Skift Take

Oyo has disclosed a surge in losses in documents related to its $1.5 billion in new funding. The hospitality company claims it will turn profitable three years from now, yet Skift Research dug beneath the headlines to deliver analysis substantiated by Oyo's latest income statements.

Oyo Rooms disclosed fresh details about its financial performance as the hospitality company continues its breakneck expansion while experiencing a rapid acceleration of losses in the three months through June 2019, according to newly released financial documents.

The filings were related to Oyo’s $1.5 billion in series F funding led by SoftBank Group. The information fills in some missing details that weren’t available in October, when Skift Research published a definitive look into how Oyo operates.

In the year through March 2019, the India-based company stated it suffered a net loss of $332 million on revenue of $900 million. But the financial filings also revealed details on the company’s accelerating losses, how operations in China account for approximately 40 percent of its losses worldwide, and that early investors in the company aren’t participating in the latest round, which placed a $6.5 billion valuation on the company.

Losses Accelerate

The documents predict that Oyo will make a profit in its India and China operations starting around 2022. But the historical data it published pointed to an alarming trend in its business model.

Oyo’s losses have been accelerating. For the three months through June 2019, Oyo’s net loss before tax was $181 million (13.08 billion rupees), which was alarmingly equal to 54 percent of the net loss of $332 million (23.85 billion rupees) it had for the full year through March 30.

“You would want to be cautious about extrapolating one quarter’s margin to a forward full-year projection because of seasonality, yet the losses are still notable,” said Seth Borko, Skift senior research analyst who authored the Skift Research report on Oyo.

In other words, during the three months through June, Oyo spent more money opening spaces and marketing them than it did generating income from them.

That isn’t the trend Oyo hinted at in its March 2019 financial statements in which it said it had “a high degree of operating leverage in the business model” that was resulting in losses as a percentage of its total realized value of bookings coming down from 44.5 percent in its fiscal year of 2017 to about 10 percent in its fiscal year ending March 2019. In other words, Oyo had said it’s having incremental improvements in unit profitability. But with losses overtaking revenue, the trend seems to be going in reverse.

China’s Losses Detailed

As a back of the envelope estimate, China will likely account for about 40 percent of Oyo’s company-wide losses in the back half of this year. In its financial filings released Thursday, Oyo released an income statement for its China operation for the first time.

During the final six months of 2019, Oyo forecasts that its China operation will generate a loss of about $175 million in earnings before interest, taxes, depreciation, and amortization (EBIDTA). That will be higher than the $153 million EBITDA loss expected in its flagship market of India during the same period.

Oyo aims to be the largest hospitality company in the world. Instead of being a hotel group growing by acquiring smaller regional chains, Oyo is acquiring inventory on a mix of a franchising and leasing basis and tuning up the inventory with brand standard functionality and plugging it into distribution channels like online travel agencies such as MakeMyTrip.

Beware of the Projections

Press coverage has focused on Oyo’s claims of profitability by 2022. But Borko stressed taking a cautious approach.

“It would be a mistake to look at this report and see it as a business plan, where if they don’t hit profitability in 2022, then they’re behind schedule,” Borko said. “This is more of a report by accountants for accountants for near-term purposes, but it’s not like CEO Ritesh Agarwal will have his pay docked if he doesn’t meet those targets.”

For more context, Skift Research subscribers can read A Deep Dive into OYO 2019: The World’s Fastest Growing Hotel Chain.

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Tags: oyo, oyo rooms, softbank

Photo credit: An example of an Oyo property. Oyo Rooms disclosed details about its financial performance as the hospitality company continues its breakneck expansion while piling up losses. Oyo Rooms

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