Q2 2023 Sonder Holdings Inc Earnings Call
Yeah.
Good day and thank you for standing by welcome to the founder Holdings second quarter 2023 earnings 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.
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I would now like to hand, the conference over to your Speaker today, Chris Berry Senior Vice President and Chief Accounting Officer. Please go ahead.
Thank you operator, good afternoon, everyone. Thanks for joining us today to discuss <unk> second quarter 2023 financial results. We have for instance, Davidson co founder and CEO and Tom <unk>, Chief Financial Officer on the call with me this afternoon.
Today, he sounded reported $157 million in revenue for the second quarter and a negative 27% operating margin of 29 point improvement over the second quarter of 2022 or.
Our free cash flow was a negative $27 million or 40% improvement over Q2 of 2022 and another step closer to our goal of sustainable positive free cash flow.
Full details of our second quarter results are available in our shareholder letter, which can be found on the Investor Relations section of our website at investors <unk> Dot com.
Our prepared remarks, and Q&A session at the end of this call contain forward looking statements.
Including but not limited to saundra strategies market opportunities and estimated future financial and operating results.
Our business involves risks and uncertainties that may cause actual results to differ materially from those discussed today and in our shareholder letter.
Additional information about the factors that could cause our actual results to differ from those expressed or implied in any forward looking statements can be found in our SEC filings.
The forward looking statements and discussion of risk today are based on current expectations Saundra.
<unk> assumes no obligation to update or revise them, whether as a result of new developments or otherwise except as required by law.
Also our remarks contain certain non-GAAP financial measures for.
For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure referred to our shareholder letter posted to our Investor Relations website.
With that I will turn the call over to Francis Davidson <unk> co founder and CEO .
Thanks, Chris Good afternoon, everyone and thank you for joining us today.
First of all I want to acknowledge and thank all of our some of our employees our guests and our partners for their efforts and their business as we strive to fulfill our mission to revolutionize hospitality through design and technology, making the world better stays open to all.
To provide a few highlights from the quarter that illustrate the remarkable progress we've had at Thunder revenue grew 30% year over year, driven by a 32% increase in Bookable nights on a 32% increase in overall life units, all while maintaining an occupancy rate of 82% and ADR relatively stable at $200.
We also produced all of this growth with a 19% improvement in total overhead costs and a 6% improvement in total property level expenses per occupied Tonight.
These accomplishments resulted in a 40% improvement in our free cash flow compared to last year.
I am proud of the progress that we've made but we still have much to do to reach our goal of sustainable positive free cash flow.
We're committed to delivering on this objective and we will pull every lever we can to get there as quickly as possible.
Almost share more details with you in a few minutes about some of the cost drivers were focused on.
But first I'll dive a bit deeper into our revenue and total portfolio growth.
Across all of our Saundra properties Revpar declined 2% compared to the second quarter of 2022, we did see a moderate pressure on ADR for our apartment product during the quarter yet the opposite is true for hotels, where ADR increased year over year our.
Our live units comprises roughly 60% apartment style units and 40% hotel units.
Over the last year, our mix has shifted eight points from apartments to hotels lessening the impact of pricing pressure from the short term rental apartment market in Q2.
Year over year Revpar for our hotel properties were up mid single digit percentage points, while revpar for our apartment style properties were down a similar amount highlighting this issue. This is notable as just five years ago 100, not operate any hotels.
This diversification of property types is improving our overall economics offering our guests a wider variety of stays and increasing our brand recognition.
Breaking it down by geography, our North American properties experienced a four 5% decline in revpar, while our properties in EMEA saw a 7% improvement in revpar year over year, notably according to AAA travel data, 8% more Americans traveled internationally, while 20% fewer international visitors arrived in the U S and.
That's in May compared to May of 2019.
I recently returned from visiting several of our softer markets in Europe , and it's clear that the demand for leisure travel is still very strong in our properties there are performing very well.
In addition to some of these more macro factors corporate sales grew slower than expected due to some turnover on our sales team and we have experience slow starts in a few of our recent North America property openings, particularly for properties that relied heavily on <unk> demand before we took over their operations.
But typically it takes some time for new properties to ramp to a system wide average economics, but even so a few of our newer larger properties have not met our expectations.
Our operations real estate revenue sales and finance teams are working together to address these challenges and come up with solutions to quickly improve the financial performance of these assets.
