Inspirato Inc

NASDAQ:ISPO

Earnings Call Transcript 2023-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the Inspirado 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. [Operator's Instructions]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, executive]

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 included, 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, executive]

Thanks, Kyle, and good morning, everyone. It's a privilege to speak with you for the first time as CEO. My expense is past several months, deeply engaging with employees, shareholders and members about our financial and operating plans. I've been a member of his product board for 2 years, so I'm familiar with our broader successes as well as challenges. In my career, I spent a lot of timing on my online travel space, namely a co-founder of Hotwire, a President of Expedia worldwide. I've seen firsthand what it takes to become a market leader in household name in the travel phase and has developed a deep appreciation for creating exceptional and truly differentiated travel experiences. And inspirato, I see a strong customer value proposition, supported by a world-class lose residence portfolio and a passionate team dedicated to delivering members with a certainty, service and value that creates the magical follow experiences Inspirato is known for. In short, we have a compelling positive 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 fans 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 and ski-out Mountain Home of Colorado, the Rustic bill on the rolling Hillcompany and hundreds of other hubs, each were throughout special touch that are brought us through color. 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 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 on top of mind. On the service side, our preship planners are dedicated to ensuring travelers experience a remarkable vacation while our on-site concierge staff or local experts uniquely capable of putting the finishing touches on a great ship. While the excel handling expected requests like making dinner reservations of the best restaurants, looking for private chefs, booking box patents at tea time. We also pride ourselves on delighting our members by delivering services that are more unique to Inspirato. Examples include docking residence refrigerators in 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 our member trips are truly personalized and unique. Beyond delivering the certain 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 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 John 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. And 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. 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 weather a 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 trips. We will continue to invest in our methods 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 in trade awareness with the luxury travel, which is an important initial step as we look ahead to grow Inspirato. 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 or 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 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 its product. 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 in 2024. As we look ahead, it is important to note that we are not starting to crash. We have our 3P portfolio, people and partnerships in place to act as a foundation to achieve our goals. In future calls, I look forward to more specifically updated 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 ecstatic 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 type of experience they can't live without. With that, I'll turn the call over to Robert.

[Robert Kaiden, executive]

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 margin, namely the mix between paid and past nights, residents and hotel nights and the mix of nights in our leased hotel versus hotels with net rate agreements. 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 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. 54% of total nights delivered were in our residences, our highest level since the first quarter of 2022. Finally, our residents ADR in the third quarter was approximately $1,500, while resident 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 rate 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 residents have always been the flagship of our portfolio and deliver the highest economics, and we are pleased with the reengagement in paid residences booked bookings by our members in Q3. Again, it's early times, but these data points are encouraging and helped 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 up 14% and 7%, respectively. We ended the quarter with 14,500 active subscriptions comprised of approximately 11,800 clubs subscriptions and 2,700 Pass subscriptions. In each of the past 4 quarters, we've now seen Pass subscriptions consistently decreased, resulting in a $5 million year-over-year decrease in our subscription revenue attributable to Pass. We're keeping colostrend in evaluating future actions to take regardless 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 lease 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 2 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, a sign 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 are 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 enter to lease terminations and the expiration of those leases, those savings were planned to be modest in the third and fourth quarters of 2020 agree, 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, turning approximately $20 million of annual payroll date. 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 Voyage 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 in Ventures contributing to a cash balance of over $50 million at the end of the third quarter. We anticipate a free cash flow deficit in the fourth quarter before more significant savings a hold in 2024. The combination of the investment in Capital One and meaningful savings anticipated in 24 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 at a time of uncertainty for our 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 million to $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 with you at the appropriate time. With that, I'd like to turn the call over to the operator for Q&A.

[Operator]

Thank you. At this time, we will conduct a question-and-answer session. [Operator's Instructions]Our first call comes from Shweta Khajuria of Evercore ISI.

