Wheels Up Experience Inc.
Q3 2022 Earnings Call Transcript

Published: 9 Nov 2022

[Operator:]

Hello, everyone, and thank you for joining the Wheels Up 3Q 2022 Earnings Call. My name is Darius, and I'll be the operator for today. [Operator Instructions] I now have the pleasure of handing you over to your host, Keith Ferguson. Please go ahead, Keith. Your line is now open.

[Keith Ferguson:]

Thank you. This afternoon we announced our third-quarter financial results. The earnings release with its supporting tables, as well as a copy of today’s presentation, can be found on our Investor Relations website at wheelsup.com/investors. Please refer to the slide with our disclaimer. Today’s presentation contains forward-looking statements based on our current forecast and expectations of future events. These statements should be considered estimates only and actual results may differ materially. During today’s call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Unless otherwise noted, all income statement related financial measures will be non-GAAP other than revenue. Reconciliations of GAAP to non-GAAP financial measures and definitions of non-GAAP financial measures are found within the financial tables of our earnings release and appendix of today’s presentation. And with that, I’d like to turn the call over to Wheels Up’s Chairman and Chief Executive Officer, Kenny Dichter.

[Kenny Dichter:]

Thank you, Keith, and thanks to all of you for joining us today. Let me start by highlighting the strong foundation we have built for Wheels Up. Today, we are a clear leader and on-demand private aviation with a highly recognized brands, a growing base, approaching 13,000 loyal members, and we are poised to deliver over $1.5 billion of revenue this year. For today's call, we are prioritizing three topics that we think are important for investors as we continue our intense focus on delivering on our path to positive adjusted EBITDA in 2024. One, our business performance for the quarter; two, a realignment of our management structure to improve our speed of execution as it relates to our operations and technology initiatives; and three, our strong cash position. With that, I will go through some highlights from our third quarter. We reported revenue of $420 million, a record for the third quarter and up nearly 40% year-over-year. Active members are up 12% compared to a year ago. Our live flight legs increased 7% year-over-year, reflecting a continued appetite for travel, as well as a contribution from Air Partner’s private jet business. Prepaid blocks are a great indicator of future flying. As you may recall, we announced an [autumn] (ph) cycle price increase in June, which resulted in unusually high block sales in the second quarter. As a result, our third quarter block sales were down year-over-year. However, prepaid block sales for the year were exceptionally strong through the third quarter of 2022, up 85% year-over-year. As our results made clear, even in an uncertain macroeconomic environment, overall demand remains healthy with continued strong customer retention and cohorts spend levels. There are clear macro concerns that are prevalent in many sectors of the market today. We do expect demand from our high-net-worth customer base and our business clientele to be more durable than that of the broader economy. With strong foundational demand and our commitment to positive adjusted EBIDTA in 2024, we are laser focused on two key areas, including

[Todd Smith:]

Thanks, Kenny. Four plus months into my time with the company, I remain very confident in the opportunity in front of us. We have a great foundation of loyal members with a well-recognized and admired brand, and a demonstrated track record of revenue growth. The Air Partner team, which joined us at the beginning of Q2, is also continuing to deliver ahead of our initial expectations, and I am quite excited about the additional cross-sell opportunities we have identified with Mark Briffa and his team. That being said, there are a number of other areas where we need to improve our execution. Throughout my 25 plus year career, I have come to appreciate the necessity of having the right alignment and accountability within an organization in order to drive results. As Kenny mentioned earlier, it is clear that we need to reduce our cost base and improve our focus and accountability in order to accelerate progress toward our profitability goals. Our objective is to run our company at a more granular level, where data more closely intersects with decisions that drive outcomes. I believe the changes we announced today put us on a path to achieve that vision. With that, let me start with the quarter highlights. Revenue came in at $420 million, up 39% year-over-year, and ahead of our guidance of 25% plus growth. The increase was primarily driven by two factors. First, higher-than-expected flight revenue due to a 20% year-over-year increase in flight revenue per live leg, driven by a full quarter of the indexed fuel surcharge and higher average pricing. Without Air Partner, which reports on the net revenue basis, the increase was 25% year-over-year. Second, stronger other revenue due to a $35 million year-over-year increase in aircraft sales, where we took advantage of a strong market, as well as the acquisition of Air Partner. Membership revenue was up 25% year-over-year, driven by an increase in new members. Retention remains consistent with historical levels. But we continue to evaluate membership growth relative to our capability to execute and deliver at the service level that our customers expect. Going forward, we will adjust membership growth initiatives and our product offering to ensure an optimal and increasingly profitable mix of revenue. Turning to margins. Our adjusted contribution margin was 5.1% for the third quarter, up sequentially and slightly above the high end of our guidance of 4.5% to 5%. Importantly, while aircraft sales were higher than expected, our core adjusted contribution margin was up sequentially, both on a percentage basis as well as in total dollars. That was due to a full quarter of the indexed fuel surcharge and improved 3P margins, partially offset by a sequentially lower contribution from Air Partner as we had expected, and a slight drop in aircraft utility. Sales and marketing expenses were 6.7% of revenue in the quarter, down slightly sequentially, but up as a percentage of revenue year-over-year due to higher commissions related to strong aircraft sales, as well as the addition of Air Partner. Technology and development expenses were 3.8% of revenue in the quarter, up sequentially and up year-over-year as a percentage of revenue, as we continue to invest in technology to drive operational efficiencies. General and administrative expense were 5.7% of revenue, up slightly sequentially, as cost saving measures were more than offset by increased recruiting fees. G&A expenses were up slightly year-over-year as a percentage of revenue driven by the acquisition of Air Partner. As a result, adjusted EBITDA was negative $45.2 million for the quarter, within our negative $42 million to $47 million guidance range. Capital expenditures were $9.2 million in the quarter, including capitalized software of $5.6 million. Year-to-date capitalized software is almost half of our normal capital spending, and reflective of our continuing technology investments. With regards to cash, on a pro forma basis, inclusive of our debt financing, we would have ended the quarter with $545 million of cash and cash equivalents on our balance sheet. That liquidity gives us added flexibility to continue to invest as we improve our operations, enhance our technology infrastructure, and execute on our plan for positive adjusted EBITDA in 2024. Now, let me provide more details on our plan. We have broken out our plan into three categories

