Inspirato Incorporated

Good day and thank you for standing by. Welcome to the Inspirato second quarter 2024 earnings conference 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 this session, you will need to press star 11 on your telephone. You will then hear an automated message advising you your hand is raised. To withdraw your question, please press star 11 again. Please, the advice to today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kyle Sork, Investor Relations. Please go ahead.

Thank you, and good morning. On today's call, we have Chairman and CEO, Payam Samani, President, Dave Callery, and CFO, Robert Caden. Yesterday afternoon, we issued our press release announcing our second quarter 2024 results and the closing of our previously announced share purchase agreement and CDO training.

Before we move forward,

comments or 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, directly comparable GAAP measures, are included in our earnings release. With that, I'd like to turn the call over to our new chairman and CEO, Payam Samad.

Thank you, Kyle, and thank you, everyone, for joining us this morning. I'm incredibly excited for today's call as we welcome a new era at Inspirado, one filled with promising opportunities. To help us accomplish these goals and further solidify our footing, I'm personally injecting $10 million of new capital into the company in Q3. In addition to the investment, I'm also personally guaranteeing an additional $6.6 million as part of a lease termination agreement. Important to note that when I say personally, it means through my entity, One Planet Group. These investments not only strengthen our liquidity position and improve our financial outlook, but also demonstrate to our current and prospective members that our business is in a stronger position than it was just a few days ago. We are now better equipped to achieve profitability while remaining committed to delivering exceptional service and world-class experiences for all of our members and their loved ones. Having said that, this transition has also brought about a number of difficult decisions. Namely, our plan to reduce headcount by 15%. While losing team members is not an action I take lightly, it was a necessary action given the current size of the business. Upon reviewing Inspirado's business plan and projections, it became clear that our current cost structure required further actions in order to make this business sustainable. To better support these goals and fully demonstrate my alignment with our shareholders, I have elected to take a $1 salary in the form of cash as CEO and chairman, and no cashfulness for the next year, and will instead perform my duties solely compensated in shares, much of it performance-based. Finally, in my role as chairman, I will be naming three new directors to bring valuable experience, a fresh perspective, and diversity of thought to the Inspirado boardroom as we look to reshape our future. With that, I'd like to turn the call over to our president, David Callery, to review some of the recent initiatives the company has undertaken.

Thank you, Payam. Before reviewing the Inspirado platform and the successful repositioning we've done over the last few quarters, I want to express how truly excited I am to begin a new chapter at Inspirado. Payam has an illustrious career and has created tremendous value for investors and shareholders at each stop along the way. Prior to my time at Inspirato, I had the pleasure of working with him in the past and can personally attest to his work ethic, his vision, and his cultural fit for both Inspirato and the members we serve. Time is an entrepreneur, an investor, and the founder of One Planet Group, a firm with a mission to support a strong business ideas while building an ethos that helps improve society and give back to communities, which is also very closely aligned with our mission of inspiring lasting memories and relationships by enriching the way our members experience the world. Over the past year, we've made some incredible progress in improving our offerings that have laid the foundation for this transformation. We've returned to our roots as a luxury travel club and moved away from a high-churn, transaction-based subscription model. Since the beginning of 2023, more than 75% of our new sales for Inspirato Club, which is the foundation of the company, have been for two years or more. Second, we reimagined Inspirato Pass to serve as the perfect complimentary offering to club and to cater to a frequent and highly flexible traveler. Next, in June, we just started to introduce Inspirado by Invited. Invited offers 10 years of Inspirado club access combined with a two-year booking window and the ability to prepay fixed nightly rates on an annual basis. While it's still very early, we've seen interest and excitement for this new offering. Since our limited introduction of this product in June, we've already generated over $4 million in new cash flow. And finally, our strategic partner with Capital One, where we're reaching the tail end of the tech and system integration work and plan to be able to take reservations by the fourth quarter. We expect this partnership to increase Inspirato's brand recognition, serve as a demand driver for paid nights, generate new membership sales, and ultimately be a key contributor to Inspirado's future growth. In summary, our team has put in tremendous amount of work to set the stage for what we feel will be a true inflection point for the company, and I'm very confident that in the next few years of Inspirado will be our most successful under Payam's watchful eye and steady leadership. And with that, I'd like to turn the call over to Robert to discuss the financials for the quarter. Robert?

