Q2 2022 Sonder Holdings Inc Earnings Call

August 10, 2022

Okay.

Good day, and thank you for standing by and welcome to <unk> second quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one one on your terms.

Bone.

Be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, John Charbonneau VP head of Investor Relations you may begin.

Okay.

Thank you operator, good afternoon, ladies and gentlemen, thank you for joining us to discuss standards second quarter 2022 financial results. Joining me on the call today are granted Davidson co founder and CEO and Sanjay banker, President and CFO for details of our results.

And additional management commentary are available in our second quarter 2022 shareholder letter, which can be found on the Investor Relations section of our website.

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Before we start I'd like to remind you that the following discussion and a Q&A session at the end of this call contain forward looking statements, including but not limited to thunder strategies market opportunities and future financial and operating results that involve risks and uncertainties.

That may cause actual results to differ materially from those discussed here additional information about the factors that could cause our actual results to differ from those expressed or implied in any forward looking statement can be found in standards periodically and.

Other SEC filings the forward.

Forward looking statements and discussion of risks in this conference call, including responses to your questions are based on current expectations as of today <unk> assumes no obligation to update or revise them, whether as a result of new developments or otherwise except as required.

Wired by law also the following discussion contains non-GAAP financial measures for a reconciliation of these non-GAAP financial measures that are most directly comparable financial measure calculated and presented in accordance with GAAP.

Our shareholder letter posted to our Investor Relations website, now I'll turn the call over to Francis Davidson founders co founder and CEO .

Thanks, John Good afternoon, everyone and thank you for joining us today I'm very pleased to be reporting on our strong second quarter 2022 results. My remarks today will cover two areas first I'll provide a quick overview of our financial performance for the second quarter, and then I'll provide an update on our cash flow positive plan announced on June nine.

We're excited to report strong second quarter results highlighted by improving free cash flow achieving negative $45 million for onetime restructuring cost compared to free cash flow of negative $62 million last quarter and negative $60 million a year ago. It's also yielded significant improvements in our free cash flow margin, which improved to negative 37% versus neck.

77% last quarter and negative 127% a year ago. In addition, cash contribution margin, excluding restructuring costs, which is an important metric to look at since it isolates property level performance improved to 18% versus 13% in Q1.

On a year over year basis, our Revpar grew by 67% and revenue grew by 157% to $121 million driven by a strong snapback in travel demand during the quarter.

Sanjay will provide additional detail on our second quarter financial performance a little later on the call.

In June we announced our cash flow positive plan, which shifted our focus from hyper growth to steady growth with strong emphasis on rapidly achieving sustainable positive free cash flow to be clear the shift was not due to lack of growth opportunities.

Stead broader market conditions that materially changed and therefore, we believe it was prudent to shift our strategy to adapt to the changing macro environment.

We firmly believe that this was the right decision and are fully committed to achieving positive quarterly free cash flow within 2023.

First we are executing our plan will enable us to more rapidly achieve positive free cash flow without additional fundraising and while preserving a robust cash cushion we.

We focused on four key levers for our cash flow positive plan, including cutting cash cost reducing plant signings pace raising the bar on incremental the signings and focusing on rapid payback revpar initiatives.

The first levers to reduce cash costs by approximately $85 million on an annualized basis before onetime restructuring costs more specifically in June we executed a restructuring plan, which will result in nearly $55 million in annualized cost savings versus Q1 2022 call.

Separately, we also expect $30 million in annualized cash cost savings from reduced pre opening costs and net capex associated with incremental units going live given our focus on finding a 100% capital light units going forward.

The second lever is proactively reducing our plan findings pace. This enables us to lower head count across the board lowering.

Preopening costs, the net capex cut back on planned geographic expansion and simplify the business.

We'll continue to scale, our live units by opening already contracted units as well as signing incremental deals that meet our high bar for funding.

As a result, our existing contracted unit portfolio will be cash accretive as they come live given the upfront cost to originate and find these deals were already incurred and the majority of the build a capital light.

This brings me to our third lever, which is increasing our already high threshold for incremental unit findings.

Prior to announcing are cash flow positive plan, our leases commonly included upfront rent abatements to help offset the cost and revenue ramp up period associated with Onboarding Wap units. In addition, and the vast majority of leases we have been successful in negotiating upfront allowances paid for by the landlord to help us offset the capital invested to prepare and firm.

The building as well as individual units.

And now we have further raise the bar aiming to only signed units that are 100% capital light.

