Q3 2024 Inspirato Inc Earnings Call
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Speaker Change: Good day and thank you for standing by and welcome to Inspirado 3rd Quarter, 24 earnings caught call. At this time, I'll participate in the list and only mode. After the speaker's presentation, I'll be a question and answer session.
Speaker Change: That's the question during this session, you only need to press star one, one on your telephone
Speaker Change: You will then hear an automated message about in your hand as raised.
Speaker Change: To a draw your question, please press star one one again. Please be advised at today's conference. It's being recorded. I would not like to hand the conference over to your speaker today. Kyle Sourk and best of relations. Please go ahead.
Kyle Sourk: Thank you, and good morning. On today's call we have Chairman CEO, Piam Zemani, CFO, Robert Kaiden, President David Kallery, and our incoming CFO Michael Arcer.
Speaker Change: Yesterday afternoon we issued our press release announcing our third quarter 2024 results.
Speaker Change: As a reminder, some of today's comments are forward-looking statements. The statements are based on assumptions and actual results could differ materially. In addition, during the call we will discuss non-gap measures, which are useful in evaluating the company's operating performance.
Speaker Change: These measures should not be considered in isolation or as a substitute for a financial result prepared in accordance with gap.
Speaker Change: Reconciliations of these measures to the most directly comparable gap measures are included in our earnings release.
Speaker Change: With that, I'd like to turn the call over to our Chairman and CEO, Payam Zamani.
Payam Zamani: Thank you, Kyle, and thank you everyone joining us this morning.
Payam Zamani: As I sit here today, nearly three months into my tenure as CEO, it's time that I provide my impressions of the business as well as outline some of our plans for the company moving forward.
Payam Zamani: After countless conversations with employees and members, both new and long-tenured, as well as experiencing a sprawl of luxury travel first-hand,
Payam Zamani: My original investment thesis has not only been validated, but reinforced.
Speaker Change: His father is a great company with an incredible value proposition and mission of delivering exceptional experiences for members and their families.
Speaker Change: However, I believe the company got in its own way over the past few years. It became fixated on new product offerings, obsessed with running a subscription business, and committed to growing purely for growth's sake.
Speaker Change: This led to a more transient member base, who have often been offered a luxury experience at a discounted price, deviating from the financial requirements of a true luxury club experience.
Speaker Change: And for a long time, this has been coupled with an overblown cost structure. These decisions impact our financial performance while also overshadowing a number of meaningful accomplishments.
Speaker Change: Signature hotel partnerships with iconic luxury brands such as Montage, the Waldorf Astoria, and Fairmont. And most importantly, we've maintained an industry-leading NPS score of approximately 70 amongst our members staying in our homes and enjoying our Espresso-only experiences.
Speaker Change: Since I joined, we've greatly improved the foundation from which we operate. We've refreshed our boardroom, including myself, four of our seven board members are new and they bring a fresh and diverse perspective.
Speaker Change: We've cleaned up our capital structure and improved our trading fundamentals by converting all of our Class B shares into Class A. I really cannot reiterate enough how important this has been.
Speaker Change: We've regained compliance with NASDAQ listing requirements.
Speaker Change: And we've taken immediate action to better align our cost structure with our revenue. On our last call, as we mentioned, we had identified cost-cutting measures expected to result in approximately $25 million of annual life savings. Today that number has grown to more than $40 million.
Speaker Change: We'll give more details on this in a moment, but I think it's really important to mention that the reason this turned out to be a much higher number is simple. As I started digging in with the team, it was clear that we had a much larger opportunity to reduce expenses than I had anticipated.
Speaker Change: We did meaningful changes that are complete now, and many of the cost-cutting initiatives implemented. We can turn our attention to the future and our 2025 plans, in which our primary focus will be to operate as a profitable luxury travel club.
Speaker Change: Within the construct of operating a luxury club, we will undertake several key initiatives.
Speaker Change: First, the focus of our sales efforts will be on our flagship offering, Inspire the Club.
Speaker Change: So, we will continue to offer Inspire the Path and Invited as complimentary products for our members.
Speaker Change: As we look to improve our retention and member LTV,
Speaker Change: We will no longer offer month-to-month and other short-duration subscriptions. Instead, we will return to offering a club membership with initiation fees and annual dues, similar to how most clubs operate. This is the way we operated for our first 10 years and is incredibly important in helping us attract and retain the right type of members.
Speaker Change: We also have a proven track record of growth and high retention under this model.
Speaker Change: Second, we will act like the luxury brand we are. We will continue to deliver value.
Speaker Change: to our first-class services and world-class portfolio as opposed to a luxury offering discounted in multiple different ways.
Speaker Change: As part of this, we will be replacing our existing rewards program, which is basically a program designed to discount our offering to a new loyalty program in the coming months. The new loyalty program will be focused on enhancing the experience of our best member clients.
