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How would you like to be a Sonder exec boasting that your free cash flow margin improved from negative 127 percent a year ago to negative 37 percent in the second quarter? Well, that's one measure of progress.

Sonder has a multifaceted plan to achieve positive free cash flow sometime in 2023, but it announced another prong — a stock option exchange program for employees whose existing stock options are “under water.”

That’s the way CEO and Chairman Francis Davidson described the status of employees’ stock options in citing the need for a one-time exchange so that Sonder might retain talented employees, and achieve its goals, including getting to positive quarterly free cash flow.

“This will provide employees a voluntary onetime opportunity to exchange existing underwater stock options for new stock options with the same terms at a strike price equal to fair market value,” Davidson told financial analysts during the company’s second quarter earnings call Wednesday. “We strongly believe our team members are our most valuable asset, and this is a critical onetime event to properly incentivize and retain them.”

The company hasn’t yet provided details on the stock option exchange program, but Davidson emphasized its importance.

“So the philosophy at the heart of this option exchange program is that we believe that our team members are our most important asset to go and achieve our cash flow positive plan,” said co-founder Davidson. “We’ve got some really talented people at Sonder. Very proud of the — not just the management team, but all the way down to our individual contributors. We’re very thorough in how we assess talent and bring them in and train and develop our people. And so it’s absolutely critical that we have — that we retain our top employees.”

Sonder employed around 1,700 people at the end of March, but it restructured in June.

The 50-day moving average of Sonder’s share price is $1.42, according to Yahoo Finance. SOND closed at $2.28 on Thursday, a day after its second quarter earnings announcement.

Davidson said the main elements of Sonder’s plan to get to quarterly positive cash flow sometime in 2023 includes “cutting cash costs, reducing planned signings pace, raising the bar on incremental lease signings and focusing on rapid payback RevPAR initiatives.”

The hospitality company also plans to tamp down geographic expansion, and efforts to make the business less complex.

Strong Growth in the Second Quarter

Sonder saw its revenue increase 157 percent to $121 million year over year in the second quarter, and it was fueled by a 67 percent growth in revenue per available room (an average of $167) and an 82 percent occupancy rate. A year earlier occupancy was 68 percent.

On a GAAP (generally accepted accounting principles) basis, Sonder notched a net loss of $43.7 million in the second quarter compared with a net loss of $73.9 million a year earlier.

But Sonder would rather focus on other measures of its financial trajectory, mainly its hoped-for road to positive cash flow status. Sonder’s operating cash flow margin improved from negative 118 percent in the second quarter of 2021 to negative 34 percent in 2022’s June quarter. Free cash flow margin likewise moved from negative 127 percent in 2021’s second quarter to negative 37 percent in the most recent quarter.

Business Travel and Ancillary Services

Sonder attracts mainly vacationers but is trying to develop a business travel revenue stream, an initiative that it believes would go well with its mostly urban locations. In the second quarter, Sonder added 150 corporate accounts, bringing its total to 400, the company said.

The company is also looking to expand its assortment of ancillary services, and is currently considering earning fees from parking, breakfast trays (primarily in Europe, Middle East and Africa), workstations and pets, Davidson said.

In other notable developments, Sonder, which grew its portfolio of units 26 percent year over year in the second quarter to 18,700, added three properties in New York City, bringing its number of “live units” there to more than 1,000. Sonder argued that such density brings gains in revenue per available room, and improves its unit economics.

Before the end of September, Sonder plans to open its largest building, a 400-unit property in Dubai.

What Is Sonder?

Is Sonder trying to be a hotel company, a short-term rental provider — or something else?

The answer is all of the above, and more.

Chief Financial Officer Sanjay Banker told analysts that the company indeed has competition, but there’s not an individual competitor or set of competitors standing in Sonder’s way across its portfolio because of its broad geographic footprint and portfolio diversity.

Said: Banker: “It’s because we look at both multifamily deals, hotel deals, office conversion deals. And so we don’t really see any competitor of size consistently across those different segments of real estate supply that we pursue.”

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Tags: ancillary services, business travel, earnings, fees, future of lodging, homes, hotels, labor, pets, sonder, stock options

Photo credit: Sonder is expanding in Dubai. Pictured is Sonder Business Bay in Dubai. Source: Sonder

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