Q3 2023 Inspirato Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the <unk> third quarter 2023 conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
Can I ask a question during the session you will need to press star one on your telephone.
And here an automated message advising that your hand as rates to withdraw your question. Please press star. One again, please be advised that today's conference call is being recorded I would now.
And I'd like to hand, the conference call over to your first speaker today titled <unk> Investor Relations. Please go ahead.
Thank you good morning.
On today's call, we have CEO Eric <unk>.
And CFO Robert.
Yesterday afternoon, we issued a press release announcing our third quarter 2023 results, which is available on the Investor Relations page of our website at Investor.
Doug.
Before we begin our formal remarks, we remind everyone that some of today's comments are forward looking.
Including but not limited to our expectations about future operating results and financial position.
Guidance and growth prospects.
Is the strategy and plan and market position and potential market opportunity.
These statements are based on assumptions.
No obligation to update them actual results could differ materially.
We refer you to our SEC filings for a more detailed discussion of additional.
In addition, during the call management.
GAAP measure, which are useful in evaluating the company's operating.
These measures should not be considered in isolation or 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.
Thanks, Kyle and good morning, everyone.
It's a privilege to speak with you for the first time as CEO.
I've spent the past several months deeply engaged with employees shareholders and members of our financial and operating plans.
Remember this product for two years, so familiar with our prior successes and challenges.
In my career I spent a lot of time in the online travel space, namely a cofactor topline president worldwide.
I've seen firsthand what it takes to become a market leader in household name in the travel space and have developed a deep appreciation for creating exceptional and truly differentiated travel experiences.
Since you brought up I see a strong customer value proposition.
Imported by a world class luxury residence.
And passionate team dedicated to delivering members with certainty service and value that creates the magic will travel experiences.
No for.
In short, we have a compelling product to buildup 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 enables family and friends to travel together in a more natural and familiar with that.
Lastly.
While we also offer our members fantastic cruises safaris in custom travel experiences.
<unk> Mountain home in Colorado, the rustic bill on the Rolling Hills.
Hundreds of other hub each with their own special touch better has brought us through call. It.
Currently we continue to iterate on our portfolio to make sure we are providing our members with the highest quality properties at the most desirable a popular destination.
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.
Member feedback top of mind.
On the service side are pre trip planners are dedicated to ensuring travelers experienced a remarkable vacation or onsite concierge staff are local experts uniquely capable of putting the finishing touches on a great trip.
While the Extel and handling expected request.
Dinner reservations.
Restaurants are ready for <unk>.
Jeff bookings box treatment time, we also pride ourselves on delighting our members by delivering services that are more unique hence product exam.
Examples include stocking residents refrigerator groceries requested by members ahead of travel as well as ensuring our onsite concierge services are available across our resident portfolio to make sure remember trips are truly personalized and unique.
Beyond delivering uncertainties service associated with our residents as the travel upgrades. We have 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 a rewards program that provides up to 25%.
Most frequent travelers and loyal members.
These recent initiatives when combined with existing programs like John provide great value to our members across the product portfolio.
Over the years, we've worked tirelessly to build a loyal group of members that absolutely love the product.
This is demonstrated through our net promoter score, which has consistently been at industry leading levels.
Had some turnover in parts of our prescriber base, our core group remains strong as evidenced by resiliency and our nights booked per subscriber.
We have a strong action plan to address churn, which includes evaluating each of our travel offerings and subscriber cohorts with the end goal of improving what we deliver and how we deliver it.
While we weather tremendous change and a variety of challenges over the past few years, we've never wavered and our member centric approach, which is built on a foundation of World class properties at five star.
We will continue to invest in our members and in our strategic partnerships, including our recently signed agreement with capital one through partnerships like capital one and others that we have in development, we expect to increase <unk> awareness with the luxury traveler, which is an important initial step as we look ahead to grow and it's brought up.
While I'm confident we can make these investments to rebuild our long term revenue momentum you must first have an intentional focus on the short term by strengthening our fundamental and improving our operating efficiency and financial position by controlling costs improving margins.
<unk> our liquidity.
These efforts are well underway and we expect to begin realizing some of the benefit 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 to.
To help reach our profitability goals.
I'm pleased 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 have also further reduced our workforce earlier in the third quarter to help make us more nimble and better positioned for.