Thanks, David. Before reviewing our second quarter results, I want to highlight what I feel is currently our most important financial metric, liquidity. Following the $10 million capital infusion, second quarter performer liquidity, including cash, cash equivalents, and restricted cash, was $39 million compared to $33 million at the end of the first quarter. We've also made significant progress in our cash burn, which has improved by $23 million, or 64%, in the first half of this year compared to the first half of 2023. In addition to the $10 million capital injection in Q3 to bolster our liquidity, we have taken the following actions. First, we implemented additional cost-cutting measures that we expect to result in approximately $25 million of annualized savings. As Payam mentioned, this includes a 15% reduction in force implemented earlier this week. It's important to note these cuts were not made to member-facing roles, as we are capturing efficiencies without sacrificing our member experience. Second, we entered into a termination agreement of previously impaired underperforming leases. As part of this agreement, we will decrease our total committed future minimum lease payments by $57 million. Total cash savings from the termination of this agreement will be approximately $50 million from 2025 through 2031. after the lease termination payment of $6.6 million from August 2024 through March 2025. In terms of our quarterly results, in the second quarter we generated total revenue of $67 million, a 20% decrease year-over-year. Much of the decrease was planned for and can be attributed to lower subscription revenue due to a 35% decrease in the number of past members and a 10% decrease in club members. In total, we exited the second quarter with approximately 12,000 members and nearly 12,700 subscriptions, approximately 85% of which were club subscriptions. From a travel revenue perspective, there are a number of factors that contributed to the 19% year-over-year decrease. First, we saw a 12% decrease in our residents' revenue, primarily due to ADRs of $1,535 coming in below quarters. While lowering our ADRs from previous highs is a part of a strategy to deliver value to members, we did not see an associated uptick in the number of paid nights delivered that we would have hoped for given the reduced rates. Second, hotel revenue decreased primarily from fewer nights delivered, not quite offsetting a modest increase in ADRs. Occupancy in our leased hotel rooms increased to 79% in the second quarter from 76% last year as we continued to risk adjust our portfolio by removing underperforming leased hotels. Cost of revenue for the quarter was approximately $51 million, a 21% improvement from the prior year. Similar to the first quarter, reduced lease expenses as well as their associated fixed costs were the single biggest driver in the year-over-year improvement. Given the seasonality of travel revenue, gross margins in the second quarter typically reflect the low watermark for the year. We believe that to be the case in 2024 as well, as our 24% gross margin for the quarter compares favorably to 2023, but is a bit below our expectations and reflects the impact of a declining subscription revenue base. Our cash operating expenses in Q2 were approximately $27 million compared to approximately $32 million in the second quarter of 2023. As Payam and David alluded to, we are planning for a further improvement in future operating expenses as a result of our reduced headcount and other cost reduction activities. We'll see modest cost savings in the third quarter given severance payments and an acceleration in cost savings thereafter. In total, we generated an adjusted EBITDA loss of $9.1 million in the second quarter compared to a loss of $11.7 million in the second quarter of 2023. Year-to-date, our adjusted EBITDA loss of approximately $5 million compares favorably to a loss of approximately $15 million in 2023. In fact, we have been seeing consistent year-over-year improvements in our quarterly EBITDA figures for three consecutive quarters. This is despite revenue decreasing over the same time span. I call this out to emphasize that improvements we've made from both a product profitability and efficiency standpoint have been paying off. While much of our declines in revenue are planned, driven by a focus on product profitability, revenue trends are not where we want them to be. However, we are beginning to see some improvements in underlying KPIs in our different product offerings related to our product positioning work we embarked on earlier in 2024. While it's still early, we remain optimistic these are the right choices for the business. Looking at costs, our gross margin are up through the first half of the year, driven by the portfolio optimization to actions taken in the first part of the year, and we've driven operating efficiencies not only within gross margin, but also in the operating expenses. These changes are reflected in our approved EBITDA and EBITDA margins and significantly improved cash burn versus 2023. Finally, through the change in leadership and the renewed cost reduction efforts we are undertaking, we are removing our 2024 guidance and we'll look to update you on our plans in the future. Before turning the call over to the operator for Q&A, I'd like to turn it back to Payam for some closing remarks.

