OneSpaWorld's Q3 2025 Earnings Call: Contradictions Emerge on AI Implementation, Service Margins, and Shorter Voyages Impact

Date of Call: October 29, 2025

Financials Results

• Revenue: $258.5 million, up 7% YOY (from $241.7 million in Q3 2024)
• EPS: $0.23 per diluted share, up ~15% YOY (from $0.20 in Q3 2024); adjusted diluted EPS $0.29, up vs $0.26 prior year
• Gross Margin: 17.3% service margin, up vs Q1 (17.0%) and Q2 (16.6%), marginally below Q3 2024 (mix-driven)
• Operating Margin: Income from operations $26.3 million, up 5% YOY (from $25.0 million)

Guidance:

• Full-year 2025 revenue expected $960M–$965M (~+8% at midpoint vs FY2024)
• Full-year adjusted EBITDA expected $122M–$124M (~+10% at midpoint vs FY2024)
• Q4 2025 revenue expected $241M–$246M; Q4 adjusted EBITDA expected $30M–$32M
• Company expects AI benefits to materialize later (specific improvements targeted by Q2 next year)

Business Commentary:

* Record Financial Performance: - OneSpaWorld reported record total revenues of $258.5 million for Q3 2025, marking a 7% increase compared to Q3 2024. - The growth was driven by increased ship counts, higher-value services, and strong demand for new ship builds.

• Enhanced Productivity and Staff Retention:
• The company experienced a 5-point increase in staff retention compared to Q3 2024, leading to improved operating metrics.

• This was attributed to enhanced sales training, better facility utilization, and a focus on creating a desirable work environment.

• AI Initiatives and Operational Efficiency:

• OneSpaWorld implemented an automated problem resolution and inquiry tool across 180 vessels, enhancing response times and reducing help desk hours.

• These initiatives are part of broader efficiency efforts aimed at improving revenue and profitability through automation and streamlining operations.

• Capital Allocation and Shareholder Returns:

• The company returned $17.6 million to shareholders through share repurchases and paid $4.1 million in dividends during Q3.
• This was part of a balanced capital allocation strategy focused on reducing debt, investing in future growth, and returning value to shareholders.

Sentiment Analysis:

Overall Tone: Positive

• Management called Q3 "record" results delivered at the high end of guidance, highlighted 18 consecutive quarters of YOY revenue and adjusted EBITDA growth, increased dividend by 25%, and raised FY2025 midpoint guidance for revenue and adjusted EBITDA.

Q&A:

• Question from Steven Wieczynski (Stifel, Nicolaus & Company, Incorporated, Research Division): So Leonard or Stephen, I'm wondering about how we should think about the benefits from some of this AI technology you guys have been implementing... can you help us think about maybe the cadence of how margin expansion or contraction should look moving forward as you kind of go through and implement some of this technology?
  Response: Too early to quantify AI-driven margin gains; expect to provide specific expected improvements by Q2 next year.

• Question from Steven Wieczynski (Stifel, Nicolaus & Company, Incorporated, Research Division): So as we think about the fourth quarter and the first quarter, basically assume nothing is in there, correct?
  Response: Yes — assume current cadence (no material AI benefit) in Q4 and Q1, with improvements thereafter.

• Question from Steven Wieczynski (Stifel, Nicolaus & Company, Incorporated, Research Division): I want to understand maybe spend patterns a little bit more on board... have you seen any changes through October, whether that's through attachment rates, a difference in spending across land-based versus maritime or really any kind of change in demand for higher-end services versus traditional treatments?
  Response: Revenue per passenger per day and attachment rates are up; pre-cruise revenue remains strong and we have seen no material change in guest spending through October.

• Question from Sharon Zackfia (William Blair & Company L.L.C., Research Division): I think you mentioned that service margin was down a little bit on mix. Could you kind of clarify what's happening with the mix?
  Response: Mix effects stem from which cruise lines are generating revenue and contractual terms; the 17.3% service margin remains healthy and the mix shift was expected.

