Inspirato - Q3 2023

Transcript

Operator (participant)

Good day, 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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star one one again. 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 Sourk, Investor Relations. Please go ahead.

Kyle Sourk (VP of Investor Relations)

Thank you, and good morning. On today's call, we have CEO Eric Grosse and CFO Robert Kaiden. Yesterday afternoon, we issued our press release announcing our third quarter 2023 results, which is available on the investor relations page of our website at investor.inspirato.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. 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. 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 Grosse.

Eric Grosse (CEO)

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 Inspirato's board for two 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 travel space, namely as co-founder of Hotwire 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 have developed a deep appreciation for creating exceptional and truly differentiated travel experiences.

At Inspirato, 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. In short, we have a compelling product 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. 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 villa in the rolling hills of Tuscany, and hundreds of other homes, each with their own special touch, that are Inspirato's true calling card.

Currently, we continue to innovate on our portfolio to make sure we are providing our members with the highest quality properties at the most desirable and popular destinations. 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 spa treatments and tee times, we also pride ourselves on delighting our members by delivering services that are more unique to Inspirato.

Examples include stocking residence refrigerators with groceries requested by members ahead of travel, as well as ensuring our on-site concierge services are available across our residence 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 to our members. In June, we rolled out rate reductions across the board, and in August, launched our rewards program that provides up to 25% savings to our most frequent travelers and loyal members. These recent initiatives, when combined with existing programs like Jaunt, provide great value to our members across the Inspirato portfolio. Over the years, we've worked tirelessly to build a loyal group of members that 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 nights booked per subscriber. We have a strong action plan to address churn, which includes evaluating each of our travel offerings and subscriber cohorts with the end goal of improving what we deliver and how we deliver it. While we've weathered tremendous change and 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 five-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 Inspirato awareness with the luxury traveler, which is an important initial step as we look ahead to grow Inspirato.

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 and improving our operating efficiency and financial position by controlling costs, improving margins, and strengthening our liquidity. These efforts are well underway, and we expect to begin realizing some of the benefits in the fourth quarter. 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, 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 third quarter 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 million investment in Inspirato. As a result, we have greater resources and liquidity to better serve our members, both today and over the long term. In closing, our near-term plan is centered around improving our operating efficiencies and liquidity, which in turn positions us for a much stronger 2024. As we look ahead, it is important to note that we are not starting from scratch. We have our three Ps: 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 third quarter financial results, I'd like to personally thank our loyal members and homeowners for their support, as well as Pass along an emphatic and heartfelt thank you to our employees for their continued passion, hard work, and dedication to making Inspirato a magical destination for member travelers, and one, a type of experience they can't live without. With that, I'll turn the call over to Robert.

Robert Kaiden (CFO)

Thanks, Eric. In the third quarter, we generated $83 million of total revenue, which was comprised of $33 million of subscription revenue and $49 million 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 margins, namely the mix between paid and pass nights, residence and hotel nights, and the mix of nights in our leased hotels versus hotels with net rate agreements. We have focused on optimizing our travel mix to improve margins. Though it's early, we have begun to see signs of progress.

In the third quarter, 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 second quarter of 2022. 64% of total nights delivered were in our residences, our highest level since the first quarter of 2022. Finally, our residence ADR in the third quarter was approximately $1,600, while residence occupancy was 73%, compared to 81% in the third quarter of 2022, and up 1% from the second quarter of this year. 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 the number of nights booked in our residences in the third quarter remained consistent with the prior year, despite a decrease in the number of subscribers. As Eric mentioned, our residences 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.

Unfortunately, solid travel performance was not enough to offset year-over-year and quarterly decreases in subscription revenue of 14% and 7%, respectively. We ended the quarter with 14,500 active subscriptions, comprised of approximately 11,800 Club subscriptions and 2,700 pass subscriptions. In each of the past four quarters, we have now seen pass subscriptions consistently decrease, resulting in a $5 million year-over-year decrease in our subscription revenue attributable to pass. We're keeping a close eye on this trend and evaluating future actions to take regarding pass 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, while these factors, plus elevated ADRs in 2022 and the first half of 2023, led to increased resignations.

