Inspirato Incorporated (NASDAQ:ISPO) Q4 2022 Earnings Call Transcript

Inspirato Incorporated (NASDAQ:ISPO) Q4 2022 Earnings Call Transcript March 16, 2023

Operator: Thank you for standing by, and welcome to Inspirato’s Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentations, there will be a question-and-answer session. As a reminder, today’s call is being recorded. I’d like — now, I’d like to turn the call over to your host, Mr. Kyle Sourk, Investor Relations. Please go ahead.

Kyle Sourk: Thank you, and good morning. On today’s call, we have Co-Founder and CEO, Brent Handler; and CFO, Web Neighbor. Yesterday afternoon, we issued our press release announcing our fourth quarter and full year 2022 results as well as our 2023 guidance, which is available on the Investor Relations page of our website at investor.insperado.com. Before we begin our formal remarks, we remind everyone that some of today’s comments are forward-looking statements, including but not limited to our expectations of future operating results and financial position, guidance and growth prospects, our anticipated future expenses and investments, business strategy and plans and market growth, market position and potential market opportunities.

These statements are based on assumptions and we assume no obligation to update them. Actual results could differ materially. We refer you to our SEC filings for a more detailed discussion of additional risks. In addition, during the call, management will discuss non-GAAP measures, which are useful in evaluating the company’s operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. Reconciliations of these measures to the most directly comparable GAAP measures are included in our earnings release. With that, I’ll turn the call over to our CEO, Brent Handler.

Brent Handler: Thank you, Kyle, and good morning, everyone. To start, I would like to provide some more context around the announcement we made yesterday with regard to continuing to bolster our team and adding to the breadth and depth of our C-suite. We announced that our CFO, Web Neighbor, will be taking on a new mandate as Chief Strategy Officer and that we are engaged in recruiting a candidate to backfill his role. I would like to thank Web for his past invaluable contributions as Inspirato’s CFO. Web has been a fantastic partner to me over the past couple of years and was instrumental in guiding us through the negotiation and execution of our de-SPAC process a year ago. He will continue serving as CFO until we appoint a successor, and as Chief Strategy Officer thereafter, he will have the dedicated bandwidth to double down on our focus on investor engagement, capital markets, strategic partnerships and better communicating our story to the public markets.

Before reviewing 2022 results and our plans for 2023, including our path to profitability, I would like to talk about our strategic partnership with Saks, one of the most recognized and premier brands with an incredible rich history in the luxury category. Inspirato and Saks share a mission centered around building long-term meaningful customer relationships. We are very excited to work with their nearly 3,000 Saks stylists, many of whom have close, long-term relationships with their luxury customers. Saks is the largest luxury e-commerce company in the United States and, with our comprehensive training and support, we expect to significantly expand our reach to new prospective markets. In addition, our existing subscribers will be able to apply for the SaksFirst Reward Program, further enriching the Inspirato value proposition.

We are incredibly excited to team up with Saks as this partnership offers a natural complementary relationship with a number of synergies that will benefit each side. Finally, as part of this partnership, Saks has the opportunity to earn commissions and incentive-based warrants to acquire Inspirato shares. These warrants have an exercise price of $2.00 per share and based on Saks successfully converting their digital and in-store customers to paying Inspirato subscribers, Saks may exercise these performance warrants to acquire up to a cap of approximately 15% of Inspirato’s current total shares outstanding. Next, as we reflect on 2022, our focus was on completing our business combination and executing a plan that would deliver strong growth, especially relating to increasing our number of controlled accommodations.

In 2022, we added 195 net controlled accommodations, an increase of 36% over 2021. In 2021, we added 170 net controlled accommodations, an increase of 46% from 2020. All said, in the past two years, we added a total of 365 controlled accommodations, representing a nearly 100% increase in total supply. Around mid-year, as market sentiment shifted, we began our pivot away from growth to focus on profitability and shoring up our financial reporting structure, while remaining committed to our core values, including innovation. We ended 2022 with $346 million of revenue, a 47% increase over 2021, and adjusted EBITDA loss of $32 million. Shifting to 2023, we are focused on our path to profitability on an adjusted EBITDA basis, similar to 2019 and 2020.

Our moderated growth projections are a by-product of the collective decisions made throughout the organization aims at improving operating efficiencies and margins. Web will give more color on some of the specific and measurable actions we’re taking to accelerate our path to profitability in a minute. For 2023, we anticipate an adjusted EBITDA loss of between $10 million and $20 million, which equates to an improvement of more than $15 million at the midpoint compared to 2022. We believe that continuing to optimize our portfolio, control costs and expenses and the maturing of IFG and IFB will enable us to continually improve our EBITDA margins in 2024 and beyond. Importantly, none of our 2023 projections include any incremental revenue, margin or expense related to the newly signed Saks partnership, which we believe could provide meaningful upside to the plan.

