Good evening and welcome to the SmartRent Inc. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the management's presentation. As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host Evelyn Infurna, Senior Vice President of Investor Relations. Thank you, Evelyn you may begin. .

Thank you, operator. Hello, everyone and thank you for joining us today. Lucas Haldeman, Chairman and CEO; and Hiroshi Okamoto, CFO will be taking you through our results for the second quarter of 2022 as well as guidance for the remainder of the year and the third quarter.

After today's market close, we issued an earnings release and filed our 10-Q for June 30, 2022 both of which are available on the Investor Relations section of our website smartrent.com.

Before I turn the call over to Lucas, I would like to remind everyone that the discussion today may contain statements related to our business that may be considered forward-looking, including statements concerning our plans to execute on our growth strategy, our ability to maintain existing and acquire new customers, the benefits of our strategic acquisitions including our acquisition of SightPlan, expected financial results, product portfolio enhancements, expansion plans and opportunities, expectations regarding key operational metrics and other statements regarding our plans and prospects.

Forward-looking statements are often identified with words such as we expect, we anticipate, we believe or similar expressions. These statements reflect our view only as of today August 11, 2022 and should not be considered our views as of any subsequent date. We do not undertake any obligation to update or revise any forward-looking statements.

Forward-looking statements are not promises or guarantees of future performance and are subject to a variety of risks and uncertainties that could cause the actual results to differ materially from our expectations.

For a discussion of material risks and other important factors that could affect our actual results please refer to those contained in our most recent annual report on Form 10-K filed with the SEC on March 24, 2022 along with the quarterly report on Form 10-Q and earnings release and current report on Form 8-K filed with the SEC today all of which are publicly available on the Investor Relations section of our website at smartrent.com and on the SEC's website at sec.gov.

As a reminder, during today's call, we will refer to certain non-GAAP financial measures. A discussion of these non-GAAP financial measures along with a reconciliation to the most directly comparable GAAP measure is included in today's earnings release.

We'd also like to point out that we've added new financial visuals to the earnings release that represent our disclosures and illustrate our results. And with that, let me turn the call over to Lucas. .

Thank you, Evelyn. Hello, everyone and thank you for joining us today. In the second quarter, SmartRent reached a number of operational milestones. As of June 30, 2022, we have deployed more than 450,000 units, installed over two million pieces of hardware and engaged with more than two million operator and resident users.

We had 447 unique customers across multiple verticals that own or control more than six million units. In March we expanded our capabilities with the acquisition of SightPlan, which offers a comprehensive SaaS platform to automate the property life cycle.

Our combined teams are executing on cross-selling sales strategies product enhancements and development as well as operational efficiencies. We recently announced the appointment of Terry Danner from SightPlan CEO to Executive Vice President of Sales for the combined enterprise.

Terry is a pioneer in the multifamily space bringing more than 30 years of leadership experience and a deep network of industry relationships to our team. We are extremely excited about Terry's new role and the continuing evolution of our company. We are just beginning to see the benefits of the synergistic acquisition.

SightPlan solutions are highly complementary to SmartRent’s smart home operating system and we are poised to take advantage of the opportunity to increase market share. This quarter, SmartRent deployed more than 60,000 units and generated over $42 million in revenue establishing new quarterly records.

Importantly, we improved profitability with margin expansion for both professional and hosted services, and reduced adjusted EBITDA loss by over $3 million compared to the previous quarter.

As of June 30, committed units increased 29% year-over-year to over 780,000 bringing total units deployed and committed units to over 1.2 million, up 50% from $800,000 in the second quarter of 2021. Units booked in the quarter grew 53% to approximately 59,000 up from approximately $39,000 in the second quarter of last year.

Total bookings in the quarter increased 87% to $57 million compared to $30 million for the same quarter last year. SaaS bookings in the quarter totaled $3.4 million compared to $1.8 million, in the second quarter of last year. SaaS ARPU was $4.79 across all units booked compared to $3.83, for all units booked in the second quarter of 2021.

We also continue to see higher SaaS ARPU with new customers, which reached $7.48 in the second quarter. The metrics just referenced related to bookings are not inclusive of SightPlan. We were able to achieve this through software subscription price increases, and the addition of new customers in the long tail.

As you are aware, global supply chain constraints are persistent. Our results for the quarter were record setting, but were also muted due to circumstances beyond our control. The demand for our product is strong and growing.

However, our ability to execute on deployments was impacted due to shortages and repeated shipment delays for certain components as well as specialty locks. To mitigate this challenge, we pivoted and we will continue to pivot to deployments for communities requiring hardware that is more readily available.

