Sonder Holdings Inc. Q3 2023 Earnings Call

November 14, 2023

Good day.

Welcome to the Saunders third quarter earnings call at this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is right to withdraw your question Press Star one again.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker Ellie do come in senior director of strategic Finance and Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone welcome and thank you for joining us to discuss <unk> third quarter 2023 financial results. Joining me on the call is for instance, Davidson co founder and Chief Executive Officer, and Don Virgo Chief Financial Officer.

Our third quarter shareholder letter and Form 10-Q, we issued today after the close of the market. These materials are available in the Investor Relations section of our website at Investor Doc Thunder Dotcom.

We encourage you to reference the detailed information contained in those materials during our call.

We begin I would like to remind everyone that our prepared remarks, and the Q&A session to follow contain forward looking statements under federal Securities laws.

These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our remarks comments are material, including our shareholder letter.

Statements in our remarks comments immaterial, our effective today, only and will not be updated as actual events unfold you can find reconciliations of all non-GAAP financial measures referred to in our remarks within our shareholder letter and the Investor Relations section of our website with that I will turn the call over to Brenda.

Thanks Ali good afternoon, everyone and thank you for joining us today I would like to start by thanking all of our sort of our employees our guests and our partners for their support as we strive to fulfill our mission to revolutionize hospitality through design and technology, making the world a better stays open to all.

A few highlights from the third quarter revenue grew 29% year over year, driven by a 33% increase in Bookable mikes on a 31% increase in overall live units.

With a 2% decline in ADR to $185, coupled with a 1% decline in occupancy rates $2, 83%.

We also produced all of this growth with a 14% improvement in total overhead costs and a 9% improvement in total property level expenses per occupied room nights.

These accomplishments resulted in a 60% improvement in our free cash flow compared to last year from negative $39 million to negative $16 million and a 21% improvement in free cash flow margin from negative 31% to negative 10%.

Incredibly proud of the progress, we're making toward our goal of sustainable positive free cash flow. We're pulling every lever at our disposal to rapidly deliver on this objective Don will share more details about our results with you in a few minutes, but first I'd like to dive a bit deeper into our revenue and supply growth as well as the portfolio optimization program we're undertaking.

To improve our current portfolio economics.

Across all of our Thunder properties Revpar declined 3% year over year, our comparable properties Revpar, which is calculated in line with industry peers and looks at Revpar for selling the properties that were life. Prior to January one 2022 grew 3% year over year.

Factors came into play this quarter, including broader travel industry trends product mix between hotel and apartment style properties geographic mix cohort mix and the impact of our corporate sales and pricing strategies.

Going with the product mix, we continued to see relative strength in our hotel product and moderate pricing pressure for our apartment product on a comparable property basis, our hotel products grew revpar by 8% year over year, while our apartment product Revpar grew by 1% this bifurcation.

<unk> is representative of the market trends with hotel revpar growing year on year, but alternative accommodation revpar decreasing across our geographies, particularly in North America.

Hotels, now make up 40% of total live units compared to approximately 30% a year ago.

While our hotel revpar growth outpaced that of our apartment product Revpar for our hotel properties tends to be slightly lower than our apartment style properties.

All else equal the shift towards hotel properties had a roughly 1% negative impact on our year over year Revpar growth.

From a profitability perspective hotel properties also tend to have lower rent and property level expenses to offset the low revpar.

In terms of geographic performance, we're continuing to see strong demand for our properties in Europe, and the middle East growing comparable properties revpar, 14% year over year in those markets, while our north American comparable properties Revpar remained flat with.

This trend is consistent with broader industry trends.

According to the U S Travel Association Americans travelling abroad, and July exceeded pre pandemic levels by 10%, while inbound travel still lags pre pandemic levels by roughly 20%.

Our Revpar was also negatively impacted by some slower starts in a few of our recent north American property openings.

Properties that have been live for less than a year had average revpar of approximately 30% lower than our mature units in Q3. It typically takes time for new properties to ramp up but this is a larger drag than we've seen in the past primarily due to a greater proportion of properties that rely heavily on <unk> sales.

We've been investing in local sales teams in markets, where the assets require them and we're seeing early signs of success from this initiative. Additionally, we are seeing challenges in properties in Mexico City, which make up over 10% of the cohort of unit that went live in the last year.

We're planning to partner with property owners there to address these challenges by our portfolio optimization program, which we'll discuss in more detail shortly.

Our <unk> sales efforts are regaining momentum our new VP of sales joined us in Q3, and we're seeing an acceleration in our forward bookings, but we expect the impact on earned revenue to ramp over the next few quarters as corporate sales tend to have longer booking windows.

