant statements take hold in 2024. The combination of the investment for Capital One and meaningful savings anticipated in 2024 through the actions we've taken to improve our free cash flow Profiles give us confidence in our liquidity position moving forward.

Speaker 3

In closing, the past few months have brought about change At a time of uncertainty for employees, homeowners, members and shareholders, it is my firm belief that Through our cost savings initiatives and overall execution, we put ourselves on a solid path towards certainty, Stability and profitability. Along those lines, we are reaffirming our 2023 full year guidance of $320,000,000 to $340,000,000 of total revenue and an adjusted EBITDA loss between $30,000,000 $45,000,000 We are hard at work finalizing our 2024 budget and look forward to communicating it with you at the appropriate time. With that, I'd like to turn the call over to the operator for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first call comes from Sweta Khajuria of Evercore ISI. Your line is now open.

Speaker 4

Okay. My questions. Let me try 2, please. First one is, Eric, could you perhaps at a high level talk about your early observations of Being at the company as now the CEO, and some of the areas that you will be focused on most in the next, Call it 6 to 12 months and areas that you're excited about the most. And then the second question I have is on your cash Burn rate versus the cash balance that you have, including the convert.

Speaker 4

So it looks like you may have approximately $50,000,000 plus in cash. And given the cash burn that you have, how should we think about potential capital raise needs versus Pass to becoming positive free cash flow. Thank you.

Speaker 2

Well, thanks, Shweta. We appreciate the question. With respect to initial observations, one thing that I've really been impressed with as I stepped into my CEO role here is just how our team in the near term has just worked and executed very, very quickly To deliver some material near term operating efficiencies, which is important because My initial and most important near term priority is just to squarely put Inspirado on a path towards profitability. We've taken A lot of steps. Our lease optimization, our personnel reductions, software savings, other expense savings, If you add it all up on an annualized basis, it's over $50,000,000 and that we've done in a very, very short period of time.

Speaker 2

So that I've been really impressed with. You asked about a longer term view over the next 6 to 12 months. And As I spend more time with the team and spend more time understanding that the unique role that Inspirato has in the luxury travel category, I really get more excited about the growth opportunities in front of Inspire. Partnerships is one area and one opportunity that leads to mind where we can really We officially tap into demand sources that where we really deliver our unique residence portfolio against and Capital One is a great example of that and I think There are others and there will be others as we look more into it. The opportunity to revisit and rationalize and revitalize some of our current Our offering around Club and Pass is definitely an opportunity as well as new business lines like IFC and ISP And are still very much in the early stages of their development and have encouraging growth prospects to fund them.

Speaker 2

But I guess when I look at it more broadly and I look at the opportunity more broadly, and when I spend more time with members and with our team, I do think we have a pretty unique opportunity to reinstill the magic of what delivers a Great, great experience at Inspirada. Delivering great travel experiences at the core of what we do and we're a travel club And a great one that delivers pretty exceptional experiences and value to members. And I believe the more time I think that the market opportunity for what we do is just a lot bigger than where in the broadway is right now.

Speaker 3

Yes. Shraddha, this is Robert.

Speaker 2

Let me take the question you

Speaker 3

had about the cash burn. For sure, you're correct. We have been burning cash at a rate of $15,000,000 a quarter consistently for a bunch of quarters now. And that's One of the reasons that we took the actions that Eric mentioned on our path to profitability of reducing our costs, we've taken action that will Eliminate at least $25,000,000 of lease costs as we've gone through portfolio optimization. And as I've mentioned in the past calls, While we've taken those actions already, the end of the leases haven't happened yet because those the end of leases are 6 12 months after we've taken the termination actions.

Speaker 3

A lot of those we'll start to see by Q1 of next year. But for now, we'll have another quarter where we'll have some cash burn around that. We also took actions around staffing Headcount as well with the reduction in force in Q3 and that didn't show up from a cash perspective yet either Because of it was done during the quarter and then there was obviously certain severance costs around that. So we'll start seeing some benefit around that. Finally, as part of our 2024 planning process, we've really dug deep to identify other areas where there may be cash savings opportunities.

Speaker 3

For instance, we went and we scrubbed through all of our software programs And technology that we had and have identified significant amount of savings there. So when you add all those pieces up, we're planning on $50,000,000 plus of savings that we'll see annualized in 2024, a very similar number to that Kind of the cash burn that we're seeing in 2023. So while we certainly have our work and our opportunity around What revenue will look like in 2024 as we firm up our 2024 plan, we feel that we've taken out sufficient costs That will really be able to temper that cash burn starting with Q1 of 2024. And because of that, We don't foresee a need where we absolutely need to raise capital, which you asked about. But certainly, We're always, as many companies are, open to the possibility of raising capital for the right rates and the right structure.

Speaker 3

But I think we have the testing in our own hands in terms of cash moving forward.

Speaker 4

Okay. Thank you, Eric. Thanks, Robert.

Operator

Thank you. One moment for our next question. Our next Question comes from Mike Grondahl of Northland. Mike, your line is open.