Our customers remain loyal to the SmartRent solution, as evidenced by our record backlog. We have built strong relationships with our clients and at their request, we will schedule our backlog deployments once all necessary components are available.

Eventual improvement of our supply chain, should enhance our path to profitability and higher recurring ARR, as we incorporate our backlog into future deployments. I'm going to turn the call over to Hiroshi, to discuss our financial results.

Following Hiroshi remarks, I will share the details of our revised outlook, before opening the call for questions.

Hiroshi?.

Thank you, Lucas. SmartRent achieved notable gains in the second quarter, resulting in record revenue and improved profitability in spite of supply chain issues. Let's start our review by talking through the statement of operations.

In the second quarter of 2022, total revenue increased 96% to $42.4 million from $21.7 million in the second quarter of last year and set a new company record for quarterly revenue. Sequentially, total revenue increased 14% from $37.4 million in the first quarter of 2022.

The increases reflect higher volume of deployments of smart home hardware devices, the growth in the number of recurring software subscriptions and the contribution from SightPlan for a full quarter. All three revenue streams increased in the quarter compared to the same quarter last year.

And importantly, the largest increase in revenue was in hosted services, which has the highest margin. Drilling further into hosted services, SaaS revenue in the quarter increased 337% to $7.6 million from $1.8 million in the second quarter last year.

On a linked quarter basis, SaaS revenue increased 88% from $4.1 million reflecting the growth in the number of recurring software subscriptions and the contribution from SightPlan for a full quarter. Total gross margin improved to 2.3% from 1.3% in the second quarter last year, and improved from a loss of 12.7% in the first quarter.

Notably, our professional services margin improved to negative 55%, from negative 119% compared to the first quarter, resulting from a 12% increase in ARPU and a 21% decrease in unit costs. Even more notably, we saw continued improvement in hosted services margin.

During the quarter hosted services margin was 49%, compared to 36% in the second quarter of 2021 and 39% in the first quarter of 2022. We anticipate continued improvement to gross margin in the second half of 2022, as we see the benefit of price increases introduced across all three revenue streams earlier in the year.

Operating expenses for the quarter were approximately $28 million compared to $10.3 million in the second quarter of 2021.

The year-over-year increase reflects investment in the growth of our team and corporate infrastructure, costs associated with being a public company and the incremental expenses assumed in connection with the operations of SightPlan and iQuue.

Included in G&A expense in the second quarter of 2022 was $3.8 million of stock-based compensation and $1.8 million in acquisition-related compensation expense. Net loss for the quarter was $25.6 million as compared to a net loss of $10.1 million in the second quarter of 2021 and a net loss of $23.4 million in the first quarter of 2022.

Adjusted EBITDA loss was $19.8 million as compared to an adjusted EBITDA loss of $9.3 million in the second quarter of 2021 and an adjusted EBITDA loss of $23.1 million in the first quarter of 2022. As a result of record revenue and improved gross margins adjusted EBITDA improved by more than $3 million compared to the first quarter of 2022.

Moving to the balance sheet. SmartRent's total deferred revenue as of June 30, 2022 increased 68% to $125.4 million from $74.5 million at the end of the second quarter of 2021. We expect to recognize over 60% of total deferred revenue within the next 12 months. SmartRent is solidly positioned from a capital and liquidity perspective.

As of June 30, 2022, the company had approximately $263 million of cash, no outstanding debt and full access to a $75 million revolving line of credit. Our liquidity position provides us with sufficient capital to advance our organic growth plans and support incremental external growth initiatives.

I will turn the call back to Lucas for additional perspective on our business and our outlook for the third quarter and the balance of 2022..

Thank you, Hiroshi. Well, we've been able to navigate a myriad of supply chain difficulties, obtaining component parts for Alloy Access, Fusion Hub as well as specialty locks remains a persistent challenge and our expectation is that we will not see marked improvements with respect to supply chain delays for the remainder of this year.

Due to persistent supply chain challenges, our results for the quarter while record-breaking fell short of our expectations and require a revision to guidance for the remainder of 2022.

Based on anticipated hardware deliveries, we now expect full year deployments to be between 190,000 and 220,000 units with revenue in the range of $155 million to $180 million. We have also revised our expectations for adjusted EBITDA to a loss of $70 million to $75 million.

With respect to the third quarter, we are expecting 45,000 to 50,000 new units deployed with a revenue range of $43 million to $47 million. I am pleased to share that despite our revised guidance, we remain on track in 2023 to be intra-year adjusted EBITDA positive due to year-over-year growth in units deployed combined with growth to our ARR.