Our corporate sales segments should enable us to bolster revpar and are primarily urban markets and in particular during weekdays.

Overall, our experimentation and early results suggest this approach should yield higher ADR, we leaned into the strategy more aggressively in late July and expect to see more of its impact in the coming quarters.

We also continue to make progress on other revpar initiatives, we've previously highlighted including our elevated visual merchandising platform and ancillary revenue initiatives.

Moving on to the supply side, we're pleased to report our live units grew 31% year over year driven by continued strong conversion from our contracted units to life units. However, our total portfolio of live units plus contracted units did declined 10% year over year and 2% sequentially.

Last quarter as development cost uncertainty and persistent high interest rates remain a significant issue for developers and landlords. We felt it was prudent to exclude a number of contracted units with financing contingencies, which drove the year over year and sequential declines.

Even after excluding these units we continue to have a notable backlog of contracted units representing a strong growth pipeline of nearly 50% of our lives unit counts.

This is in line with our strategy set out in June 2022 to proactively reduce our planned finding space and focused primarily on growth driven by the conversion of our contracted units.

The strategy supports our goal to deliver sustainable positive free cash flow as soon as possible given upfront costs to originate and sign our contracted deals have already been been incurred they are expected to be cash accretive as they come live due to their capital light structure. In this narrowed focus enables us to prioritize improving the economics of our current portfolio.

As we strive to grow topline revenue. We also continue to scrutinize future lease hold obligations, particularly on underperforming assets.

While the majority of our properties are profitable some of our properties do have negative margins with that we're collaborating with external advisors to implement a portfolio optimization program working to understand how we can mitigate losses related to these underperforming properties assessing our portfolio of rents relative to current operations and the existing market rents and exploring alternative solutions to minimize their <unk>.

Ragen, our Bottomline we're.

We're engaging our landlords to work towards solutions that certain properties, where both parties may benefit from revised commitments, we value the collaboration with our landlords as well seek mutually agreeable outcomes as part of the strategic initiative.

It's never the intent for an operation to underperform, but in today's challenging marketplace. We must appreciate that our proactive approach to asset management is more important than ever.

Before turning it over to norm I want to highlight several new additions to the world class team we're building at Thunder.

First I am thrilled to welcome Tom Buoy, and Simon Turner to our board.

Tom and Simon are among the most accomplished executives in the hospitality industry. They both bring deep expertise and experience in areas, including executive leadership operations revenue generation and real estate I'm also pleased to announce we have been recently joined by Adam Bowen as Chief Accounting Officer, Katie Potter as General Counsel and chat Fletcher Vice President of sales.

Each of these individuals brings experience and knowledge that will be valuable assets as we continue executing on our plan to achieve sustainable positive free cash flow as soon as possible.

With that I'll turn the call over to our Chief Financial Officer, Don <unk> Don.

Thank you Frances Hello, everyone and thank you for your patience as we took a few more days to finalize our close process.

The release on our results.

We're pleased to report our best free cash flow quarter to date as a public company demonstrating continued progress on our path to achieving sustainable positive free cash flow in the near term.

Industry, leading unit economics.

The long term.

I will first provide a brief overview of our third quarter financial results and then take you through guidance before opening the call to questions.

In the third quarter free cash flow before one time restructuring cost totaled negative $16 million compared to negative $27 million in the second quarter of this year and negative $39 million in the third quarter of 2022.

Free cash flow margin also improved year over year, reaching negative 10%.

31% in the third quarter of 2022.

We generated $161 million representing.

Representing a 29% increase compared to Q3 of 2022.

As Francis mentioned key topline performance metrics improved year over year, including like units.

And on the buybacks.

While we experienced a slight decline in revpar.

We ended the quarter with approximately 11000.

Units, representing 31% growth year on year, and we reached a milestone of over 1 million Bookable diets in Q3, an increase of 33% year over year driven by underlying unit growth.

Occupancy remained strong at 83% in the third quarter, a slight decline from 84% in Q3 of 2022, even as we saw significant growth in bookable rates.

Since Francis went into details on our revenue performance I will now focus my remarks on the cost side.

For Q3, 2020, total costs and operating expenses increased by 17% year over year too.

<unk> $218 million, which is inclusive of a $5 million of stock based compensation expense.

The 17% increase in total costs on the back of a revenue increase of 29% and Bookable that's growth of 33% illustrates the strong improvements we've been driving in our operating leverage.

D level costs grew by 19%, while our non property level operating expenses were lower by 14% compared to the prior year.

This operating leverage improvement in turn drove our trailing 12 month cash contribution margins of 19% in the most recent quarter compared to 17% in Q3 of 2022.

