Sonder Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 5 speakers on the call.

Operator

Day, and thank you for standing by, and welcome to the Thunder First Quarter 2023 Earnings 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 your hand is raised. And please be advised that today's conference is being recorded.

Operator

I would now like to hand the conference over to your speaker today, John Charbonneau, VP, Head of Investor Relations, please go ahead.

Speaker 1

Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us to discuss Sander's First Quarter 2023 Financial Results. Joining me on the call today are Francis Davidson, Co Founder and CEO And Don Bergeau, Chief Financial Officer. Full details of our results and additional management commentary Are available in our Q1 2023 shareholder letter, which can be found on the Investor Relations section That the following discussion and the Q and A session at the end of this call contain forward looking statements, including, but not limited to, Saunders' strategies, market opportunities and future financial and operating results that involve risks and uncertainties that may cause actual results to differ materially versus those discussed here.

Speaker 1

Additional information about the factors That could cause our actual results to differ from those expressed or implied in any forward looking statements Can be found in Saunders' SEC filings. The forward looking statements and discussion of risks in this conference call, including responses to your questions are based on current expectations as of today. Sander assumes no obligation to update or revise them, whether as a result of new developments or otherwise, except as required by law. Also, the following discussion contains non GAAP Financial measures. For a reconciliation of these non GAAP financial measures to the most directly comparable financial measure Calculated and presented in accordance with GAAP, please see our shareholder letter posted to our Investor Relations website.

Speaker 1

Now, I'll turn the call over to Francis Davidson, Saunders' Co Founder and CEO.

Speaker 2

Thanks, John. Good afternoon, everyone, and thank you for joining us today. First off, I'd like to welcome our new CFO, Dom Borgo, to his first Sonder earnings call. I'm very excited to have Dom on board. He brings over 2 decades of financial leadership experience, the vast majority of which was spent working at Expedia, He has already made a great impact in his short time here at Sandler.

Speaker 2

Before I comment on Q1 results, I want to share a few thoughts about our share price. While we understand the broader macroeconomic environment that's currently affecting capital markets, we're obviously not thrilled about the value at which shares have been trading. In our conversations with some of our shareholders, it's clear that we have the same desire to achieve cash flow positivity on a sustainable basis as soon as possible. The The progress we've made since announcing our cash flow positive plan in June last year has been enormous. To communicate our actual results and their drivers more clearly, We've updated our investor presentation to better illustrate Sonner's free cash flow equation.

Speaker 2

We believe this demonstrates the reasons why we have conviction that we're heading in the right direction And anticipate achieving sustainable free cash flow positivity without having to fundraise. The 4 drivers that have led to improvements to free cash flow Our cash contribution margin improvements, live unit growth, overhead cost reductions and pre opening cost reductions. We feel great about our capacity to keep pulling these levers to see free cash flow improve at a similar pace going forward. Now on to Q1 results. Revenue grew by 50% year over year to $121,000,000 in what is our seasonally slowest quarter of the year.

Speaker 2

As expected, January was a slow month, but we saw a steady month over month increase in RevPAR in both February March. Additionally, free cash flow improved to negative $41,000,000 versus negative $62,000,000 in the Q1 of 2022, a $21,000,000 year over year improvement. Free cash flow margin improved to negative 34% in the Q1 of 2023 versus negative 77% in the Q1 of 2022. This has been partially driven by our continued focus on reducing costs, such as overhead costs, which were down 20% year over year. In fact, overhead costs have improved on an absolute dollar basis in every quarter since the Q1 of 2022, while revenue grew nearly 80% over that same time period.

Speaker 2

On direct costs, we've seen a roughly 10% reduction in property level operations and support expenses per occupied night on a like for like basis Over the past year, primarily driven by improvements in housekeeping and customer service. This has helped drive a significant improvement in trailing 12 month cash contribution margin to 19% in the Q1 versus 4% a year ago. Dom will provide additional detail on our Q1 financial Now, I'd like to provide an update on a number of our RevPAR initiatives, which drive cash contribution margins. During the Q1, we continued to expand our corporate business, including deepening our presence in existing verticals such as entertainment, while also expanding into several new verticals, We also signed a new GDS partnerships and are working with many of the industry's leading travel management companies. We're very excited about our momentum within our corporate business and still anticipate another year of solid growth, which will further bolster weekday RevPARs, An area with immense opportunity.