This will set us up so new deal signed after are cash flow positive plan won't consume cash as they come alive.

We're excited about our healthy late stage pipeline of deals that fit this even more stringent profile.

Further we're also only focusing on countries, where we already have operations or contracted units in order to leverage fixed cost more effectively.

Our fourth lever and final lever is focusing efforts on improving free cash flow through rapid payback revpar initiatives.

Given our fixed landlord payments, a small increase in revpar translates to a much larger increase in cash contribution margin.

As such we are focusing on several rapid payback revpar initiatives, including our higher occupancy strategy, which was implemented in Q1 that includes among other things marketing bookings further in advance.

Help drive a significant increase in occupancy rates, 82% in Q2 versus 68% a year ago, enabling us to take advantage of demand elasticity to drive higher revpar.

Additionally, we remain focused on growing our new corporate travel offering and ended Q2 with nearly 400 active accounts versus 250 last quarter and 100 in Q4 2021.

While we are still in the early stages of our corporate travel offering we have continued to gain traction each quarter since its launch and we're incredibly excited about this as an opportunity to drive incremental revpar.

Lastly, we're also focused on building out several ancillary revenue offerings during the second half of the year, which should further benefit revpar, especially in 2023 and beyond.

Beyond our focus on these four key levers we are continuing to deliver our signature tech enabled design forward experience to our guests around the world and look to attracting a growing share of travelers across both business and leisure segments.

Separately I would also like to briefly discuss another 8-K, we felt today after market close which outlines our intention to launch on the option exchange program for our current employees. This will provide employees a voluntary onetime opportunity to exchange existing underwater stock options for new stock options with the same terms at a strike.

It's equal to fair market value.

We strongly believe our team members, our most valuable asset and this is a critical one time events to properly incentivize entertain them to.

To finish I'd like to reiterate that we remain laser focused on the execution of our cash flow positive plan to drive sustainable long term value for all our shareholders and continue to revolutionize hospitality for all.

Like to thank our employees across the world for their tireless work and express my gratitude to our partners and investors for their ongoing support.

That I will turn over the call to president and CFO Sanjay banker to provide you with further details on our recent financial performance and an update on our outlook.

Thank you Francis and Hello, everyone.

This afternoon I will provide a brief overview of our second quarter financial results and share our outlook for the remainder of 2022, well then open the call to questions.

Unless otherwise specified all of the Q2 growth figures cited in my remarks, our year over year comparison.

In the second quarter, we generated $121 million of revenue, representing a 157% increase compared to Q2 2021. This was the highest quarterly revenue in company history by a wide margin and the first time, we eclipsed $100 million in a single quarter.

Our Q2 revenue growth year over year was fuelled by 67% Revpar growth and the expansion of our life portfolio, which grew 53%.

Our key performance metrics improved year over year, including live units Bookable nights occupied nights and Revpar.

We ended the quarter with approximately 8400 live units, representing 53% growth driven by the strong conversion of contracted units into live units by.

By opening 14, new properties worldwide in Q2.

Three of these properties are in New York City, where we just surpassed 1000 live units in the market.

Not only is this an exciting milestone.

<unk> for both the Revpar and profitability standpoint.

Greater than 100 density within a market improves our revpar and unit economics, as we benefit from better sales conversion reduced risk and additional operating efficiencies.

Moreover growth in New York City provides substantial opportunity to capitalize on both our core leisure offerings as well as our new corporate travel offerings.

At quarter end, we had approximately 18700 units in our total portfolio, representing 26% year over year growth.

During Q2, we proactively slowed our deal signings ahead of our June finalization of the cash flow positive plan.

As Francis noted earlier. This plan includes higher hurdle rates targeting 100% capital light deals moving forward.

In addition to be conservative we exited certain contracted units that did not align with the objectives of our cash flow positive plan and excluded from the total portfolio counts certain contracted units with substantial contingencies.

In Q2, we had approximately 725000 bookable nine an increase of 53% driven by our live unit growth.

Combined with our strategic focus on increasing occupancy rates. It also drove 86% growth in our occupied.

As a result, our occupancy rate increased 4500 basis points to 82%.

As noted our strong snapback in travel demand during Q2 drove year over year revpar growth of 67% to a record $167 and ADR growth of 38% to $203.

Looking ahead, we expect to continue benefiting from the recovery of urban travel with third party forecasters anticipate will continue to recover through 2023 as well as additional upside from the rapid payback revpar initiatives Francis spoke about earlier.