With the addition of SightPlan, we have diversified our business strategy and are able to augment SaaS revenue. Our path to profitability should be further enhanced with the eventual improvement in the supply chain allowing us to execute on higher ARPU deployments.

Before we open the line for questions, I'd like to reiterate the key themes from the quarter. We experienced record revenue growth and improved our profit margins for both professional and hosted services in spite of supply chain issues.

Importantly, demand for our solutions is stronger than ever, and we'll be able to deploy units that have moved to our record backlog as global supply chain headwinds ease. We continue to believe supply chain disruptions are temporary and our path to profitability and our growth trajectory remains on track.

Operator, please open the line for questions..

Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question comes from Rod Hall of Goldman Sachs..

Yes. Hi. Thanks for the question. I guess I wanted to start Lucas with kind of a high-level question on the environment. We've seen some data on multifamily real estate construction delays, and I know that you're mostly retrofit, but we've seen that data.

And then, a general macro kind of environment, obviously, is weakening certainly for single-family homes.

So I'm just wondering, what you're hearing from your customers in respect of this as they look out into 2023? Do you think that -- does this encourage them to purchase solutions like SmartRent? Does it cause people to pause a little bit? Just kind of wondering what you think the macro impacts to the business might be as we look out over the next few quarters?.

Yeah. Hey Rod. Thanks for the question. What we're seeing and hearing from the multifamily segment is really still continued strong demand and tremendous growth in renters.

We've also seen some of the public REITs who our customers have already announced and we've seen income ratios to rent actually go down into pretty affordable rates, sub-25% for most of the big REITs. And so we're still seeing a lot of renter demand, as home prices and rates go up for single-family homes. I think its driving demand for renters.

The other macro trend that we are seeing is really around increasing operating efficiency. And I know that people are seeing multifamily REITs are seeing their cost of capital go up. And so they're starting to think more about the expense side. That's another driver of demand for our products.

And as we look at reducing the number of staff and implementing technology we see really favorable tailwind. So, all of the demand indicators for us are just incredibly strong and growing every month. And so we feel really good about the macro environment right now..

Great. Okay. That's helpful, Lucas. And then, I wanted to kind of circle back on the supply question. I think I remember last quarter the Alloy Access was the issue. I think you're still struggling to get the Fusion Hubs.

But then, we've heard from other people in the semiconductor supply chain things are starting to loosen up a little bit, because consumer demand for some of the higher volume things like smartphones is weakening. So I'm just curious, whether you're seeing anything on the edge that is improving supply for you.

And maybe you could give us a little bit more detail on specifically what -- where the supply constraints are right now as we sit today..

Yeah. I mean, the supply constraints for us still remain as they were last quarter really around Alloy Access our common area access platform, our Fusion Hub and also on specialty locks that are made to order. And we have seen some buying in the supply chain around some of our more standard products.

We have a record number of smart home hubs in inventory today in Arizona. So it's not that there's no thawing. It's just on the edge sort of on the margin where we need that access control and where we need specialty locks, we're still not able to get it.

And I think we're getting guidance from our partners that it's Q4 into Q1 before really getting a steady supply. There's sort of a slow drip coming in. And then that translates everything sort of cascades off of that. As these jobs are waiting for that to come in everything gets pushed back. And so it's just sort of a function of timing for us..

Great. Okay Lucas. Thanks very much. I appreciate it..

Thanks Rod..

Thank you. The next question comes from Ryan Tomasello of KBW..

Hi everyone. Thanks for taking my questions. Just following on with the supply chain topic, is there any way to quantify approximately how many deployments are on hold maybe as a percentage of your books and un-deployed backlog due to these component access limitations? And to the extent, we do get relief perhaps sooner than expected.

Are there any capacity issues on your ability to work through that pent-up backlog in a timely fashion? I guess based on your current staffing, where would you say your installation capacity stands on maybe a monthly or quarterly basis?.

Yeah. Thanks Ryan. On the supply chain side of it, I mean, I think I can share we have over 100,000 units in our backlog right now over 300 access control jobs on hold. So I mean it is a significant and record backlog. Our pace is still around -- at capacity, we feel like we can do 25,000 to 30,000 new units per month of our IoT product.

And so if you sort of marry that up with that supply comes in we feel like we've got the right amount of staff in place. So we're trying to kind of walk that line between having enough staff to be ready for when we get supply in, but not sort of get overstaffed.

I think we've done a really good job of balancing that using both our W-2 and our general contract labor. So it is -- the good news bad news is it's a very localized problem. We need the supply to come in. We feel like we've got the crew and the teams in place to deliver once that happens..