Several of the Revpar initiatives, we've discussed in earlier calls continued ramp and are contributing to our overall improving cash contribution margins.
In the second quarter, we added another 18% of our total live units to our elevated visual merchandising platform with re imagined our direction and photography.
I'll have a third of our lives units Merchandised under this new program and we've seen an uplift in conversion of over 10%, we expect over 50% life unit coverage by the end of the year.
Our ancillary revenue initiatives rollout continues to progress well and particular rolling out our paid parking options has added an incremental 26 basis points to revpar in the second quarter.
Although not significant on an individual basis, our team is pushing through several of these ancillary revenue programs each of which is improving our overall property financial performance.
On the supply side, our overall live units grew 32% year over year, driven by strong conversion from our contracted units to live units our.
Our total portfolio of live units plus contracted units did declined 7%, however year over year as development cost uncertainty and persistent high interest rates remain a significant issue for developers and landlords. We felt it was prudent to exclude an additional number of contracted units with financing contingencies, which drove the decline.
Even after excluding these units we continue to have a notable backlog of contracted units representing a strong growth pipeline of nearly 60% of our lives unit counts.
This quarter. We also publicly launched our new powered by solid product. This is a collection of uniquely designed boutique hotels powered by <unk> technology and operational expertise. These hotels are infused with local flair and have their own distinctive aesthetic with our proprietary technology and our efficient operating model, we are able to provide compelling value to hotel owners.
And in many cases buildings in this product segment allow us to onboard and get to market more quickly. We have 23 Thunder hotels across 13 markets in this segment with new properties coming on board.
Before turning it over to Don I want to highlight the accolades we received from our guests we've.
We recently announced that over a third of our properties, 87% total received Tripadvisor is Travelers' choice Awards in 2023, and this is a threefold increase from last year.
Very grateful for this recognition.
Two of our properties the Midland <unk> in Montreal, and Dow plus are real and Barcelona received the best of the Best Award representing the top 1% of all Tripadvisor accommodations. So a huge shout out to our teams in these award winning properties. Thank you for taking great care of our guests.
With that I'll turn over the call to our Chief Financial Officer, Don <unk> Don.
Thank you Frances and Hello, everyone.
Five months with <unk> continue to be impressed by the energy of the solid team and how dedicated they are to reaching our financial operational goals.
The team is United in our focus on achieving sustainable positive free cash flow in the near term and industry, leading unit economics over the long term.
This quarter's results move us another step closer to achieving that goal.
Still have a lot of work to do but I'm pleased that our results demonstrate consistent progress on our path to becoming cash flow positive.
With that said I will provide a brief overview of our second quarter financial results and then take you through guidance.
We will then open the call for questions.
In the second quarter, we generated $157 million of revenue, representing a 30% increase compared to Q2 of 2022.
As Francis mentioned key topline performance metrics improved year over year, including a light units Bookable nights occupied while we experienced a slight decline in revpar.
We ended the quarter with approximately 11190 units, representing 32% growth year on year, and we had over 957000 Bookable Heights also an increase of 32% driven fiber lighting.
Occupancy remains strong at 82% in the second quarter stable with Q2 of 2022 on the back of significant growth in book of loans.
In the second quarter free cash flow before one time restructuring cost totaled negative $27 million compared to negative 41 million in the first quarter of this year and negative $45 million in the second quarter of 2022.
Free cash flow margin also improved year over year, reaching negative 17% compared to negative 37% in the second quarter of 2022.
<unk> continues to show consistent improvement in free cash flow and we expect this trajectory to continue our pipeline a slight unit growth combined with strong operating leverage in our cost base will lay the path to sustainable free cash flow will strengthen as we scale and result in significant long term value.
So all of our shareholders.
Since breakfast provided the details of our revenue performance I will now focus my remarks on the cost side.
For Q2, 2023 total costs and operating expenses increased by 6% year over year to $199 million, which is inclusive of <unk> 8 million of stock based compensation.
The 6% increase in total cost of the back of a revenue increase of 30% illustrates the strong improvements we've been driving our operating leverage.
Property level costs grew by 24% and our non property level operating expenses were lower by 19% compared to prior year.
Our commitment to positive free cash flow and cost leverage is driving fiscal discipline in our organization and there is all sort of encouraging.
That said there are several areas of opportunities for further cost reduction.
Going to address over the next several months.
I'd like to touch on a few of these.
First.
We must get into the right real estate deals to begin with and hold our portfolio slightly and thats the highest standards of performance.