Importantly, an emphasis on multiyear subscriptions has led to approximately 80% of new Club sales in 2023 being for two or more years, which has helped drive improved Club retention. In the third quarter, our cost of revenue was $58 million compared to $63 million in the third quarter of 2022. The decrease in cost of revenue was in part due to reduced hotel booking fees between periods. I find that another key initiative of 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 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 third and fourth quarters of 2023, followed by a more significant reduction in the first quarter of 2024. Consistent with our communications in the prior quarter, we anticipate at least $25 million of annualized lease expense savings in 2024. From an expense standpoint, the third quarter included several nonrecurring 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 million of annual payroll savings.

As such, total operating expenses were $43 million in the third quarter, or 52% of revenue, compared to $41 million or 43% of total revenue in the third quarter of last year. Excluding severance related expenses and stock-based compensation, our cash operating expenses were just under $33 million, compared to $38 million in the third quarter of last year. From an Adjusted EBITDA standpoint, we had a loss of $9 million in the quarter, compared to approximately $7 million in the third quarter of 2022. Importantly, Adjusted EBITDA loss in the third quarter would have been approximately $4 million, if not for the severance expense I just mentioned, as well as a $2 million reduction to revenue due to revenue recognition accounting for our recently launched Inspirato Rewards program. This is meaningfully better than our internal projections.

In terms of cash and liquidity, in late September, we received a $25 million investment from Capital One Ventures, contributing to a cash balance of over $50 million at the end of the third quarter. We anticipate a brief cash flow deficit in the fourth quarter before more significant savings take hold in 2024. The combination of the investment from Capital One and meaningful savings anticipated in 2024 through the actions we've taken to improve our free cash flow profile, give us confidence in our liquidity position moving forward. In closing, the past few months have brought about change and, at times, uncertainty for our employees, homeowners, members, and shareholders. It is my firm belief that through our cost savings initiatives and overall execution, we've put ourselves on a solid path towards certainty, stability, and profitability.

Along those lines, we are reaffirming our 2023 full-year guidance of $320 million-$340 million of total revenue and an Adjusted EBITDA loss between $30 million and $45 million. 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&A.

Operator (participant)

Thank you. At this time, we will conduct a question-and-answer session. As a reminder, to ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first call comes from Shweta Khajuria of Evercore ISI. Your line is now open.

Shweta Khajuria (Managing Director and Senior Research Analyst)

Okay, thank you for taking my questions. Let me try two, 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 six-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. So it looks like you may have approximately $50 million+ in cash. And given the cash burn that you have, how should we think about potential capital raise needs, versus path to becoming positive free cash flow? Thank you.

Eric Grosse (CEO)

Well, thanks, Shweta. We appreciate the question. With respect to initial observations, you know, one thing that I've really been impressed with, as I've 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 Inspirato 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 million, and that we've done in a pretty, in a very, very short period of time. So that, I've been really impressed with.

You asked about a longer-term view over the, you know, over the next 6-12 months. And as I spend more time with the team and spend more time understanding the unique role that Inspirato has in the luxury travel category, I-

... I really get more excited about the growth opportunities in front of Inspirato. You know, partnerships is one area and one opportunity that comes to mind, where we can really, you know, efficiently tap into demand sources that where we really deliver our unique residence portfolio. 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, you know, re-rationalize and revitalize some of our current product offering around Club and Pass is definitely an opportunity, as well as new business lines like IFT and ISP, that are still very much in the early stages of their development and have encouraging growth prospects in front of them.

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 Inspirato. Because delivering great travel experiences is 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 spend here, that the market opportunity for what we do is just a lot bigger than where Inspirato is right now.

