Good afternoon, and welcome to the SmartRent Second Quarter 2023 Earnings Call. Please note that this call is being recorded. All lines have been placed on listen-only mode at this time. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. I would now like to turn today’s call over to Brian Ruttenbur, Senior Vice President of Investor Relations. Please go ahead.

Hello, and thank you for joining us today. My name is Brian Ruttenbur, Senior Vice President of Investor Relations for SmartRent. I'm joined today by Lucas Haldeman, Chairman and CEO; and Hiroshi Okamoto, Chief Financial Officer. They will be taking you through our results for the second quarter of 2023 as well as discussing guidance for the second half of the year. Before today's market opened, we issued an earnings release and filed our 10-Q for the three months ended June 30, 2023 both of which are available on the Investor Relations section of our website smartrent.com. Before I turn the call over to Lucas, I’d like to remind everybody that the discussion today may contain forward-looking statements that involve risks and uncertainties. Various factors could cause our actual results to be materially different from any future results expressed or implied by such statements. These factors are discussed in our SEC filings, including our annual report on Form 10-K and our quarterly report on Form 10-Q. We undertake no obligation to provide updates with regard to the forward-looking statements made during this call, and we recommend that all investors review these reports thoroughly before taking a financial position in SmartRent. Also, during today's call, we will refer to certain non-GAAP financial measures. A discussion of these non-GAAP financial measures along with the reconciliation to the most directly comparable GAAP measure is included in today's earnings release. We would also like to highlight that the second quarter earnings deck is available on the Investor Relations section of the website. And with that, let me turn the call over to Lucas to review our results.

Good morning. Thank you for joining our call. I'm pleased to report we had another strong quarter with both revenue and adjusted EBITDA within our guidance range. We grew total revenue by 26% year-over-year to more than 53 million and we improved adjusted EBITDA to negative 6 million, an increase of over 2 million sequentially from Q1 and more than 13 million from Q2 of 2022. This marks the fifth consecutive quarter of improved adjusted EBITDA, primarily driven by a combination of higher gross margin and tight controls on operating expenses. In the second quarter of 2023, we saw notable improvement of our gross margin to more than 18% versus 2% last year, as both hardware and hosted services gross margin hit record highs in the period. As expected, professional services gross margin decreased compared to last year. While each quarter is impacted by the mix and timing of deployments, we anticipate improvement in professional services gross margin as well as our total gross margin in the second half of 2023. Our operating margin continues to expand as we control overhead expenses and drive toward profitability. We are reiterating our goal of achieving adjusted EBITDA breakeven by year end and cash flow breakeven within the following six months. I'd like to turn now to new announcements and product developments for the quarter. Today, we shared that we have a new agreement with ADI Global Distribution to serve as our preferred distribution partner. This agreement strengthens our competitive position, providing enhanced flexibility and ability to scale without impacting our working capital. Additionally, it enables us to convert fixed costs into variable costs while also reducing the financial exposure we have in months with lower volume deployments. If you refer to Slide 8 of our quarterly investor presentation, we provide a brief…

Thank you, Lucas. We had another solid quarter of revenue growth, expanding margins and narrowing adjusted EBITDA loss as we continue to execute on our path to adjusted EBITDA profitability by the end of the year. I will provide updated guidance for the rest of the year. But before that, I'd like to dive a little deeper into four areas that Lucas touched on. That should help in understanding where we currently are as a company; revenue growth, gross margin, profitability and cash optimization. Total revenue for the quarter was 53 million, down as anticipated from an exceptionally strong Q1, but a solid 26% increase from Q2 last year. Combining the first two quarters, revenue was 118 million, up 49% from 80 million for the first half of 2022. By revenue stream, hardware revenue was 28 million, professional services was 10 million and hosted services was 16 million. The composition of our revenue continues to change as the company evolves. But I would like to highlight that we expect SaaS revenue to continue to increase every quarter as we deploy more units and more products that generate a steady flow of additional software subscription revenue. A key metric for us is SaaS ARR, which increased from 36 million in Q1 to 39 million in Q2, an increase of 8% sequentially and 27% year-over-year from 31 million. Unlike the steady buildup of SaaS revenue, hardware and professional service revenues will fluctuate quarter-to-quarter as the velocity of unit deployments varies. This quarter, we deployed 48,000 units pushing total units deployed to over 650,000. Hardware and professional services ARPU declined from the heights we experienced in Q1 because of differing product mixes in the quarters, but the annualized trajectory of ARPU for hardware and professional services remains positive. Hardware ARPU increased 13% from…