Speaker 2

Next, we're continually looking to improve our pricing optimization and have made considerable progress Rolling out our improved pricing algorithms, allowing us to better capture demand throughout the booking window. More broadly, we believe that our revenue management technology is unique With a lot of innovative features, enabling us to maximize profit across the broad range of length of stays that Sondra attracts. During the Q1, we rolled out our new flex cancellation policy on Vrbo and have already seen a positive incremental benefit to RevPAR. At the same time, we tested a new commission model, which produced a notable uptick in both search and page views, and therefore, we decided to implement it across all of Vrbo. Moving on, I believe our elevated merchandising strategy with the reimagined art direction and photography Further showcases our design led value proposition, one of our most important brand differentiators.

Speaker 2

This strategy has continued to result in an uplift and conversion of over 10% and was implemented in over 15% of total live units by the end of the Q1. The found in Santa Monica is a great example And you can find a before and after within our shareholder letter. Throughout the Q2, we anticipate upgrading our photography across an additional 15% of live units and expect over 50% live unit coverage by the end of the year. Shifting to our total portfolio, in the Q1 live units grew by 35% year over year, Driven by strong conversion from our contracted units to live units. This resulted in us surpassing 10,000 live units, a big milestone for the company.

Speaker 2

New signed units also more than doubled sequentially, which is encouraging after a slower second half of twenty twenty two, many landlords and developers are still dealing with difficulty getting financing. That said, we still have a notable backlog of contracted but not live units, Which we're expecting will continue to be the primary driver of unit growth over the next few quarters. I'd also point out that 100% of deals signed in the Q1 were capital light. Before turning it over to Dom, I want to thank our employees, partners and guests across the globe for choosing Sonder

Speaker 3

Thank you, Francis, and hello, everyone. I'm excited to be here with the team and working for a company that is revolutionizing hospitality Through design and technology. Since joining Sandler 2 months ago, I've taken an in-depth look at the business And as reaffirmed the confidence I had in our overall strategy when first deciding to join the company. I believe we are on the right track, but there is still more work to be done in order to reach our goal of achieving sustainable positive free cash flow as soon as possible, while preserving the company's attractive growth profile. With that said, I will provide a brief overview of our Q1 financial results and then take you through guidance.

Speaker 3

We'll then open the call to questions. In the Q1, we generated $121,000,000 of revenue, representing a 50% increase compared to Q1 of 2022. Our Q1 revenue growth year over year was driven by an increase in bookable nights of 30% and RevPAR growth of 15%. Again, this quarter, key top line performance metrics improved year over year, including live units, bookable nights, Okay. Thanks and RevPAR.

Speaker 3

More specifically, we ended the quarter with approximately 10,400 live units, Representing 35% growth, driven by the conversion of contracted units into live events. In Q1, we have nearly 900,000 bookable nights, an increase of 30% driven by the slight unit growth. RevPAR in the Q1 was $134 up 15% year over year With the ADR component growing 4% to $167 As Francis mentioned, The Q1 is our seasonally weakest quarter of the year and RevPAR saw some incremental impact from new units going live during the quarter. As a reminder, new units take a period of time to ramp up to normalized ADRs. Occupancy rate was 80% in the 1st quarter, up 700 basis points year over year, but down 300 basis points sequentially.

Speaker 3

Q1 last year saw some residual impact from Omicron, while we began experimenting with our higher occupancy strategy During the same period, the full benefit to occupancy rate initially seen in the 2nd quarter. Total Q1 costs and operating expenses increased by 17% year on year to $205,000,000 Inclusive of $12,000,000 of stock based compensation expense in the quarter, demonstrating strong operating leverage compared to our revenue increase of 50%. The increase in total cost and operating expenses were driven primarily by the overall growth in our live units. As this relates to the cost reduction actions we spoke about last quarter, we remain confident in achieving the $10,000,000 in annualized cost savings related to headcount reductions and we continue to look for additional savings across the rest of our cost structure on an ongoing basis. In the Q1, as Francis mentioned, free cash flow before one time 2022.