Thank you, Robert. As many of you will soon find, I aim to be transparent and direct when communicating, and these results are simply disappointing. While there certainly have been improvements in recent quarters, Inspirado is not where I want it to be or where it should be as an organization. The past several years have been riddled with far too many challenges and, frankly put, failures. That said, I'm incredibly excited by the future and confident that we are on the cusp of great things. When I evaluate businesses, there are three things that matter to me the most. The culture of the company, profits, and growth. But profits is by far more important than growth. It's quite simple. I firmly believe that you cannot cut your way to prosperity, and it's time to once again invest in our growth. But again, first comes profitability. As we approach this next chapter, my promise is that We will continue to innovate and learn as we go, but we will also be nimble enough to react and respond accordingly. I look forward to connecting with you and further articulating our future plans in the coming quarters. With that, I'd like to turn the call over to our operator for Q&A.

Thank you. As a reminder, to ask a question at this time, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment while we compile our Q&A roster. And our first question is going to come from the line of Mike Grindahl with Northland. Your line is open. Please go ahead.

Hey, thank you. Hey, Pam, I wanted to ask you kind of a two-part question. One, what attracted you to Inspirado? And two, what is your vision for Inspirado if you look out like three-plus years?

Hi Mike. Great question. I've been watching Esprado for many years and I do travel a lot. I don't come from the hospitality industry, but I've been to many, many countries. I don't know exactly how many, but probably 60 to 70 countries. I'm a big consumer of hotels, Airbnb, which I don't necessarily enjoy, and other options out there. So It's probably something I've kept an eye on for a long time, and I really like the business model. I love the concept of a subscription model with 12,000 members that represent some of the most successful people in our country and beyond. So that by itself is extremely interesting. And looking at this business, to me it felt simple from the perspective that The company has significant revenue, but it's definitely spending more than what it should. It seemed to me that the challenge wasn't as big as probably it felt like by some of the people who've been around this business for a very long time. At the end of the day, it felt like here's a company with significant revenue, but it's spending about 10% more than it should at this point in time. I know it's been higher before. That's really what attracted me, a company with a significant opportunity that it should really right-size. So what do I think the next three years will look like? I like to make this business boring. I like to make this business one that has no drama, that it does the same thing but does it over and over again and does it very well. I want us to do more of the kinds of things that work, simplify our products, and just become very, very good at selling our product. There are plenty of people we can sell this to. So really, you're not going to find necessarily a whole lot of innovation, but rather innovation in the form of doing a better job, growing the kinds of things that we already have in place, maybe optimizing them. But I don't want to confuse the market. Fair enough.

I guess a follow-up question is what are you going to focus the sales team on? You know, in the past we've heard about the, you know, the core product, then Inspirato for business, Inspirato for good, now Inspirato invited, you know, all interesting things. But what do you anticipate you'll focus the sales group on, you know, over the next six to 12 months?

Mike, this is David Callery. I would tell you that we're gonna primarily focus the team on selling Club. Club is the heart of what we offer. We think 80 to 85% of the prospects that we engage with are attracted to that product. It's a very straightforward way to access the complete portfolio and all of our services. About 10% of our members, or excuse me, prospects, are very, very attracted to PaaS. If you remember from prior conversations, PaaS is highly flexible, last minute inventory that provides great value. And there's a consumer set out there that are looking for luxury, but they're looking for value. And then about 5% of our memberships going forward are going to be invited. We tested invited last year, Mike, in a beta format. No pomp and circumstance, we sold it to about 60 Different members watched the way they interacted with it. And there's a couple features about that product that we think are very, very attractive. The fact that the pricing is flat, the same nightly rate for all trips was definitely something that consumers are attracted to. And then the two-year booking calendar that they have access to is another feature that we think the invited prospects are going to be attracted to. The offering is a lot more expensive than some of our other offerings. We're selling it in sort of a charter mode right now for $150,000 up front, and then they get the fixed pricing on the nightly rates after that. It's a very attractive product for a segment of the total population. So I'd summarize by saying 80%, 85% club, approximately 10% pass, and maybe 5% invited.