In terms of total revenue, we expect to generate between $350 million and $370 million, a much more modest growth rate of approximately 4% at the midpoint compared to the 40%-plus growth in both 2021 and 2022. There are several drivers contributing to our reduced revenue range compared to our prior guidance of approximately $400 million that I’d like to quickly touch on. First, reduced Pass subscription. Since its inception in 2019, Pass has served as a tremendous driver for the company, reaching over $100 million of annual recurring revenue at the end of 2022. However, as we referenced on our last call, we began seeing slower-than-anticipated Pass results in Q4 2022. At year-end, our 3,600 Pass subscriptions represented a decrease of approximately 7% compared to the end of Q3 2022.

We’ve seen this trend continue to start 2023, though we expect it to taper in coming quarters. The second driver affecting revenue was lower projected 2023 paid occupancy in our residences. Our current plan assumes 43% paid residence occupancy compared to 48% in 2022, with a projected 7% increase in paid ADR. When combined with Pass residence occupancy, this would equate to approximately 70% total occupancy compared to 81% in 2022 and 88% in 2021. The combination of reduced Pass subscribers and lower-than-anticipated paid residence occupancy present us with the opportunity to capture newly found economic availability. To optimize this available capacity, we are working on a variety of strategic initiatives, including offering loyalty and reward opportunities for our existing subscribers, removing and renegotiating underperforming supply, monetizing excess supplies through proven distribution channels and leveraging new member acquisition strategies, including IFB, IFG, Saks and more.

To illustrate the operating leverage of our existing member base and residence portfolio, we project that adding only one incremental paid travel night per subscriber would consume approximately 9% of our projected availability, while still leaving us well below our 2021 total occupancy. Assuming a 30% discount to the average paid ADR of our current 12 months forward bookings in residences, our reservations currently in place for the year, this would equate to more than $20 million of incremental in year high margin travel revenue. Finally, we have modified our sales incentive plans to encourage multiyear club membership at the point of purchase. In our 2023 plan, this strategy will intentionally reduce annual revenue and EBITDA margin due to the discounted annualized rates in exchange for longer subscription terms.

More importantly, long term, this strategy is expected to result in higher retention, increased booking and improved economics around customer acquisition. Before turning the call to Web, I’d like to provide an update on Inspirato for Good and Inspirato for Business, two new platforms that launched in second half of last year. Through year-end 2022, Inspirato for Good sold more than 500 packages for approximately $1.5 million, and as of last week, an incremental 400 packages sold in 2023 for more than $1 million in total sales. While we’re encouraged by the $2.5 million of sales, based on the natural seasonality of non-profit fund raisers, we expect to drive the most activity in the upcoming spring and fall seasons. Meanwhile, Inspirato for Business sold nearly $5 million contracted revenue in the fourth quarter and year-to-date combined, which will be recognized over the life of those contracts.

The $7.5 million of combined sales across these two new platforms over the past period of time is a solid start, but only part of the story considering these thousands of travelers will be introduced in Inspirato and represent a highly targeted membership conversion opportunity. In summary, I’m very proud of our team. After two consecutive years of 40%-plus growth, we have built a plan that projects $17 million of adjusted EBITDA improvement at the mid-point of our 2023 range and sets the table for long-term and sustainable profitability. With that, I’ll turn the call over to Web.

Web Neighbor: Thanks, Brent. Before reviewing the financial and operating results, I’d like to thank our team for the tremendous work and effort throughout the course of the year. As Brent highlighted, 2022 involved incredible change in new processes that required tireless work and dedication, and our team is focused on executing our path to profitability as the core company objective for the coming year. It has been a privilege to lead Inspirato’s finance and accounting teams through executing the de-SPAC process and in our transition to performing as a public company. I’m looking forward to bringing on a new partner who will add even more horsepower to our ongoing improvements to accounting, controls and financial processes, and also to this new opportunity as Chief Strategy Officer, which will allow for more dedicated focus on critical public company functions that we will believe will create value for our members and shareholders.

I will, of course, continue to lead our terrific accounting and finance teams as we work towards finding the right candidate to round out our C-suite. Moving on to our financial and operating results. We generated total revenue of $87 million in the fourth quarter compared to $68 million in the fourth quarter of 2021. Full year revenue for 2022 was $346 million compared to $235 million in 2021, with the 47% increase in annual revenue marking Inspirato’s highest level since 2014. In a year in which growth was our objective, we very clearly succeeded. Our 2023 revenue guidance of $350 million to $370 million equates to a more modest growth rate and as the product of a more streamlined and efficient operating plan focused on the path to profitability.