Thank you, Hiroshi. We delivered results within guidance due to the marked improvement in overall margins and reductions in operating expenses and have now produced five consecutive quarters of improving profitability. The distribution agreement with ADI will fortify our inventory and distribution activities, streamline inventory management, enhance product availability and reduce costs. New offerings such as Community WiFi will drive high margin recurring revenue and further embed us with our clients, and our growing channel partner network will continue to expand our reach. With over 650,000 units deployed with our smart home technology, more than all our competitors combined, our market leading position remains unchallenged. Our growth is multipronged through existing clients, new customers and our channel partner program. We see a bright future for rental housing and are proud to play an important role for our customers as they seek to provide smarter living and working experiences for their residents and site teams. From protecting assets with leak sensors to creating operational efficiencies with Work Management and Smart Package Room to helping our customers generate revenue with Community WiFi and self-guided tours, our holistic solutions solve real challenges and are the reason we remain on the leading edge. We are grateful to be the trusted supplier in our space and look forward to all that's on our horizon. Operator, please open the call for questions.

Certainly. [Operator Instructions]. Our first question comes from Sidney Ho with Deutsche Bank. Your line is now open.

Thank you. I want to ask about the guidance. So you are guiding fourth quarter revenue to be up about 8% at the midpoint, which seems to be better than normal seasonality. Why is it up this year? Is it the number of unit deployment or is it more because of hardware ARPU going up? Also there is a big range for Q4. Is it based on some project that may have high value or just a number of deployments that is uncertain? And then I have a follow up. Thanks.

Yes. Thank you, Sidney. Thank you for the question. Let me take the first question first, which is our guidance that we provided is really based on different scenarios that we created. Q4 is a little bit wider than Q3 because it's a little further out. But in general, we expect revenue to continue to increase. The seasonality is something that still affects our installations. But as we've -- I think we've tried to explain in the past, there's a divergence between our units and our revenue. So even if units are flat, which we're not guiding to that, but even if it is, we continue to see revenue increase. So that's why you see that Q4 is higher compared to Q3.

Okay, that's fair. My follow up is on the professional services gross margin. It went down about 20 points quarter-over-quarter. I think, Lucas, in your remarks, you said that's kind of expected, but the magnitude is still a little larger than I thought. Can you talk about what was driving that decline, especially when revenue was up and the team's focus on improving that, any one-time event in that that may have impacted the quarter? But more importantly, how are you thinking about the business breaking even by the end of calendar '24 per your comments last call? You talk about working on some long-term initiatives, and maybe gross margin will improve significantly starting Q4. Can you give us a little more color on that? Thanks.

Yes. Thanks, Sidney. It’s Lucas. I'll take that one. Yes, I think we did anticipate professional services margin to go down in this quarter. It is really on lower deployments in Q1 is what's driving that and the fixed costs that we have there. And the bright spot is exactly what you alluded to, which is we have a lot of initiatives that we've been working on, some over a year now that are starting to come to fruition in Q3 and will really be felt in Q4. So that's part of where we feel really good about the guidance, and we're on track to bring that professional services margin in line -- in a durable way going forward.

Okay. Thank you.

Thanks, Sidney.

Next, we have Ryan Tomasello with KBW. Your line is open.

Hi, everyone. Thanks for taking the questions. Just starting on the preferred distribution agreement, maybe you could just elaborate on the economics there? Should we expect any impact to hardware gross margins as that partnership ramps? Any just parameters around just how much order flow you expect ADI to oversee over time?

Hi, Ryan. Thanks for the question. Yes, I think we're pretty excited with this ADI agreement. I think it has really positive aspects on our working capital as well as our ability to continue to scale without outlaying capital. And over time, I think you'll see the bulk of our distribution will go there. We don't anticipate seeing a big effect on gross margin. We structured this in a way where it should be pretty much neutral to the P&L, but has a great impact on cash and working capital.

Okay. And then just unpacking the SaaS metrics a bit more, Hiroshi, I appreciate the color there. But I guess nitpicking here, I'd say, the ARR growth decelerated sequentially while the SaaS ARPU declined quarter-over-quarter. And by our math, it looks like that might have been driven by the weaker -- some weaker performance on site plan, which can I think alter the ARPU given there aren't necessarily units associated with that. So maybe you can just put a finer point around that math. And just more broadly, if you're willing to comment on where the structural growth profile could be for SaaS ARR over a multi-quarter period going forward?

Yes. Thanks, Ryan. Just to touch on the site plan, we don't disclose it, but it's generally flat. So kind of the decreases isn't really due to that. I think the SaaS ARR, the ARPU is really just a function of a lot of different things, kind of the whole product mix and also kind of when in the quarter a unit comes online. So all those things could drive kind of the SaaS ARPU to go up or down a little bit, but I think the thing to look at is probably our year-to-date and really how it’s increased over a longer period. So really taking six months for this year versus last year is probably a better way to look at it.

Okay. Thanks for the color.

Sure.

Your next question comes from Erik Woodring with Morgan Stanley. Your line is open.