Speaker 3

Free cash flow margin also improved year over year, reaching negative 34% compared to negative 77% in the Q1 of 2022. The free cash flow improvement year over year was due to ADR growth as well as an improvement in non property level operating expenses. Given typical OPDR seasonality in Q1, We believe sequential performance is less relevant and was focused more on year over year comparisons. Finally, cash contribution margin, which is a unit economics metric we use to provide visibility on property level performance, Was 12.5% versus 12.9% in Q1 of 2022. The slight decline primarily stems from Change in classification of certain costs starting in the Q1 of 2023, which was not adjusted for prior periods, impacting the metric by 200 basis points year over year.

Speaker 3

Turning to the balance sheet. As of March 31, we have $246,000,000 in cash, cash equivalents and restricted cash And $180,000,000 in total debt. Note that while restricted cash declined sequentially in Q1, It is likely to increase in Q2 due to the dynamics stemming from the failure of SVB, leading to us Having to collateralize certain new line of credit issuances under First Citizens ownership and due to certain We've been pleased with the partnership with First Citizens so far and we'll be working with them to explore options to enhance our partnership going forward. On the free cash flow front, since the beginning of 2022, Sander has demonstrated a consistent improvement in free cash flow And we expect to see this trajectory continue. Forward visibility into attractive growth in bookable nights, Combined with strong operating leverage in our cost base, trace a clear path to a sustainable free cash flow formula, One that we aim to continue to strengthen as we scale, resulting in significant long term value to our shareholders.

Speaker 3

For the balance of 2023, we are expecting that our free cash flow burn will continue to trend significantly lower Compared to the same period in 2022, can as such exit 2023 with a liquidity profile that should provide the runway needed We felt it prudent to lower our RevPAR assumptions for the balances this year due to lower projected ADRs given the uncertain macro conditions we are facing. While achieving a positive quarter of free cash flow this year is still a goal, We believe it is unlikely under this slower RevPAR scenario. Our primary focus is to put The business is on a solid path to achieving sustainable positive free cash flow as soon as possible, while preserving the business' Attractive top line growth rate and again doing so without having to raise additional capital. With regards to guidance itself, we are aiming to provide you with more visibility into the trajectory of our business and are changing our approach to now provide revenue and free cash flow guidance for not only the upcoming quarter, but also the second half of this year. For the Q2 of 2023, we expect revenue between $165,000,000 $165,000,000 And free cash flow excluding one time restructuring costs between negative $30,000,000 negative $20,000,000 which at the midpoint is a $20,000,000 improvement versus the Q2 of 2022.

Speaker 3

For the second half of twenty twenty three, We expect revenue between $345,000,000 $375,000,000 which at the midpoint of the guidance ranges provided Translates to approximately 40% year over year growth for the full year of 2023. For free cash flow, we expect between negative $50,000,000 and negative $30,000,000 in the second half of twenty twenty three. At the midpoint of the guidance ranges provided, this translates into a 40% year on year improvement for the full year of 2023 for a $70,000,000 improvement. With that, we're now happy to take your questions. Operator?

Operator

Thank you so much presenters. Your first question comes from the line of Nick Jones of JMP Securities. Your line is now open.

Speaker 4

I guess just as we think about adding units to the portfolio and then live units, Should we kind of expect live units to outpace kind of net adds in the total portfolio for the rest of the year? And then could you maybe touch on how you feel about your cost structure As you try to reach free cash flow positivity in the face of kind of macro environment? Thanks.

Speaker 2

Yes. Thanks so much. Nick, Francis here. Thank you for kicking things off. I'm going to start with the first point on The live unit versus total portfolio growth.