Total costs and expenses increased by 68% to $189 million in Q2 inclusive of $5 million of stock based compensation expense in the quarter.

Total costs and expenses were driven primarily by the expansion of our live units.

As we noted in conjunction with the cash flow positive plan announcement in June we are focused on free cash flow as our main measure of profitability.

This metric aligns with how we assess profitability internally.

I am pleased with the notable improvement in free cash flow in the second quarter, which totaled negative $45 million before onetime restructuring costs compared to negative $62 million in the first quarter and negative $60 million one year ago.

Given our strong revenue growth free cash flow margin also showed significant improvement, reaching negative 37% compared to negative 77% in the first quarter of 2022 and negative 127% in the second quarter of last year.

During Q2, we paid out $2 $4 million in cash restructuring costs and anticipate the remaining $1 $7 million to occur in the second half of this year.

Turning to the balance sheet as of June 32022, we had $361 million in cash and $161 million in total debt.

Finally regarding our outlook in the third quarter of 2022, we anticipate revenue is better than $120 million.

Any more than 78% year over year growth versus $67 million in the third quarter of 2021.

This is primarily due to anticipated continued growth of Bookable nights and live units offset by a lower revpar.

Q3, Revpar faces headwinds from FX and the impact of Onboarding, our largest ever building in the quarter.

The 401 unit building in Dubai is expected to experience. The typical short term ramping effect that all of our new property has experienced.

As well as the seasonality impacts associated with the region summer low season.

Additionally, while we don't spend much on performance marketing, we reduced our spend by approximately 70% month over month in June as we focused on the cash flow positive plan.

Given the time lag between our performance marketing spend and revenue impact we expect the temporary Q2 reduction in marketing spend to have a negative impact on Q3 revpar.

However, we ramp spend back up to historical levels in July , which we expect to provide a modest revpar uplift in the fourth quarter relative to the third quarter.

We continue to expect to grow full year revenue by between 100% to 110% as compared to full year 2021.

We expect free cash flow in Q3 of approximately negative $45 million before onetime restructuring costs.

For the second half of the year Q3, and Q4 combined we are reaffirming our free cash flow of better than negative $70 million before onetime restructuring costs.

We will drive these results by pulling the four key levers of our cash flow positive plan, which France as detailed earlier cutting cash cost.

Reducing planned signing pace.

Raising the bar on incremental signings and focusing on rapid payback revpar initiatives.

I'll close our prepared remarks today by reiterating that our business fundamentals remained strong and our market opportunity is enormous.

We are focused on driving sustainable long term value for all of our stakeholders via our cash flow positive plan and continue to revolutionize hospitality for all.

I'd like to thank all of our Thunder teammates for a great quarter and thank all of our investors and partners for your continued support.

We're now happy to take your questions.

Operator.

As a reminder to ask a question you will need to press star one on your telephone. Please standby, we compile the Q&A roster.

Okay, one moment for questions.

And our first question comes from Jed Kelly from Oppenheimer. Your line is now open.

Hey, great. Thanks for taking my question and John Good to hear your voice and welcome aboard.

First couple questions just you talked about this cash capital light.

<unk> strategy and that it's immediately cash accretive can you kind of dig in more to that and in terms of like your competitors for supply are you starting to see your competitors Act more rationally and then my second question is just on the Revpar offerings.

Can you dive into ways you can increase Revpar plan to include increased Revpar in 2023, especially if we're under a more difficult macro environment. Thank you.

Okay sure. Thanks, a lot for your question great to hear your voice again.

So I'll start with the.

Capital light supply strategy and from the supply of themes that we're seeing and then I'll ask Francis at ask Franco to address the corporate travel.

Following offering so on the.

The capital light side.

That had been a proud theme that we've been pursuing for several quarters now increasing the fraction of our deals that are capital light and.

We view capital light is a deal that is cash accretive within six months and so that can happen to a variety of ways. The principal one is the landlord developer is providing upfront funding for the <unk> that goes into our property. It also comes through the form of upfront abatements. So every single deal has its own composite of how we're getting.

Generating economics that we're generating.

R R.

The path is to get to 100% capital light I E deals that are cash accretive within six months or less.

In many cases other deals that are cash accretive in month, one or month too.

We are well underway to reaching that.

Do you see competitors.

As from deal to deal.

But there is no single competitor or a segment of competitors that we see across the property. If you look at it and that's partly because we have the advantage of pursuing deals in over 40 markets in a dozen plus countries.

As we look at the multifamily deals hotel deals.