Phil.
From a liquidity standpoint, our strategic partnership with capital one included a $25 million investment 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 efficiency and liquidity, which in turn positions us for a much stronger 2020.
As we look ahead. It is important to note that we are not starting from scratch, we have our three piece.
Palio people and partnerships in place to act as the foundation to achieve our goals.
In future calls I look forward to more specifically updating you on our plans to rebuild our revenue momentum starting with our core products and partnerships.
Before turning the call over to Robert to discuss our third quarter financial results I'd like to personally thank our loyal members and homeowners and their support as well as pass along an aesthetic and heartfelt. Thank you to our.
Employees for their continued passion hard work and dedication to making gets brought up 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.
Thanks, Eric in the third quarter, we generated $83 million of total revenue, which was comprised of $33 million.
<unk> revenue and $49 million of copper revenue, while each of these metrics decreased on an annual basis travel revenue was 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 traveler behavior that was negatively impacting our travel revenue and gross margin, namely the mix between paid and path right.
And hotel night, and the mix of nights in our leased hotel hotel with net rate agreements. We are focused on optimizing our travel mix to improve margins, though its early we have begun to see signs of progress.
In the third quarter, we delivered approximately $46 400, total mice and from a mixed perspective, 57% of total nights delivered were paid.
Our highest level since the second quarter of 2022 50.
64% of total nights delivered where in our residents our highest level since the first quarter of 2022.
Finally, our residents ADR in the third quarter was approximately $600. While residents occupancy was 73% compared to 81% in the third quarter of 2022 and up 1% from the second quarter of this year.
<unk> also believes earlier this year that average daily rates was elevated and negatively impacting the value proposition for our members. We saw this show up in our numbers with a more than a 10% decline in the number of paid bookings for residences in Q2 2023 compared to the prior year.
However in June we lowered our ADR 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 delivered the highest.
And we are pleased with the re engagement and paid residences.
Bookings by our members in Q3.
Again, it's early time, but these data points are encouraging and help contribute to an annual and sequential decrease in trying to revenue per subscriber.
Unfortunately solid profit performance was not enough to offset year over year and quarterly decrease in subscription revenue up 14% and 7% respectively. We ended the quarter 14500 active subscriptions comprised of approximately 11800 club subscription and 'twenty 700 pass subscription.
Each of the past four quarters, we have now seen past subscriptions consistently decrease resulting in a $5 million year over year decrease in our subscription revenue attributable to <unk> with.
We're keeping a close eye on this trend in evaluating future actions to take regarding tap subscription sales.
From a cloud perspective, we believe the macroeconomic environment and the perceived challenges of the business contributed to fewer than anticipated news now while these factors, but elevated ADR in 2022, and the first half of 2023 led to increased resignation.
Importantly, an emphasis on multi year subscription has led to approximately 80% of new clubs in 2023 being for two or more years, which has helped drive improved comprehensive.
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.
That another key initiatives of better leveraging our leased hotel has begun to take hold strategically net rate hotel continued to be a valuable lever at our disposal as we are.
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 aren't touched on previously.
As a reminder, due to the lag between when we entered to lease termination and the expiration of those leases those savings were planned to be modest in the third and fourth quarters of 2023, followed by a more significant reduction in the first quarter of 2024.
With our communications in the prior quarter, we anticipate at least $25 million 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 was part of our payroll reduction plan that we also discussed on our earnings call last quarter targeting.
Ultimately $20 million of annual payroll David.
Total operating expenses were $43 million in.
In the third quarter, a 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 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 right.
Commission accounting for our recently launched is broader voyage program. This.
This is meaningfully better than our internal projects.
In terms of cash and liquidity in late September we received a $25 million investment from capital ventures contributing to a cash balance of over $50 million at the end of the third quarter, we anticipate free cash flow deficit in the fourth quarter before more significantly take hold in 2024, the combination of the investment.
For capital, one and meaningful savings anticipated in 2004 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 uncertainty for our employees homeowners members and shareholders. It's 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.
Adjusted EBITDA loss between 30% and $45 million.
We are hard at work finalizing our 2020 for 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.
Thank you at this time, we will conduct a question and answer session.
Mind or to ask a question you will need to press star one on your telephone and wait for your name to be announced.
