Sonder Holdings Inc. (NASDAQ:SOND) Q4 2022 Earnings Call Transcript

Sonder Holdings Inc. (NASDAQ:SOND) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good day and thank you for standing by, and welcome to Sonder’s Fourth Quarter 2022 Financial Results. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Also be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jon Charbonneau, Vice President, Head of Investor Relations. Please go ahead.

Jon Charbonneau: Thank you, operator. Good afternoon, ladies and gentlemen. Thank you for joining us to discuss Sonder’s fourth quarter 2022 financial results. Joining me on the call today are Francis Davidson, Co-Founder and CEO; and Chris Berry, Chief Accounting Officer. Full details of our results and additional management commentary are available in our fourth quarter 2022 shareholder letter, which can be found on the Investor Relations section of our website at investors.sonder.com. Before we start, I’d like to remind you that the following discussion and the Q&A session at the end of this call contain forward-looking statements including but not limited to Sonder’s strategies, market opportunities and future financial and operating results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.

Additional information about the factors that could cause our actual results to differ from those expressed or implied in any forward-looking statements can be found in Sonder’s SEC filings. The forward-looking statements in discussions of risks in this conference call including responses to your questions are based on current expectations as of today. Sonder assumes no obligation to update or revise them whether as a result of new developments or otherwise except as required by law. Also the following discussion contains non-GAAP financial measures. For a reconciliation of this non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP. A please see our shareholder letter posted to our Investor Relations website.

Now I’ll turn the call over to Francis Davidson, Sonder’s Co-Founder and CEO.

Francis Davidson: Thank you Jon. Good afternoon, everyone, and thank you for joining us today. My remarks will cover two areas. First, a quick overview of our financial performance in the fourth quarter and 2022; and second, a brief overview of our key focus areas for the year. I’m encouraged by what we accomplished in 2022, especially considering a material shift in company strategy midyear to focus on generating positive free cash flow. We continue to meaningfully scale the business and still have a robust portfolio of contracted but not live units to help drive growth in the near to mid-term. At the same time, our cost structure improved through the year and we expect further leverage on costs in 2023 and beyond. We also saw a meaningful improvement in property level performance, enabling us to cut free cash flow burn in half over the course of 2022.

These results reaffirm my conviction in our business model and I believe that we’re on a path to generating positive free cash flow. Now I’d like to provide more details on the fourth quarter and 2022. Our fourth quarter results were highlighted by the third quarter in a row of free cash flow improvement to negative $30 million versus negative $39 million in the previous quarter, and negative $62 million in the first quarter of 2022. This helped drive the significant improvement in FCF margin throughout the year reaching negative 22% in the fourth quarter versus negative 77% in the first quarter. And cash contribution margin, which is a unit economic metric, we used to measure property level performance was 24% in the fourth quarter compared to 22% last quarter and 10% a year ago.

In 2022 we saw a significant improvement in RevPAR, which is up over 30% year-over-year, while we lowered our cost structure including our property level cost drivers which improved over the course of the year. Together with high-quality and capital-light property openings, this drove a sequential improvement in cash contribution margin in every quarter of 2022, enabling us to cut cash burn and improve FCF margins. As you can see, we’ve meaningfully improved our unit economics versus a year ago and exited 2022 with a better overhead cost structure, while continuing to strive for further improvements including the ones that we’ll speak about shortly. We believe this demonstrates that our business fundamentals will continue to improve and that we’re executing against our cash flow positive plan.

I’m also proud of our top-line performance with 2022 revenue up approximately 100% year-over-year. Moreover, we generated $135 million in revenue in the fourth quarter which is over $0.5 billion on an annualized run rate revenue basis, exiting 2022. Now I’d like to provide a quick overview of our key focus areas for 2023 and starting with our RevPAR initiatives. In 2022, we continued to expand our corporate business which included among other things strengthening our position on GDS platforms and adding a significant amount of corporate travel accounts. This translated into approximately $70 million in booked to corporate sales in 2022 roughly 5x growth compared to 2021. This year we plan to continue expanding into new industry segments and expect another year of strong growth within the corporate business, which will bolster weekday RevPAR in particular an area with still a lot of upside.

