Latch, Inc. Q2 FY2021 Earnings Call

Thank you, operator. Good afternoon and thank you for joining us today to review Latch’s second quarter 2021 financial results. With me on the call today are Luke Schoenfelder, Chief Executive Officer, Co-Founder, and Chairman of the Board of Directors; and Garth Mitchell, Chief Financial Officer. After prepared remarks, we will open up the call for a question-and-answer session. During this call, we may make statements related to our business that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance but rather subject to a variety of risks and uncertainties. Our actual results could differ materially from these expectations reflected in any forward-looking statements. Forward-looking statements made today speak only to our expectations as of today and we undertake no obligation to publicly update or revise them. For a discussion of material risks and other important factors that could affect our actual results, please refer to the risk factors section in our SEC filings, available on the SEC's Edgar system and our website, as well as other risks and other important factors discussed in today's results. Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the investor relations portion of our website for reconciliation of these measures to the most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Chief Executive Officer, Luke Schoenfelder. Luke?

Thanks so much, Sean. And I'd like to start by thanking all of you for joining us today on our second earnings call as a public company. Latch began trading as LTCH on NASDAQ on June 7th, and we're very grateful to our long-standing and new stockholders, employees, customers, and partners for making this possible. We're also very excited to share results for the second quarter. In Q2, our total bookings grew substantially by 102% year-over-year to $95.8 million, an acceleration from 89% growth in Q1. Our attach rates of non-access LatchOS software modules increased again from 81% just a quarter ago in Q1 to 90% in Q2, which gives us continued confidence that our robust 2021 product roadmap and release schedule will drive high adoption and sustained lifetime value expansion. Despite unprecedented supply chain constraints and construction delays due to labor and material shortages, we continue delivering for our customers, growing our revenue in Q2 by 227% year-over-year, up to $9 million, a sharp acceleration from 143% year-over-year growth in Q1. Garth, our CFO will talk in a few moments about Q2 results in detail. As this is only our second earnings call, we'd also like to take a moment to remind everyone about who we are, what we do, our value proposition, market opportunity, and business model. I am one of the Co-Founders of Latch, and beginning in 2014, we embarked on our journey to make buildings better spaces to live, work, and visit, creating a product company focused on the biggest challenges that we saw on the market. From the beginning, we recognized the powerful opportunity to transform the world's oldest subscription product, renting and space and the world's largest asset class, real estate. Our flagship product LatchOS provides real estate operators, residents, and service providers the capabilities they need to solve the problems they face every day in their spaces, and we provide tailored solutions through our LatchOS modules. Smart access, delivery and guest management, smart home, connectivity, personalization, and services. Our average building customer installs Latch and partner devices across new and existing buildings in their portfolio and then pays Latch between $7 and $12 per apartment per month for the software features that they need. This range is expected to continue to increase as we solve more customer problems with future products. Typically, our customers prepay for the LatchOS software contract for a period greater than six years, which benefits them and their ability to capitalize the expense, while also benefiting us with powerful cash generation. Once installed, Latch app users interact with our app an average of 4.6 times per day. This engagement is something we're super proud of, and we're excited to continue to expand the availability of LatchOS to more users and deepen engagement with each stakeholder that interacts with our products. As we look forward, we want to highlight some of the growth pillars that make us most excited. First, the market for an apartment building operating system is massive, with an estimated 47 million rental homes in the US alone, representing a $54 billion TAM, while Europe has another $90 billion TAM. Second, LatchOS is defining the full-building operating system category by continuing to develop innovative products that are constantly improving and evolving. Our products both enhance revenue generation for our customers and reduce their operating expenses. Our robust and modular system architecture also allows us to rapidly innovate on the platform, ensuring that the value that LatchOS delivers to its customers will grow and can adapt to customer needs more rapidly than other products in the market. And third, LatchOS is integrated with the best partners in the market, including Google Nest, Apple, ecobee, Yardi, Entrata, RealPage, and more. These partnerships are focused on the highest levels of user experience, data security, and user privacy provide us the opportunity to partner with the highest-quality companies and products, all while pushing our total ecosystem forward. Fourth, this robust platform approach allows us to deliver new products and features to take advantage of the rapidly growing and evolving market. Because of the strong foundation that LatchOS provides, we can expand deeper into existing customer portfolios with new and existing features, as well as expand into adjacent markets, such as commercial office market space, which we're entering starting with our pilot deployment sites that include the Empire State Building, Rockefeller Center, and Brookfield Place. And fifth, since our inception in 2014, we've had incredibly strong customer attraction, demonstrated by our zero churn rate and high lifetime customer value, both of