Speaker Change: Finally, one thing we won't change is our focus on the member experience. In fact, we plan to make investments to enhance it.
Speaker Change: His brother will be the best-in-class luxury club. Our new approach and our anticipated financial strength will give us the ability to make the investments needed to remain a cutting-edge offering in a very exciting and growing space.
Speaker Change: Profitability represents a lifeblood of all well-run businesses, and with that in mind, we will have a relentless focus on improving our margins.
Speaker Change: I'm not concerned with top-line growth. In fact, I don't expect it next year. However, I do expect meaningful gross margin and EBITDA margin expansion that will position us to sustain profitability.
Speaker Change: Our success will ultimately be measured by our ability to provide a great service to our members while being a highly profitable company.
Speaker Change: At this point, I can say with confidence that we intend to be profitable on an adjusted EBITDA basis in Q1, and we will also expect to be cash flow positive.
Speaker Change: Finally, before turning the call over to discuss the results for the quarter, I'd like to thank Robert for the incredible work he's done as CFO over the past few years.
Speaker Change: While his list of accomplishments and contributions is too lengthy to go through at this moment, among the finest was the training and succession planning of our new CFO, Michael Arthur. Bravo.
Speaker Change: Thank you for your time.
Michael Arthur: Before discussing our third quarter results, I want to emphasize the point Kaiden just made on better aligning our cost structure with our revenue.
Michael Arthur: During our last earnings call, we identified a target of approximately $25 million in annualized cost savings following the leadership transition. After further effort, as Biden mentioned, we've raised our savings target to over $40 million, the majority of which we've already executed.
Michael Arthur: These games can be categorized into three primary buckets, leases, payroll, and other operations.
Michael Arthur: In terms of lease savings, approximately half of our projected lease expense savings is attributable to the early termination of a multi-year contract associated with a number of unprofitable units in one geographic location. Removing the lease is...
Michael Arthur: Properties not popular with our member base is incredibly beneficial as it is expected to improve our profitability outlook.
Michael Arthur: In terms of payroll, we anticipate approximately $18 million of annualized savings, primarily as a result of the reduction of force that took place in August.
Michael Arthur: Other operations, which primarily include professional services and software expenses, is expected to account for approximately $10 million of annualized savings as we streamline and renegotiate our outside services.
Michael Arthur: Turning to the third quarter, total revenue of $69 million reflects a 3% increase from the second quarter and a 16% decrease year-over-year, primarily driven by decreased subscription revenue as a result of a decrease in the number of PASS members. As a reminder, this decrease was planned for, and the changes we've made to the PASS product better align with our profitability goal.
Michael Arthur: In total, we exited the third quarter with approximately 1,500 pass members and 10,200 club members.
Michael Arthur: Travel revenue increased 9% from the second quarter as we experienced a 15% increase in paid residence nights delivered. However, on a year-over-year basis, travel revenue decreased 13% permanently driven by an 11% decrease in the number of total nights delivered.
Michael Arthur: In terms of residence travel, we continue to see strong levels of paid nights per member.
Michael Arthur: In total, paid residence nights have decreased approximately 3% year-over-year, which is less than that of our member base. While our average nightly rate for all paid residents delivered came in slightly above $1,600 in the third quarter of each of 2023 and 2024.
Michael Arthur: Sequentially, paid residence nights delivered increased approximately 14%, whereas nightly rates increased 6% on average. Meanwhile, total occupancy was between 70% and 73% in all periods.
Michael Arthur: From a hotel standpoint, which is a smaller portion of our travel revenue than that of our residences, we had a decrease in total paid nights, but an offsetting increase in average nightly rates.
Michael Arthur: Turning to cost of revenue, we continue to realize the benefits of our portfolio optimization efforts.
Michael Arthur: In the third quarter of 2024, cost of revenue was approximately $50 million, a 14% improvement compared to nearly $58 million in the third quarter of last year, and 3% lower than the second quarter of 2024.
Michael Arthur: Most of this improvement is due to a reduction in our leases and related fixed cost expenses, offset by some increases in booking costs due to our mixed shift away from lease hotels toward net rate hotel agreements.
Michael Arthur: Further, our lease expenses plus a fixed cost year-to-date have decreased 24% compared to 2023.
Michael Arthur: Gross margin for the quarter was $49 million and included a gain on lease termination of nearly $30 million related to the early termination of those poor performing assets we discussed previously. This compared to a gross margin of $21 million in the third quarter of last year, which included a $4 million asset impairment on the same properties.
Michael Arthur: Cash operating expenses in the 3rd quarter were $27 million, compared to $39 million in the 3rd quarter of 2023, representing a 31% decrease.
Michael Arthur: As time referenced, we have made strides in better aligning our expenses to our current revenue level and actions we have already taken, but have not yet impacted our financial results, but will result in further improvements in coming quarters. We believe we are making steady progress towards a more sustainable run rate as we move into 2025.