We remain focused on driving leverage across all cost categories to support our goal of achieving sustainable positive free cash flow as soon as possible.

Princess already spoke about our efforts to right size, our largest expense item in the cost of our leases.

Our large scale initiatives currently underway aiming to improve our individual property economics to meet our targeted profitability levels.

Our underwritten rate.

We remain relentlessly focused on driving efficiencies across all of our property level costs, where we've outperformed our cost targets for the first three quarters of 2023 due to the success of multiple direct cost reduction initiatives.

We're also continuing to identify non property level cost savings.

Illustrated by a 14% decrease in this category compared to the prior year.

As a reminder, we have reduced our corporate workforce over 30% on a net basis since going public in early 2022.

Continue to press on to reduce our non head count expenses as well.

Driving consistent improvements in our cost structure is not integrated in our normal operating rhythm.

Ross the enterprise.

As discussed in our Q2 call in August we've evaluated the introduction of more common non-GAAP profitability metrics to make it easier to compare with our peers.

As such we plan to start using adjusted EBITDA, and adjusted EBITDAR and place US cash contribution margin beginning with our Q1 2024 earnings release.

Turning to the balance sheet.

The <unk> 38.

$207 million in cash cash equivalents and restricted cash and $197 million in total debt.

As you've seen in our 8-K last week, we've worked with our lenders to amend our credit agreements in the wake of the SPP event earlier this year.

We're happy with the outcome, which allows us to regain some flexibility with the expansion of the banks, we can use to issue letters of credit.

The extension of the Pik feature of our term loan in exchange for a downpayment, reducing our gross debt level.

We appreciate the partnership we have with our lenders.

Regarding guidance note that the ranges, we are providing for revenue and free cash flow for the fourth quarter of 2023.

Excluding any future impact of the portfolio optimization program that we discussed earlier on this call which could be material.

For the fourth quarter of 2023, we expect revenue between $165 million and $175 million, which at the midpoint represents a $148 million or 32% year over year improvement for full year of 2023, and a $35 million or 26%.

Improvement versus the fourth quarter of 2022.

This implies a slight decline from the previous revenue range for the second half of the year provided at our last quarter call due to the factors that Francis alluded to earlier.

For free cash flow, we expect to between negative $39 million and negative $29 million in the fourth quarter.

At the midpoint of the guidance range provided this translates to $58 million or 33% year over year improvement in free cash flow for the full year of 2023.

This is in line with the bottom half of the implied Q4 range from our last quarter call, reflecting the lower revenue guidance and the additional $4 3 million in onetime prepayment and interest penalty.

Associated with our amended credit agreements.

Partially offset by continued progress on cost reduction initiatives.

Note that while Q1 2023 free cash flow sequentially worsened compared to Q4 of 2022.

We do not expect this pattern to repeat itself going into 2024.

As we continue to ramp our corporate sales and collection processes and better scrap payments of certain annual contracts throughout the year.

We do expect a sequential improvement in free cash flow from Q4 of 2023 through Q1 of 2024.

As a reminder, the same as past quarters. Our guidance is based on our best knowledge available from internal data and third party forecasters and does not contemplate an extreme slowdown in demand.

Our guidance framework also does not incorporate any future impact of our portfolio optimization program, which may be material.

Given that we are early stages and there are still many unknowns about the magnitude and timing of that revenue and free cash flow.

While we are optimistic about the final outcome of this process. There is a high degree of uncertainty around how this will affect revenue and free cash flow in the short term as we strive to bring our entire portfolio up to positive unit economics.

With that we're now happy to take your questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

Your question Press Star one again, one moment, while we compile the Q&A roster.

And our first question will come from the line of Ron Josey with Citi. Your line is open.

Hey, guys. This is Robert on for Ron Thanks for taking my question.

Quick question on gross margins came in a little bit lower than expected in the quarter can you guys talk to kind of some of the main drivers behind that Mitch.

Then perhaps comment on how you see margins trending over the next few quarters here.

Hey, I'll take that question. This is not in terms of the gross margins.

I think this is mostly driven by the.

Revpar to meaning just a little bit lower than than where it was last year and.

From what our expectations were as we saw the revenue results came in.

Towards the low end of the range in terms of the cost structure of the business, we continue to see our.

EBITDA margin improving our cost per unit is coming down so.

We're pleased with the success, we've seen so far and the progress we've made on the cost side, but again. This remains in terms of GM percentage subject to the <unk>.

Volatility with Revpar, then again, so going forward I think it's the same dynamic continues work on the cost side and work on improving our revpar to sustain gross margins.

Understood. Thanks, a lot.

You bet.

Thank you one moment our next question.