And deals and so we don't really see any competitor size consistently across those different segments of the real estate supply that we pursue.

Okay.

Yes for instance, here, let me let me jump into the address the question on 2023 Revpar.

So there's a lot of things a lot of levers that we're pulling to improve revpar like we mentioned in our castle positive plan. It's one of our four core levers that we're pulling in order to improve free cash flow. So I'll just I'll just go through a couple of examples the first is.

Ancillary revenue streams.

So theres a series of things that we've tested out over the last several months that give us conviction that there is a big opportunity there to improve the revenue that we generate outside of just the room rate. So examples of that that we're exploring further our parking breakfast rates, particularly in EMEA.

Pets workstations, so theres a variety of use.

Use cases, where we think we can both enhance the experience.

And have a an offering for.

Our guest that otherwise might not even booked with us. So there is kind of the double benefit there of incremental demand. In addition to fees generated for these ancillary revenue streams. So for 2023, that's one of the components that that we think is going to help bolster revpar.

Another really big one that we've been discussing for now a few quarters as corporate travel right. This is a program that we launched and I believe it was mid 2021.

And we've seen fast growth of corporate accounts. The latest figure for Q2 was 400 corporate accounts that's up from 250 in Q1. So this is really especially in pursuing this.

This new demand stream and theyre going to be a lot more of that in 2023.

And just as a reminder.

Business that operates in urban settings, primarily where business travel is a really important component and specifically of generating weekday revpar, where we have a gap of performance versus comps. So we have conviction in our capacity to go and close that gap by building out the corporate travel segment. Further and then there is other ideas outside of that revenue management, improving our technology to yield better.

Fixed pattern month of stay improvement, there's a series of other a very extensive roadmap of things that ideas that we're we'll keep pursuing to help improve revpar in the coming years.

Great and then just on the options exchange you announced after the close is there any impact on share price or anything or how should we be thinking about that in our models. Thank you.

Yes, absolutely.

Happy to address that question so the.

The philosophy at the heart of this option exchange program is that we believe that our team. Our team members are our most important asset to go and achieve our cash flow positive plant. We've got some really talented people at Thunder very proud of the not just the management team, but all the way down to our visual contributors were very thorough and how we assess talent.

Bring them in and train and develop our people and so it's absolutely critical that we have.

We retain our top employees. So we don't have additional details to share at this time.

But we thought that.

Initiating this option exchange program would be absolutely crucial lever to ensure that our team is.

<unk> compensated.

Thank you.

And if you have a question that is star one one again, if you'd like to ask a question that is star 111 moment for our next question.

And our next question comes from Ron Josey from Citi. Your line is now open.

Great. Thanks for taking the question.

So Sanjay I'm, hoping you can help us understand I mean, clearly very strong occupancy and revpar results here in the quarter. So maybe help us understand how July trends, we're coming along.

Just broader steps broader strokes if weather June saw July saw continued patterns from June , particularly as it relates to those two metrics and then.

Understood that guidance, calling for lower revpar because of launching of newer properties and I think you mentioned that wanted to buy but just talk just maybe bigger picture, how you or how you plan to balance occupancy rates with with Revpar, given the 2023 plants and the ancillary revenue streams coming going forward. Thanks, guys.

Okay.

Yes, certainly.

I'll take this one here on I'll start with the B how to balance the occupancy with the rate our view is that it.

It's all about mathematics, and figuring out what will generate the strongest revpar that we ran a series of velocity tests that demonstrate that by fluctuating the price lever, especially as we're seeing.

Come back of demand post COVID-19.

That can yield substantially higher revpar at an occupancy rate that's in and around.

This high <unk> low <unk> is that we've been that we've been seeing 82% in the case of Q2, which is a 400 4800 basis points improvement year over year, So very happy about that.

I'll come to the strategy, which led to this 167 revpar quarter.

That we just announced so I think I think we're seeing that this higher occupancy rate strategy is one that our test with showing could yield some really interesting results and now we're seeing it across the board for our entire portfolio deliver meaningful value for the business and as part of your question on how we see July in Q3.

We're not providing detail on revpar at this time.

And but but.

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Or.

The guidance that we put out here for Q3 of $120 million of revenue, which we described as being an increase in Bookable nights. So were there more properties will be open, but this will be offset by a slightly lower revpar lower revpar, rather in Q3 and so the.

The dynamic that you alluded to as well when it comes to Dubai is a really important once we got the biggest property in our portfolio.