,: Next, on June 9 we announced our cash flow positive plan, which shifted our focus from hyper growth to generating positive free cash flow more rapidly than previously planned. As a reminder, this shift in focus was not due to a lack of growth opportunities, but instead because market conditions have changed and we thought it was prudent to shift our strategy to adapt to the changing macro environment. As you can see from our fourth quarter results we’ve continued to make meaningful progress against this plan. I’ll let Chris provide details on guidance, but we’ll note that our focus remains on reaching our first quarter of positive free cash flow in 2023. We’ve also continued to evaluate our cost structure, especially, given ongoing macro uncertainty.

As a result, we decided to reduce our overhead expense base both across non-headcount and headcount spend reducing approximately 100 corporate roles or 40% of our corporate workforce which will lead to approximately $10 million in annualized cost savings, in addition to anticipated savings from non-headcount spend reductions. We’ve done our best to support our departing colleagues with care, dignity and compassion and are providing severance packages including benefits continuation and other support to system transition. Another component of cash flow positive plan has been to proactively reduce our planned signing pace with growth in the near-term still being primarily driven by opening previously contracted units. And in the fourth quarter live units grew by 28% year-over-year driven by strong conversion from our contracted units to live units.

At the same time, we continue to see development cost uncertainty and augmented risk around financing. As a result, we felt it was prudent to exclude a number of contracted units with financing contingencies which drove the sequential decline within our total portfolio numbers. Importantly, the vast majority of contracted units we excluded weren’t expected to go live until 2025 or beyond, and we expect limited impact to growth this year even in 2024. Separately, we’ve made a lot of progress in the search for our next CFO, and hope to have an update for you in the coming weeks. In closing, our focus remains on the execution of our cash flow post plan to drive sustainable long-term value for all shareholders. I want to thank our employees, partners and guests across the globe for choosing Sonder and for their continued belief and support of our mission to revolutionize hospitality.

With that, I’ll turn the call over to our Chief Accounting Officer, Chris Berry, who will provide you with further details on a recent financial performance and an update to our guidance. Chris?

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Chris Berry: Thank you, Francis, and hello, everyone. I will first provide a brief overview of our fourth quarter financial results. And then we’ll share our guidance for the first quarter of 2023. We’ll then open the call to questions. And unless otherwise specified, all of the Q4 growth figures cited in my remarks are year-over-year comparisons. In the fourth quarter, we generated $135 million of revenue, representing a 56% increase compared to Q4 of 2021. Our fourth quarter revenue growth year-over-year was driven by an increase in bookable nights of 39% and RevPAR growth of 11%. Again, this quarter key performance metrics improved year-over-year, including live units, bookable nights occupied nights and RevPAR. We ended the quarter with over 9,700 live units representing 28% growth driven by the conversion of contracted units into live units over the past year.

In Q4, we had approximately 852,000 bookable nights, an increase of 39% driven by this live unit growth. RevPAR in the fourth quarter was $158, up 11% year-over-year despite a 7% decline in ADR to $191. The decline in ADR was a result of our higher occupancy strategy, we have talked about previously. To that point, our occupancy was 83% in the fourth quarter, up 1,400 basis points year-over-year. Our strategy hasn’t changed in this respect. Our goal is to optimize revenue and we are continually trying to strike the right balance between demand and rate. Occupancy rate is an output of this optimization effort rather than a goal in it of itself. Total costs and operating expenses increased by 25% to $194 million, inclusive of $5 million of stock-based compensation expense in the quarter.

All of this, while revenue increased 56%. The increase in total costs and operating expenses were driven primarily by the overall growth in our live units. We continue to focus on free cash flow as our primary measure of financial performance. We are building this muscle at Sonder. The trajectory and our free cash flow result is evidence of this, and we continue to look at our investments and our cost structure through the lens of our free cash flow metric. In the fourth quarter, as Francis mentioned, free cash flow before one-time restructuring costs totaled negative $30 million, compared to negative $39 million in the third quarter and negative $53 million in the fourth quarter of 2021. Free cash flow margin also improved, reaching negative 22% compared to negative 31% in the third quarter of 2022 and negative 61% in the fourth quarter of 2021.