Your question. Please press Star one again, please stand by while we compile the Q&A roster.
Our first call comes from sweater category of Evercore ISI. Your line is now open.
Okay. Thank you for taking my questions. So let me try two please first one is Eric could you perhaps at a high level talk about your early observations of being of the company.
Now the CEO and some of the.
Areas that you will be focused on most in the next call. It six to 12 months and areas that you are excited about the most and then the second.
Second question I have is on your cash.
Burn rate versus the cash balance that you have including the convert.
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 need versus <unk>.
Basket, becoming positive free cash flow. Thank you.
Well thanks Lee.
Appreciate the question.
With respect to initial observations one thing that I've really been impressed with.
And to my.
CEO role here is just how our team in the near term.
<unk> executed very very quickly to deliver some material near term operating efficiencies.
It's important because my my initial and most important near term priority squarely put in Toronto on a path towards profitability.
<unk> taken a lot of steps are leased.
<unk>, our personnel reductions software savings other expense savings if you add it all up on an annualized basis, it's over $50 million and now we've done a pretty in a very very short period of time.
Yes.
I've been really.
Impressed with you.
You asked about <unk>.
Longer term over the next six to 12 months.
Spend more time with the team and spend more time understanding the unique role that it's Brito has been electric travel category.
I get more excited about the growth opportunities in front of its broad.
Partnerships is one area and what opportunity that leads to buy where we can really efficiently tap into demand sources that we're we really deliver our unique residents portfolio capital. One is a great example of that and I think there are other and there will be others that we look forward to it.
The opportunity to revisit.
Rationalizing revitalize some of our current product offering around club in past.
Definitely an opportunity as well as new business lines Blake.
<unk> that are still very much in the early stages of.
Their development.
Encouraging growth prospects.
But I guess when I look at it more broadly and I looked at the opportunity more broadly.
I spend more time with members and with our team I just think we have a pretty unique opportunity too.
Instill the magic.
What delivers.
Great Great experience.
It is.
The delivery great travel experiences at the core of what we do.
And a great one that delivers pretty exceptional experiences and value to members and.
Believe the more time I felt good about the market opportunity for what we do it's just a lot bigger than whereas broadway's right.
Yeah. This is Robert let me take the question you had about the cash burn.
For sure Youre correct, we have been burning cash at a rate of about $15 million a quarter consistently.
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 cost.
We've taken action that will.
Eliminate at least $25 million of lease costs as we've gone through our portfolio optimization and as I've mentioned in the past 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 six to 12 months. After we've taken the termination options a lot of those will start to see by Q1 of next year.
But for now we will have another quarter, where we'll have some cash burn around that we also took actions around staffing head count 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 will start to see some benefit around that finally as part of our 2020 for planning process, we really dug deep to identify other areas, where there maybe cash savings opportunity for instance, we went in we scrubbed through all of our software.
Sure.
Programs.
And technology that we had and have identified.
Significant amount of savings there. So when you add all those pieces up we're planning on $50 million plus sale.
Savings that will be annualized in 2024.
Similar number to that kind of the cash burn that we're seeing in 2023 so.
All we certainly have our.
Our work and our opportunity around what revenue will look like in 2024, as we firm up our 2024 plants.
We feel that we've taken out sufficient cost that will really be able to September that cash burn.
<unk> with Q1, 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 we're all.
As many companies are open to the possibility of raising capital for the right rates.
And the right structure, but I think we have estimated our own hands in terms of cash moving forward.
Okay. Thank you Eric Thanks, Robert.
Thank you one moment for our next question.
Our next question comes from Mike Grondahl of Northland, Mike Your line is open.
Hey, Thanks, guys.
First question is just on pass subscribers.
What do you think that weakness is it macro related.
Is it something you need to do to tweak the offering just looking for a little insight there.
Sure. Thanks, Mike, Yes, you've noticed that our past subscriptions are declining and like any trend.
A number of factors behind it I think.
One macro trend you asked for that is is that travel trends overall, just start are normalizing in the Covid era.
Work is moving.
Moving into the past and anticipating and passed obviously was a great product offering for that type of life.
Lifestyle.
But neither of these thing as Robert and I and the team have looked into past more deeply which definitely have particularly over the course of the last month is how there is a core group of users.