That we've ever signed Thats coming online is just over 400 units that are coming online are expected to come online in Dubai. In Q3. This is a large building will be ramping up during the low season in Dubai. So thats one of the reasons why the Revpar for Q3 will be.

Impacted.

But I think Sanjay you wanted to.

Yes, just to supplement and obviously, Ron we don't Kim.

The individual months, but kind of off and anybody that Q2 had a robust travel dynamic not just for selling aircraft for everybody in the travel category and so we don't assume that same level of demand in the fall and winter of course, that's partly difficult seasonality. That's partly the unusual patterns of how this year is unfolding I think it's important.

From a bigger picture perspective.

Keep in mind, though that in our view, we are nowhere near full recovery to travel even in Q2 relative to where we were pre pandemic can send while Q2 may have had a a level out.

Heavy travel patterns, just given everything that's going on in the world and we don't necessarily see that.

Looking at <unk> in Q3, and Q4, and we do believe that looking into 2023, there is a meaningful headroom from a market recovery standpoint.

Do you believe that looking into 2023, there is a meaningful headroom from a market recovery standpoint, even relative to Q2 2022 and on top of that we saundra, specifically have a lot of our own my versus Francis just outlined in detail.

Okay.

Got it. Thank you Frances Thank you Sanjay.

Thank you.

And I am showing no further questions.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly.

As Johan during Q&A, you can dial star one one.

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Advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, John Charbonneau VP head of Investor Relations you may begin.

Thank you operator, good afternoon, ladies and gentlemen.

Thank you for joining us to discuss <unk> second quarter 2022 financial results joining me on the call today are Francis Davidson co founder and CEO and Sanjay banker, President and CFO full details of our results and additional management commentary are available in our <unk>.

Second quarter 2022 shareholder letter, which can be found on the Investor Relations section of our website at investors.

<unk> Dot com.

Other SEC filings the forward looking.

These statements and discussion of risks in this conference call, including responses to your questions are based on current expectations as of today <unk> 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 and the most directly comparable financial measure calculated and presented in accordance with GAAP.

Our shareholder letter posted to our Investor Relations website, now I'll turn the call over to Francis Davidson founders co founder and CEO .

Thanks, John Good afternoon, everyone and thank you for joining us today I'm very pleased to be reporting on our strong second quarter 2022 results. My remarks today will cover two areas first I will provide a quick overview of our financial performance for the second quarter, and then I'll provide an update on our cash flow positive plan announced on June nine.

Excited to report strong second quarter results highlighted by improving free cash flow, achieving negative $45 million or one time restructuring cost compared to free cash flow of negative $62 million last quarter and negative $60 million a year ago. It's also yielded significant improvements in our free cash flow margin, which improved to negative three 7% versus negative seven.

7% last quarter and negative 127% year ago. In addition, cash contribution margin, excluding restructuring costs, which is an important metric to look at since it isolates property level performance improved to 18% versus 13% in Q1.

On a year over year basis, our Revpar grew by 67% and revenue grew by 157% to $121 million driven by a strong snapback in travel demand during the quarter.

Sanjay will provide additional detail on our second quarter financial performance a little later on the call.

Ted broader market conditions that materially changed and therefore, we believe it was prudent to shift our strategy to adapt to the changing macro environment.

We firmly believe that this was the right decision and are fully committed to achieving positive quarterly free cash flow within 2023.

First we are executing our plan will enable us to more rapidly achieve positive free cash flow without additional fundraising and while preserving a robust cash cushion we.

We focused on four key levers for our cash flow positive plan, including cutting cash cost reducing planned findings pace raising the bar on incremental lease signings and focusing on rapid payback revpar initiatives.

The first levers to reduce cash cost by approximately $85 million on an annualized basis before onetime restructuring costs more specifically in June we executed a restructuring plan, which will result in nearly $55 million in annualized cost savings versus Q1 2022 call.

Separately, we also expect $30 million annualized cash cost savings from reduced pre opening costs and net capex associated with incremental units going live given our focus on finding a 100% capital light units going forward.

The second lever is proactively reducing our plan findings pace. This enables us to lower head count across the board lowering.

Pre opening costs, the net capex cut back on planned geographic expansion and simplify the business. We will continue to scale. Our live units by opening already contracted unit as well as signing incremental deals that meet our high bar for funding.

This brings me to our third lever, which is increasing our already high threshold for incremental unit findings.