The sequential improvement was primarily driven by continued efficiencies realized in our efforts to optimize our cost structure as we scale. I would also like to provide an update on cash contribution margin, which is a unit economic metric we use to measure property level performance by excluding corporate and other non-property level costs. This enables us to assess the performance of our live property portfolio taking into account the benefit of upfront rent abatement, which is typical in the deals we signed. In the fourth quarter, cash contribution margin was 24% versus 22% in the third quarter and more than double the 10% from Q4 of 2021. We are focused on continuing to improve this metric over time, and I am pleased with the progress we are making in property level financial performance.

Turning to the balance sheet. As of December 31, we had $289 million in cash and restricted cash and $173 million in total debt. Note that restricted cash increased by $41 million sequentially due to temporary cash collateral requirements as we transition our levers of credit and deposit accounts to our new line of credit bank partner. $8 million of that restricted cash was already released in January, and we anticipate the majority of the remainder of this cash will be released by the end of this year. In conjunction with the change in bank partners, we were also able to increase our line of credit capacity from $50 million to $60 million to support our live unit growth as this line of credit supports letters of credit issued to our property owners.

Regarding guidance. For the first quarter of 2023, we expect revenue of better than $110 million representing 37% year-over-year growth. I want to remind everyone that Q1 has historically been our seasonally weakest quarter of the year and we anticipate a similar pattern again this year. For Q1 2023, we expect free cash flow of better than negative $45 million before restructuring costs. Separately, as a reminder the same as past quarters, our guidance is based on our best knowledge available from internal data and third-party forecasters and does not contemplate a significant slowdown in demand. With that, we are now happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. And we have a question from the line of Jed Kelly with Oppenheimer & Company.

Jed Kelly: Hey. Great. Thanks for taking my questions. Can we just talk about the outlook for 1Q and then just sort of how you’re thinking of RevPAR. I think when we look at the overall hotel industry this year. It seems like you get a big jump in RevPAR in 1Q pride call it 25% to 30% that year-over-year growth sort of dissipate. So, do you expect your RevPAR to sort of follow a similar trend? So any thoughts on RevPAR would be great.

Chris Berry: Hey Jed, this is Chris. I’ll start this off. Yes. So, the guidance today we said — we really guide toward revenue. We don’t really differentiate or split out RevPAR versus bookable night. But we are guiding better than $110 million in Q1, which is an increase of about 37%, 38% versus Q1 of 2022. So, we feel good about that trajectory right now. I mean just recognizing too that Q1 is typically our lowest quarter from a seasonality perspective as well. The other reminder too is last year during, sort of, really hard-hit COVID periods like Omicron in Q1, we performed better than our peers. So, the comps going into Q1 for us are going to be a little bit tougher than the other comps from our peers. So, just a recognition of that.

Jed Kelly: Got it. And then just with some of the headcount reduction, should we expect the majority of that to come out of G&A? And then can you just give us an update your positive cash contribution quarter. Are you expecting that to be in 3Q or 4Q? Just how should we be thinking about that?

Chris Berry: Yes, Jed, thanks again. In terms of the impact of the headcount reductions the largest impact will be to G&A. These are largely corporate roles. So, that’s the answer for that one. In terms of the free cash flow timing, we’re really focused on reaching positive free cash flow — quarterly free cash flow here in 2023. We’re not providing anything further at this point other than the guidance for Q1.

Jed Kelly: Got it. All right. And then just — and then with the reduction of units can you just talk about how we should be thinking about your portfolio approach going forward? And anything on like how we should be thinking about the supply ramp this year?

Chris Berry: Yes. For sure. This is Chris once again. Yes, each quarter we take a look at — we take a fresh look at our portfolio based on what’s going on current fact circumstances macro environment. And what we’ve done is our best — we exclude what we consider at-risk units given the macro on financing environment challenges that we’ve seen over the past several months and then how that impacts any financing contingencies that are built into some of these contracted properties. Just to be clear some of the contracted properties are still — they’re still in our portfolio. We just have excluded them from our overall look to be more of a conservative event given the uncertainty that’s out there on these financing contingencies.

As we have focused on free cash flow this year, the signings that we’ve entered into this year we’ve increased the hurdle rates — the contribution margin hurdle rates, lower payback periods all of that as we really develop this muscle. And so we’re pretty optimistic about further signings this year but that’s why you’ve seen some of the slowdown over the course of the past few months.

Jed Kelly: Thank you.