which were further exemplified in our second quarter financial results. Again, which Garth will discuss in more detail shortly. And now, I'd like to turn to a few exciting product and marketing updates specifically from Q2 that we believe demonstrate our commitment to serving our customers with an ever-evolving set of products and experiences, all while enhancing our broader ecosystem and driving long-term growth. In Q2, we expanded our property management software integrations, adding both Yardi and Entrata to LatchOS. This follows our previous integration of RealPage, resulting in LatchOS now integrating with the three largest ePMS providers in the United States. With LatchOS's growing roster of ePMS integrations, property managers can save on average over four hours of their time for every 100 residents. This will yield ongoing net operating income savings for our customers across asset classes and markets. In Q2, we also officially launched our strategic direct sales and deployment efforts, which allow us to provide a unified experience and a single point of contact for customers across fulfillment, installation, support coordination, and third-party vendors. Besides the critically improved customer experience for our key and enterprise accounts, direct sales will drive long-term improvements to hardware and software margins and give us more direct control over the customer relationship for renewals and upsells of existing and future products. This quarter, in addition to other deployments, we took our personal building live successfully with AvalonBay through this new direct deployment model. We also hired Justina Omokhua as our Chief Marketing Officer, furthering our investment in the expansion of our enterprise customer base, and the ways we serve the personalized needs of individual users on our platform. Justina’s marketing career has included experience at some of the world's most powerful brands, with recent roles including Senior Vice President of Brand Marketing at Endeavor and Global Head of Content and Lifestyle strategy at Apple. Reflecting on our second quarter results, the first thing is that our strong and expanding product offering is driving a very powerful bookings engine that exceeded even our internal expectations for the quarter. Bookings growth specifically accelerated in Q2 to the 102% year-over-year growth I stated earlier, which is a powerful testament to the increase in product category adoption, demand from our customers, and accelerating sales velocity. Let me take a moment to illustrate our momentum with a couple of Q2 vignettes that reflect how we go to market and how customers find value working with Latch. In Q2, we welcomed another one of the largest owners of apartment buildings in the United States as a new customer with a direct deployment deal, including LatchOS Smart Access and smart home modules. This customer chose Latch due to Latch Electrics' high uptime relative to another vendor they had been using. Our industry-leading engagement levels, our automation benefits for their property management teams, and our deep integrations with EPMS platforms. We also signed our second deal with a preeminent Chicago developer for the remainder of the residential portfolio. This customer had already installed Latch in one retrofit and one new building in their portfolio and is currently completing a third building with Latch, as we speak. Now, having experienced firsthand the functionality, reliability, and customer demand for Latch, this customer has come back and signed up the remainder of their portfolio with Latch. We're excited to continue to build out our relationship with this customer with new deployments and products to come. We're also very excited to welcome a large mixed-income housing developer, who focuses on the acquisition, redevelopment, and management of affordable housing projects in the Northeast. This customer was initially looking for just a Smart Access product to reduce their operating expenses, and they chose Latch based on positive feedback regarding tenant experience, functionality, and operating cost reduction from other reputable players in the industry. They have now signed up a mix of retrofit and new projects with a variety of LatchOS modules, including Smart Access, Smart Home, and Latch Delivery Assistant. Beyond just these examples, the second theme is our durable and sustainable revenue growth driven again by that strong bookings engine. We experienced significant revenue acceleration to 227% year-over-year growth in the second quarter. We delivered this strong growth without an increase in ramped sales capacity and while dealing with the direct and indirect effects of global supply chain shortages and construction delays that are emerging as a result of the global pandemic. We're particularly proud of our engineering and supply chain teams as they have continued to deliver our products and serve our customers, despite the headwinds caused by these challenges. I'm also proud of our direct deployment teams, who despite significant indirect construction material and labor shortages, delivered in Q2, working hand in hand with our customers to ensure that they got as many of their spaces up and running with LatchOS as possible. Setting aside our strong Q2 performance, the most powerful driver of our business remains the secular shift towards technology in the real estate industry, which has been woefully underserved by technology companies and which we believe has never been served by a product company approach like ours. A lack of focused innovation for real estate has led to exceptionally low technology penetration rates in what is the world's largest asset class. This historic underutilization of technology is a long-term driver of our business and we remain steadfast in our focus on delivering the products and experiences our customers and their tenants deserve, right now and going forward, layering in richer and more valuable experiences in every space where we operate. I've never been more excited about what we're going to continue to deliver to the market. With that, let me turn the call over to Garth Mitchell, Latch's CFO. Garth?