And that will come from the line of Nick Jones with JMP Securities. Your line is open.

Great. Thanks for taking the questions I guess two.

One just as we think about the total portfolio versus the lives units.

Yes, I know that total portfolio numbers coming down kind of you're pulling some some of the properties out of that.

Is this kind of the right level to think about it going forward.

Another live units youre kind of approaching 70%.

Wow.

Our percent of the total fully alive.

Do we kind of expect this number to stagnate for a little bit as you focus on free cash flow.

From here and then I guess the second question is how are you feeling about the balance sheet.

Kind of given the macro environment and kind of what you see ahead.

From here thanks.

Yes, thanks, so much Nick pregnancy, I'll take the first question.

So yes as you pointed out the core focus is really on driving the business to cash flow positivity and we've been beating the same drum since June of 2022 that really the story there will be to convert our existing contracted properties into alive properties.

So we're not seeking out to go and sign a lot of new properties. We're just focused on making sure that the ones that have been signed were expenses already been.

Deployed to go and identify these assets and open them.

That those are done successfully and of course now also working on our portfolio optimization program and so our real estate teams effort is really focused on.

Ensuring that the portfolio economics as a whole are as strong as possible.

And that we work with our landlord partners to to go and make these underperforming assets perform.

I also want to point out that we've got still.

Early 50% embedded growth, which we think is really exciting frankly, a lot of properties that.

We think theyre going to be really great assets for the brand for the guest experience and also.

<unk> add more dollars to.

And contribution to alter the business are going to open in the next couple of years.

So we think that this industry leading growth is actually quite exciting in the growth rate is not an issue for the business at this point, we're growing quite rapidly. It's really just doing everything we can to go and accelerate.

The timeline to cash flow positivity.

And then.

On the live unit growth side, we just posted in the third quarter at 31% year over year growth of live units and so we're really happy with with that pace and we will keep on focusing the team on improving the free cash flow performance of the business in the near term.

And I will take the balance sheet question. So.

So you saw we had a healthy cash cushion at the end of the quarter.

He also the sustained progress we've been making on the free cash flow fronts.

That trajectory I think when you look at the <unk>.

The visual is very telling is talking to the right and.

We're working hard on our plan to keep that going rollout units as Francis just talked about there is a lot of embedded growth in the model that we feel we feel good about <unk>.

Unit economics, so reducing property level costs, including improving demand profile at these properties and then controlling preopening costs and overhead as we have in the past and that's the recipe for us to continue to improve free cash flow and when you contrast that with where we're at with the balance sheet, we see.

The trajectory we're comfortable with.

Great. Thank you both.

Thank you one moment our next question.

And that will come from the line of Jed Kelly with Oppenheimer. Your line is open.

Hey, great. Thanks for taking my question, maybe just give us an update on how your revpar initiatives and the technology around your revenue management is trending and then I know yes.

Relatively early and you don't want to guide next year, but can you sort of give us.

What youre sort of looking for and what.

Do you think for 'twenty four it looks like thanks.

Thanks, So much Chad no I think I'll start with the revenue management question I think it's an incredibly important topic, it's a very important lever for the profitability of the business and frankly I think that we have we have room for improvement on our pricing strategy. One of the changes that we've recently initiated is to ensure that our pricing trajectories are.

More stable and by that I mean that within seven days or 14 days before.

Target dates we would go and reduce price to drive more occupancy and we actually think thats about right.

The right approach and building a base of occupancy earlier and to the booking window, but then holding price as we approach that date of arrival is actually.

A better strategy to drive stronger ADR and stronger Revpar. So that's a major change that we're initiating I think there were some data where we've been selling out.

Bit too early and that's cause.

Our capacity to yield optimally to be impaired.

So those are just a few tweaks that that you can expect that we're going to we're going to put to work in the next few few months and quarters and all of that of course is powered by a lot of technology. We've built much of this technology in house, we're not afraid to also benchmark our technology versus third parties and to always explore whether.

Our solutions are the most adequate adequate.

But.

Really the biggest opportunity as we see it in the near term as those as this price trajectory the sellouts and ensuring that we can optimally drive.

Revpar through through higher ADR.

And Jim I'll take your question on 24, obviously, it's still too early for US to guide on 'twenty four quarterly we're finalizing our 2004 plans as we speak we still got a few more weeks to go to but all of that up.

The other thing is the property optimization programs that portfolio optimization program that census described earlier. This is very much in the early innings.

We feel confident it will improve the trajectory meaningfully but for now there's too many unknowns for us to embed any guidance based on that.

The last thing I'll say is similar to my answer to the prior question I'll point, you back to the trajectory you see the trajectory of improvements.