Prior to announcing are cash flow positive plan, our leases commonly included upfront rent abatements to help offset the cost and revenue ramp up period associated with Onboarding wipe units. In addition, and the vast majority of leases we have been successful in negotiating upfront allowances paid for by the landlord to help us offset the capital invested to prepare and furnace.

The building as well as individual units.

And now we have further raise the bar aiming to only signed units that are 100% capital like this.

This will set us up so new deal signed after are cash flow positive plan won't consume cash as they come live.

We're excited about our healthy late stage pipeline of deals that fit this even more stringent profile further.

Further we're also only focusing on countries, where we already have operations or contracted units in order to leverage fixed cost more effectively.

Our fourth lever and final lever is focusing efforts on improving free cash flow through rapid payback revpar initiatives.

Given our fixed landlord payments, a small increase in revpar translates to a much larger increase in cash contribution margin.

As such we are focusing on several rapid payback revpar initiatives, including our higher occupancy strategy, which was implemented in Q1. It includes among other things marketing bookings further in advance.

Helped drive a significant increase in occupancy rates, 82% in Q2 versus 68% a year ago, enabling us to take advantage of demand elasticity to drive higher revpar.

Additionally, we remain focused on growing our new corporate travel offering and ended Q2 with nearly 400 active accounts versus 250 last quarter and 100 in Q4 2021.

While we're still in the early stages of our corporate travel offering we have continued to gain traction each quarter since its launch and we're incredibly excited about this as an opportunity to drive incremental revpar.

Lastly, we're also focused on building out several ancillary revenue offerings during the second half of the year, which should further benefit revpar, especially in 2023 and beyond.

Separately I would also like to briefly discuss another 8-K, we filed today after market close which outlines our intention to launch on the option exchange program for our current employees. This will provide employees a voluntary onetime opportunity to exchange existing underwater stock option for new stock options with the same term at a strike price.

To fair market value with.

We strongly believe our team members, our most valuable asset and this is a critical one time events to properly incentivize entertain them to.

I'd like to thank our employees across the world for their tireless work and express my gratitude to our partners and investors for their ongoing support.

That I will turn over the call to president and CFO Sanjay banker to provide you with further details on our recent financial performance and an update on our outlook.

Thank you Frances and Hello, everyone. This afternoon I will provide a brief overview of our second quarter financial results and share our outlook for the remainder of 2022, we'll then open the call to questions.

Unless otherwise specified all of the Q2 growth figures cited in my remarks, our year over year comparisons.

Our Q2 revenue growth year over year was fuelled by 67% Revpar growth and the expansion of our life portfolio, which grew 53%.

Our key performance metrics improved year over year, including live units Bookable nights occupied nights and Revpar.

We ended the quarter with approximately 8400 live units, representing 53% growth driven by the strong conversion of contracted units into live units by.

By opening 14, new properties worldwide in Q2.

Three of these properties are in New York City, where we just surpassed 1000 live units in the market.

Not only is this an exciting milestone it's a meaningful one from both the revpar and profitability standpoint, great.

Greater than 100 density within a market improved our Revpar and unit economics, as we benefit from better sales conversion reduced risk and additional operating efficiencies.

Moreover growth in New York City provides substantial opportunity to capitalize on both our core leisure offering as well as our new corporate travel offerings.

At quarter end, we had approximately 18700 units in our total portfolio, representing 26% year over year growth.

During Q2, we proactively slowed our deal signings ahead of our June finalization of the cash flow positive plan.

As Francis noted earlier. This plan includes higher hurdle rates targeting 100% capital light deals moving forward.

In addition to be conservative we exited certain contracted units that did not align with the objectives of our cash flow positive plan and excluded from the total portfolio count certain contracted units with substantial contingency.

In Q2, we had approximately 725000 bookable nine an increase of 53% driven by our live unit growth.

Combined with our strategic focus on increasing occupancy rates. It also drove 86% growth in occupied room nights.

As a result, our occupancy rate increased 4500 basis points to 82%.

As noted our strong snapback in travel demand during Q2 drove year over year revpar growth of 67% to a record $167 and ADR growth of 38% to $203.

Total costs and expenses increased by 68% to $189 million in Q2 inclusive of $5 million of stock based compensation expense in the quarter.

Total costs and expenses were driven primarily by the expansion of our live units.

As we noted in conjunction with the cash flow positive plan announcement in June we are focused on free cash flow as our main measure of profitability.

This metric aligns with how we assess profitability internally.

I am pleased with the notable improvement in free cash flow in the second quarter, which totaled negative $45 million before onetime restructuring cost compared to negative $62 million in the first quarter and negative $60 million one year ago.