Our total units generated 18% and cash contribution margin over the past 12 months.
While roughly three quarters of our properties are positive contributors to this performance some of our properties do have negative cash margins.
For example, certain properties in markets such as Phoenix has struggled to perform.
We are taking a deep dive into these underperforming properties looking at a set of improvement actions, including targeted marketing and corporate sales efforts.
Revpar initiatives and partnering with our landlords for creative ways to restructure the leases.
Rapidly improving the financial performance of these properties represent a sizable opportunity to solidify and accelerate the achievement of our sustainable free cash flow goal.
Second we must achieve better leverage of our property level.
For example, our utility costs were approximately $30 million annually and global.
We're partnering with utility management companies together, a complete data set for our utility provider and costs across our portfolio in order to better manage the rising cost of energy.
We're also taking action to be more efficient in our buildings and reduce switch.
These actions will both reduce cost and our overall carbon footprint a win win for all our stakeholders.
We're also addressing payment processing fees and commissions.
We are a bit inefficient historically at how we flow funds, especially with cross border transaction.
Recently, we have partnered with our payment processors to more effectively process foreign currency transaction and.
And expect to save over $1 million in commission on an annualized run rate basis from improvements made to date with more opportunities ahead.
And third we can do more on non property level operating costs.
As a reminder, we have reduced our corporate workforce approximately 30% on a net basis since going public in early 2022.
<unk> in approximately $30 million of annualized savings.
But we are not stopping there.
For instance, we have been comping through all of our software contracts.
Aiming to eliminate duplicate solutions renegotiate terms with vendors and establish new processes to ensure we had a solid ROI metrics before we enter into new contracts.
Sure.
Existing ones.
These are only a few examples of the actions we are taking internally to drive cost reduction in our operating model and ultimately help us achieve positive free cash flow.
Trailing 12 months cash contribution margin was 18% versus 13% at the end of Q2 of 2022.
We know that cash contribution margin can make it difficult to compare us with our competitors.
As the company matures and our unit economics become more comparable to the industry. We are looking to transition to a more traditional earnings metrics like EBITDA or EBITDAR.
Our next year.
EBITDAR in particular is commonly used by other organizations in the industry that operates leased properties.
Allows for management and investors to assess the financial performance of the business.
Excluding the cost of financing those properties.
Turning to the balance sheet as of June 30, we had $220 million in cash cash equivalents and restricted cash and harder than 87 million and total debt.
Strictly cash increased sequentially in Q2 due to the dynamic stemming from the failure of SBB and from certain amendments to our financial covenant requirements, leading us to collateralize certain new letter of credit issuances under our facility with first citizens.
We are working with for citizens and our other financial partners on solutions to provide the right form of financing.
Allow us for the issuance of collateralized letters of credit.
As a reminder, there are no financial covenants tied to our term loan and we are not contractually obligated to pay cash interest until January of 2024th.
Looking ahead for the third quarter of 2023, we expect revenue between 160, and 170 million and free cash flow, excluding onetime restructuring costs between negative <unk> 25, and negative $15 million, which at the midpoint is a $19 million or over 50.
Percent improvement versus the third quarter of 2022.
For the second half of 2023 based on our current projections of Revpar and lagging unit growth, we expect revenue between $335 and $365 million, which is a slight decline from the range of $3 45 to $3 $75 million for.
From our last quarter call due to the headwinds that Francis alluded to earlier.
For free cash flow, we expect between negative 65% to negative $35 million in the second half of 2023.
Selecting the lower revenue guide.
Partially offset by continued progress on cost reductions from initiatives such as the ones we mentioned earlier.
At the midpoint of the guidance ranges provided this translates to a $63 million or 36% improvement in free cash flow for the full year of 2023.
With that we're now happy to take your questions operator.
As a reminder.
To ask a question. Please press star one one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
The first question comes from Ron Josey with Citi. Your line is open.
Hi, Thanks for taking the question. This is Jake on for Ron.
So I just had two questions first this is really an powered by <unk> that was really great to hear about this new initiative could you maybe speak a little bit more about the motivation behind it and then also how the economics might differ from the business and then just thinking out like two three.
Years from now like how how would you see this evolving over time.
And then <unk>.
Second is really on on Revpar.
Really great to get the color on this current quarter and the breakdown. We found that really helpful could you speak to how you're thinking about.
As you look at the back half of the year.