Speaker 2

And so as we mentioned, we expect the majority of The live unit growth to come from our significant book of contracted units. And so you've seen in the last few quarters that While live units have grown quite a bit, the growth on total portfolio has been a little bit slower. There's a couple of reasons for that. One of which has been The fact that we've cleaned up a lot of the deals that were in our contracted book that we didn't feel high conviction would convert to live units. And the biggest reason for this adjustment has been the capital markets environment, specifically on commercial real estate Financing conditions, even though we have a contract with these developers, we thought it was more prudent to say, you know what, we think We've done a lot of that cleanup.

Speaker 2

We saw total portfolio actually increase in Q1 in addition to obviously live units. And so, it's difficult to predict exactly how things will shape out. We haven't given specific guidance on that front. But really the thing that we're most Opening new properties that have very strong unit economics, that have very rapid payback periods that very quickly start adding to The cash contribution dollars that are really fueling this improvement in free cash flow. So live unit growth is really the core focus of the team.

Speaker 2

We have a large book of contract And we're focusing on making sure that these signed deals actually deliver live units as a core priority.

Speaker 3

And Nick, this is Don. So I'll take the second question on the cost structure. So first, nice meeting you. I'm happy to be here on the call and Start speaking with investors going forward. So in terms of the cost structure, you'll see us continue to improve our cash contribution And margin going forward, that's a key part of getting to free cash flow positive.

Speaker 3

Francis just spoke about portfolio expansion. That's another key component for sure, Driving top line going forward. And in terms of cost and sales, you've seen our overhead cost declining. We're going to continue to leverage overhead costs significantly. There was very strong leverage in Q1 and that's a goal of ours to continue to operate with A very tight lid for our costs going forward.

Speaker 3

Preopening costs have also come down and that's another one we'll continue to control. And then last thing It is on a direct cost standpoint. We're turning every rock, optimizing every direct cost spend, trying to decouple that growth from the growth of So a lot of progress has been made. You can see it in the numbers. There's still a lot of opportunity for us going forward to continue to expand margins.

Speaker 1

Thanks for taking our questions. Could you maybe speak to how we should be thinking about your RevPAR

Speaker 2

Yes. Maybe I'll start here for the question on RevPAR for the rest of the year. So like we mentioned earlier on in the call, we've seen some nice momentum in the Q1 from month to month. And I'll just remind you that we've got really good visibility 30 to 45 days out on bookings just because of the booking curve or The percentage of bookings that are on the books gives us really high conviction about a month and a half in advance. And so that really informed our Q2 guidance.

Speaker 2

But for the rest of 2023, we really take a look at macroeconomic analyses to try to understand What are the demand supply dynamics that are expected in each of the markets in which we're currently situated? And then we kind of roll those into our own forecast. And like Don mentioned earlier on In the call, we want to take a more balanced approach and cautious approach given the uncertainties that exist in the macro economy right now When it comes to how that particular very sensitive variable will evolve over time. And most importantly, we're planning the rest of the business, the cost structure and The decisions that we're making internally, not assuming really ambitious heroic Levels of RevPAR growth like we've seen in the last few years given where we're at in the cycle.

Speaker 3

Hi, Jeff. This is Francois. I'll take the question on the cash draw. So we're not going to comment On the cash draw, I think I'll point you back to the guidance. I think you might have seen also the materials we've updated on our investor page.

Speaker 3

We're going to continue to reduce cash burn through this year. You see the range there we have for that forecast burn. We can easily translate that into an Ending cash balance by the end of this year, which we believe is going to be a good cushion for us to Finalize the execution of our free cash flow positive plan and not having to raise capital again To get there. And if you actually look at the trajectory of the burn and extrapolate that, you can get a sense of How close we're going to be and how much margin we'll have to maneuver. Again, we haven't done our 2024 planning.

Speaker 3

It's too far out. We will update you guys later this year or very early next year once we have more data and we get closer to it. But again, I'll just point you to the trajectory of what Business has delivered and what we forecast to be able to deliver for the rest of this year and That's kind of the construct there for how we think about our liquidity position.

Speaker 1

Great. Thanks.

Operator

Thank you so much. And presenters, there are no further questions at this time. This concludes today's conference call. Thank you for participating and you may now disconnect. Have a good

Powered by Quartr
Earnings Conference Call
Sonder Q1 2023
00:00 / 00:00