Sonder Holdings Inc. Q3 FY2023 earnings call

• Revenue growth was driven by increased bookable nights and live units despite ADR and occupancy declines. - Total overhead costs improved 14% and total property level expenses per occupied nights improved 9%, leading to a 60% improvement in free cash flow and a 21% improvement in free cash flow margin. - Hotel product showed stronger RevPAR growth than apartment product on a comparable basis. - There was strong demand in Europe and the Middle East for properties while North America had flat performance. - New properties opening had lower RevPAR due to B2B sales reliance, but local sales teams are being invested in. - A portfolio optimization program is underway to address underperforming properties and collaborate with landlords. - New additions to the team include Tom Buoy, Simon Turner, Adam Bowen, Katie Potter, and Chad Fletcher.

Revenue grew 29% year-over-year. Bookable nights increased 33% year-over-year with live units up 31% year-over-year. ADR was $185 (a 2% decline) and occupancy was 83% (a 1% decline). On a comparable properties basis, hotel product RevPAR grew 8% year-over-year while apartment product RevPAR grew 1%. Hotels now make up 40% of total live units. Geographic performance saw strong demand in Europe and the Middle East with comparable properties RevPAR up 14% year-over-year, while North American comparable properties RevPAR remained flat. Live units totaled approximately 11,800 at the end of the quarter, and bookable nights reached over 1 million.

• For the fourth quarter of 2023, revenue is expected to be between $165 million and $175 million. - Free cash flow for the fourth quarter is expected to be between negative $39 million and negative $29 million. - The midpoint of the full year 2023 revenue represents a 32% year-over-year improvement, and the midpoint of free cash flow shows a 33% year-over-year improvement. - 2024 plans are being finalized, but the portfolio optimization program is in the early stages with unknown impacts on short-term results.

• Development cost uncertainty and persistent high interest rates are affecting contracted units. - Newly opened properties are ramping up slowly, especially those relying heavily on B2B sales. - Properties in Mexico City are facing challenges. - There is uncertainty around the impact of the portfolio optimization program on revenue and free cash flow in the short term.

Q: Quick question on gross margins. It came in a little bit lower than expected in the quarter. Can you guys talk to kind of some of the main drivers behind that miss? And then perhaps comment on how you see margins trending over the next few quarters there?

A: Hey, I'll take that question. This is Dom. In terms of the gross margins, I think this is mostly driven by the RevPAR coming in just a little bit lower than where it was last year and from what our expectations were. As you saw, the revenue results came in a little bit towards the low end of the range. In terms of the cost structure of the business, we continue to see our EBITDA margin improving, our cost per unit coming down. So we're pleased with the success we've seen so far and the progress we've made on the cost side. But again, this remains, in terms of GM percentage, subject to the volatility with RevPAR in any given period. So going forward, I think it's the same dynamic, continue to work on the cost side and work on improving our RevPAR to sustain gross margins.

Q: One, just as we think about the total portfolio versus the live units, I know that total portfolio number is coming down for kind of -- you're pulling some of the properties out of that. Is this kind of the right level to think about it going forward? And on the live units, you're kind of approaching 70% of total portfolio live, do we kind of expect this number to stagnate for a little bit as you focus on free cash flow from here? And then I guess the second question is how are you feeling about the balance sheet kind of given the macro environment and kind of what you see ahead from here?

A: Yeah. Thanks so much, Nick. Francis here. I'll take the first question. So yes, as you pointed out, the core focus is really on driving the business to cash flow positivity. And we've been beating the same drum since June of 2022, but really, the story there will be to convert our existing contracted properties into live properties. And so we're not seeking out to go and sign a lot of new properties. We're just focused on making sure that the ones that have been signed where expense has already been deployed to go and identify these assets and open them, that those are done successfully. And of course now also, working on our portfolio optimization program. And so our real estate team's effort is really focused on ensuring that the portfolio economics, as a whole, are as strong as possible and that we work with our landlord partners to go and make these underperforming assets perform. I also want to point out that we've got still nearly 50% embedded growth, which we think is really exciting, frankly. A lot of properties that we think are going to be really great assets for the brand, for the guest experience and also add more dollars to -- contribution of the dollars to the business are going to open in the next couple of years. And so we think that this industry-leading growth is actually quite exciting, and the growth rate is not an issue for the business at this point. We're growing quite rapidly. It's really just doing everything we can to go and accelerate the time line to cash flow positivity. And then on the live unit growth side, we just posted, in this third quarter, a 31% year-over-year growth of live units and so we're really happy with that pace, and we'll keep on focusing the team on improving the free cash flow performance of the business in the near term. Dom Bourgault: And I'll take the balance sheet question. So you saw we had a healthy cash cushion at the end of the quarter. We see also the sustained progress we've been making on the free cash flow front. That trajectory, I think when you look at the visual, it's very telling. It's up into the right and we're working hard on our plan to keep that going, roll live units. As Francis just talked about, there's a lot of embedded growth in the model that we feel good about. Unit economics, so reducing property level costs, including improving the rent profile of these properties and then controlling preopening costs and overhead as we have in the past. And that's the recipe for us to continue to improve free cash flow. And when you contrast that with where we're at with the balance sheet, we see a trajectory we're comfortable with.

Q: Hey, great. Thanks for taking my question. Will you just give us an update on how your RevPAR initiatives and the technology around your revenue management is trending? And then I know it's still relatively early, and you don't want to guide to next year, but can you sort of give us what you're sort of looking for and what you think for '24 looks like?

A: Thanks so much, Chad. No, I think the -- I'll start with the revenue management question. I think it's an incredibly important topic. It's a very important lever for the profitability of the business. And frankly, I think that we have room for improvement on our pricing strategy. One of the changes that we've recently initiated is to ensure that our pricing trajectories are more stable. And by that, what I mean, that within seven days or 14 days before target dates, we would go and reduce price to drive more occupancy. And we actually think that's not the right approach and building a base of occupancy earlier into the booking window, but then holding price as we approach that data arrival is actually a better strategy to drive stronger ADRs and stronger RevPARs. And so that's a major change that we're initiating. I think there are some dates where we've been selling out a little bit too early, and that's caused our capacity to yield optimally to be impaired. And so those are just a few tweaks that you can expect that we're going to put to work in the next few months and quarters. And all of that, of course, is powered by a lot of technology, and we've built much of this technology in-house. We're not afraid to also benchmark our technology versus third parties and to always explore whether our solutions are the most adequate, but really, the biggest opportunity as we see it in the near term is those -- is this price trajectory, the sellouts and ensuring that we can optimally drive RevPAR through higher ADR. Dom Bourgault: And Jed, I'll take your question on '24. Obviously, it's still too early for us to guide on '24 formally. We're finalizing our '24 plans as we speak. We still got a few more weeks to go to button all of that up. The other thing is the property optimization program, the portfolio optimization program that Francis described earlier, this is very much in the early innings. We feel confident it will improve the trajectory meaningfully. But for now, there's too many unknowns for us to embed any guidance based on that. And the last thing I will say is similar to my answer to the prior question. I'll point you back to the trajectory. You see the trajectory of improvements. I illustrated earlier that -- the ingredients behind that improvement, and those we expect to continue to work on and sustain going forward. And right now, that's how we're framing '24 at a high level, continued improvements in the trajectory and working on the key levers to deliver that, but no formal guidance at this point. More to come on the next one.