• Question from Sharon Zackfia (William Blair & Company L.L.C., Research Division): I just wanted to clarify that you weren't seeing passengers kind of shift down into lower price point services, but it sounds like it's ship mix, not necessarily the actual...
  Response: No customer shift to lower-price services observed; model insulates results and customers continue to spend.

• Question from Sharon Zackfia (William Blair & Company L.L.C., Research Division): We've been getting a lot of questions on the global minimum tax. Can you kind of talk about OneSpaWorld and how or if you will be impacted by that beginning next year?
  Response: Expect not to be impacted after planned reorganizational changes are implemented.

• Question from Maksim Rakhlenko (TD Cowen, Research Division): In the release, you noted that you saw a noteworthy increase in guest counts, frequency as well as average spend. Just what do you attribute that to? And then is there a way to think about the magnitude of the step-up that you may be seeing?
  Response: Growth attributed to fleet expansion (new builds), higher penetration and improved staff/facility utilization; management can pursue additional berth capacity where demand justifies.

• Question from Maksim Rakhlenko (TD Cowen, Research Division): How are you thinking about the right level of cash to hold on the balance sheet in the context of likely continued declines in interest rates? Should we assume that you're going to put more cash to work as what we saw both in 3Q and quarter-to-date? Or what's the plan ahead?
  Response: Target keeping roughly $25M cash on hand with $50M revolver available; prioritize opportunistic share repurchases, then dividends, then debt paydown.

• Question from Gregory Miller (Truist Securities, Inc., Research Division): You mentioned you redesigned the talent management process. Could you elaborate on the kind of changes you're implementing?
  Response: Redesigned talent management to deploy staff across multiple modalities (cross-training) to improve facility and staff utilization.

• Question from Gregory Miller (Truist Securities, Inc., Research Division): The revenue enhancement projects are on 40 vessels but operating efficiencies on 180 vessels — what's driving the disconnect?
  Response: Operational-efficiency tools are simpler apps to roll out; revenue-enhancement requires more complex training, so its rollout is slower.

• Question from Andrew May (Northcoast Research Partners, LLC): Was there any tangible headwind or benefit you guys call out from storm activity during the quarter?
  Response: No tangible or material impact from storm activity during the quarter.

• Question from Andrew May (Northcoast Research Partners, LLC): A step-up in CapEx this quarter — related to the AI initiatives or anything else to call out?
  Response: Yes — majority of the elevated CapEx related to AI initiatives; a smaller portion to Medi‑Spa equipment rollouts.

• Question from Assia Georgieva (Infinity Research): Adding an extra berth — might adding more staff depress the productivity metric in Q2 due to structural change, or is that unfair?
  Response: Adding a berth would be accretive and should not depress productivity metrics; it's pursued only when it improves penetration/productivity.

• Question from Assia Georgieva (Infinity Research): Banners shifting to shorter voyages — do shorter voyages remain favorable for you or any net-net impact?
  Response: Shorter voyages remain favorable and historically perform well; no material net impact expected.

• Question from Assia Georgieva (Infinity Research): With private island development, is there opportunity to build out your infrastructure on marquee private islands?
  Response: Management is actively exploring participation and upgrades on private-island destinations and sees potential to expand services there.

• Question from Assia Georgieva (Infinity Research): Has the prebooked services rate moved and are you benefiting from cruise-line prebooking increases?
  Response: Prebooking is a focus; cruise lines report higher prebook rates (~50%); OSW's prebook is ~22% of service revenue (ex‑MediSpa), and prebooked guests spend ~30% more — expect continued growth.

• Question from Assia Georgieva (Infinity Research): What is your current prebook rate roughly, if you don't mind sharing?
  Response: About 22% of service revenue (ex‑MediSpa).

Contradiction Point 1

AI Implementation and Timing of Impact on Results

It involves the expected timeline and impact of AI initiatives on company results, which are critical for investor expectations and strategic planning.

