SmartRent, Inc. (SMRT) Earnings Call Transcript & Summary

All right. So let's get started. All right. Let's get started here at 11:55. So for those of you that don't know me, my name is Erik William Woodring. I lead the hardware research efforts here at Morgan Stanley. Quick disclosure for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So for the first time, I am pleased to welcome Lucas Haldeman, CEO of SmartRent; and Hiroshi Okamoto, CFO of SmartRent. So guys, thank you for joining us here.

Thanks for having us. Great to be here.

So again, this is your first time at our TMT conference. So I just think for the benefit of the people in the room, for the benefit of the people on the line. Just let's start at a very high level. What does SmartRent do? Kind of what's your value proposition? How do you make money? What's your background? Kind of just big picture, and then we'll go in from there.

Okay. Great. I'll start, and you can add some color, Hiroshi. So at SmartRent we are an enterprise smart home company focused on selling to people own apartments, rentals, single-family homes for rent apartments for rent. And so really, the niche we started this business. I'm a frustrated operator who is looking for a solution is on the operations side of multifamily CTO for a large REIT and really was shocked at how little enterprise control was out there for smart devices, but there's a lot of really cool hardware that have been built, but no one ever thought about, well, how do I manage 50,000 or 100,000 or 500,000 of these devices. And so we're sort of that middleware layer that sits between the hardware that's on the property side and then the software that's used to already manage the property, and we float in between. So we take all this new data from IoT. There's always great sensors and great better protect our assets, better monitor what's going on. We take that data and make it actionable.

Right. Perfect. So I guess maybe why don't we -- maybe let me ask you what is your most competitive advantage do you think as Smart rent?

Well, I think 2 things. One is we have the most comprehensive platform. And so if you're not -- if you don't spend your time sort of heads down on multifamily, like we do, it may not be intuitive, but there's a tremendous amount of vendor fatigue is a real thing in multifamily. And so that was one of my frustrations on the operations side. As I was saying, why would I have 4 vendors to have one smart house, like that doesn't seem that start all of a sudden. And so the comprehensiveness of the platform was really the initial hook that made us stand out from the crowd. And now really, the other moat that we've created is just our scale. So we've deployed as of our last quarter early earnings, 547,000 units around the U.S. If you put all of our competitors together and add up what they've done, it doesn't equal that amount. And so when you go to talk to someone who has 50,000 units and they want to look at doing a portfolio rollout, for us, it's easy to with conviction, say we can easily take that on. if you rolled out 10,000 units in the past 4 years, operators like, yes, I'm not sure that we're going to be a good fit. Right.

And then -- so you mentioned it, but just help us frame the competitive environment today? Is it intensifying? And then I don't know if you get the question, but I've gotten it and that is, does mega-tech play in this space at all? Or how do we think about that?

Yes. We get that a lot. And sort of mega cap tech actually embraces us, it's how they play in the space. So we're a reseller of Google or a reseller of ring and Amazon devices. And so really, we're almost like a channel partner for them in multifamily. Those companies are incredible companies, of course, but they're really used to selling direct to consumer. So the nuance is to say, no one wants to put in a device that doesn't integrate with their property management software. And if you go to the mega cap companies, they go, "I don't know what property management software is, let go integrate with it. I'll just take an end cap and target and make more money that way. And so we found a little niche where we actually -- we take the best-of-breed hardware that all these companies are making, but actually make it effective for our customers.

Right. Okay. So that's the perfect lead into what I was going to ask you next, which is you're kind of a hardware agnostic, let's call it, you do have a few offerings that you produce and manufacture on your own smart hub leak detectors. What was -- why take that approach, but then also why are there certain products that you manufacture on your own? And should we expect to see more of that? Or is this more trending towards, hey, let everybody else do the hardware, we're going to focus on this kind of middleware layer.