I illustrated earlier that the ingredients behind that improvement and those we expect to continue to work on and sustain going forward right now that's how we're framing 24 at a high level.

Improvements in the trajectory and working on the key levers to deliver that.

No formal guidance at this point.

More to come over the next year.

Thank you.

Okay.

Thank you I'm showing no further questions in the queue at this time I would now like to turn the call back over to Francis Davidson for any closing remarks.

Well I just wanted to say, thank you to all of our listeners and participants for joining the call today.

We look forward to speaking with you in early 2024 and share our fourth quarter and full year of 2023 results. So thanks very much everyone for dialing in.

This concludes today's program. Thank you all for participating you may now disconnect.

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Good day and welcome to the Saunders third quarter earnings call. At this time, all participants are in a listen only mode.

After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will there.

<unk>, an automated message advising your hand as rate so low.

<unk>. Your question Press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your Speaker early Ducommun senior director of strategic Finance and Investor Relations. Please go ahead.

Thank you operator, good afternoon, everyone welcome and thank you for joining us to discuss <unk> third quarter 2023 financial results.

In EMEA on the call is Francis Davidson co founder and Chief Executive Officer, and Dan <unk> Chief Financial Officer.

Our third quarter shareholder letter and Form 10-Q were issued today after the close of the market. These materials are available in the Investor Relations section of our website at Investor Doc Finder Dot com.

We encourage you to reference the detailed information contained in those materials during our call.

<unk>, we begin I would like to remind everyone that our prepared remarks, and the Q&A session to follow contain forward looking statements under federal Securities laws.

These statements are subject to numerous risks and uncertainties as described in our SEC filings, which could cause future results to differ materially from those expressed in or implied by our remark comments are material, including our shareholder letter.

Statements in our remarks comment immaterial, our effective today, only and will not be updated as actual events unfold you can find reconciliations of all non-GAAP financial measures referred to in our remarks within our shareholder letter and the Investor Relations section of our website with that I will turn the call over to Brenda.

Thanks Ali good afternoon, everyone and thank you for joining us today I would like to start by thanking all of our Sondra employees, our guests and our partners for their support as we strive to fulfill our mission to revolutionize hospitality through design and technology, making the world a better stays open to all to provide a few highlights from the third quarter revenue grew 29% year over year driven by a.

33% increase in Bookable mikes on a 31% increase in overall <unk> units.

With a 2% decline in ADR to $185, coupled with a 1% decline in occupancy rates $2, 83%.

We also produced all of this growth with a 14% improvement in total overhead costs and a 9% improvement in total property level expenses per occupied might be.

These accomplishments resulted in a 60% improvement in our free cash flow compared to last year from negative 39 million to negative $16 million and a 21% improvement in free cash flow margin from negative 31% to negative 10%.

Im incredibly proud of the progress, we're making toward our goal of sustainable positive free cash flow. We're pulling every lever at our disposal to rapidly deliver on this objective Don will share more details about our results with you in a few minutes, but first I'd like to dive a bit deeper into our revenue and supply growth as well as the portfolio optimization program we're under.

Taking to improve our current portfolio economics.

Across all of our Thunder properties Revpar declined 3% year over year, our comparable properties Revpar, which is calculated in line with industry peers and looks at Revpar for some of the properties that were life. Prior to January one 2022 grew 3% year over year. Several factors came into play this quarter, including broader travel industry trends product mix between.

<unk> hotel and apartment style properties geographic mix cohort mix and the impact of our corporate sales and pricing strategies, starting with the product mix. We continued to see relative strength in our hotel product and moderate pricing pressure for our apartment product on a comparable property basis, our hotel product grew revpar by 8% year over year while.

Our apartment product Revpar grew by 1%. This bifurcation is representative of the market trends with hotel revpar growing year on year, but alternative accommodation revpar decreasing across our geographies, particularly in North America.

Hotels, now make up 40% of total live units compared to approximately 30% a year ago.

While our hotel revpar growth outpaced that of our apartment product Revpar for our hotel properties tends to be slightly lower than our apartment style properties all else equal the shift towards hotel properties had a roughly 1% negative impact on our year over year Revpar growth.

From a profitability perspective hotel properties also tend to have lower rent and property level expenses to offset the low revpar.

This trend is consistent with broader industry trends.

According to the U S Travel Association Americans travelling abroad into July exceeded pre pandemic levels by 10%, while inbound travel still lags pre pandemic levels by roughly 20%.

Our Revpar was also negatively impacted by some slower starts in a few of our recent north American property openings.

We've been investing in local sales teams in markets, where the assets require them and we're seeing early signs of success from this initiative. Additionally, we're seeing challenges in properties in Mexico City, which make up over 10% of the cohort of unit that went live in the last year.