Really really love it.
So what we're doing is.
Evaluating what are the elements around past.
That.
A good segment of our of our of our prescribers are really really drawn to.
Verbally double down on that and deliver even more value, but at the same time.
Or if for whatever reason.
People.
Travel needs and lifestyle change and then we meet them where they are.
And the good news is is that.
Club another product offered within the portfolio.
Good landing spots in the event that people.
Travel needs.
This shift and Thats one area of opportunity I think we can do a better job of more proactively.
Shifting our members from.
It's a product that's best for them.
Got it and then.
Eric you've talked well I'll say it. This way you have done a lot on the cost side of the business. Like you said you are 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 our revenue growth.
Sure sure Great Great question, and you're right to point out that it really the first 36 to 100 days Ive really been focused on just the operational efficiency and I just wanted to emphasize.
And besides that Mike because when we do grow again and I'm confident that we will I wanted to make sure that we're doing it from a position of core operational efficiency and strength.
That growth will more directly translate to profitable growth and controlling our own destiny as we get to.
At March toward profitability.
So I mentioned I've mentioned partnerships.
And that's one area that I believe it is a real opportunity for us because.
There is a lot of travel demand thats out there and there was a lot of travel demand I think out there through partnerships that we can tap into really really efficiently and when you have the net promoter scores that we do.
When people take it as part of trips and less of as much of a basically an on ramp to membership. So that's why I think partnerships can be really attractive for us because it's basically to get people travelers on its brought up again given sort of R. R.
Our net promoter scores and that leads to at least.
We've also gone through a pretty explosive internal area of growth.
Around different product lines across its brought up so I think taking a fresh look at that around how Kevin Pat fit together really mapping that against the personas that our members.
There's been an awful lot of innovation I think there can be an awful lot of this kind of innovation really focus on rationalization that can lead to that way of members.
Have a better idea on what products and services across the product portfolio are best suited for that 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 we.
When you deliver a kind of travel experience that as far as noncore and when you take a look at sort of the macro growth rates.
Obviously travel which from what I've seen it's been in kind of the mid to high single digits.
I do think that Theres a lot of opportunity.
For Florida, It's Brito, one sort of more efficient and can grow along the lines of what I mentioned.
Got it got it Hey, I appreciate it. Thank you sure. Thanks, Mike.
As a reminder to ask a question. Please press star one on your phone.
At this time I am seeing no further questions I would now like to turn it back to CEO, Eric <unk> for closing remarks.
I apologize Janice just pumpkin bear with me one moment.
Okay. Kelly your line is now open.
Great great. Thanks for taking my question.
Just when you look at the <unk>.
Ray you want to.
Transformed the business.
Can you talk about your supply road map.
Talking to owners and are they happy with the current value.
Youre, bringing in and then can you just talk to how we should think about sales force productivity going forward. Thank you.
Sure.
To supply and our inventory I'm glad you brought it up just 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 as the.
The exact kind of experience.
On the supply side as our as our members do you on that.
When they are traveling I think one benefit and one of the big benefits that I here I've heard this EBIT just in my first week in my in my New role is how much.
Residents owners in homeowners really appreciate sort of the closed.
A closed ecosystem and the managed ecosystem that if it's brought up it's not the wild west out there with other with other.
What other <unk>.
Pavel services.
A much more curated membership group.
I think.
Homeowners a lot more a lot more confidence, especially also when you lay on top of that just the.
The points of contact and the support infrastructure that we have to manage the portfolio has done really exceptionally highway we really manage our portfolio as if they were our residents because it's such a critical part of delivering the kind of experience that we're known for.
What I can say is that so far satisfaction rates for our members excuse me for a homeowner but has also been really high because of that.
Curated.
The client base that we.
Invite into their homes, which is again much more.
Much more managed and what you see from other alternatives.
As well as.
The high attention to detail we play we placed on management, each and every call to ensure that the great experience that our <unk>.
Travelers again.
Thank you.
Thank you very much. This concludes our question and answer session I would now like to turn it back to CEO, Eric <unk> for closing remarks.
Perfect well I really appreciate the questions and.
Thanks, very much for participating in my first earnings call here at its Bravo and I look forward to developing more relationships with all of you in and.