Thanks, Luke. It's great to connect with our existing and prospective shareholders on Latch's second public earnings call. The second quarter was a record quarter for the company once again, and I'm excited to share these results and provide an update on our third quarter and fiscal year 2021 guidance. Before diving into our financial results, I wanted to first provide a reminder of the important aspects of our business revenue model as some of you may be new to Latch’s story. Since our launch in summer 2017, we've not lost a single customer, leading to 100% gross dollar retention. Our direct sales model enables high repeat customer bookings, larger deal sizes, and strong upsell and cross-sell activity resulting in growing customer value. Our go-to-market model and long software contract terms drive remarkable sales and marketing efficiency as measured by our LTV to CAC ratio. We've previously stated that our fourth quarter 2020 LTV to CAC was 6.8x or 4x after factoring in initial hardware costs. Strong new product attach rates in the second quarter of 2021 of 90% continue to expand our LTV to CAC ratio. Note that LTV to CAC does not take into account upsells or renewals, which leaves room for expansion on the initial ratio. When we win a new account and a customer begins to deploy Latch across their portfolio, we see significant LTV expansion as sales and marketing expenses tend to be lower on future deals or new product upsells. Furthermore, scale efficiencies in next-generation access products improve our hardware profitability. Because we consider hardware losses to be a cost of deploying our highly sticky, high-margin software products, improvements in hardware profitability effectively lower our customer acquisition costs. Year-to-date, these dynamics have allowed us to continue to drive bookings growth while improving hardware profitability, despite lingering COVID-related global macro environment volatility. Equally important, Latch has very compelling upfront unit economics; on average, software contracts are more than six years in length, and around 97% of our customers elect to prepay their full contract on day one, creating highly attractive upfront cash profitability and efficiencies. Before diving into our second quarter results, I thought it might be helpful to walk through our sales process and get some color on the seasonality in our business. We do bookings as the primary measure of customer adoption of LatchOS, Latch’s sales velocity. Bookings represent signed customer LOIs to purchase Latch hardware and software services, not reflecting term or promotional discounts, with a target delivery date no later than 24 months following signature. Bookings are the sum of the total hardware revenue commitment and the total software revenue commitment over the total life of the software agreement. Each booking is associated with a specific building, including pricing for the specific software and hardware products for each unit, and includes explicit target delivery dates upon which the customer expects delivery and deployment. The total hardware revenue commitment is recognized net of promotional discounts as GAAP hardware revenue at the time of shipment; software revenue is recognized net of promotional discounts over the course of the contract, starting from software contract signature through contract end. There is thus a greater lag between software bookings and the recognition of GAAP software revenue than with hardware bookings to GAAP hardware revenue. While a deal's target delivery date is no further out than 24 months, the average initial delivery timelines range from six to 18 months. Retrofit deals tend to fall on the shorter end of this scale, while new construction deals, deals with bigger customers, or larger full portfolio deals, tend to fall on the longer end of the scale due to extended construction timelines and increased complexity. As installation timelines are largely dependent on real estate schedules and activity, we do experience some seasonality in the business. Most notably, delivery volumes in the first and fourth quarters tend to be relatively lighter than the second and third quarters, due primarily to construction seasonality in colder climate zones and slowdowns due to end-of-year holidays. We also note that some quarters can be back-end loaded, which is a dynamic we experienced in the second quarter this year. Macro events can delay our delivery timelines. For example, construction site shutdowns during the 2020 pandemic quarantines extended our average delivery timelines. These delays tend to be short-term drivers, as we saw catch-ups in delayed deliveries as construction sites reopened early in 2021. Post-pandemic macro normalization has been choppy, as we began to see June 2021 construction materials and labor shortages drive similar delays to what we saw in 2020. From talking with our customers and monitoring industry data, we are confident these are only short-term drivers, like those experienced in 2020. Finally, as we continue to scale the business, we expect to see some lumpiness in bookings, as we are increasingly closing larger multi-building deals that can have an outsized impact on the quarterly bookings cadence. Now, let me turn to our second quarter results. I'd like to quickly point out that we'll be discussing some non-GAAP metrics going forward. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the earnings release we issued earlier today. For the second quarter, bookings were $95.8 million, up 102% year-over-year growth and cumulative booked home units also accelerated to a total of 451,000 units, up 108% year-over-year. Finally, booked ARR grew to $48.8 million, up 122% year-over-year. Booked home units represent the total number of apartment units, or similar dwellings installed cumulatively, as well as committed to be installed with Latch products. Booked ARR is defined as the cumulative value of annual recurring revenue from Latch Software subscriptions that are under a signed LOI. The acceleration in growth across all bookings metrics is reflective of increased adoption of Latch’s unique product offering. Second quarter sales and marketing expenses grew 77% year-over-year as we began to invest in sales capacity to meet accelerating growth and customer demand and take advantage of our huge untapped market. Importantly, we drove this accelerating growth with no year-over-year growth in Latch’s sales capacity, which demonstrates the robust and growing market demand for our products. We saw attach rates of non-access LatchOS modules grow up to 90% in the second quarter, a 9 percentage point increase versus attach rates of 81% just a quarter ago. This increase demonstrates