Got it. Yeah, and the 4 million you mentioned since June of cash flow from invited, that's a big number. That's great. Hey, maybe my last question is just any updated thoughts on Capital One? You know, that's something we've been looking forward to, that integration. It sounds like 4Q, you can start accepting reservation. Any new thinking on how that may or may not drive the business?

Mike, this is David again. Look, we're very, very excited about having the technical work done. There was a big lift there. Capital One uses Hopper as their technical platform. The team there was outstanding to work with, but it was a lot of work for us, and it's taken a few quarters. We're on the one-yard line on finishing that work. We're actually done with the actual development work, and we're just doing some testing. So over the last couple weeks, we've moved back into discussions about the way we'll present and market the offering. Look, we're very, very excited. I mean, Capital One, I'd argue, is one of the most prolific companies, definitely in the United States, today in North America, around demand. You can't really watch the Olympics or just about any other sporting event without seeing them. And we think they're going to make an amazing partner. I don't want to talk too, too much about, you know, what the future might look like because obviously this is very new for us. But we're very, very excited. We've put in a lot of the hard work and we're ready to begin transacting in Q4. Definitely something we'll keep you updated on in the future. Okay. Hey, thank you.

Thank you. And one moment for our next question. And our next question is going to come from the line of Brett Knoblauch with Cantor Fitzgerald. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my questions. I guess, could we maybe just start on the controlled accommodation portfolio? You know, I think we've embarked down this route of optimizing the accommodations almost kind of two years ago at this point. Has there been an increase to the number of underperforming locations? You know, we've already taken, call it 200, 300 accommodations out of the portfolio. Now, we're looking to take more. So, I guess, Has the number of underperforming locations increased, or how should we think about this, the constant reduction of controlled accommodations?

Yeah. Hey, Brett. Thanks for the question. It's Robert here. So we embarked starting in Q2 of last year, so just a little bit over a year ago, on taking some of the portfolio out. When we did that, there was a number of reasons for it. One was we had seen that our demand didn't match our supply and we were oversupplied. And because of that, in part, we were also seeing that, you know, we had occupancy rates that were lower than we'd like. And so we started that process then. As you may recall, you know, it takes time for us to exit some of our leases. So it's usually six months to 12 months before you get out. So you give a notice, which we started due in Q2 and did in Q3 of last year. And so we started to see really in Q1 of this year where we started to see some pickup on that lease expense and saw some benefits to our overall occupancy rates. Q2 is a challenging quarter from an occupancy rate perspective. It's our lowest traveling quarter of the year. So I'm not reading too much into those occupancy rates for this quarter. But we continue now as compared to the one big bang where we took out about $100,000 of our residences last year, we'll continue to optimize the portfolio. So last year when we did this, we said, what do we think the number of residences our members will want and need next year? And we targeted towards that number. Since then, we continue to look across our portfolio and we're making decisions such as, are there certain residents that are still underperforming? And quite honestly, some of those residents might be new. We're still picking up a limited number of residences that relate back to deals that we cut in 2022. And so as we go through the first year with them, we're assessing what does their profitability look like? How much do our members really enjoy the experience at those locations? What are our occupancy rates? And so we're continuing to refine the portfolio. We did exit one group of properties, as we mentioned earlier, just now in Q3. That will be, that's approximately 37 units, so that's a big haircut there. And then we are kind of reworking our entire portfolio for other properties that, you know, may not be, you know, achieving the results that we want. And at the same time, we continue to look at where the locations that we're, you know, we wound up for whatever reason to be underinvested in that our members really want to go to, and we want to do a little bit more of a lift. The other thing I'd say is that from a hotel perspective, you know, residence is obviously a big piece and we're down close to 20% of residences. From a hotel perspective, we've also changed the mix there over the last 12 months or so. We had a bunch of leased hotels in our portfolio and we had some really differentiated type of profitability on them. We've kept the ones that were profitable. And the ones that weren't profitable, we've replaced them with what we describe as net rate hotel arrangements, meaning we pay on a per-night basis, so our members still get to go to all the great places they want to, but it doesn't have the same level of exposure for us. And we will continue to invest in leased hotels, but knowing that we've got the net rate hotels out there, we'll only do that when we get really attractive rates that we can pass on to our members in locations that they really want to be and in the best of hotels. Hope that helps.