During Q2, we paid out $2 $4 million in cash restructuring costs and anticipate the remaining $1 7 million.

To occur in the second half of this year.

Turning to the balance sheet as of June 32022, we had $361 million in cash and $161 million in total debt.

Finally regarding our outlook in the third quarter of 2022, we anticipate revenue is better than $120 million, representing more than 78% year over year growth versus $67 million in the third quarter of 2021.

This is primarily due to anticipated continued growth of Bookable nights and live units offset by a lower revpar.

Q3, Revpar faces headwinds from FX and the impact of Onboarding, our largest ever building in the quarter.

The 401 unit building in Dubai is expected to experience. The typical short term ramping effect that all of our new properties experienced.

As well as the seasonality impacts associated with the regions summer low season.

Additionally, while we don't spend much on performance marketing, we reduced our spend by approximately 70% month over month in June as we focused on the cash flow positive plan.

Given the time lag between our performance marketing spend and revenue impact we expect the temporary Q2 reduction in marketing spend to have a negative impact on Q3 revpar.

However, we ramped spend back up to historical levels in July , which we expect to provide a modest revpar uplift in the fourth quarter relative to the third quarter.

We continue to expect to grow full year revenue by between 100% to 110% as compared to full year 2021.

We expect free cash flow in Q3 of approximately negative $45 million before onetime restructuring costs.

For the second half of the year Q3, and Q4 combined we are reaffirming our free cash flow of better than negative $70 million before onetime restructuring costs.

We will drive these results by pulling the four key levers of our cash flow positive plan, which France as detailed earlier cutting cash cost.

Reducing planned signing pace raising the bar on incremental signings and focusing on rapid payback revpar initiatives.

I'll close our prepared remarks today by reiterating that our business fundamentals remained strong and our market opportunity is enormous.

We are focused on driving sustainable long term value for all of our stakeholders via our cash flow positive plan and continue to revolutionize hospitality for all.

I'd like to thank all of our stronger teammates for a great quarter and thank all of our investors and partners for your continued support.

Now happy to take your questions.

Operator.

As a reminder to ask a question you will need to press star one on your telephone please standby will compile the Q&A roster.

One moment for questions.

And our first question comes from Jed Kelly from Oppenheimer. Your line is now open.

Hey, great. Thanks for taking my question and John Good to hear your voice and welcome aboard.

First couple questions. Just you talked about this cash capital light supply strategy and that it's immediately cash accretive can you kind of dig in more to that and in terms of like your competitors for supply are you starting to see your competitors Act more rationally and then my second question is just on the Revpar.

Our offerings.

Can you dive into ways you can increase Revpar plan to include increased Revpar in 2023, especially.

For a more difficult macro environment. Thank you.

Sure. Thanks, a lot for your question great.

Thanks again.

So I'll start with the <unk>.

Capital light supply strategy and from the supply chain that we're seeing and then I'll ask Frank ask Franco to address the corporate travel.

We're offering so on the.

On the capital side.

It had been a broad theme that we've been pursuing for several quarters now increasing the fraction of our deals that are capital light and for US we view.

Capital Light is a deal that is cash accretive within six months and so that can happen to a variety of ways. The principal one is the landlord developer.

<unk> upfront funding for the SME because into our property.

It also comes through in the form of upfront abatements. So every single deal has its own composite of how we're getting generating economics that we're generating.

Our stated path is to get to 100% capital light I E. Mails that are cash accretive within six months or less.

Many cases those are deals that are cash accretive in month, one or month too so.

So we are well underway to reaching that.

Do you see competitors.

Areas from deal to deal, but there is no single competitor or a segment of competitors that we see across the property. If you look at it and that's partly because we have the advantage of pursuing deals in over 40 markets in a dozen plus countries because we look at the multifamily deals hotel deals.

Inversion deals and so we don't really see any competitor size.

Totally across those different segments of the real estate supply that we pursue.

Okay.

Yes for instance, here, let me let me jump into the address the question on 2023 Revpar.

So there's a lot of things a lot of levers that we're pulling to improve revpar like we mentioned in our cash flow positive plan. It's one of our four core levers that we're pulling in order to improve free cash flow. So I'll just I'll just go through a couple of examples the first is.

Ancillary revenue streams.

Pat.

<unk> stations, so theres a variety of.

Use cases, where we think we can both enhance the experience.

And have a an offering for.