robust customer demand for incremental LatchOS modules as they become available, and supports increased investments in R&D, which will accelerate the time to market for several new modules. We expect these modules will drive higher customer lifetime value expansion. Now turning to revenue. We're pleased to announce revenues of $9 million in the quarter, up 227% year-over-year. We're very proud of this result as this once again demonstrates the strong customer demand for our products. Revenues were at the lower end of our second-quarter guidance range as we began to see some of the impact of labor and building materials shortages at the end of the quarter, most notably in the month of June. Given our products are typically among the final materials installed before completion and construction and related upgrades, completion delays can have an outsized impact in particular periods. We deliver a strong improvement in hardware margin to negative 12% for the second quarter compared to negative 65% in the second quarter of 2020 and up from negative 20% a quarter ago. This was largely driven by scale efficiencies and more cost-effective next-generation access products. Our priority remains meeting our customers' needs and we are extremely proud of our differentiated ability to simultaneously deliver accelerating second quarter revenue growth and greater than 5,000 basis points of year-over-year hardware margin improvement. During these unprecedented global supply chain and electronics shortages, which have impacted almost every company that distributes physical products, our global supply chain team is tactically sourcing components to meet our customer demand, enabling us to continue to drive greater than 100% year-over-year revenue growth. Though this macro environment may slow or erode some of our expected margin improvements for the remainder of the year, we have high confidence that this temporary market dynamic will not impede long-term hardware margin improvements. Our software gross margin was 90% for the second quarter, a marginal difference compared to 93% in the second quarter of 2020. We believe these software margins continue to demonstrate the strength of Latch’s business model and highlight our scalable and modular software stack, which enables all of LatchOS functionality, including integrating first- and third-party hardware devices. Over time, we expect software revenues to increase as a percentage of our revenue mix, a key driver for long-term gross margin expansion. Operating expenses were $22.7 million in the second quarter, up 61% year-over-year compared to a 227% year-over-year increase in second quarter revenues. Adjusted EBITDA in the second quarter was a loss of $17.4 million, as compared to a loss of $13.4 million in the second quarter of 2020. The net loss was $40.1 million in the second quarter of 2021, as compared to a loss of $15 million in the second quarter of 2020. The primary reason for the gap between adjusted EBITDA and net loss was an increase in non-operating and non-recurring expenses, largely related to the closing of our merger and public listing. Turning now to our balance sheet. As of June 30, we had cash and cash equivalents of $472 million compared with $60.5 million as of December 31, 2020. The increase in cash and cash equivalents was primarily due to proceeds received in connection with the closing of the business combination with TS innovation. At the end of the second quarter, we had debt of $800,000. Now let me turn to guidance. Because of the accelerating growth in demand for our products and our strong year-to-date execution, we're now raising our full-year total bookings expectations to the range of $325 million to $340 million, reflecting 97% to 105% year-over-year growth compared to our previous guidance range of $290 million to $325 million. For the third quarter, we are now raising our total bookings expectations to the range of $85 million to $90 million, reflecting 149% to 164% year-over-year growth. Our bookings are the single best indicator of market adoption of our products and the performance of our business. We are excited about the long-term implications of such strong year-to-date bookings outperformance. While we still expect revenue growth of well over 100% year-over-year in the second half of 2021, we are adjusting our guidance to reflect the construction industry supply and labor shortages we saw in June. Industry data suggests that the industry could experience some relief before the end of the year, but we are currently assuming the construction delays persist for the remainder of 2021. As such, we now expect full-year revenue in the range of $38 million to $42 million, reflecting 110% to 133% year-over-year growth compared to the prior range of $47 million to $51 million. We expect third-quarter revenues to be in the range of $10 million to $11 million, reflecting 96% to 116% year-over-year growth. We delivered north of 5,000 basis points of hardware margin improvement in the second quarter amidst an accelerating global electronic supply chain shortage, which highlights the long-term drivers of hardware margin improvement. Despite these electronics shortages, we will continue to prioritize meeting customer demand for our products and will tactically source supply to maximize the delivery of our long-term high-margin software agreements. We assume this macro disruption will persist for the remainder of the year, impacting hardware margins, which, in combination with our updated revenue guidance, will affect our forecasted EBITDA for the year. We now expect full-year 2021 adjusted EBITDA losses to be in the range of $115 million to $90 million, as compared to the prior range of losses of $95 million to $75 million. Third-quarter adjusted EBITDA losses are expected to be in the range of $32 million to $28 million. The long-term drivers of hardware margin expansion discussed earlier remain in place, despite short-term macro disruption. In summary, we're very pleased with our performance in the second quarter and look forward to continuing to deliver long-term sustainable growth. We remain proud of our team's ability to continue to deliver such high growth rates despite the volatile macro environment. While supply chain issues have marginally affected our short-term results, we've seen a huge increase in customer demand, as shown by our unprecedented second-quarter bookings of $95.8 million. With the massive and growing market opportunity ahead of us, incredible products in market and in development, and a strong market leadership position, we believe we are uniquely positioned for sustained long-term success. With that, we will now open the call up for questions. Operator?