We're planning to partner with property owners there to address these challenges by our portfolio optimization program, which we'll discuss in more detail shortly.

Our BTB sales efforts are regaining momentum our new VP of sales joined us in Q3, and we're seeing an acceleration in our forward bookings, but we expect the impact on earned revenue to ramp over the next few quarters as corporate sales tend to have longer booking windows.

Success in our corporate sales segment should enable us to bolster revpar and are primarily urban markets and in particular during weekdays.

And finally this quarter, we leaned into a pricing strategy that focuses on building a better base of occupancy earlier in the booking window and enables us to have greater pricing power over the rest of the booking window overall, our experimentation and early results suggest this approach should yield higher ADR, we leaned into the strategy more aggressively in late July and expect to see more of it.

Impact in the coming quarters.

We also continue to make progress on other revpar initiatives, we've previously highlighted including our elevated visual merchandising platform and ancillary revenue initiatives.

Moving on to the supply side, we're pleased to report our live units grew 31% year over year driven by continued strong conversion from our contracted units to lie peanuts. However, our total portfolio of live units plus contracted units did declined 10% year over year and 2% sequentially.

Even after excluding these units we continue to have a notable backlog of contracted units representing a strong growth pipeline of nearly 50% of our live unit counts.

This is in line with our strategy set out in June 2022 to proactively reduce our planned finding space and focused primarily on growth driven by the conversion of our contracted units.

As we strive to grow topline revenue. We also continue to scrutinize future lease hold obligations, particularly on underperforming assets, while the majority of our properties are profitable some of our properties do have negative margins with that we're collaborating with external advisors to implement a portfolio optimization program working to understand how we can mitigate losses related to.

These underperforming properties assessing our portfolio of rents relative to current operations and the existing market rents and exploring alternative solutions to minimize their drag on our bottom line.

We're engaging our landlords to work towards solutions that certain properties, where both parties may benefit from revised commitments, we value the collaboration with our landlords as we will seek mutually agreeable outcomes as part of the strategic initiative.

It's never the intent for an operation to underperform, but in today's challenging marketplace. We must appreciate that our proactive approach to asset management is more important than ever.

Before turning it over to norm I want to highlight several new additions to the world class team we're building at Thunder.

First I am thrilled to welcome Tom Buoy, and Simon Turner to our board Tom.

Tom and Simon are among the most accomplished executives in the hospitality industry. They both bring deep expertise and experience in areas, including executive leadership operations revenue generation and real estate I'm also pleased to announce we've been recently joined by Adam Bowen as Chief Accounting Officer, Katie Potter as General Counsel and chat Fletcher Vice President of sales each of these individuals brings experience in <unk>.

That will be valuable assets as we continue executing on our plan to achieve sustainable positive free cash flow as soon as possible.

And with that I'll turn the call over to our Chief Financial Officer <unk> done.

Thank you Frances Hello, everyone and thank you for your patience as we took a few more days to finalize our close process and release our results.

We're pleased to report our best free cash flow quarter to date as a public company demonstrating continued progress on our path to achieving sustainable positive free cash flow in the near term and industry, leading unit economics over the long term.

I will first provide a brief overview of our third quarter financial results and then take you through guidance before opening the call to questions.

Free cash flow margin also improved year over year, reaching negative 10% compared to negative 31% in the third quarter of 2020.

We generated $161 million.

Representing a 29% increase compared to Q3 of 2022.

As Francis mentioned key topline performance metrics improved year over year, including light units Bookable lights and Akamai is.

While we experienced a slight decline in revpar.

We ended the quarter with approximately 11800.

Units, representing 31% growth year on year, and we reached a milestone of over 1 million Bookable diets in Q3, an increase of 33% year over year driven by underlying unit growth.

Occupancy remains strong at 83% in the third quarter, a slight decline from the 84% in Q3 of 2022, even as we saw significant growth in book room nights.

Since Francis went into details on our revenue performance I will now focus my remarks on the cost side.

For Q3, 2023 total costs and operating expenses increased by 17% year over year to $218 million, which is inclusive of a $5 million of stock based compensation expense.

The 17% increase in total costs on the back of a revenue increase of 29% and Bookable that's growth of 33% illustrates the strong improvements we've been driving in our operating leverage property level costs grew by 19%, while our non property level of operating expenses were lower by <unk> <unk>.

14% compared to the prior year.

This operating leverage improvement in turn drove our trailing 12 month cash contribution margins of 19% in the most recent quarter compared to 17% in Q3 of 2022.