Whether the various factors you highlighted in your prepared remarks do you expect those to persist is that it is.
And then is that implied in your guidance. Thanks, so much.
Thanks very much.
This year I will get started on the first question and I'll, let <unk>.
<unk> further question on Revpar and Revpar guide.
Listen, we're really excited by powered by Thunder.
So thank you for calling out that really important initiatives.
<unk> four it frankly is multi fold.
It starts with just the mission of this business.
I mean, our mission starts with the words to revolutionize hospitality and we've been very careful not to say to revolutionize short term rentals or apartments hospitality as a broader category and we hope to be successful across a variety of asset classes, starting with departments, but also with hotels and with a few bets that we have in <unk>.
<unk>, but over time, adding a plethora of accommodations categories. We think is the most appealing brand value proposition. So we want to do it for the customers.
But there are several other reasons why we decided to launch power bi.
One is that it's really a good business and that.
Often we identify independent hotels, they're really beloved by their guests.
But they don't have the technology that we've built maybe the operational wherewithal to really maximize the value of the asset and so in conversations with these owners. It makes a lot of sense for <unk> to be the operator for these assets well under our current brand construct it is not possible for us to take on properties that have a different design aesthetic or at least prior to the launch of powered.
By Saundra, so powered by Thunder allows us to operate these hotels to bringing our technology to bring in our operations.
But without having to redesign the whole thing if it already is really interesting and distinctive and beautiful and has its own identity.
And so it's allowed us to really expand the range of supply that we can take on at really attractive economics. Another one of the benefits is that those properties could become live quite rapidly. So when youre talking about a multifamily development project you might be two or three years out and especially in the financing environment right now you could take a while for these properties to actually.
Deliver there is some risk that they might not get financed at all whereas when we're talking about an independent hotel and powered by saundra property. They can be turned over to us relatively rapidly.
With minimal investment on our part or on the owner's apartment. So we're talking about rapid payback periods.
And pretty rapid conversion of signed to live units.
So that hopefully answers the question a little bit on economics as well.
That those are capital light deals.
We use the same hurdles internally for these powered by properties as we do for others. Other deals that we sign meaning that we pay attention to.
Cash contribution margin that the asset is expected to generate we do a very robust underwriting and so both on payback on profitability.
On minimum deal size, we're looking at some earlier variables now.
Up until now and the performance has been very strong. So lastly, let me comment briefly on how we see it evolving over time over the next couple of years. So we announced that we had 23 properties to launch this brand segment.
Ross I believe doesn't markets.
And we've got more that are signed so this is a relatively new initiative for us.
We're just getting started here, but we see that there is a vast vast opportunity, especially in markets with the deep supply of independent properties I am talking about continental European capitals, like Paris, Barcelona, or in New York City with just a really deep supply of independent hotels that could be converted to powered by saundra. So I'll leave it here.
On the question of are powered by and let Don step in for the second question.
Thanks, Francis and James to your question on the Revpar dynamics, we've seen in how we forecast that so.
Essentially just to reiterate what factors such Tal in terms of the trends we've seen in Q2.
Turning to EMEA and across the board, but offset by weakness in North America in particular.
Alternative accommodation and also slower corporate bookings are what we do with our Revpar forecast as we entered rigorously to struggle.
Our rates dropped back.
The range of course is it's meant to.
Incorporate the.
Volatility of required in the market even that.
Make it is and.
The range is constructed to give us a little bit of room.
And absorb some of them some of these movements.
Yes.
Just to reiterate I think what you saw in Q2 is how we think about the rest of the year.
And China.
Got it.
Thanks, so much.
Please standby for the next question.
The next question comes from Jed Kelly with Oppenheimer. Your line is open.
Okay great.
This is Josh on for Jeff.
Ed.
Okay.
Balancing occupancy and ADR.
Talk about the progress around active management.
A quick follow up.
Okay.
I'm going to jump in.
This here just I think what I understood here is the balance between occupancy and ADR.
The audio didn't come in Super clearly, but let me maybe just provide a quick commentary on how we think about occupancy.
And balancing that with ADR. So one thing to note is just how strong Saunders occupancy rate has been for the last several quarters I think for 10 quarters in a row here, we outperform industry peers. So we're talking about low <unk> occupancy rates and it just speaks to the value proposition of this onto brand right, which is.
To offer a really elevated accommodation a really modern service experience, but doing so at a price point that's reasonably affordable.