Adjusted EBITDA in 2022 was a loss of $32 million compared to a loss of $16 million in 2021. Our 2022 loss was primarily due to a 50% increase in our cost of revenue and a 46% increase in our operating expenses as compared to 2021. Our 2023 guidance of an adjusted EBITDA loss of $10 million to $20 million includes a number of measures aimed at improving our efficiencies that I’ll touch on in a moment. At year-end 2022, we had 14,600 active subscribers and 16,100 active subscriptions compared to 13,800 and 14,900, respectively, at year-end ’21. In 2022, full year retention, including monthly, annual and multiyear prepaid subscribers of the entire cohort that began the year with us was approximately 82%. There are, obviously, a number of ways we view and track retention internally, including daily reporting and frequent review of product level analysis, including monitoring the movement between products.

Cutting through those dynamics, we feel a simple beginning-of-period end-of-period approach across a full year is a digestible and fair representation of our subscriber retention. Travel revenue for the fourth quarter and full year 2022 was $47 million and $200 million, respectively, compared to $39 million and $135 million for the comparable 2021 periods. We generate travel revenue in a number of ways, namely paid nights in our residence and hotels as well as Inspirato Only experiences and Bespoke custom travel services. The year-over-year increase in travel revenue was predominantly due to increased revenue associated with our residences, the flagships of our portfolio of travel offerings. Paid residence nights delivered in 2022 increased by 11% year-over-year, while our average ADR increased 17% between periods to approximately $1,825 per night compared to approximately $1,560 per night in 2021.

We also delivered over 38,000 residence night through Pass, an increase of 48% year-over-year. Shifting to gross margin. We generated 29% and 34% margins for the fourth quarter and full year 2022 respectively, compared to 38% and 35% in the comparable 2021 periods. The difference in fourth quarter gross margin was due to the $18 million increase in revenue between periods being offset by a $19 million increase in our cost of revenue. This is a perfect example of the opportunity ahead of us in 2023 as the increased cost of revenue was associated with a 44% increase in lease expense and a 46% increase in booking fees between periods. Historically, this has been a common theme or by adding controlled accommodations rapidly has a negative short-term margin impact, which generally improves over time as the booking window stabilizes.

Next, operating expenses, which were $40 million in the fourth quarter of ’22 compared to $34 million in the fourth quarter ’21, and $162 million compared to $110 million for the full year period. Excluding stock-based compensation and cost associated with becoming publicly traded, operating expenses were $152 million or 44% of revenue in 2022 and $99 million or 42% of revenue in 2021. Simply put, this was too high. In January 2023, we made the difficult decision to reduce our headcount by approximately 12%. We expect this to contribute approximately $10 million of savings in 2023 with approximately $500,000 of one-time severance related payments in the first quarter. For full year 2023, we expect total operating expense, excluding stock-based comp, of $135 million to $140 million, which is a year-over-year reduction of approximately $15 million.

Shifting to the balance sheet. We exited the year with approximately $82 million of cash on hand. Obviously, adjusted EBITDA is not a direct proxy for cash, but given our 2023 objectives and cost cutting measures, as well as minimal CapEx requirements relative to the significant asset base we control through flexible lease shipments, we expect this to be ample liquidity as we execute against our path to profitability. Having said that, we do have natural seasonality in our booking patterns and cash outflows can be lumpy throughout the year. As a reminder, Inspirato has zero outstanding debt, no amounts drawn on (ph) credit line and has a diversified cash strategy with top-tier national banks. Before turning the call over to Q&A, I’d like to spend a moment on several portfolio optimization initiatives, largely within our control, that we expect to contribute to a long-term improvement to our gross margin.

First, reduced portfolio growth. As Brent mentioned, our plans for 2023 contemplate very minor portfolio growth. I noted a moment ago and we’ve discussed on prior calls, the embedded cost associated with adding new residences in our portfolio. There is typically a ramp up period and a lag in fully selling the forward-looking calendar and fully integrating our residence in our platform from a revenue generation perspective, as well as upfront staffing and other costs that don’t yet have the benefit of being spread over a stabilized revenue base. By consciously slowing our pace of portfolio growth, we will reduce many of the costs associated without fitting and onboarding the large volume of homes we launched in 2022 and we believe we will have a much more predictable booking calendar to work with going forward.