Got it.

And then in terms of the expectation to reach adjusted EBITDA positive in the year, next year, how dependent is that on the supply chain constraints abating? And to the extent that those disruptions continue and look less temporary than you think, what actions would you consider taking in terms of balancing those headwinds with your profitability targets? Thanks..

I mean, it kind of goes back to the first question too, which is watching the labor cost and making sure we're appropriately staffed. But most of the forecast that we have now as we said in the call we're pivoting to those jobs that where we have the inventory. It takes time for us to pivot. It's not a quick shift to turn.

And so that's where we feel good about reiterating the guidance into 2023 with the line of sight we have, we feel like we're on track to reach that milestone..

Great. Thanks for taking the questions..

Thanks Ryan..

The next question comes from Barry Oxford of Colliers..

Great. Thanks for taking my question. Lucas just, I guess, to harp on the guidance even a little further. You had mentioned on another question that your supply chain people were giving you visibility into like 4Q, Q1 as far as timing, as far as when things might lighten up a little bit.

What guidance have they given you in the past as far as timing? And have they been correct on their timing?.

Thanks for the question Barry. It's an excellent question. And no we've been fighting these continued delays and that's where we're optimistic that maybe there's some of the stuff is going to come in sooner, but we're certainly watching it closely. And I think it is a good point to make that we are reliant on multiple suppliers.

We're working hard to diversify our suppliers. One of the benefits of us being a hardware agnostic platform is that we can look at other hardware and look at implementing other solutions.

And so given enough time, I think we feel like we've got some different pathways to make sure we get what we need either from our current supplier or from additional suppliers we'll bring on..

Great. That's helpful. That's helpful. Switching gears just a little bit last question on the margins. I'm looking at the hardware. You were slightly -- and not that this is a huge deal, but you were slightly positive in 1Q on your margins on the hardware but you were slightly negative this quarter.

Was there anything in particular on the cost side that drove that?.

I mean in particular, yes, our costs are still going up. So the other thing that we're fighting in the hardware is not just the supply, but the cost of supply going up. And so we're able to pass that through but not immediately.

So contracts we signed in the previous quarter if the price moves on us, we want to get that hardware in so we're willing to pay a little bit more but you will see some fluctuation in that. We anticipate that will continue to marginally improve throughout the year.

I don't think you're going to see a huge jump but that will get back to the positive side in Q3..

Okay, perfect. Thanks. Appreciate the color..

Thanks Barry..

The next question comes from Sidney Ho of Deutsche Bank..

Great. Thanks for taking my question. So I'm looking at the units booked in the quarter. It’s not up nicely year-over-year by 55%, but it is down roughly 35% quarter-over-quarter. Can you just walk us through the dynamics there? I assume it has nothing to do with supply constraints.

Is there a seasonal pattern about bookings that we should expect? And along the same lines, how are you thinking about bookings for the rest of the year, which I think is more reflective of the current demand environment?.

Yeah. So Sidney thanks for the question. There is a seasonality to our bookings, which is what you're seeing where actually you'll see Q2 and Q3, while typically our best quarters for installation, you'll see a slowing in bookings.

And it's primarily a function of where we set budgets and make buy decisions in multifamily, Q4 Q1 is where we're setting up and getting ready for peak leasing season, which we're in the middle of now. There tends to be less buying happening as institutional owners are in the middle of their peak leasing season.

And so we felt like, we had a great bookings number for Q2. It is – for us the better metric is to look year-over-year than necessarily quarter-over-quarter for that metric. And I think you will see Q2, Q3 certainly growth in bookings year-over-year, but Q4 and Q1 are going to always be our stronger quarters for bookings..

Okay. That's helpful. And my follow-up question is on the margins for the professional services.

If it has improved to negative 55% in Q2, what is your expectation in the second half of the year? The supply constraints have any impact on that number? And longer term, how are you thinking about the margins? Would it be viewed as an enabler so maybe a breakeven type of business? And how long would you think you need to get to that point?.

Hi, Sidney, this is Hiroshi. I'll just answer that. In terms of the professional services margin we saw a market improvement from Q1, because I think as we stated ARPU went up 12%. So our selling price went up as well as our unit cost per unit went down 21%. I think, though going forward as we noted that our guidance for Q3 the unit volume is down.

So I think, we will have challenges in terms of professional services margin in Q3. But in the future, as our units go back up, we believe that, it will be at a sustainable level..

Okay. Thank you..

The next question comes from Erik Woodring of Morgan Stanley..