Hi, guys. Thanks for taking my questions. Lucas, I just want to ask on ADI, again, just to understand a bit more about the deal, because I understand the offloading of inventory improves your costs, improves working capital. But I guess what is the incentive for ADI to take this business. I guess the way I'm understanding it is they're just going to be effectively reselling your hardware to your customers, or are you targeting new customers? Because I was under the belief that ADI primarily sells to remodeling integrator. So just really trying to understand what the purpose is in your view from the ADI side, why would they be taking this business, especially if there's no impact to your P&L, it seems like they must be incurring some costs or some -- from taking this agreement? So just want to double click on some of those points, if we could, please. And then I have a follow up.

Yes. I think the best way to think about it is we're currently utilizing multiple third parties, FedEx, UPS, DHL, and forward stocking locations that will get replaced by ADI. So it's not that ADI doesn't make any revenue. It's sort of that it is neutral to us because we're already paying it to multiple third parties. The benefit to us is streamline and accountability and the ability over time to do more than just a FedEx or UPS would be able to do for us. Because you're right, ADI does primarily service security integrators around the country. And they have the ability to do things that we currently have to do in our warehouse, like update firmware and put together kits for units. That gives us the ability to be more flexible with them going forward. So to be clear, it's not that there's no revenue for them, there's good revenue for them. And for us, it's just going to one partner instead of multiple other third parties.

Yes. Okay, that is super clear. That was the color I was looking for. Thank you for that. If I just touch on another point, the unit’s book number in the June quarter looked kind of unseasonably low. You'd have to go back to the height of the pandemic to really see 20,000 units booked in any quarter. And so was there something that happened in the quarter, or is this evidence of perhaps customers being more cautious about the economy, just want to make sure I understand if there's any one-time dynamics that impacted that number, because it did look relatively low to your recent run rate? And that's it for me. Thanks so much.

Yes. Thanks. Again, it’s a good question. I think Q2 and Q3 historically are lower bookings quarters for us. Budgets really get set in multifamily mostly in Q3. So Q4 and Q1 are always higher bookings quarters for us. And I think you're also seeing a function of we had a really strong Q4 and a strong Q1. And we're not on pace to deploy double the units we did last year. And so some of that is this -- we have a good backlog that we're working through and customers don't sign new orders. So we fulfill the ones that they have in place. So I think it just is -- it's sort of an anomaly that it came in where it is, but we feel still really good about the macro dynamic and the demand.

Awesome. Thank you for the color, guys.

Thanks, Erik.

Your next question comes from Tom White with D.A. Davidson. Your line is open.

Great. Good day. Thanks for taking my questions. Two, if I could. Just a follow up on the professional services gross margins. Hiroshi, I thought you referenced maybe kind of tackling the fixed cost side of that part of the business to kind of improved gross margins. And then, Lucas, I heard some commentary around some of the newer initiatives kind of helping with the deployed units and kind of tackling that gross margin that way. Can you maybe just double click on that? I'm just curious to the extent to which there are more kind of fixed costs changes there that you're going to make, or is it just again more about scaling units deployed with some of these newer offerings? And then, if I can ask you to kind of maybe talk a little bit about next year even though I know you're not guiding. But presuming you guys get to cash flow positive next year, can you maybe just give us like a little bit of a preview about how you're thinking about being able to sort of meaningfully ramp free cash flow margins versus continue to invest in not only the core business, but some of the newer initiatives like Community WiFi and things like that? Thanks.

Thanks, Tom. Let me try to answer that. The first part is really professional services. We know that it is a drag on our total profitability that this quarter we did negative 5 million for our gross profit from professional services. And that is an area that we need to improve on. I think when we mentioned kind of fixed costs and variable costs, there's a lot that goes into that, lots of things that we're doing, but one thing is the increasing use of general contractors. So I think those are things that you'll see kind of hit our results more in Q4, because these take time. But that's kind of the direction that we know we have to get to. We think that we're going to have to get that to profitable gross margins over time in 2024, and that will lead to our adjusted EBITDA profitability as well as free cash flow as well. So professional services is definitely a big driver in that. Did that answer your question?

Yes. Thanks.

Your next question comes from Brett Knoblauch with Cantor Fitzgerald. Your line is open.

Hi, guys. Thanks for taking my question. I guess to start, can you maybe help me understand how you would look to maybe grow the number of units deployed in the quarter over the coming years while also reducing the fixed cost base in professional services? Do you think you can grow more rapidly with, call it, increased use of general contractors and that would also be kind of margin accretive as well?

Yes. Brett, I think you're spot on there that we -- in general, two things are happening in professional services. We've been working, as I talked about, on different technology initiatives that improve the efficiency. The other thing that happens is it improves the oversight of those installs, which allows us to lower our fixed costs and essentially substitute technology for personnel that we have in the field today. And so you'll see some of that starting to come to fruition. We've also matured to a point where some of the partners that we've been co-installing with have now installed so many thousands of units for us that they really don't need the same kind of oversight they once did. So you're seeing sort of this combination, this transformation happening this year of technology initiatives coming to fruition and sort of empowering us to use more variable costs and lower that fixed costs.