And participating in these calls going forward, thanks very much.
Thank you for your participation in today's conference call. This does conclude the program you may now disconnect.
[music].
Yes.
Yes.
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Okay.
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[music].
So I ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising that your hand as rates to withdraw. Your question. Please press star one again, please be advised that today's conference call is being recorded.
I'd now like to hand, the conference call over to your first speaker today titled <unk> Investor Relations. Please go ahead.
Yes.
Thank you and good morning.
Today's call, we have CEO Eric growth.
CFO Robert.
Yesterday afternoon, we issued a press release announcing our third quarter 2023 results, which is available on the Investor Relations page of our website at Investor.
<unk> Dot com.
We begin our formal remarks, we will remind everyone that some of today's comments are forward looking statements, including but not limited to our expectations of the future operating results and financial position guidance and growth prospects business strategies, and plans and market position and potential market opportunity.
These statements are based on assumptions that 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.
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.
Thanks, Kyle and good morning, everyone.
Privilege to speak with you for the first time as CEO.
<unk> spent the past several months deeply engaged with employees shareholders and members of our financial and operating plans.
Number of installs for two years, so familiar with a broader successes as well as challenges.
In my career I spent a lot of time in the online fallow space, namely a cofactor hotwire a president.
Worldwide.
Seen firsthand what it takes to become a market leader in household name in the travel space and have developed a deep appreciation for creating exceptional and truly differentiated travel experiences.
And as you brought up I see a strong customer value proposition.
Sorted by a world class luxury residence.
And passionate team dedicated to delivering members with certainty service and value that creates the magic will travel experiences and brought out is now for the short we have a compelling positive buildup and as we move forward our decisions will be based on continuing to deliver wonderful member experiences while also becoming.
Operationally more efficient.
We delivered certainty through our portfolio of World class homes.
Our amazing residents enabled family and friends to travel together in a more natural and familiar way that creates lasting that.
While we also offer our members fantastic cruises safaris in custom travel experiences.
<unk> Mountain home in Colorado, the rustic bill on the Rolling Hills.
100 development each with throughout vessel touch that brought us through call it.
Currently we continue to iterate on our portfolio to make sure we are providing our members with the highest quality properties at the most desirable a popular destination.
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.
Member feedback top of mind.
On the service side, our precept planners are dedicated to ensuring travelers experienced a remarkable vacation.
<unk> staff are local experts uniquely capable of putting the finishing touches on a great trip.
<unk> sell in handling expected request dinner.
Basically the best.
Restaurants are mainly comprised chest bookings box business at Teatime, We also pride ourselves on delighting our members by delivering services that are more unique hence product exam.
Examples include stocking residents refrigerator groceries requested by members ahead of travel as well as ensuring our onsite concierge services are available across our resident portfolio to make sure remember trips are truly personalized.
Okay.
Beyond delivering of certainty and service associated with our residents as they travel with races. We have 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 a rewards program that provides up to 25% 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 product portfolio.
Over the years, we've worked tirelessly to build a loyal group of members that absolutely love brought up this is demonstrated through our net promoter score which has consistently been at industry leading levels.
Well it had some turnover in parts of our subscriber base, our core group remains strong as evidenced by resiliency and a nice book per subscriber.
We have a strong action plan to address churn, which includes assets evaluating each of our travel offerings and subscriber cohort with the end goal is improving what we deliver and how we deliver.
While we weather tremendous change and a variety of challenges over the past few years, we've never wavered and our metro centric approach, which is built on a foundation of world class properties and <unk>.
We'll continue to invest in our members and in our strategic partnerships, including our recently signed agreement with capital one through partnerships like capital one and others that we have in development, we expect to increase <unk> awareness with the luxury travel which is an important initial step as we look ahead to grow in this product.
While I'm confident we can make these investments and rebuild our long term revenue momentum you must first have an intentional focus on the short term by strengthening our fundamental and improving our operating efficiency and financial position by controlling costs improving margins 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 to.
To help reach our profitability.
A priest 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 have 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 2020.
As we look ahead. It is important to note that we are not starting from scratch, we have our <unk> portfolio people and partnerships in place to act as the foundation to achieve our goals.
In future calls I look forward to more specifically updating you on our plans to rebuild our revenue momentum starting with our core products and partnerships.
