Texas Ventures Acquisition III Corp (TVACU) 2024 Q3 法說會逐字稿

Good day and thank you for standing by and welcome to Inspirato Inc Q3 2024 earnings call. At this time. All participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session to ask a question during the session.

(Operator Instruction)

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

Thank you and good morning. 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 Q3 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.

Thank you, Kyle and thank you everyone joining us this morning.

As I sit here today, nearly three months into my tenure as CEO, it's time to 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 knew a long tenure as well as experiencing a far 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 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.

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 partnership 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 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 have 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.

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.

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 is for the club, though we will continue to offer Inspirato Pass and invite (inaudible) as complementary product 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 operate for our first10 years and is incredibly important in helping us attract and retain the right type of members. We also have a proven track record of growth and high retention under this model.

Second, we will act like a luxury brand we are. We will continue to deliver value to our first class services and world class portfolio as opposed to a luxury offering discounts 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 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 the lifeblood of all well run businesses. And with that in mind, we will have a relentless focus on improving our margins. I'm less concerned with topline growth. In fact, I don't expect it next year. However, I do expect meaningful growth 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 positively.

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, 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?

Thanks Payam.

Before discussing our third quarter results, I want to emphasize the point time 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 annual annualized cost savings following the leadership transition. After further effort, as I 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 the 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 in annualized savings primarily as a result of the reduction in force that took place in August. 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.

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 past members. As a reminder, this decrease was planned for as the changes we've made to the past product that are 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 might deliver. 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 sites 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 $1600 in the third quarter of each of 2023 and 2024. Sequentially, paid residents' nights delivered increased approximately 14% whereas nights, nightly rates 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 night 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 is 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 lease hotels to net rate hotel agreements. Further, our lease expenses plus the fixed cost 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 compared to gross margin of $21 million in the third quarter 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 time reference, we have made strides in better aligning our expenses to our current revenue levels and actions we have already taken 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 4th 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 one time transaction related and other non-recurrent 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 three 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 flow through three quarters is $20 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 two years and I'm excited to introduce our incoming CFO Michael Arthur to discuss how these results pertain to our 2025 plans.

Thanks Robert. Before we turn 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 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've improved our EBITDA performance on a year over year basis each of the last four quarters. Through nine months, we're 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're pleased with improvements we have made in our cash flow dynamics. As Payman 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'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 possibility and start generating cash from operations.

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

Thank you.

(Operator Instructions)

Mike Grondahl, Northland.

Hey guys, 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 you know where the most incremental savings came from in those three categories?

Hey, 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 cost. 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, ad that primarily pertain to non-member facing activities like software spend and non-professional services fees.

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

Correct.

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

Hey Mike, this is David Kallery, President. You know, 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 and annualized cost saving and ultimately, you know, getting the profitability and positive free cash flow. And you know, when we're successful with all of that, we believe the Capital One could be a great part of our future. But for right now, we're really focused on executing the plan.

Fair. 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.

Hi, 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 relatively significant thing. When you join a club, typically join the club because that's a commitment you want to have for the long term. It's not like, you know, joining a country club, whereas the subscription could be something that you subscribe to, but then you might unsubscribe and then you might come back and so on.

And in the case of the club program, there is going to be and initiation fee that will range from $10 million to $15 million -- sorry, $10 thousand to $15 thousand. It will start at about $10 thousand and then go to about $15 thousand by Q2. And then there is an annual due that will be just over $5000 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, do you want to add to that?

A couple of other things, Mike. And you know, Payam allude to this in his prepared remarks. But we're going back to our roots in this this product structure, and we've seen these members be a more stickier member base than our subscription type product. They retain at a higher clip, they have a higher LTV, both because of 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 the past four quarters. We've also seen, you know, 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.

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

Those are approximate figures.

Yeah, approximate. And is there a start date for this or is it already started?

We have already announced that, and it will officially go into effect as of 1st January 2025.

Okay, 1st January 2025.

And then lastly, just a couple of financial questions, I think you said for 2025, 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 EBITA, was it break even or profitable in Q1 2025?

So yeah, 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 like 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 EBITA.

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 even them. 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 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 and adjusted a bit of a cash flow positive during Q1 of 2025.

Okay. That's helpful. And then then lastly Q4 2024 seasonally, it's, it's a slower quarter, It's a down quarter from Q3. Is that the right way to think about Q4, you know, the current quarter we're in.

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, but at the same time, we're an EBITDA basis. We are expecting continued improvement on EBITDA, especially as we talked about that $40 million. Much of that, you know, 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.

Got it. Okay.

Hey, thanks guys and good luck with the progress so far, it seems pretty productive.

Thank you.

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.

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 result for 2024 and provide you with guidance for Q1 and 2025. And until then, wishing you all the best. Thank you.

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