Understood. And maybe just one other question on the build out Community WiFi, I thought it was very helpful the slide on the economics for that product. But I guess how should we think about -- you guys are often gearing the business to get to breakeven on adjusted EBITDA basis now. And assuming this product begins to ramp, call it, the back half next year and going into 2025? Is there a lot of incremental cost you need to add on your end, whether it's in COGS or OpEx, that could maybe slow the pace of adjusted EBITDA margin improvement, or how should we think about those two kind of blended together?

Yes, it's a good question. I don't think you're going to see that happen. I think it's a relatively low initial cost for us to go in. The real big cost in WiFi as you'll see on that Slide 9 is sort of the upfront hardware, and really most of our customers are bearing that cost. They want to bear that cost and take the improved economics on their site. And so we do feel like we can scale up Community WiFi without really a significant cash investment that would impact our margin. So I think it's a kind of a win-win product for us.

Next, we have Sidney Ho with Deutsche Bank. Your line is open.

Great. Thanks for taking my follow up. I just have a couple of quick ones. So when I look at the SaaS ARPU in the bookings, it's good to see that’s jumping quite a bit to over $8 this quarter. Can you help us understand what's driving that? Is that primarily driven by products like the Community WiFi, or is it just that the mix of legacy customers maybe just way down? And kind of related to that is the ARPU in revenue -- I see the ARPU in revenue was relatively flat to a question earlier. But how quickly do you think that will grow given the strength you're seeing in bookings?

Yes. Sidney, I don't think I caught the second part of your question, but kind of the bookings, I think that's -- I'm glad you highlighted that. That is really kind of our efforts of cross selling and upselling starting to show up. I think you'll -- self-guided tour would be one of the products. Also a lot of Alloy Access, our common area access, those are showing up in the bookings ARPU there. The second part I didn’t -- can you repeat that again?

Yes. I was going to say, while your ARPU in revenue was relatively flat the last couple of quarters. But given the booking strength -- the ARPU strength in bookings, how quickly do you think that will flow into the revenue side?

Right. So that is -- it's kind of just a math equation, right? We do 47,000 units in a quarter, but there's 650,000 units out there. So it'll take time for that to increase. But I think we saw that the bookings ARPU, that's a very promising sign for us.

Okay, that's fair. And then a quick one here as well. Lucas, I think you talked about the Community WiFi a little bit. It makes a lot of sense for your customers to adopt it. Curious why we haven't seen the owners and operators asking for this solution sooner? And when it comes to future competition, what are the things that you believe sets you apart? And how do you think it will take -- how long do you think it will take competitors to catch up?

Yes, great questions, Sidney. I think on the competitive front, you can actually look throughout rental real estate and see just the cost of being second is incredibly punitive. It's very hard to catch up, if at all possible to catch up to us. So I think every quarter that we continue to expand and grow our footprint and grow our dominance, you're seeing that it gets harder and harder to catch up. And sort of the -- I think the question is, why our WiFi versus others? And really, it comes down to a couple of factors. And I mentioned a little bit on the call, but I’ll give you a little more color. I think if we kind of think about it, our app -- if you download the SmartRent app as a resident, everyone downloads that app, it's your key, how you get into your apartment. So instead of getting handed the keys, you get handed the app. And so we have this unique marketing time where we can say, hey, here's your key. Next step is choose your password for the Internet. So we create this incredibly seamless and elegant onboarding experience that takes all the friction out of getting the Internet set up. And if you think about one of the most frustrating parts of moving is not having Internet and waiting for the cable company to come and taking a day off of work. All that friction is removed with our solution. At the same time, we're providing new ancillary revenue to our customer base. So it's sort of this perfect combination. And I can't really opine, Sidney, on why it has taken this long for this to catch on in multifamily. That's sort of a philosophical question that I'm not sure I have a good answer to. But it's incredible the demand we're seeing for it now. And the shift has happened. It's really kind of coming out of COVID still where owners really realize that they have to care a lot about the Internet. And not to say they didn't before, but I think it was sort of thought of as sort of an ancillary item and not sort of how you go to work and how you go to school kind of a service. So we've seen this key [ph] change happen and we feel like it's a great tailwind for us. And you can tell from the comments, we're really excited about it. So thanks for the questions, Sidney.

Thank you.

[Operator Instructions]. Seeing no further questions, I will now turn the call back to Lucas Haldeman for closing remarks.

Thank you. Thank you all for joining the call. We'll look forward to speaking with you soon. Take care.

This will conclude today's conference call. Thank you for joining us. You may now disconnect.