Before turning the call over to Robert to discuss our third quarter financial results I'd like to personally thank our loyal members and homeowners and their support as well as pass along an aesthetic and heartfelt. Thank you to our employees for their continued passion hard work and dedication to making gets brought up a magical destination for member travelers.
One type of experience they can't live with now.
With that I'll turn the call over to Robert.
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 copper revenue while each of these metrics decreased on an annual basis travel revenue was up sequentially and we are encouraged by some early signs of success.
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 Pat Knight.
<unk> and hotel night, and the mix of nice in our leased hotel versus hotel with net rate agreements. We are focused on optimizing our travel mix to improve margins, though its early we have begun to see signs of progress.
In the third quarter, we delivered approximately 46400 total mice and from a mixed perspective, 57% of total nice delivered were paid.
Our highest level since the second quarter of 2022 50.
64% of total nights delivered where in our residences, our highest level since the first quarter of 2022.
Finally, our residents ADR in the third quarter was approximately $600. While residents occupancy was 73% compared to 81% in the third quarter of 2022 and up 1% from the second quarter of this year.
<unk> also believes earlier this year that average daily rates was elevated and negatively impacting the value proposition for our members. We saw this show up in our numbers with a more than 10% decline in the number of paid bookings for residences in Q2 2023 compared to the prior year.
However in June we lowered our ADR 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 delivered the highest <unk>.
And we are pleased with the Reengagement and paid residences.
Bookings by our members in Q3.
Again, it's early time, but these data points are encouraging and help contribute to an annual and sequential decrease in travel revenue per subscriber.
Unfortunately solid profit performance was not enough to offset year over year and quarterly decrease in subscription revenue up 14% and 7% respectively. We ended the quarter with <unk> thousand 500 active subscriptions comprised of approximately 11800 cloud subscription and 'twenty 700 pass subscription.
Each of the past four quarters, we have now seen past subscriptions consistently decrease resulting in a $5 million year over year decrease in our subscription revenue attributable to <unk> with.
We're keeping a close eye on this trend in evaluating future actions regarding.
Regarding cash for future sales.
From a cloud perspective, we believe the macroeconomic environment and the perceived challenges of the business contributed to fewer than anticipated news now while these factors, but elevated ADR in 2022, and the first half of 2023 led to increased resignation.
Importantly, an emphasis on multiyear subscription has led to approximately 80% of new clubs in 2023 being with two or more years, which should help drive improved club returns.
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 assigned that another key initiative of better leveraging our leased hotel has begun to take hold strategically net rate hotel continued to be a valuable lever at our disposal.
We're able to both satisfy member demand and test new markets.
Another factor contributing to the decrease in cost of revenue was our portfolio optimization efforts that are touched on previously.
As a reminder, due to the lag between when we entered to lease termination and the expiration of those leases those savings were planned to be modest in the third and fourth quarters of 2023, followed by a more significant reduction in the first quarter of 2024.
With our communications in the prior quarter, we anticipate at least $25 million of annualized lease expense maybe in 2024.
From an expense standpoint, the third quarter included several nonrecurring charges, primarily related to severance payments associated with the July reduction enforce and changes in executive leadership that occurred in the quarter. This was part of our payroll reduction plan that we also discussed on our earnings call last quarter targeting.
Proximately $20 million of annual payroll David.
Total operating expenses were $43 million in.
In the third quarter, a 52% of revenue compared to $41 million or <unk>, 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.
Compared to $38 million in the third quarter 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 right.
Commission accounting, our recently launched <unk> voyage program. This.
This is meaningfully better than our internal projects.
In terms of cash and liquidity in late September we received a $25 million investment from capital 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 significantly in 2024, the combination of the investment.
For capital, one and meaningful savings anticipated in 2004 through the actions we've taken to improve our free cash flow profile give us confidence in our liquidity position moving forward.
Closing the past few months have brought about change at a time uncertainty for our employees homeowners members and shareholders.
My firm belief that through our cost savings initiatives and overall execution.
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% and $45 million. We are hard at work finalizing our 2020 for 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.
Thank you at this time, we will conduct a question and answer session.
As a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please stand by while we compile the Q&A roster.
Our first call comes from Sweater could you go area of Evercore ISI. Your line is now open.