We remain focused on driving leverage across all cost categories to support our goal of achieving sustainable positive free cash flow as soon as possible.

Princess already spoke about our efforts to rightsize, our largest expense item in the cost of our leases.

We're a large scale initiatives currently underway aiming to improve our individual property economics to meet our targeted profitability levels they were underwritten.

We remain relentlessly focused on driving efficiencies across our property level costs.

We've outperformed our cost targets for the first three quarters of 2023 due to the success of multiple direct cost reduction initiatives.

We're also continuing to identify non property level cost savings as illustrated by a 14% decrease in this category compared to the prior year.

As a reminder, we have reduced our corporate workforce over 30% on a net basis since going public in early 2022.

Continuing to press hard to reduce our non head count expenses as well.

Driving consistent improvements in our cost structure is not integrated in our normal operating rhythm across the enterprise.

As discussed in our Q2 call in August.

Diluted the introduction of more common non-GAAP profitability metrics to make it easier to compare with our peers.

As such we plan to start using adjusted EBITDA, and adjusted EBITDAR and place US cash contribution margin beginning with our Q1 2024 earnings release.

Turning to the balance sheet as of September 30, we had $207 million in cash cash equivalents and restricted cash and $197 million of total debt.

As you've seen in our 8-K last week, we've worked with our lenders to amend our credit agreements in the wake of the <unk> earlier this year.

We're happy with the outcome, which allows us to regain some flexibility with the expansion of the banks, we can use to issue letters of credit and the extension of the Pik feature of our term loan in exchange for a downpayment, reducing our gross debt level.

We appreciate the partnership we have with our lenders.

Regarding guidance note that the ranges, we are providing for revenue and free cash flow for the fourth quarter of 2023 exclude any future impact of the portfolio optimization program that we discussed earlier on this call which could be material.

Improvements versus the fourth quarter of 2022.

This implies a slight decline from the previous revenue range for the second half of the year provided at our last quarter call due to the factors that Francis alluded to earlier.

For free cash flow, we expect to between negative $39 million and negative $29 million in the fourth quarter.

At the midpoint of the guidance range provided this translates to a $58 million or 33% year over year improvement in free cash flow for the full year of 2023.

We entered with our amended credit agreements.

Partially offset by continued progress on cost reduction initiatives.

Note that while Q1 2023 free cash flow sequentially worsened compared to Q4 of 2020, we.

We do not expect this pattern to repeat itself going into 2024.

As we continue to ramp our corporate sales and collection processes and better scrap payments of certain annual contracts throughout the year.

We do expect a sequential improvement in free cash flow from Q4 of 2023 to Q1 of 2024.

As a reminder, the same as past quarters. Our guidance is based on our best knowledge available from internal data and third party forecasters and does not contemplate an extreme slowdown in the market.

Our guidance framework also does not incorporate any future impact of our portfolio optimization program, which may be material.

Given that we have R&D early stages and there are still many unknowns about the magnitude and timing of the revenue and free cash flow impacts.

With that we're now happy to take your questions operator.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced.

<unk> Your question Press Star one again.

While we compile the Q&A roster.

And our first question will come from the line of Ron Josey with Citi. Your line is open.

Hey, guys. This is Robert on drawn next ticket question.

Quick question on gross margins came in a little bit lower than expected in the quarter can you guys talk to kind of some of the main drivers behind that niche.

And then perhaps comment on how you see margins trending over the next few quarters here.

Hey, I'll take that question. This is not in terms of the gross margins.

I think this is mostly driven by the Revpar to meeting just a little bit lower than than where it was last year and the <unk>.

What our expectations were as you saw the revenue results came in.

Towards the low end of the range in terms of the cost structure of the business, we continue to see our.

EBITDA margin improving our cost per unit is coming down so.

We're pleased with the success, we've seen so far and the progress we've made on the cost side, but again. This remains in terms of GM percentage subject to the <unk>.

Volatility with Revpar, then again, so going forward I think it's the same dynamic continues work on the cost side and work on improving our revpar to sustain gross margins.

Understood. Thanks, a lot.

You bet.

Thank you one moment for our next question.

And that will come from the line of Nick Jones with JMP Securities. Your line is open.

Great. Thanks for taking the questions I guess two.

And just as we think about the total portfolio versus the live units.

Yes, I know that total portfolio numbers coming down for kind of you're pulling some some of the properties out of that.

Is this kind of the right level to think about it going forward.

Another live units youre kind of approaching 70%.

Hello.

Our percent of the total fully alive.

Do we kind of expect this number to stagnate for a little bit as you focus on free cash flow.

From here and then I guess the second question is how are you feeling about the balance sheet.

Kind of given the macro environment and kind of what you see ahead.