Yes. No, it's an important question, and there's -- so when we first started the company, we really had the idea that we wouldn't be involved in hardware at all, that we would just use best-of-breed hardware that was already out there. And what we found as we really dug into it is there were some gaps because of this niche that we found of our customers are sometimes commercial real estate and sometimes residential real estate, right? If you think of apartment when it's vacant, it's kind of just a commercial property when it's occupied, though it's someone's home. And so it comes with these unique challenges that we couldn't find a way to get around with existing hardware. And so that's why we started. We built the first product we built was a smart home hub that really understood the idea of being in a rental property and was durable and commercial in some ways, but also private and secure. So when someone was in there, their data wasn't being shared where they didn't want it. And from there, we've continued to look at where we can really -- other products that we manufacture, it's more just to bring the cost down like leak sensors. We wanted to make an improved leak sensor that was more durable, and we realized we could do that and bring the cost down. So that made a lot of sense to do that. But primarily, what we like to do is say, take advantage of Samsung, Amazon, Google, these incredible companies that are spending billions of dollars in R&D, taking advantage of that and use that hardware right? That was the first part of the question. That was the reason for being hardware agnostic was I don't have to invent a lot of this. It's already been invented. I have to make it useful for my customer base. And just from my perspective, covering hardware, it's not always the highest margin base in the world.

So exactly. And it does take a long time to create the -- All right. Cool. So let's talk about the opportunity that you guys have in front of you. You've talked about a TAM, I believe it's 41 million units, multifamily and single-family rental units in the U.S. That's obviously huge when you think about roughly 550,000 units deployed. So maybe just kind of like help us along the time line of thinking like if we're looking out over the next 3 or 5 years, like what is more realistic? Because I've got to imagine that not all 41 million units the owner or operators of those units necessarily have the money to pay for that when we go further kind of further down the stack. So just kind of help us frame like the -- I don't know, the more realistic near-term TAM, I guess, if that's the way to phrase it.

Yes. Well, a couple of points on that. I think I actually believe every unit could afford this because of the cost savings that we bring -- now that doesn't mean every unit is going to know that they need that, right? You need a customer. So it's a good point. But I think the TAM is so massive. I like to kind of bring it in a little bit narrower because it's just so overwhelmingly large. And so what I look at, there's 2 key metrics that we really focus on. One is the total units owned by our current customers. So just -- we have about 500-plus customers, how many units do they own? That number is 6.7 million. So just current customers today, if we said, "Hey, we're never going to sell another customer or anything, we would say we could have a 6 million or 6.5 million unit portfolio, be a massive business. And so that's sort of the long term of our current customers. That will come in over a number of years. The near term, the next metric that we really use as a guidepost is our committed units. So that's where owners have said, "I now figured out how to pay for this, to your point, I have budget, I'm ready to go. In the next 2 years, this is what I want to roll out, and that's 850,000 units. So that's more than double where we are today just in our committed unit, almost like -- we call almost like a backlog. And so that sort of narrows the TAM. And you can see every day, we're adding to that 500-plus customers adding to that 6.7 and growing it out.

So you mentioned kind of the customer base you have over 500 right now. something that I found unique about your story is that some of your largest customers are also investors. They know the story well. And so just talk us through that kind of alignment of interest, how did that come about? Why does that exist? How does that give you kind of a lead on your competitors, so to speak, maybe?

Yes. I think it is a really important distinction of what we've done. I think for me, the one asterisk that I would like to put to that is every one of those companies that invested after we started rolling them out or on their RFP right.

I like that sequence because it sort of makes a true partnership. But one of the things that we experienced as operators is your portfolio is so large, you can create value for your vendor business just by putting your weight behind them. And so we knew that from being on that side. And so we went to these key customers and said, "Would you like an opportunity to invest in that way, when you go and give us a 50,000 or 40,000 unit commitment and we're growing, you're going to recoup some of that cost. And a lot of these more sophisticated REITs actually looked at it as an arbitrage against the technology spend. So they say, "Hey, I'm going to go spend $50 million to deploy your tech, but I own stock? And if that goes up, it actually kind of nets down and makes it sort of an even playing field, right?