[Shweta Khajuria, analyst]

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

[Eric Grosse, executive]

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 com prior day is just to squarely put in fraud on a path towards profitability. We've taken a lot of steps on 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 very, very short period of time. I've been really impressed with. You asked about a longer-term view over the next 6 to 12 months. 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 inspirato. Partnerships is one area and one opportunity that the lease to find where we can really efficiently 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 we rationalize and revitalize our current as offering around Club and Pat is definitely an opportunity as well as new business lines like IST that are still very much in the early stages of their development and have encouraging growth prospects in fund. But I guess when I look at it more broadly, and I look at the opportunity more broadly and want to 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 rate grade experience at Inspirato. We deliver great travel experience is at the core of what we do, and we're travel,and a great one that builders pretty exceptional experiences and value to members. And I believe the more time I spend you that the market opportunity for what we do is just a lot bigger than where it's broadway right now.

[Robert Kaiden, executive]

Yes. 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 that we've gone through our portfolio optimization. And as I've mentioned in the past call, while we've taken those actions already, the end of the leases haven't happened yet because those -- the end of the leases are 6 to 12 months after we've taken the termination actions. A lot of those will 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 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 really do to identify other areas where there may be cash savings opportunities. For instance, we went and we struck 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. 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, we're the right rates and the right structure. But I think we have testing in our own hands in terms of cash moving forward.

[Operator]

Our next question comes from Mike Grondahl of Northland.

[Mike Grondahl, analyst]

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?

[Eric Grosse, executive]

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. I think one macro trend you after that is all trends overall just are normalizing. And the cover of remote work is moving into the past and anticipating. And as obviously was a great product offering for that type of lifestyle. But the thing, as Robert and I and the team have looked into past 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 one of the elements around paths that a good segment of our subscribers are really, really drawn to. So we can coverable double down on that and deliver even more value. But at the same time for whatever reason, if people travel needs and lifestyles change, then we meet them where they are. And the good news is that club another product offer within the portfolio could be the Atlantic spots in the event that people 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 -- to the product that's best for them.

[Mike Grondahl, analyst]

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?

[Eric Grosse, executive]

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 the core operational efficiency and strength. So that growth will more directly translate to profitable growth and controlling their own density as we get to the March towards profitability. So I've 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. And there's a lot of travel demand thing 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 in Inspirato trip and love them as much, 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 -- we've also gone through a pretty explosive internal area of growth around different product lines across intro. So I think taking a fresh look at that around how club and pass it together. I mean really mapping that against the personas that are members. There's been an awful lot of innovation. I think there can be an awful lot of different kind of innovation, really focused on rational location that can lead to that way, members have a better idea around what products and services across the pro 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 deliberate the kind of travel experience that spot 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, it's been in kind of 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.

[Operator]

[Operator's Instructions]At this time, I'm seeing no further questions. I would now like to turn it back to CEO, Eric Grosse for closing remarks. I apologize, Jed has just popped in. Give me one moment. Jed Kelly, your line is now open.

[Jed Kelly, analyst]

Great. Great. Just when you look at the way you want to transform the business, can you talk about your supply road map and talking to owners and are they happy with the current value you're bringing to them? And then can you just talk to how we should think about sales force productivity going forward?

[Eric Grosse, executive]

Sure. With respect to supply and our inventory, I'm glad you brought it up, Jed. It's a really, really important part of our 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 has the exact kind of experience on the supply side is our members view when they're traveling. I think one benefit and one of the things that is that I hear, I've heard that even just in my first reason 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 left 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 lay on top of that, just the point of contact and the support infrastructure that we have to manage the portfolios that are really exceptionally high rate. We really manage our portfolio as if they were our own residences because it's such a critical part of delivering the type of experience that we're known for. So what I can say is that some of our 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 much more managed than we see from other alternatives as well as the high attention of the tail we play that we placed on management, keeping every call to ensure the great experience that our travel set.

[Operator]

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, executive]

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

[Operator]

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