Inspirato Inc

NASDAQ:ISPO

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by, and welcome to Inspirato Third Quarter 2024 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Kyle Sourk, Investor Relations. Please go ahead.

[Kyle Sourk, executive]

On today's call, we have Chairman and CEO, Payam Zamani; CFO, Robert Kaiden; President, David Kallery; and our incoming CFO, Michael Arthur. Yesterday afternoon, we issued our press release announcing our third quarter 2024 results. As a reminder, some of today's comments are forward-looking statements. These statements are based on assumptions and actual results could differ materially. In addition, during the call, we will discuss non-GAAP measures, which are useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for 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'd like to turn the call over to our Chairman and CEO, Payam Zamani.

[Payam Zamani, executive]

Thank you, Kyle, and thank you, everyone, joining us this morning. As we sit here today, nearly 3 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.

After countless conversations with employees and members, both new and long tenured as well as experiencing the Inspirato way of luxury travel firsthand, my original investment thesis has not only been validated but reinforced. Inspirato is a great company with an incredible value proposition and mission of delivering exceptional experiences for our members and their families. However, I believe the company does in its own way over the past few years. We became fixated on new product offerings, obsessed with running a subscription business and committed to growing purely for growth's sake.

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. 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. For instance, year-to-date, we brought on 11 new luxury homes. We created 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 Inspirato-only experiences.

Since I joined, we've greatly improved the foundation from which we operate. We've refreshed our boardroom, including myself, 4 of our 7 Board members are new, and they bring a fresh and diverse perspective. 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. We've regained compliance with NASDAQ listing requirements. 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 annualized savings. Today, that number has grown to more than $40 million.

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. With these 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. Within the construct of operating a luxury club, we will undertake several key initiatives.

First, the focus of our sales efforts will be on our flagship offering, Inspirato Club. So we will continue to offer Inspirato Pass and Invited as complementary products for our members. As we look to improve our retention and member LTV, 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 those right type of members. We also have a proven track record of growth and high retention under this model.

Second, we will act like the luxury brand we are. We will continue to deliver value through our first-class services and world-class portfolio as opposed to a luxury offering discounted in multiple different ways. 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. Finally, one thing we won't change is our focus on the member experience. In fact, we plan to make investments to enhance it.

Inspirato 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. Profitability represents a lifeblood of all well-run businesses. And with that in mind, we will have a relentless focus on improving our margins. 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 for sustained profitability. Our success will ultimately be measured by our ability to provide a great service to our members while being a highly profitable company. 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.

Finally, before turning the call over to discuss our results for the quarter, I'd like to thank Robert for the incredible work he's done as CFO over the past few years. 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. Robert?

[Robert Kaiden, executive]

Thanks, Payam. Before discussing our third quarter results, I want to emphasize the point Payam just made on better aligning our cost structure with our revenue. 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 Payam mentioned, we've raised our savings target to over $40 million, the majority of which we've already executed. These savings can be categorized into 3 primary buckets; leases, payroll and other operations.

In terms of lease savings, approximately half of our projected lease expense savings is attributable to the early termination of a multiyear contract associated with a number of unprofitable units in one geographic location. Removing these leases, properties not popular with our member base is incredibly beneficial as it is expected to improve our profitability outlook.

In terms of payroll, we anticipate approximately $18 million of annualized savings, primarily as a result of the reduction in force that took place in August. Other operations, which primarily includes professional services and software expenses, is expected to account for approximately $10 million of annualized savings as we streamline and renegotiate our outside services.

Turning to the third quarter. Total revenue of $69 million reflected 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 as the changes we made to the pass products better aligned with our profitability goals. In total, we exited the third quarter with approximately 1,500 pass members and 10,200 club members.

Travel revenue increased 9% from the second quarter as we experienced a 15% increase in paid residents nights delivered. However, on a year-over-year basis, travel revenue decreased 13%, primarily driven by an 11% decrease in the number of total nights delivered. In terms of residents travel, we continue to see strong levels of paid nights per member. In total, paid resident nights have decreased approximately 3% year-over-year, which is less than that of our member base, while our average nightly rates for all paid residents delivered came in slightly above $1,600 in the third quarter of each of 2023 and 2024.

Sequentially, paid resident nights delivered increased approximately 14%, whereas nightly rate increased 6% on average. Meanwhile, total occupancy was between 70% and 73% in all periods. 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 monthly rates.

Turning to cost of revenue, we continue to realize the benefits of our portfolio optimization efforts. 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. 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 mix shift away from net -- from leased hotels toward net rate hotel agreements.

Further, our lease expenses plus fixed costs year-to-date have decreased 24% compared to 2023. 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 compares to gross margin of $21 million in the third quarter of last year, which included a $4 million asset impairment on the same properties.

Cash operating expenses in the third quarter were $27 million compared to $39 million in the third quarter of 2023, representing a 31% decrease. As Payam referenced, we have made strides in better aligning our expenses to our current revenue levels and actions we have already taken, but we have not -- but have not yet impacted our financial results 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. 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.

We ended the quarter with approximately $24 million of 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 onetime transaction-related and other nonrecurring costs that have strengthened our position moving forward. It's worth emphasizing that we have approached the third quarter as a key investment period to set ourselves up for future success.

Year-to-date, our cash balance has decreased by $18 million compared to a decrease of nearly $31 million through 3 quarters in 2023. 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 burns through 3 quarters is $28 million lower in 2024 than in 2023. 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.

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 plans.

[Michael Arthur, executive]

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. 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.