So I think it does it was really important as we're getting going to build scale, but it remains important because as we extend the business as we continue to work and bring new products to market, those are our first customers who are willing to be our test case and willing to try it out because they're shareholders. I mean it just makes sense, right? If you're going to say like WiFi is the next big frontier for us and putting in community-wide WiFi, I think, is going to be a mega trend in this industry. And we had owners coming to us saying, "Hey, I'm getting pitched on these WiFi companies. I wish you would do this so I could pay you to do it, that's fantastic, right? That's a dream come true as an entrepreneur.

So last question, I mean to kind of ask you before we get into the nitty-gritty is if you can kind of walk us through the typical ramping process for a customer from talking to you and learning about the product to getting units deployed to turning on that SaaS part of this business? Just walk us through an example of how that might look like?

Yes. It -- one of the critiques of multifamily is it's a very long sales cycle, and that is absolutely true. It takes a long time. Even people who have invested in us, we went through a long RFP to get there. It's an industry that automatically wants to pilot because if we're sitting in our headquarter office in Dallas, and we have 100 properties around the country and someone comes with something, the natural thing is to say, let's try it in 2 or 3, right? Why would I go all the way out, let me verify it. And so you have to -- if you're going to sell in the multifamily, you have to know that going in. This is all muted by one great thing, which is once you're in there's -- we've had 0 churn in 6 years. I mean once you get through that, that's the benefit of being patient with this industry is once they make that decision and get conviction, you're basically a partner for life as long as you continue to fulfill. So a little less -- we typically would look at about 6 months to get into a pilot 6 months for pilot and then start to roll more broadly. And I've got to mention, just to the churn point, it's got to be hard if you're going through a building and you have 50% of that building or 50% of the , but whatever their units are to then Reap and replace, that's very costly, I imagine. That's part of why you're saying it's sticky. And part of why it's a slow to go in, like it's a big decision and not made lightly. Right.

Okay. So let's kind of talk about here now. Just talk us through kind of the macro environment, what you're hearing from customers today? Is there -- I'm only going to ask you one supply chain question. But just what are you hearing from customers today as it relates to the backdrop and how it relates to how they want to uptake SmartRent.

Well, there's definitely in multifamily, there's a challenging macro environment, where we're seeing rents start to soften or come down in some cases. What's interesting from where we sit is that actually becomes a tailwind for our product because the durable expense savings, the better protection of assets, which saves money is a demand driver when you're trying to control expenses. And so it's actually been kind of a long time coming, and we've had essentially had 10 years of straight line growth in multifamily, where just candidly, people didn't -- weren't that focused on the expense side because I'm growing rents at 11%, the difference between 3% and 4% expense growth is not that big of a deal. And now we're back into an environment where we have to control expenses. If we're not able to raise rent, we have to control expenses. And so it's -- while it's challenging for some of our customers, and we don't take that lightly, it's actually a driver of demand for our business.

Okay. All right. So here's the supply chain question. I know it was a thorn in your side in 2022. Just where are we as we think about where we are today and looking forward.

Well, we're in a really good position. And I kind of say that hopefully, we're through this entire -- all of us on every company you deal with hopefully is through…

Has been a huge team this.

Yes. So you can see from our balance sheet, we're also protecting ourselves against future supply shocks. We're not going to kind of be caught again flat footed, and that's where you can see on the balance sheet that just the amount of inventory we hold has grown significantly, and we'll stay there. That's sort of the new normal for us going forward. But the good news is we're really out of -- I think the supply chain is sad, we're feeling good.

And then the other kind of near-term question was, so you reported earnings last night, you guided to 2023. Just kind of talk us through the factors that kind of underlie your guidance, and then we'll go from there.

Yes. I mean I think for us, the theme of this year is getting to profitability and getting to positive EBITDA. And so the guide is around making sure we get to that. And it's a little bit of a pullback from grow as fast as you can, which is basically what we've done since inception and then to grow as fast as you can profitably. And so it's a nuance, but I think it's an important one to say, we're not going to try to just add as many new units as humanly possible. We're going to add them in a way that is actually benefiting the bottom line.