And so that translates into quite a lot of occupancy and ADR, which was last quarter around $200.
We have a lot of data internally, we've run many tests on elasticity to kind of figure out what is profit maximizing for us and it is clear that our customer demographic responds.
Quite strongly to changes in price.
And so this is the benefit in terms of our capacity to generate strong occupancy, but it also makes it a little bit harder for us to just increased ADR, while preserving that occupancy.
That partly motivates our strategy to invest more in b to B travel and our sales team. So that we can get less price less price sensitive customers to generate demand during weekdays in particular so that.
Generally how we think about occupancy and ADR, but we're very happy with the strong occupancy results we've seen today.
Great and then could you talk about progress around.
Revenue management.
Yes, so on revenue management, there's a series of initiatives that our team has been working on one of the very important.
Metrics is.
The booking curve or the price trajectory, the so called price trajectory.
And so.
Typically it's preferable to increase price closer to the day of arrival.
Because these customers tend to be more in elastic and so there could yield stronger revpar is by having lower prices initially and raising them, but those dynamics are very different depending on season, depending on markets and so our data science team has been doing quite a lot of work to figure out.
What is the optimal booking trajectory by market by season by asset by even room type to try and figure out how we can maximize yield. So that's one one thing that we've been working on an update in the backend. Another one is our contacting algorithms. So this is something that our technology team has delivered in the past quarter.
Quite exciting which allows us actually it's part of the answer I Should've mentioned on occupancy rate is this sort of tetris game with the calendar to ensure that we can maximize the quantity of bookings that that could happen in a given property, especially given that we tend to have a pretty broad distribution of lengths of stay.
To take a simple example, if a guest wants to stay with US for four weeks of course, the average length of stay is four nights, but suppose if someone wants to stay for four weeks and they need to place starting on Friday, a couple of days from now well if we're not careful about how we allocate the significant number of bookings that we already have on the books, we might have nothing available, but by properly putting the right reservations and the right <unk>.
<unk>, we can actually open up more availability. So there is a pretty complex math problem here that's applied.
Where our team has been able to update the algorithms and generate incremental contacting incremental occupancy, which is particularly valuable for the high season.
And demand constraint.
Supply constrained markets and properties.
So those are just a couple of examples maybe the last one I should mention as an update to our fixed pattern length of stay formula. So I alluded to this in a prior earnings call, but for those that werent on the fixed pattern length of stay implies basically.
Making the price per night, a function of the length of stay and doing though in a continuous fashion. So a three night or a four night stay will actually have a different price per night that depends on the cost to serve that specific guests. So this is something that's quite a bit of in the in the hospitality industry to kind of have our cost to serve by length of stay feed into our pricing model.
And so our teams have updated and improved those formulas in a way that has allowed us we believe to two.
To increase the contribution profit at the asset level by just optimizing this kind of discount curve.
Great. Thanks for all the color and then just like a quick follow up <unk> guidance. It looks like it implies revenue acceleration.
Good morning.
Okay.
Okay.
Yes, sorry, I think we lost the last part of that question. So you mentioned Q3 guidance.
Revenue acceleration and then we lost the rest of that question.
Thank you guys.
Calibration.
Is it driven more by unit.
Sure.
Okay. So the question is we understand it is it was it more unit counts or Revpar that is driving.
The revenue increase in.
In the guide for Q3, so Don I'll, let you answer that.
Thanks Francis.
Basically all Revpar, we probably volume standpoint, our forecast and very stable. So.
Yes, most of it is from a slight reduction in Revpar for the same drivers as we mentioned earlier.
Also abdominal I think maybe the question was misunderstood here. So I think let me just reiterate it so from Q2 to Q3 were.
Seeing a step up in our revenue guide right. So revenue came in in Q2, $1 57 were guiding $1 60 to 170 here is it mostly revpar Bookable nights and obviously, it's a combination of both.
And we don't.
Down specifically what is revpar versus what is Bookable nights, but last quarter. We saw about 850 life units open and we've got quite a lot of units that are set to open this quarter as well so we should see an increase in.
And Bookable nights.
And into Q3, but the exact split we haven't we haven't broken out and like it seems like dawn is having a little bit of an issue with the audio so I'm going to I'm going to cover cover for him on this one but hopefully that answers the question.
Yes. Thank you.
Okay.
Yes.
As a reminder to ask a question. Please press star one one on your telephone.
I show no further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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