Guest that otherwise might not even booked with us. So there is kind of the the double benefit there of incremental demand. In addition to fees generated for these ancillary revenue streams. So for 2023, that's one of the components that that we think is going to help bolster revpar.

Another really big one that we've been discussing for now a few quarters as corporate travel right. This is a program that we launched and I believe it was mid 2021.

And we've seen fast growth of corporate accounts. The latest figure for Q2 was 400 corporate accounts Thats up from 250 in Q1. So this is really especially in pursuing this.

This new demand stream and theres going to be a lot more of that in 2023.

And just as a reminder.

Business that operates in urban settings, primarily where business travel is a really important component and specifically of generating weekday revpar, where we have a gap of performance versus comps do we have conviction in our capacity to go and close that gap by building out the corporate travel segment further and then theres other ideas outside of that revenue management, improving our technology to yield better.

Fixed pattern length of stay improvement, there's a series of other a very extensive roadmap of things that idea of that.

We will keep pursuing to help improve revpar in the coming years.

Great and then just on the options exchange you announced after the close.

Is there any impact on share price or anything or how should we be thinking about that in our models. Thank you.

Yes, absolutely.

Yeah.

Happy to address that question so the.

The the philosophy at the heart of this option exchange program is that we believe that our team. Our team members are our most important asset to go and achieve our cash flow positive plant. We've got some really talented people at Thunder very proud of the not just the management team, but all the way down to our individual contributors were very thorough and how we assess talent.

Bring them in and train and develop our people and so it's absolutely critical that we have.

We retain our top employees. So we don't have additional details to share at this time.

But we thought that.

Initiating this option exchange program would be absolutely crucial lever to ensure that our team is.

Competitively compensated.

Thank you.

And if you have a question that is star one one again, if you would like to ask a question that is star 111 moment for our next question.

And our next question comes from Ron Josey from Citi. Your line is now open.

Great. Thanks for taking the question.

So Sanjay I'm, hoping you can help us understand I mean, clearly very strong occupancy and revpar.

Here in the quarter, So maybe help us understand how July trends for coming along.

Just broader steps broader strokes with weather June saw July saw continued patterns from June , particularly as it relates to those two metrics and then.

Okay.

Yes, certainly I'll take this one here on I'll start with the the how to balance the occupancy with the rate our view is that.

It's all about mathematics, and figuring out what will generate the strongest revpar and so we've ran a series of velocity tests that demonstrate that by fluctuating the price lever, especially as we're seeing a comeback of demand post COVID-19.

That can yield substantially higher revpar at an occupancy rate that's in and around.

This high <unk> low <unk> is that we've been that we've been seeing 82% in the case of Q2, which is a 400 4800 basis point improvement year over year, So very happy about.

The outcomes of the strategy, which led to this 167 revpar quarter.

That we just announced so I think I think we're seeing that the higher occupancy rate strategy is one that our test with showing could yield some really interesting results and now we're seeing it across the board for our entire portfolio deliver meaningful value for the business and that's part of your question on how we see July in Q3.

We're not providing detail on revpar at this time.

And but but we.

Are the.

The guidance that we put out here for Q3 of $120 million of revenue, which we describe as being an increase in bookable nights. So were there more properties will be open, but this will be offset by a slightly lower revpar lower revpar, rather in Q3 and so.

The dynamic that you alluded to as well when it comes to Dubai is a really important once we've got the biggest property in our portfolio.

Impacted.

But I think Sanjay you wanted to.

Yes, just to supplement I mean, obviously, Ron we don't.

The individual months, but it's not lost on anybody that Q2 had a robust travel dynamic not just for selling aircraft for everybody in the travel category and so we don't assume that same level of demand in the fall and winter of course, that's partly difficult seasonality that's partly the unusual patterns of how this year is unfolding.

And then from a bigger picture perspective.

Keep in mind, though that in our view, we are nowhere near full recovery to travel even in Q2.

<unk> to where we were pre pandemic and say, while Q2 may have had a a level out.

Heavy relative to where we were pre pandemic can say, while Q2 may have had a a level.

Heavy travel patterns, just given everything that's going on in the world and we don't necessarily see that.

Looking identical in Q3, and Q4, and we do believe that looking into 2023.

<unk> headroom from a market recovery standpoint, even relative to Q2 2022 and on top of that we saundra specifically have a lot of our own my participants has just outlined in detail on how we can over perform that might be of a country.

Got it. Thank you Frances Thank you Sanjay.

Thank you.

And I am showing no further questions.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2022 Sonder Holdings Inc Earnings Call

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