And I guess my follow-up question to that was going to be why now? Why is now the right time to kind of make that slight pivot? It's a slight pivot, but why now?

Well I think 2 reasons. One is we've gotten to sufficient scale where we have a great base. And so it's a big important business on its own, right? So for a while, you're trying to actually become meaningful, we reach that point. And then -- the second point is we've got all these customers that are in pilot and kind of back to what we're talking about the sales cycle, like they're not going anywhere. And so they're not pushing us to say, I urgently need this next quarter. They're happy to kind of go at that pace. They want to get the portfolio done, but they look at it as a 2- or 3- or 4-year rollout to roll out their portfolio. And so it sort of with us pushing just to push, and so it's just a more natural way for us to grow anyway.

And then I know as you were scaling at times outside of supply chain, there were kind of limiting factors in terms of being able to deploy, but you've hired those people now. And so as we think about the limitations, is the limitation really we want to make sure we're doing this profitably or is there anything else.

No, that is the limitation. We want to make sure we're doing this profitably. We have supply, we have human capital. We're -- we can -- and as we are doing that properly, you will see us increase the trajectory and go faster, but in the right way.

Okay. So I think one of the more exciting parts of this story is we've talked about hardware and the big picture opportunity. Really, the key here is turning on that software, right? If you want to plant the seed, so the flowers can bloom. So just talk to us about when you think about that opportunity, what is kind of like your ARPU today? What are you collecting from your customers today? What's the long-term kind of potential for that? And what takes you from point A to point B.

Yes. I mean if you look at the current ARPU, if you -- let's just start with our smart apartment product because we have now 9 products that we sell, but we started with that, that's around $5.30 revenue per unit per month. So that's our SaaS fee. Every product we layer on, the other 8 products increase that SaaS fee. So today, you came and said, "I want every product you have, which I wish more people did, but that would already be like a $14 or $15 ARPU, -- 2 ways that grows. One is just natural price increasing and pricing power, which is once you year-end, to your point, it's hard to rip and replace and so we have some pricing power there. I certainly felt that on the operation side when I was a CTO of software going up. And so I like that natural growth. But the other way that I think is more exciting is there's a lot more products we can add to this, either organically or inorganically to continue to service the same customer base. So we look across the landscape, we're not done. We have 9 products. I think we can easily have 15 to 20 in the near term that we think would be interesting.

And we're going to get into that. But something we talked about last night that I thought was interesting was -- so you've been building out your technological capabilities, but at the same time, you have some of these legacy customers that were onboarded 3, 4, 5 years ago. What is -- how do those customers kind of uptake new technology? What is that opportunity almost like upsell to the existing customers that may not have an opportunity to buy this because they came on before these technologies came out.

Yes. It's a big piece. It's part of why we're trying to focus on total revenue and EBITDA instead of just new units because a lot of the jobs we're doing, they're not new units. They're already on our platform. We already counted them as a unit, but we're going back and doing access control. We're going back and doing self-credit tour. We're going back and doing parking management. And so it's increasing our revenue, it's increasing our ARPU, but it's not increasing the number of units. And really, every legacy customer we have has now continued to raw at least 1 or 2 other products. And so I think that's part of the growth that we're going to experience is, yes, and we do get the question we say, why didn't they roll this out when they were doing the apartment? It's like, well, because we didn't have it. That wasn't a product right? And so yes, it's great. I think the biggest trend we're seeing is in self-guided tour, and this industry is finally embracing this technology of saying, we don't need to have a person walk someone around and show them an empty apartment. Like that's actually something that someone wants to do on their own, and we want you to do it on your own to much more cost effective.

I work in New York City, I testify that.

It's funny we did recordings of tours as we were sort of thinking about self-guided tours in every -- like the #1 thing that we heard from prospects saying to leasing is like Yes, I know. Like I know I know I've seen that. I looked at 72 photos online before I showed up here, like, I know you have a gym. So we're sort of overselling our product.