Okay. Thank you for taking my question. So let me try two please first one is Eric could you perhaps at a high level talk about your early observations as being of the company now.
Now the CEO and some of the.
Areas that you will be focused on most in the next call. It six to 12 months and areas that you are 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.
Given the cash burn that you have how should we think about potential capital raise needs versus basket, becoming positive free cash flow. Thank you.
Well, thanks way, though we appreciate the question.
We expect to initial observations one thing that I've really been impressed with.
Stepped into my.
CEO role here is just how our team in the near term is just work and executed very very quickly to deliver some material near term operating efficiencies.
Which is important because my my initial and most important near term priority squarely put in Toronto on a path towards profitability.
We've taken a lot of steps of our least 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 then we've done a pretty in a very very short period of time.
I've been really.
Impressed with.
You asked about a longer term view over the next six to 12 months.
As I spend more time with the team and spend more time understanding the unique role that it's Brito has electrics aloe category I really get more excited about the growth opportunities in front of it.
Partnership is one area and what opportunity that leads to buy where we can really efficiently tap into demand sources that we're we really deliver our unique residents portfolio capital. One is a great example of that and I think there are others and there will be others that we look forward to it.
The opportunity to revisit.
Rationalize and revitalize some of our current product offering around club in past.
Currently an opportunity as well as new business line Blake.
ISP that are still very much in the early stages of.
Their development.
Encouraging growth prospects.
But I guess when I look at it more broadly and I looked at the opportunity more broadly.
I spend more time with members and with our team I just think we have a pretty unique opportunity too.
And still the magic.
What delivers.
Great Great experience.
It is product.
The delivery great travel experiences at the core of what we do and where it fell apart and a great. One pillar is pretty exceptional experiences.
And value to members and.
Believe the more time I've been here that the market opportunity for what we do it's just a lot bigger than where its broad ways right.
Yes, Sean This is Robert let me take the question you had about the cash burn.
For sure Youre correct, we have been burning cash at a rate of about $15 million a quarter consistently.
A bunch of quarters now.
And that's one of the reasons that we took the actions that Eric mentioned on our path to profitability of reducing our costs.
We've taken action that will.
Eliminate at least $25 million of lease costs as we've gone through our portfolio optimization and as I've mentioned in the past call. While we've taken those actions already.
And of the leases haven't happened yet because those the end of the leases are six to 12 months. After we've taken the termination actions a lot of those will start to be by Q1 of next year.
But for now we will have another quarter, where we will have some cash burn around that we also took actions around staffing head count as well with a reduction in force.
Q3, and that didn't show up from a cash perspective, yet either because of it.
It was done during the quarter and then there was obviously certain severance costs around that so we will start to see some benefit around that finally as part of our 2020 for planning process, we've really dug deep to identify other areas, where there maybe cash savings opportunity for instance, we went in we scrubbed through all of our software.
Sure.
Programs.
And technology that we had and have identified.
Significant amount of savings there. So when you add all those pieces up we're planning on $50 million plus.
Savings that will be annualized in 2024.
A very similar number to that kind of the cash burn that we're seeing in 2023, so while we certainly have.
Our work and our opportunity around.
Revenue will look like in 2024, as we firm up our 2024 plants.
We feel that we've taken out sufficient cost that will really be able to September 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 we're always as many companies are open to the possibility of raising capital for the right rates.
Yes.
Right structure, but I think we have the testing in our own hands in terms of cash moving forward.
Okay.
Thank you Eric Thanks, Robert.
Thank you one moment for our next question.
Our next question comes from Mike Grondahl of Northland, Mike Your line is open.
Hey, Thanks, guys.
First question is just on pass subscribers.
What do you think that weakness is it macro related.
Something you need to do to tweak the offering just looking for a little insight there.
Sure. Thanks, Mike Yeah.
Youll notice that our past subscriptions are declining and like any trend.
A number of factors behind it I think.
One macro trend you asked for that is is that travel trends overall just start our normalized again.
The Covid era.
Work is moving.
Moving into the past and anticipating and passed obviously was a great product offerings for that type of life.
Lifestyle.
But the big thing as Robert and I and the team have looked into past more deeply which definitely have particularly over the course of the last month is how there is a core group of users.