What are the benefits of your AI technology implementation? How will margin expansion progress moving forward? - Steven Wieczynski(Stifel)

2025Q3: It is too early to commit to specific increments. Improvements from AI initiatives are expected to be more evident by the second quarter of next year. The current improvements are consistent with historical trends. - [Stephen Lazarus](CFO)

How significant will AI-enhanced profitability be over time, and what is the expected timeline? - Steven Moyer Wieczynski(Stifel)

2025Q2: We have two sets of initiatives: one for yield improvement using AI to drive revenue and a second for efficiency and automation to increase flow-through. We have added specialized personnel to this project, and we expect a significant step forward in this area, likely impacting results in fiscal 2026. - [Stephen Lazarus](CFO)

Contradiction Point 2

Mix Impact on Service Margin

It involves the impact of mix changes on service margins, which are crucial for understanding revenue generation and operational efficiency.

What caused the slight decrease in service margin? - Sharon Zackfia(William Blair)

2025Q3: The mix change is due to agreements with cruise lines and is not a concern as the overall service margin is healthy at 17.3%. Recent margins are higher than the first two quarters of 2025. - [Stephen Lazarus](CFO)

Can you provide guidance on gross margin for the remainder of the year? - Tania Lynn Anderson(William Blair)

2025Q2: The mix within service revenue has moved to a lower yielding activity, which has resulted in a lower service margin. - [Stephen Lazarus](CFO)

Contradiction Point 3

Impact of Shorter Voyages on Business

It directly impacts understanding of the company's revenue generation strategy and sustainability as shorter voyages become prevalent.

How do shorter voyages becoming more common affect your business? - Assia Georgieva (Infinity Research)

2025Q3: Shorter voyages tend to be decent for revenue generation and have not led to material changes in demand patterns. - [Leonard Fluxman](CEO)

Can you explain changes in guest spending patterns, including board spend, attachment rates, and demand for higher-end services? - Steve Wieczynski (Stifel)

2025Q1: We have not seen a significant increase in discounting or a decline in spend. In fact, spend has increased, with high-end services like medi-spa and upper-body services in high demand. - [Leonard Fluxman](CEO)

Contradiction Point 4

Impact of AI Technology on Margins

It involves differing expectations regarding the impact of AI technology on margin expansion, which could influence investor expectations and strategic planning.

How should we think about the benefits of your AI technology implementation? What is the expected rate of margin expansion going forward? - Steven Wieczynski(Stifel)

2025Q3: It is too early to commit to specific increments. Improvements from AI initiatives are expected to be more evident by the second quarter of next year. The current improvements are consistent with historical trends. - [Stephen Lazarus](CFO)

Given your guidance midpoint of 12.5% margin, flat with 2024’s margin, why isn’t there potential for margin expansion this year despite price increases and higher prebooking activity that could boost spending? What cost-side headwinds are offsetting these opportunities? - Steve Wieczynski(Stifel)

2024Q4: There are no specific cost headwinds, and we are comfortable with a flat margin profile. We have not built in any pricing, and the focus remains on absolute dollar generation. We maintain flexibility for pricing improvements, but currently, we are aligned with our guidance. - [Stephen Lazarus](CFO)

Contradiction Point 5

Service Margin Decline

It highlights differing explanations for the service margin decline, which could impact financial analysis and investor understanding of the company's performance.

Can you explain the mix shift causing the slight service margin decline? - Sharon Zackfia(William Blair)

2025Q3: The mix change is due to agreements with cruise lines and is not a concern as the overall service margin is healthy at 17.3%. Recent margins are higher than the first two quarters of 2025. - [Stephen Lazarus](CFO)

Given the services gross margin's lower year-over-year expansion compared to recent periods, are we at a normalized run rate, or are there factors weighing it down? - Sharon Zackfia(William Blair)

2024Q4: There is nothing weighing down the services gross margin in the fourth quarter. The decrease is attributed to the normalization of revenue levels after a higher third quarter. The margin is primarily variable with some fixed costs, which benefit from higher revenue levels. - [Leonard Fluxman](CEO)