Second, lease expense. Our leases represent one of the largest expense categories on the corporate P&L and are typically the largest single expense at the level of a given property. Our portfolio growth over the last two years has been marked by the addition or renewal of many leases with longer terms than what would have previously been negotiated, including some as long as 20 years. These often carry low or no rent increases over the term, affording us the benefit of embedded inflation protection that we believe will create significant value over time. In addition, we typically have favorable terms that give us the opportunity to renegotiate or even prune poor-performing accommodations, if needed. We will keep an eye on member satisfaction as well as on regional scale and overall availability and are confident we can make thoughtful decisions that will both improve our cost structure and also deliver remarkable travel experiences for our member.

Third is inventory allocation, the mix of travel and residences versus hotels, paid travel versus Pass travel, and travel and lease accommodations versus in-supply access through net rate and revenue share agreements. Earlier I mentioned booking fees as a large contributor to the increased cost between periods. As a reminder, booking fees are associated with travel outside of our controlled accommodations, primarily via our experiences and Bespoke offerings and with net rate agreements with our various hotel partners. There is obvious value in capturing this incremental wallet share and offering unique and custom experiences for our subscribers, but as a whole, this travel is lower margin than travel in our lease portfolio. We have the ability to not only drive new bookings towards our higher-margin lease properties, but also to redirect existing bookings to an unused property, taking advantage of our fixed cost base and lower variable costs and improving our margin as a result.

We believe these changes are not only achievable, but sustainable and representative of the significant margin expansion opportunities that we aim to capture. We look forward to providing updates in the coming quarters. In summary, our team is excited and focused on the year ahead. We set out a number of attainable and meaningful goals, all centered around our path to profitability. With that, I’ll turn the call over to the moderator for Q&A.

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Q&A Session

Operator: Thank you. Our first question comes from the line of Shweta Khajuria of Evercore ISI. Your line is open.

Shweta Khajuria: Okay. Thank you. A quick question for Brent, please. You mentioned when you were talking about the full year revenue guide, the trend for reduced Pass subs. So, is the moderating trend continued into Q1 of this year? You also said you hope that it tapers off in the coming quarters. Could you give a little bit more color on what gives you confidence that it will taper off and what are some of the key factors? Thank you.

Web Neighbor: Hi, Shweta. This is Web. Great question. Before I turn it over to Brent to take that, I did want to speak to some of the new disclosures that we provided this quarter. Some of it relates to your question, but Brent will respond on the Pass. We continue to try to provide more visibility into some of the fundamental drivers of the business. And with respect to retention, in particular, the full year annual measure of 82% is one that we believe will improve with our emerging success in selling multiyear prepaid subscriptions. I also wanted to clarify in the context of these new disclosures that with respect to residence occupancy, our total occupancy, which includes, as Brent noted, Pass occupancy that we’ve broken out for the first time, the anticipated 70% for the coming year includes in total paid occupancy, past occupancy and other forms of occupancy like employee and comp nights.

Part of the opportunity not included in our guidance is to use the additional capacity to drive those incremental nights that Brent mentioned and the high-margin residence EBITDA. So just a couple of quick clarifications on some of that new disclosure. It ties into your question about Pass and the Pass trends, which I can turn it over to Brent to respond to.

Brent Handler: Great. Thanks, Web. Great question. I think the first thing that I would want to say about Pass is that I don’t think we fully recognized how great a product it was in ’21 and early ’22, because it really applies to people who have flexibility in their travel and want to travel frequently. And we’ve definitely seen in — because we read every survey when somebody leaves. Typically, they’re staying with the club, but their travel patterns have just changed. They have school activities. They want to go to concerts. They’ve just kind of gotten that revenge travel out of their system. And so, we just think that it’s a product that does fit a certain type of traveler extremely well. And in fact, in our member surveys that we do, where we ask people about their overall satisfaction, what we have found is that there’s people love Pass — that love Pass.

I mean, there’s a really, really high NPS of the people who can take advantage of all of the benefits and value that they get from that flexibility. But we’ve seen that more normalized travel, people who have more normalized schedules, back to work, et cetera, are less apt to continue with their Pass. We think because what we’re seeing with the surveys and how many people have actually loved that experience, but that’s going to taper off over time. And we’re also selling it now more as a value in exchange for flexibility-type product. And we think there will always be a need for that. Importantly though, when you think about our portfolio and the risk we take in our leases, really it’s just a game of how do we fill all of that occupancy in an appropriate way.

And so, if we do end up losing Pass holders that does provide an opportunity for us to be able to provide economic availability for other members Inspirato for Good, Inspirato for Business, in order to fill that newly sound economic availability. Thank you for the question.

Shweta Khajuria: Okay. Thank you, Brent. Thank you, Web.

Operator: Thank you. One moment please. Our next question comes from the line of Jed Kelly of Oppenheimer. Your line is open.