Really really love it.
So what we're doing is.
Evaluating what are the elements around past.
That.
A good segment of our of our of our subscribers are really really drawn to.
<unk> doubled down on that and deliver even more value, but at the same time.
Or if for whatever reason.
People.
Travel needs and lifestyle change and then we meet them where they are.
And the good news is is that.
Club another product offered within the portfolio.
Good landing 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 the.
Product is best for them.
Got it and then.
Eric you've talked well I'll say it this way you have done a lot on the cost side of the business.
You said you are 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.
Sure sure Great Great question, and you're right to point out that it really the first 36 to 100 days Ive really been focused on just the operational efficiency and I just wanted to emphasize that Mike because when we do grow again and I'm confident that we will I wanted to make sure that we're doing it from a position of core operational efficiency and spreads.
So that that growth will more directly translate to profitable growth.
Following their own destiny as we get to.
The march toward profitability.
So I mentioned I've mentioned partnerships.
And that's one area that I believe it is a real opportunity for us because there is a lot of travel demand thats out there and theres a lot of travel demand I think out there through partnerships, we can tap into really really efficiently.
And when you have the net promoter scores that we do when.
When people take it as part of trips and let them as much.
Secondly, an on ramp to membership. So that's why I think partnerships can be really attractive for us because it basically to get people traveling on its brought up again given sort of R. R.
Our net promoter scores and that leads to at least.
We've also gone through a pretty explosive internal area of growth.
Around different product lines across its brought up so I think taking a fresh look at that around how Kevin Pat fit together really mapping that against the personas that our members.
There's been an awful lot of innovation I think there can be an awful lot of this kind of innovation really focus on rationalization that can lead to that way of members.
Have a better idea on what products and services across this product portfolio are best suited for that 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 we when you deliver it.
The kind of travel experience that as far as noncore and when you take a look at sort of the macro growth rates.
Luxury travel, which from what I've seen it's been in kind of the mid to high single digits.
I do think that there is a lot of opportunity.
For Florida, It's Brito once we're more efficient and can grow along the lines of what I mentioned.
Got it got it Hey, I appreciate it. Thank you sure. Thanks, Mike.
As a reminder to ask a question. Please press star one on your phone.
At this time I am seeing no further questions I would now like to turn it back to CEO, Eric <unk> for closing remarks.
I apologize Chad has just popped in bear with me one moment.
Jed Kelly your line is now open.
Great great. Thanks for taking my question.
Just when you look at it.
Ray you want to.
Transformed the business.
Can you talk about your supply road map.
Talking to owners and are they happy with the current value.
Youre, bringing them and then can you just talk to how we should think about sales force productivity going forward. Thank you.
Sure.
To supply and our inventory I'm glad you brought it up just a really really important part of our.
However, overall experience and it's also one that is.
We have.
A dedicated team that really is focused on ensuring that our homeowners as the.
The exact kind of experience.
On the supply side as our as our members do you on that.
When they're traveling I think one benefit and one of the big benefits that I here I've heard this EBIT just in my first week in my in my New role is how much.
Residents owners in homeowners really appreciate sort of the.
Closed ecosystem and the manage ecosystem that if it's brought up it's not the wild west out there with other with other.
What other <unk>.
Pavel services.
A much more curated membership group.
I think.
Homeowners a lot more a lot more confidence, especially also when you lay on top of that just the.
The points of contact and the support infrastructure that we have to manage the portfolio has done really exceptionally highway we really manage our portfolio as if they were our residents because it's such a critical part of delivering the kind of experience that we're known for.
What I can say is that so far satisfaction rates for our members excuse me for a homeowner but has also been really high because of that.
Curated.
The client base that we have.
Invite into their homes, which is again much more.
Much more manage that we see from other alternatives.
As well as.
The high attention to detail we play we placed on management each and every call to ensure that the great experience that are that are traveling again.
Thank you.
Thank you very much. This concludes our question and answer session I would now like to turn it back to CEO, Eric grocery for closing remarks.
Perfect well I really appreciate the question.
Thanks, very much for participating in my first earnings call here at its Bravo and I look forward to developing more relationships with all of you in.
And participating in these calls going forward, thanks very much.
Thank you for your participation in today's conference call. This does conclude the program you may now disconnect.