And are those -- you mentioned self-guided towards access control parking. Are those kind of the 3 that you found existing legacy customers are uptaking more so than others when you think about the product set today?

Yes, that -- and our work order management product, which we -- that product we acquired through acquisition, but really modernizing the process of a resident putting in a work order request, which is still -- surprisingly, there's a lot of apartment owners that still -- they only have a phone call like you can't go on your app and put in your work order, kind of shocking to think about all we do on our phone and it's like, well, just ring the office. So that's the other product that I think has really started to take off.

Okay. All right. And then you kind of mentioned, but I want to touch on site plan. You acquired them, I guess, it's just about a year ago now. Why site plan, what's the value that they add. And then how does that kind of impact the model from like a P&L perspective in terms of ARPU and margins and whatnot?

Yes. So the [indiscernible] plan really was they have a -- it started with -- they have a very similar DNA to our company, which is they come from the industry. They are former operators. They understand the industry. They got a lot of their key customers to be investors. So you sort of hear that theme they had sort of a similar approach. And we had 39 shared customers at the time of the acquisition. And what was amazing is we were seeing the utilization of our platform was significantly higher at Smart rent, where they had site plan install. Like we had better engagement, better usage by the staff. And I thought, well, that's really interesting, and I called Terry, who's the CEO of site plan is now with us. And I said, "Hey, we're seeing this trend, and he said, "Well, that's interesting because we actually see better usage of site plan where SmartRent is installed. And so it was really one of those things where they were so symbiotic that putting them together just seemed to make a lot of sense. And so that was sort of the philosophy. The other side of it is it was a SaaS-only software product with incredibly good margins and was accretive to our P&L. And so that was sort of made kind of a no-brainer.

Right. Okay. So I guess maybe one more question on SaaS and then we'll want to ask a question on kind of like products and features. But you're generating just so we call it, $30 million in ARR on a base of, let's call it, again, 550,000 unit deployments. So I guess I'm just trying to understand the scalability and that is like if you doubled or tripled your installed base, does ARR double or triple? Is there a multiplier effect? Just help us think about maybe that relationship if there is a relationship?

Yes. I mean the base case is if we doubled our installed base, we had double ARR. But I think actually, as you put in these other products, you actually -- that's the multiplier effect, just to say, the 500 and first 1,000 units is going to actually be -- have more ARPU than the first unit did. So yes, sort of the worst-case scenario is you would double ARR.

Okay. So you talked about the -- you mentioned more products. As we sit here, what are you kind of most focused on in terms of products and features that you could roll out to, again, new and existing customers. Where are you investing that R&D into. And again, is that hardware is that software? I manage more software, but then what could be kind of like the financial impact, I guess, so to speak, from that?

Yes. I mean there's -- a lot of what we're looking at is that intersection of hardware and software because it's complex, which makes it defensible. And -- but a lot of it is pure software. And so I think there's really interesting sort of themes that I'm thinking of. One is around ESG, really around helping owners understand and control their utility consumption, helping residents save money on their utilities, great themes, both financial and environmental impacts there, kind of green tech, clean tech, is, I think, important. But the one that's nearest term, I mentioned it a little bit earlier, but to double-click on it is around providing WiFi I think that's the biggest near-term product on our road map that coming out of COVID, owners suddenly realized like just getting $5 a month so we can have someone sell bad DFL is actually hurting my product and hurting my image and that what we really need to do, both for its sort of this intersection of PropTech, which has gained a lot of traction, as you know, and then also resident demand is saying, we need connectivity and relying on cellular infrastructure is not going to work and that the answer is not to put in big dots installations it's to go put WiFi and that what a great user experience to say, when you sign your lease, you go and download the smarter app, that's your keys to your apartment. So everyone downloads the app. And the next question is, you want 300, 500 or gigabit Internet and choose your password and the day you move in, everything is connected. Exactly -- you as a user, you're not going on and going through that friction, pain in the butt process. And this is for the entire building for all of the units. And the other important nuance as a former CTO, I'd be remiss if I didn't say it is it's also more secure. So as people are working from home as they're going down to common areas. So we've gotten rid of a lot of media rooms and big TVs because we don't need them, and we've put in office space and conference rooms. Now you're on your secured network when you're there, too. So you're -- it's an important distinction.