[Kenny Dichter:]

Thank you, Todd, and thanks to all of you who have joined us today. We are building a marketplace that will improve asset utilization across our industry and generate sustained profitable growth for Wheels Up in the years ahead. We have a great foundation with nearly 13,000 active members and over $1.5 billion of revenue expected this year. We have all of the pieces. Now, it is up to us to execute. I look forward to sharing our progress. With that, let's take some questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Sheila Kahyaoglu from Jefferies. Please go ahead, Sheila. Your line is now open.

[Sheila Kahyaoglu:]

Thank you, and good afternoon, everyone. Thanks for the time. So, just on your initiative, maybe first more broadly, in terms of the initiatives you have in place, SG&A going from double digits -- 16% to low double digits, that's $40 million of EBITDA benefit over the next 12 to 18 months. How do you think about the other buckets and how that saves? And then maybe more specifically, for the quarter, adjusted EBITDA margin were slightly better sequentially from Q2. How much of that was due to the fuel surcharge? And how do we think about some of the sequential improvement going into ’23, too?

[Kenny Dichter:]

Yes, thanks, Sheila. I'll take that. So, I think overall, you're right. At the current revenue levels, that would equate to about the range of SG&A reduction. I think the way we think about this is that, first and foremost, as we said earlier, we'll always prioritize safety, service delivery, pilots and maintenance, and the member experience, that's always going to be first and foremost. But at the same time, we also think we need to continue to make some investments in technology. We'll continue to do that. But I think as we think about that spending level, our goal is to reduce a lot of the overhead spend, be more focused on our marketing and advertising, and then deliver savings for -- by consolidating a lot of activities that are performed in a more decentralized manner today. We still have a lot of silos out across the organization. And I think there's ways that we can bring that activity together in a more centralized fashion, use systems and technology to automate it, and then that's really going to help us. I would say some of the sequential improvement we've already seen is the result of some of the actions. We've already started hiring and headcount freezes, reduced internal travel, and some headcount reductions. And then, we're going into our cycle right now to work on our 2023 budgets. So, we're doing a lot of work, looking at the organization, the organizational structure, and really developing that quarter-by-quarter cost framework that will execute and use in 2023. You asked about like the fuel, as well. I think in the third quarter, we saw about a $6 million benefit in terms of our cost structure related to fuel. So, we are seeing that fully indexed fuel surcharge now helping us mitigate some of that pressure that we saw earlier in the year. And we effectively look that. Now it's in place and ensuring that we shouldn't have any significant adverse impact from fuel fluctuations going forward.

[Sheila Kahyaoglu:]

Got it. And then maybe just a quick follow-up on the top-line. In terms of live flight legs, I think, they slowed down a little bit. How do we think about what's going on there?

[Kenny Dichter:]

Yes, I mean, I think we're still seeing some improvement. I mean, year-over-year, the live flight leg and the revenue per live flight leg is up significantly, up 20%, 25% if you exclude Air Partner. So, I do think that we're seeing some progress there. I mean, it was slightly on a sequential basis. But if you think about the revenue impact of that, I think that's really driven by -- starting to see some of those pricing increases come through. As we mentioned earlier, only about 20% of the revenue -- flight revenue in the third quarter was on that new June pricing basis. And still around 50% or so was even pre-December of 2021. So, increasingly, we'll start to see more of that move through the book and now continues to give us some blips on the revenue per live flight leg. And then we're continuing to watch the live flight leg itself in terms of that activity, but still feel pretty good about the strength there. Obviously, a lot of variables that drive that in terms of how that translates into revenue, but I think our outlook is so positive there.

[Sheila Kahyaoglu:]

Okay. Thank you.

[Operator:]

[Operator Instructions] It appears we have no questions at this moment. So, I'm just going to hand back to the management team for any final remarks.

[Kenny Dichter:]

Yes, thanks to everybody for joining us today, and thank you for being involved with Wheels Up. And we appreciate you, and have a great day.

[Operator:]

This concludes today’s call. Thank you for joining. You may now disconnect your lines.