It does help. The 37 units, when will the lease expense fall off the income statement there?

Yeah. So we just entered into a termination arrangement. Let me do it more from a cash perspective, which is that we'll be paying through end of March. for those, and then after March of 2025, those will fully drop off the books.

Got it. I guess when I look at the subscriber count, you know, I think it declined a little less than we expected this quarter, which is nice. I guess ultimately for, you know, the business return to growth, club subscribers need to return to growth, and given that's where your guys' emphasis is on, Um, have you guys tinkered with, uh, you know, different pricing models for club, maybe lowering it to, you know, easy attractiveness to a broader set of consumers or how should we think about that? Or is that something you guys haven't looked at?

This is David, uh, Brett. So I absolutely over the last 24 months, but really with high focus over the last 12 months, we're really trying to guide. new club subscribers toward multi-year deals. And we're doing that by really making a multi-year deal from a cost on an annual basis much more attractive. So I think you're going to start to see and you're already seeing some of the improvement that you're seeing is as a result of us selling these multi-year arrangements. The typical person is buying something today that's probably close to two and a half years when you look at the number of folks that are buying two-year memberships, three- and five-year memberships. So we see over time that that will continue to improve with the multi-year memberships and the economics associated with those.

Got it. And I know you guys kind of have taken away guidance for the back half of the year, but Should we think seasonality is somewhat consistent with years in the past, with Q3 being somewhat higher than Q2 and Q4 maybe a little bit lower than Q2? Or I guess any way to just give us some color on what we should be expecting for the full year?

Yeah, Brett, I think that's exactly right. We've seen a year-over-year decline, which has been fairly consistent in the first two quarters of the year. um you you should expect to see that trend continue and certainly q3 and q4 from a revenue perspective are definitely and which also means from a margin perspective are are typically and will be stronger quarters uh than q2 perfect and if we're looking at you know occupancy rates for this quarter they stepped down quite meaningfully from from last quarter and we're down year over year despite the maybe

pricing initiatives you guys have put in place. Would you expect occupancy rates to improve going into the end of the year?

Yeah. I think we certainly will see an improvement in occupancy rates. Those units that we referenced, those units that we just took out are very much seasonal units. And so the benefits of those you see in Q3 and other parts of the years, they really have a downward impact on our occupancy. We did not have in 2023 all those units in our portfolio yet. Those are newer units, and so they hit us in full effect in 2024 really with a drag on our Q2 occupancy. And then just a more broad comment about the occupancy that you're asking about with the quarters. If you just think about the seasons of the year, Q2 is – you know, April, May, and June, and there's not a lot of holidays in there. There's a little bit of summer. It really depends on how the year falls, and that's why that quarter is a lot weaker than the summer quarter or the holiday quarter or the ski quarter. So this is just a lot of seasonality that goes into Q2, and therefore there can be a little bit of variability in occupancy goes a long way there in terms of having an impact on our margins as well.

Perfect. Got it. Thank you, guys. Really appreciate it.

Thank you. And I would now like to turn the conference back to Chairman and CEO Payam Zamani for closing remarks.

Well, thank you very much. And I, you know, we're really looking forward to sharing with you whatever progress that we make in the coming months and quarters. Thank you.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone have a great day.