Speaker 5

Hey, thanks guys. First question is just on Past subscribers, what do you think that weakness is? Is it macro related? Is it something you need to do to tweak the offering? Just looking for a little insight there.

Speaker 2

Sure. Thanks, Mike. Yes. You've noticed that our past subscriptions are declining. And like any trend, there's a number of factors behind it.

Speaker 2

I think One macro trend you asked for that is our travel trends overall just are normalizing and the COVID era of remote work is moving into the past and anticipating. And Path obviously was Great product offering for that type of lifestyle. But the interesting thing is, Robert and I and the team have looked into the past More deeply, which we definitely have, particularly over the course of last month, is how there is a core group of users that just really, really love it. So what we're doing is evaluating what are the elements around packs that A good segment of our subscribers are really, really drawn to, so we can proverbially double down on that Deliver even more value, but at the same time, for if for whatever reason, if people's travel needs and lifestyle change, And then we meet them where they are. And the good news is that club and other product offerings within the portfolio Could be good landing spots in the event that people's travel needs and preferences shift.

Speaker 2

And that's one area of opportunity. I think we can do a better job More practically shifting our members from the to the product that's best for them.

Speaker 5

Got it. And then, Eric, you've talked well, I'll say it this way. You've done a lot on the cost side of the business, but you said you're also working on Some things to kind of refill the revenue bucket and whatnot. Can you just give us a sense of a couple of things there we should be Watching or listening for kind of to reinvigorate the revenue growth?

Speaker 2

Sure, sure. Great question. And you are right to point out that Really the first 30, 60, 100 days, I've really been focused on just the operational efficiency piece. And I just want to emphasize that, Mike, because When we do grow again, and I'm confident that we will, I want to make sure that we're doing it from a position of just core operational efficiency and strength, So that growth will more directly translate to profitable growth and controlling our own destiny as we get to the March 4th profitability. So I mentioned partnerships at the outset, and that's one area that I believe is a real opportunity for us, because There is a lot of travel demand that's out there.

Speaker 2

And there's a lot of travel demand, I think, out there through partnerships that we can tap into really, really efficiently. And when you have the Net Promoter Scores that we do, when people take Inspire trips and love them as much, it's basically an on ramp to membership. So that's why I think partnerships can be really attractive for us, because it basically gets people traveling on Inspirado. And again, given sort of our net promoter scores, that leads to good fit. We've also gone through a pretty explosive internal area of growth around different product lines across Inspirado.

Speaker 2

So I think taking a fresh look at that Around how Club and Path fit together, I mean, really mapping that against the personas that are our members. There's been an awful lot of innovation. I think there can be an awful lot of this kind of innovation really focused on rationalization that can lead to that way members Have a better idea around what products and services across the Inspire portfolio are best suited for them. So I think that is a really big opportunity. And as I dig into it more, as I mentioned at the outset, I really do believe that when you deliver The kind of travel experience that Inspire is known for and when you take a look at sort of the macro growth rates in luxury travel, which from what I've seen has been in kind of mid to high single digits, I do think that there is a lot of opportunity for Inspirato once we are more efficient and can grow along the lines of what I mentioned.

Speaker 5

Got it. Got it. Hey, I appreciate it. Thank you.

Speaker 2

Sure. Thanks, Mike.

Operator

Thank you. At this time, I am seeing no further questions. I would now like to turn it back to Jed Kelly, your line is now open.

Speaker 6

Hey, great, great. Thanks for taking my question. Just when you look at the way you want to transform the business, Can you talk about your supply roadmap and talking to owners and Are they happy with the current value you're bringing them? And then can you just talk to How we should think about sales force productivity going forward? Thank you.

Speaker 2

Sure. With respect to supply in our inventory, I'm glad you brought it up, Jed. It's a really, really important part of our overall experience. And it's also one that is we have a dedicated team that really is focused on ensuring that our homeowners I have the exact kind of experience on the supply side as our members do on the when they're traveling. I think one benefit and one big benefit that I hear, I've heard that even just in my 1st week in my new role is How much residents, owners and homeowners really appreciate sort of the closed ecosystem and the managed ecosystem that is in Sperado.

Speaker 2

It's not the wild west that you see out there with other travel services. And having a much more curated membership group, I think it gives homeowners a lot more confidence, especially also when you really on top of that just The point of contact and the support infrastructure that we have to manage the portfolio is at really exceptionally high rate. We really manage our portfolios As if they were our own residences, because it's such a critical part to delivering the kind of experience that we're known for. So What I can say is that so far satisfaction rates for our members excuse me, for our homeowners have also been really high because of that curated Client base that we invite into their homes, which is again Much more managed than we see from other alternatives, as well as the high attention to the tail we play We place on management a decent every call to ensure the great experience that our travelers get.

Speaker 6

Thank you.

Operator

Thank you very much. This concludes our question and answer session. I would now like to turn it back to CEO, Eric Grossi for closing remarks.

Speaker 2

Terrific. Well, I really appreciate the questions. And thanks very much for participating in my first earnings call here at Inspirado. I look forward to developing more relationships with all of you and participating in these calls going forward. Thanks very much.

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Inspirato Q3 2023
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