Second, our cost structure is now aligned with our revenue base. On our last call, we mentioned a target of approximately $25 million in annualized savings from reduced lease expenses, payroll and non-payroll savings. 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. This includes the early termination of poor performing highly seasonal leases that Robert referenced, which contributes to almost 20% of our year-to-date EBITDA loss. Third, we have improved our EBITDA performance on a year-over-year basis in each of the last 4 quarters.

Through 9 months, we are at an adjusted EBITDA loss of approximately $8 million compared to $24 million last year. We fully expect the trend of EBITDA improvement to continue into 2025 through a more streamlined and simple business model. Last and most importantly, our cash burn year-to-date has improved significantly compared to last year. While we are not yet where we want to be, we are pleased with the improvements we have made in our cash flow dynamics. As Payam mentioned, we have improved our capital structure and access to future capital if needed.

In fact, during Q4, we'll be receiving an incremental $5.5 million in financing, including $2.5 million related to the One Planet Group exercising their option to increase their investment as outlined in the original agreement. Given these improvements, we are now on a 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.

Before we wrap, I want to personally thank Robert for his level of service and dedication in Inspirato 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.

[Operator]

[Operator Instructions] And our first question comes from Mike Grondahl from Northland.

[Mike Grondahl, analyst]

Just first question on the $25 million of OpEx saves going to $40 million. So I don't know if you could rank it between leases, payroll and other. Maybe where the most incremental savings came from in those 3 categories?

[Michael Arthur, executive]

Mike, this is Michael. Thanks for the question. I would characterize the bulk of the incremental savings up to $25 million is in the non-payroll operating costs that kind of Payam alluded to. As we dug in further, we found real opportunity to more streamline our cost structure outside of leases and non-payroll, and that primarily pertaining to nonmember-facing activities like software spend and nonprofessional services fees.

[Mike Grondahl, analyst]

Got it. And I think you said what the total annual save there is $10 million?

[Michael Arthur, executive]

Correct.

[Mike Grondahl, analyst]

Got it. Any update on Capital One in getting that started?

[David Kallery, executive]

Mike, this is David Kallery, President. We partnered with them a year ago. And obviously, the tech integration was a tremendous lift for both teams, and we completed that. Having said that, our focus right now is really on continuing to improve our operating efficiencies, capturing that $40 million that we've spoken about in annualized cost savings and ultimately getting to profitability and positive free cash flow.

I think 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.

[Mike Grondahl, analyst]

That makes sense. How are you guys feeling about -- I don't know if the right word is an inflection in club or just kind of the trend and the feedback with club members? 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, executive]

Michael, this is Payam. Yes, we are definitively going to pursue the club membership versus 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, but it actually is a relatively a significant thing.

When you join a club, typically you join a club because that's a commitment you want to have for the long term. It's not like joining a country club. -- whereas the subscription could be something that you subscribe to, but then you may un-subscribe and then you may come back and so on. And in the case of the club program, there is going to be an initiation fee that will range from $10 million to -- sorry, $10,000 to $15,000. It will start at about $10,000 and then grow to about $15,000 by Q2. And then there is an annual due that will be just over $5,000 a year. And the combination of that, we think will give us access to the right kind of club members that will represent the kind of stability that this company will need and it has had in the past.

Michael, anything you want to add to that?

[Michael Arthur, executive]

Yes. A couple of other things, Mike. And Payam alluded to this in his prepared remarks, but we're going back to our roots in this product structure. And we've seen these members be a more stickier member base than our subscription type products. They retain at a higher clip, they have a higher LTV, both because of the retention, but also their spending patterns. 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 the most recent couple of quarters, we've seen sequential improvement in the past 4 quarters. We've also seen solid recent data points in both in new sales and optimistic about kind of returning to growth in the future, but obviously, we'll still take probably into the first half of 2025.

[Mike Grondahl, analyst]

And just so I understand it, so under that newer model, we'll call it, but the old legacy model, the initiation fee will be $10,000, growing to $15,000 and then annual dues will be $5,000. Did I hear those right?

[Michael Arthur, executive]

Those are approximate figures, yes.

[Mike Grondahl, analyst]

Approximate. And is there a start date for this or has it already started?

[Michael Arthur, executive]

We have already announced that, and it will officially go into effect as of Jan 1.

[Mike Grondahl, analyst]

Okay. January 1, 2025. Okay. And then lastly, just a couple of financial questions. I think you said for '25, you would not expect revenue growth, but you'd expect an expansion in gross margin and adjusted EBITDA margin. Any other color? And I think you said adjusted EBITDA, was it breakeven or profitable in 1Q '25?

[Payam Zamani, executive]

So this is Payam. I guess the best way to put it is that I think that growth can be measured in many different ways. And I'm a bit more old school, I think, when it comes to operating a business that I think that growth without profit is kind of meaningless. And so we are very focused on profitability and maximization of margins and EBITDA -- now if revenue growth comes as a part of that, albeit, but I don't expect revenue growth next year. 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. 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 to be profitable and cash flow positive, profitable on an adjusted EBITDA basis and cash flow positive during Q1 of 2025.

[Mike Grondahl, analyst]

Okay. That's helpful. And then lastly, Q4 '24 seasonally, it's a slower quarter. It's a down quarter from Q3. Is that the right way to think about Q4, the current quarter we're in?

[Michael Arthur, executive]

Yes, that's the right way. So Q3 outside of kind of the holiday period is a slower travel quarter for us. But at the same time, on 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.

[Mike Grondahl, analyst]

So far, it seems pretty productive.

[Operator]

And I'm 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, executive]

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 for Q1 and 2025. And until then, wishing you all the best. Thank you.

[Operator]

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