Michael Arthur: In total, we generated an adjusted EBITDA loss of approximately $3 million compared to a loss of approximately $9 million in the third quarter of 2023. In fact, the third quarter is the fourth consecutive quarter in which we've improved our EBITDA profile on a year-over-year basis.
Michael Arthur: We ended the quarter with approximately $24 million in cash, down $5 million compared to the second quarter. This quarter included the $10 million investment by One Planet Group and also $4 million of one-time transaction-related and other non-recurrent costs that have strengthened our position moving forward.
Michael Arthur: It's worth emphasizing that we have proposed the third quarter as a key investment period to set ourselves up for future success.
Michael Arthur: Year-to-date, our cash balance has decreased by $18 million compared to a decrease of nearly $31 million through three quarters in 2023.
Michael Arthur: However, when excluding financing activities each year, $10 million for the One Planet Group in 2024 and $25 million from Capital One in 2023, our true operating cash flow through three quarters is $20 million lower in 2024 than in 2023.
Michael Arthur: This 50% improvement is not only a strong testament to the portfolio optimization work and efficiency gains throughout the organization, but an indication of further improvements in 2025 as some of our most recent efforts get fully captured.
Michael Arthur: Finally, I'd like to thank the team for their tremendous work and tireless effort over the past few years and I'm excited to introduce our incoming CFO, Michael Arthur, to discuss how these results pertain to our 2025 plan.
Michael Arthur: Thanks, Robert. Before turning the call over to Q&A, I'd like to highlight several financial accomplishments and trends that give me a high degree of confidence heading into 2025.
Michael Arthur: First, we have refocused the business back to being a club. This is designed to offer us higher retention and improved LTV associated with our members.
Michael Arthur: Second, our cost structure is now aligned with our revenue base. For our last call we mentioned a target of approximately $25 million in annualized savings from reduced lease expenses, payroll, and non-payroll savings.
Speaker Change: As Payam and Robert mentioned, we have currently identified and taken action on more than $40 million of annualized cost savings that we expect to fully capture in 2025.
Speaker Change: Third, we have improved our EBITDA performance on a year-over-year basis for each of the last four quarters. Through nine months, we are at an adjusted EBITDA loss of approximately $8 million, compared to $24 million last year.
Speaker Change: We fully expect the trend of UBEDA improvement to continue into 2025 through a more streamlined and simple business model.
Speaker Change: Last and most importantly, our cash flow for New Year's Day has improved significantly compared to last year. While we are not yet where we want to be, we are pleased with improvements we have made in our cash flow dynamics.
Speaker Change: As Payam mentioned, we have improved our capital structure and access to future capital if needed. In fact, during Q4, we will be receiving an incremental $5.5 million in financing, including $2.5 million related to the OnePlanet Group exercising their option to increase their investment, as outlined in their original agreement.
Speaker Change: Given these improvements, we're now on more solid footing with a better trajectory than probably ever before. I'm looking forward to working alongside all of our stakeholders as we execute our 2025 plan and expect to achieve profitability and start generating cash from operations.
Speaker Change: Before we wrap, I want to personally thank Robert for his level of service and dedication inspired during his tenure. Through his leadership, he is leaving the company well-positioned for success in the quarters and years ahead. And with that, I'd like to turn the call over to the operator.
Speaker Change: And thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
Speaker Change: To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And one moment for our first question.
Speaker Change: David Kallery, Robert Kaiden, Eric Grosse, David Kallery, Robert Kaiden, Eric Grosse,
Speaker Change: And our first question comes from Mike Grundahl from Northland. Your line is now open.
Mike Grundahl: Hey guys, first question on the $25 million of OPEC saves going to $40 million.
Mike Grundahl: So...
Mike Grundahl: I don't know if you could rank it between leases, payroll, and other. Maybe, you know, where the most incremental savings came from in those three categories.
Michael Arthur: Hey Mike, this is Michael. Thanks for the question. I would characterize the bulk of the incremental savings up to 25 as in the non-payroll operating costs. That kind of Pym alluded to as we dug in further, we found real opportunity to more streamline our cost structure outside of
Michael Arthur: Leases and non-payroll, and that primarily pertains to, you know, non-member facing activities like software spend and non-professional services fees.
Speaker Change: Got it. Got it. And I think you said, what, the total annual save there is $10 million? Correct. Correct.
Speaker Change: Got it. Any update on Capital One and getting that started?
Speaker Change: Hey Mike, this is David Kallery, President.
David Kallery: You know, we partnered with them a year ago, and obviously the tech integration was a tremendous lift for both teams, and we've completed that.
David Kallery: Having said that, our focus right now is really on continuing to improve our operating efficiencies.