Right. Okay. So let's get -- I want to get into some of the numbers here. So I guess kind of going back to the profitability discussion. You talked about turning EBITDA positive intra-year in 2023 -- what are the most important factors that get you to that? And when I say that, I mean from like a revenue, gross margin, OpEx, Think about the -- what are the different levers that help you guys get there?

Yes. Sure. Let me -- so I think as we guided, we plan to continue to increase our revenue at a pretty steep pace. But doing that, we want to increase our gross margins on all 3 really on hosted services, on hardware and improvement in professional services as well. So I think with kind of improvement in all 3 of those buckets and holding operating expenses flat, we should be able to reach positive adjusted EBITDA.

Right. And I guess the goal or the -- maybe the biggest lift is that professional services business, again, just going from the levels that it was in 2022 to something that is less negative. What do you guys need to do to scale that to an improved level?

Yes. Well, I think Lucas has made clear internally that we want to turn this positive. It should be positive and it is going to be positive, but it's going to take time -- so we're working on a lot of operational efficiencies, a lot of additional technology that's added to make people more efficient. And gradually, I think sequentially, you'll see that improvement in professional services.

Okay. All right. And this is thinking kind of longer term because there is such an interesting long-term opportunity here, but this is a bit of a model in transition where you could almost say this is like a hardware or a software asset trading at a hardware multiple, you're planting the seeds now, but the goal is at 5, 10 years down the line, more of this business is being driven by software than hardware and professional services. And so as we think about that, how do we think about what the normalized kind of gross margin for this business could be -- again, I'm thinking further out, right, not today, but what's the goal? Is there a goal that you think about today?

Yes, there is. But it really is sort of 3 separate businesses, and so it's hard to talk about a blended gross margin. And so the way we think about it internally, sort of long term where we're trying to get to is really sort of into the mid-70s on SaaS as a gross margin. And then hardware, we think, settles out in the low 20s. That's a really -- that's partly a benefit of we manufacture much of our own hardware as we talked about earlier. So that's why that margin is healthy. And then professional services, as Roche said, I don't want to lose money, but it doesn't need to be a cash cow because it is it's just the friction to get to the fast. So we want to -- as little friction as possible. So we think that normalizes out in a low single-digit way. And so when you put that together, though, as you alluded to, as you continue to grow that high-margin SaaS that becomes more and more impactful. The mix shift is -- And you see a blended gross margin that really takes off. Right.

And to give you credit on the side, I don't remember the number is exactly off the top of my head, but you've seen a very significant improvement even in 2022 from 1Q to 4Q -- so you're all on the way. You're building that out as that business ?

Yes, 250% increase year-over-year. Right.

So the other side of that -- again, this kind of cost conversation is just OpEx. So obviously, there needs to be scale and leverage in the model as you get bigger to help get more profitable. Today, you're spending, let's call it, 50% of revenue on OpEx. Is there a target, again, when you think about being bigger, what that would be as a percentage of revenue?

Yes, it'll be significantly below where it is today. And you're starting to see that as we're going to significantly increase revenue this year and really hold that flat. So we're at that point where we're kind of getting the economies of scale. It will continue to grow but at a much slower pace than revenue. And so you'll see that continue to drop.

So we're just almost out of time. Just last question is really just leave us with what are the thoughts that you guys want to leave us with as we go here, what's most important as we think about having spot rent on our radar?

Yes. It's a great question, and thanks again for the time today. So I think one of the things we're trying to really help the public understand and we touched on it earlier, is really the embedded growth that's already here from our current customers that we don't need to go -- we're doing a lot of new products. We're doing a lot of exciting things, but we actually don't need to do that, and you would still want to be an investor in this business just based on our current customer base.

So Lucas, Hiroshi. Thank you very much for joining us. Thank you here.