Hey, guys. Thank you for taking my question. I apologize for harping on the supply chain side. But I was just wondering kind of can you give us a little more color into the conversations you're having with your suppliers today again.

What kind of visibility do they actually have? Can you get any form of rebates back from them as you face delays that obviously negatively impact your business? I would just love to know, how these conversations are maybe changing as the supply chain landscape evolves? Thank you..

Yeah. I mean we're in – thanks Eric first of all for the question. We're in constant communication with these suppliers. We have people in Southeast Asia, and people in Mexico, also double checking what we're hearing and making sure that we're getting the full picture of what's going on.

And so it is just a matter of in certain areas and certain components, we have not seen a thawing of the supply chain, and there's still a global shortage. And so – and we know from shopping other people in the industry, not even our competitors, but just other access control and security dealers everyone is fighting this.

And so we are starting to get a lot more visibility and a lot more granular with the reports we're getting on when where and what is coming out of production. But we're taking a much more conservative view to make sure that we're able to sort of not have to reset expectations going forward. .

Okay. That's super helpful. And then maybe just on the total customer count. Obviously, nice growth, I imagine. Can you just break down what of that was kind of like organic versus acquired? And that's it for me. Thanks..

Yeah, we can share the details of those metrics as well, but the bulk of that, was organic growth that you're seeing. We did put in the SightPlan customers unique customers of SightPlan. So you'll see us organically went from 2.90 to 3.18 and the remaining delta of that is the SightPlan customers folded in. .

Okay. Super. Thanks so much, guys..

Thanks, Erik..

Thank you. [Operator Instructions] The next question comes from Jason Weaver of Compass Point..

Hi. Good evening. Thanks for the time. I'm pretty sure, I know the answer to this.

But again, regarding the supplier constraints on the proprietary products, are you exploring any alternative relationships that might be able to soften the blow perhaps even domestic producers?.

Hi, Jason, yeah we are absolutely pursuing additional suppliers. Actually, when you said the question proprietary, the manufacturer of our own hardware, we actually have good consistent supply of. I think I mentioned in earlier question, we actually have a record number of smart home hubs in stock.

And so, that's where we feel really good about what we have and what we can go deliver on it. It's other third party suppliers that we're having to challenge with. And so we're certainly looking at other suppliers. We are not currently exploring anything domestically.

Specifically, around the access control, board is a very, very specific component that isn't able to be sourced domestically at this time..

Okay, got it. Thank you for that.

And I was going to say, if this is a persistent condition past that Q4-Q1 time line that you mentioned, as you're thinking at, what point do you start to think about adjusting the expense base given the capacity that you have right now?.

I mean it's something we're looking at continuously, weekly and monthly, and we're able to move on if we need to. But I think we're taking -- I think the other path is more we're focusing on which is making sure, because we are in a hardware-agnostic platform, we can put other hardware onto this and bring other hardware on.

So, we already started significant projects around broadening the hardware that we have. So instead of reducing capacity, we'd look to hit capacity with additional hardware..

Got it. All right. Thank you..

Thanks, Jason..

The next question comes from Steven McDermott of Cantor Fitzgerald..

Hi. Good evening and thank you for taking my question. As you look at professional services, real wages have decreased somewhat in the past six months or so. So, what are the dynamics that you're seeing there? And as far as pricing, correct me if I'm wrong, but I believe you guys have a breadth initiative in 3Q.

And so, I was just kind of wondering, what pricing power are you seeing given the macro environment with demand on the rise or still strong versus the cost conscious customer? Any color would be appreciated. Thanks..

Thanks for the question, Steven. I would say -- so we took our pricing initiative was actually in Q4 of last year. And the guidance we've given is it will come in and started in Q2, which it did, which is part of why we have the pickup in professional services margin and continue through Q3 and Q4.

So that -- on the pricing side, that's how that's going, and I think we're actually seeing most of our customers continue to take a full service white glove installation price, but we're able to pass through our increased costs.

We have not seen wages come down with our labor in the field nor internally with research and development, although it certainly has leveled off. I think we saw, particularly in Q1, a big jump in some markets. It was over 50% quarter-over-quarter in terms of cost of labor.

We've seen that start to flatten off, but I don't think we've seen a real pullback yet in that labor cost..

Great. Thank you..

Thank you..

Thank you. Mr. Haldeman, there are no more questions in the queue. Please continue with your closing remarks..

Great. Thank you all for joining the call. I appreciate your support and look forward to talking to you again next quarter. Have a great night..

Ladies and gentlemen, the conference has now concluded. Thank you for your participation. You may now disconnect your lines..