Robert Kaiden (CFO)

Yeah, Shweta, this is Robert. Let me take the question you had about the cash burn. For sure, you're correct. We have been burning cash at a rate of about $15 million 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 million of lease costs as we've gone through our portfolio optimization. And as I've mentioned in the past calls, you know, while we've taken those actions already, the end of the leases haven't happened yet because the end of the leases are 6-12 months after we've taken the termination actions. 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 a reduction in force in Q3, and that didn't show up from a cash perspective yet either because 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. For instance, we went and we scrubbed through all of our software programs and technology that we had and have identified a significant amount of savings there.

So when you add all those pieces up, we're planning on $50 million plus of savings that we'll see annualized in 2024. A very similar number to the 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 we'll really be able to temper that cash burn starting with Q1 of 2024.

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

Shweta Khajuria (Managing Director and Senior Research Analyst)

Okay. Thank you, Eric. Thanks, Robert.

Operator (participant)

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

Mike Grondahl (Senior Research Analyst)

Hey, thanks, guys. First question is just on Pass 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.

Eric Grosse (CEO)

Sure. Thanks, Mike. Yes, you've noticed that our Pass subscriptions are declining, and like any trend, there's a number of factors behind it. I think one macro trend you asked for is that our travel, you know, travel trends overall just are normalizing. And the kind of COVID era of remote work is moving into the past and is dissipating. And Pass obviously was a great product offering for that type of lifestyle. But the interesting thing, as Robert and I and the team have looked into Pass more deeply, which we definitely have, particularly over the course of the 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 Pass that a good segment of our subscribers are really, really drawn to, so we can proverbially double down on that and deliver even more value. But at the same time, for whatever reason, if people's travel needs and lifestyles change, that 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. And that's one area of opportunity.

I think we can do a better job of more proactively shifting our members from the to the product that's best for them.

Mike Grondahl (Senior Research Analyst)

Got it. And then, Eric, you know, 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 things there we should be, you know, watching or listening for, kind of to reinvigorate the revenue growth?

Eric Grosse (CEO)

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

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 Inspirato 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 Inspirato. And again, given sort of our Net Promoter Scores, that leads to good things. We've also gone through a pretty explosive internal area of growth, around different product lines across Inspirato. So I think taking a fresh look at that, around how Club and Pass fit together, and 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 rational innovation. So that way, members have a better idea around what products and services across the Inspirato portfolio are best suited for them. So I think that is a really big opportunity.

You know, 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 Inspirato 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 the mid to high single digits, I do think that there's a lot of opportunity for Inspirato once we're more efficient and can grow along the lines of what I mentioned.

Mike Grondahl (Senior Research Analyst)

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

Eric Grosse (CEO)

Sure. Thanks, Mike.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your phone. At this time, I am seeing no further questions. I would now like to turn it back to CEO Eric Grosse for closing remarks. Oop, I apologize. Jed has just popped in. Bear with me one moment. Jed Kelly, your line is now open.

Jed Kelly (Managing Director)

Hey, great, great. Thanks for taking my question. Just when you look at, you know, the way you want to transform the business, can you talk about, you know, your supply roadmap and, you know, talking to owners and, and, you know, 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.

Eric Grosse (CEO)

Sure. Well, with respect to supply and 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 we have a dedicated team that really is focused on ensuring that our homeowners have the exact same kind of experience on the supply side as our members do when they're traveling. I think one benefit, and one big benefit that I hear. I've heard this even just in my first week in my new role, is how much residence owners and homeowners really appreciate sort of the closed ecosystem and the managed ecosystem that is Inspirato.

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 gives homeowners a lot more confidence. Especially also when you really on top of that, just the points of contact and the support infrastructure that we have to manage the portfolios at a 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, or excuse me, for our homeowners, has 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, you know, the high attention to detail we place on managing each and every home to ensure the great experience that our travelers get.

Jed Kelly (Managing Director)

Thank you.

Operator (participant)

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

Eric Grosse (CEO)

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

Operator (participant)

Thank you for your participation in today's conference call. This does conclude the program. You may now disconnect.