From here thanks.

Yes, thanks, so much Nick pregnancy, I'll take the first question.

So we're not seeking out to go and sign a lot of new properties. We're just focused on making sure that the ones that have been signed were expenses already been.

Deployed to go and identify these assets and open them.

That those are done successfully and of course now also working on our portfolio optimization program and so our real estate teams effort is really focused on <unk>.

Ensuring that the portfolio economics as a whole are as strong as possible.

And that we work with our landlord partners to to go and make these underperforming assets perform.

I also want to point out that we've got still.

Early 50% embedded growth, which we think is really exciting frankly, a lot of properties that.

That we think are going to be really great assets for the brand for the guest experience and also.

<unk> add more dollars to.

The contribution to alter the business are going to open in the next couple of years.

And so we think that this industry leading growth is actually quite exciting in the growth rate is not an issue for the business at this point, we're growing quite rapidly. It's really just doing everything we can to go and accelerate.

The timeline to cash flow positivity.

And then.

On the live unit growth side, we just posted in the third quarter, a 31% year over year growth of <unk> and so we're really happy with with that pace and we will keep on focusing the team on improving the free cash flow performance of the business in the near term.

And I will take the balance sheet question. So.

So you saw we had a healthy cash cushion at the end of the quarter you see also the sustained progress we've been making on our free cash flow products.

That trajectory I think when you look at that as the visual is very telling it's up into the right and.

We're working hard on our plan to keep that going rollout units as Francis just talked about there is a lot of embedded growth in the model that we feel we feel good about <unk>.

Unit economics, so reducing property level costs, including improving demand profile of these properties and then controlling preopening costs and overhead as we have in the past and that's the recipe for us to continue to improve free cash flow. When you contrast that with where we're at with the balance sheet, we see.

Second trajectory, we're comfortable with.

Great. Thank you both.

Thank you one moment for our next question.

And that will come from the line of Jed Kelly with Oppenheimer. Your line is now open.

Hey, great. Thanks for taking my question, maybe just give us an update on how your revpar initiatives and the technology around your revenue management is trending and then I know it's still.

Relatively early and you don't want to guide next year, but can you sort.

Sort of give us.

What youre sort of looking for and what you.

Thanks for 'twenty four it looks like thanks.

Thanks, So much Chad no I think I'll start with the revenue management question I think it is an incredibly important topic. It's a very important lever for the profitability of the business and frankly I think that we have we have room for improvement on our pricing strategy. One of the changes that we've recently initiated is to ensure that our pricing trajectories are.

More stable and by that I mean that within seven days or 14 days before.

Target dates we would go and reduce price to drive more occupancy and we actually think thats about right.

The right approach and building a base of occupancy earlier into the booking window, but then holding price as we approach that date of arrival is actually.

A better strategy to drive stronger ADR and stronger Revpar and so that's a major change that we're initiating I think there was some data where we've been selling out a little bit too early and that's cause.

Our capacity to yield optimally to be impaired.

And so those are just a few tweaks that that you can expect that we're going to we're going to put to work in the next few few months and quarters.

All of that of course is powered by by a lot of technology. We've built much of this technology in house, we're not afraid to also benchmark our technology versus third parties and to always explore whether.

Our solutions are the most adequate adequate.

But really the biggest opportunity as we see it in the near term as those as this price trajectory.

<unk> and ensuring that we can optimally drive revpar through through higher ADR.

And Joe I'll take your question on 24, obviously, it's still too early for US to guide on 'twenty four quarterly we're finalizing our 2004 plans as we speak we still got a few more weeks to go to but all of that up.

The other thing is the property optimization program the portfolio optimization program that census described earlier. This is very much in the European Union.

We feel confident it will improve the trajectory meaningfully but for now there's too many unknowns for us to embed any guidance based on that.

The last thing I'll say is similar to my answer to the prior question.

Got you back to the trajectory you see the trajectory of improvements I illustrated earlier that the ingredients behind that improvement.

Those we expect to continue to work on and sustained going forward right now that's how we're framing 24 at a high level and a continued improvement in the trajectory.

And working on the key levers to deliver that.

No formal guidance at this point.

More to come over time.

Thank you.

Hey, guys.

Thank you I'm showing no further questions in the queue at this time I would now like to turn the call back over to Francis Davidson for any closing remarks.

Well I just wanted to say, thank you to all of our listeners and participants for joining the call today.

We look forward to speaking with you in early 2024 and share our fourth quarter and full year of 2023 results. So thanks very much everyone for dialing in.

This concludes today's program. Thank you all for participating you may now disconnect.

Sonder Holdings Inc. Q3 2023 Earnings Call

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