David Kallery: Capturing that $40 million that we've spoken about in annualized cost savings and ultimately, you know, getting the profitability and positive free cash flow.
David Kallery: When we're successful with all of that, we believe that Capital One could be a great part of our future, but for right now, we're really focused on executing the plan.
Speaker Change: Fair. That makes sense. That makes sense.
Speaker Change: How are you guys feeling about, I don't know if the right word is an inflection in club,
Speaker Change: or just kind of the trend and the feedback with club members.
Speaker Change: And maybe talk just a little bit more, are you guys definitively going back to that initiation fee plus annual dues? I know you mentioned that on the call, but if you could just kind of, I don't know, clarify that a little bit.
Payam Zamani: Hi Michael, this is Payam. Yes, we are definitively going to pursue the
Payam Zamani: Co-op membership versus
Payam Zamani: on the subscription program that the company has been selling over the past few years. And I know that for some on the call, the difference between a membership and a subscription may be subtle.
Payam Zamani: It actually is relatively a significant thing. When you join a club, typically join a club because that's a commitment you want to have for the long term. It's kind of like, you know, joining a country club.
Payam Zamani: And initiations fee that will range from $10,000 to $15,000. It will start at about $10,000 and then go to about $15,000 by Q2. And then there is an annual due that will be just over $5,000 a year.
Payam Zamani: And the combination of that, we think, will give us access to the right
Payam Zamani: kind of club members that will represent the kind of stability that this company will need and it has had in the past.
Speaker Change: Michael, anything you want to add to that?
Michael: These members be a more secure member base than our subscription type product. They retain at a higher clip.
Michael: They have a higher LTV both because of retention but also their spending patterns.
Michael: And so we believe through that, through those efforts, it will more stabilize that subscriber or kind of club membership base versus what we've seen historically. But even in the most recent couple quarters, we've seen sequential improvement the past four quarters.
Michael: We've also seen, you know, solid recent data points in both new sales and optimistic about kind of returning to growth in the future, but obviously we'll still take, you know, probably into the first half of 2025.
Speaker Change: and just so I understand it so
Speaker Change: under that newer model we'll call it but the old legacy model the initiation fee will be ten grand.
Speaker Change: growing to $15,000 and then annual dues will be $5,000. Did I hear those right?
Speaker Change: Those are approximate figures, yes.
Speaker Change: Is there a start date for this or has it already started?
Speaker Change: We have already announced that, and it will officially go into effect as of January.
Speaker Change: Okay.
Speaker Change: And then, hey, lastly, just a couple financial questions.
Speaker Change: I think you said...
Speaker Change: for 25 you would not expect revenue growth but you'd expect an expansion in gross margin and adjusted EBITDA margin
Speaker Change: Any other color, and I think you said adjusted EBITDA, was it break-even or profitable in 1Q25?
Speaker Change: So, yeah, this is Pam.
Speaker Change: 1.
Speaker Change: I guess the best way to put it is that...
Speaker Change: I think that growth can be measured in many different ways and I'm a bit more old-school like I think when it comes to operating a business but I think that growth without profits is kind of meaningless.
Speaker Change: And so, we are very focused on profitability and maximization of margins and EBITDA. Now, if revenue growth comes as a part of that, I'll be it, but I don't expect revenue growth next year.
Speaker Change: I think that ultimately we will require revenue growth in order to continue to grow margins and EBITDA, but I don't think that next year will be the year for that. I think next year will be the year for us to be very focused on profitability and margin expansion.
Speaker Change: And we have many vectors for that, many opportunities to go after that. Now, we have not yet finalized our plans for 2025, so I cannot give you anything specific. But at this point, we do expect.
Speaker Change: to be profitable and cash flow positive during Q1 of 2025.
Speaker Change: and the current quarter we're in.
Speaker Change: Hey Mike, this is Michael again. Yeah, that's the right way. So Q3, outside of kind of the holiday period, is a slower travel quarter for us.
Speaker Change: But at the same time, we're an EBITDA basis. We are expecting continued improvement on EBITDA, especially as we talk about that 40 million, much of that starts to get realized in Q4. So we still expect the EBITDA improvement trends to continue while on a seasonality basis, Q4 is a little bit lower on revenue.
Speaker Change: Hey, thanks guys, and good luck with the progress. So far, it seems pretty productive.
Speaker Change: Thank you.
Speaker Change: Thank you and I am showing no further questions. I would now like to turn the call back over to Payam Zamani, Chairman and CEO, for closing remarks.
Payam Zamani: Well, thank you, everyone, for joining the call today. We really appreciate you being with us this morning, and we really look forward to meeting with all of you again in a few months as we share our Q4 and final results for 2024 and provide you with guidance.
Payam Zamani: for Q1 of 2025 and until then, wishing you all the best. Thank you.
Speaker Change: This concludes today's call. Thank you for participating. You may now disconnect.
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