Thank you. Our first question comes from Rod Hall with Goldman Sachs. You may proceed with your question.

Hi, Tim. This is Max Gamperl on for Rod. We have a couple of questions. First one is on the mix of your booked units this quarter, and particularly looking at multi-family retrofits. It looks like you've booked about 82,000 new units this quarter, and we understand that retrofits are very important for Latch’s expansion in the future. It would be good for us to get a bit of sense for the ability for Latch to deploy at retrofit buildings. Maybe you can even give us a percent of booked units that came from retrofits this quarter? And maybe even touch on the market share of new builds, and then I have a follow-up.

Garth, I don't know if you want to take this question because I'm happy to sort of take the first pass, and you can fill in for me or fill in for me at any point there?

Hi. Thanks so much for the question. We are not at this point breaking out retrofit versus new construction data in the quarter. We think it's important, but what we've said before is that we're trending towards a 50-50 mix between retrofit and new construction because the large deals skew in a particular quarter, potentially skewing the mix. You know, I think the best way to think about it is sort of trending towards 50-50 between the two at any given period of time, and we're really excited to see super strong retrofit growth, some of which we highlighted in the customer vignette. But we're not going to break out specifics at this point in time. I don't know, Garth, do you have anything to add to that? Yeah, Max, we're good question. We're not providing the specific mix of retrofit and new construction in the quarter. So like Luke said, historically, we have actually been closer to 50-50 in the mix. What I would note is that we've seen a very, very large percentage of our both deliveries and bookings in Q2, which is a product that was built specifically to serve customers that have older doors, that are common in retrofit environments. So we continue to make great progress on deploying successfully into retrofit environments, and we look forward to updating you on our progress on our next earnings call.

Okay. Okay, great, thank you. And then as a follow-up, just on the supply shortages. Did the supply charges mainly affect your customers, or did they also affect the manufacturing and sourcing of your products as well?

Yes, I can address that. Thank you for the question. We take pride in our supply chain team's ability to consistently deliver. We have managed to supply all of our products despite some instances, particularly towards the end of the quarter, where the cost to purchase components increased. However, due to our strong relationships within the supply chain, we have been able to maintain our deliveries when many other companies could not. We view this as a significant competitive advantage moving forward. Additionally, a survey conducted by the National Multifamily Housing Council in June indicated that 86% of those surveyed are experiencing shortages in construction materials. This helps illustrate where the shortages are currently impacting the market.

Great. Thank you so much.

Thank you. Our next question comes from Mark Schappel of Benchmark. You may proceed with your question.

Hi, thank you for taking my question and congratulations on the good bookings spreads. Look, just want to dig a little bit deeper into the supply chain issues and construction delays that you began to see in the quarter. Just to build on the earlier question, are you seeing the supply chain issues with respect to pretty much all of your products, or is it just limited to certain ones?

Certainly. We appreciate your question. We've been able to continue manufacturing all of our products despite facing increased costs and delivery challenges throughout the year. Our top priority remains delivering for our customers, and we've successfully managed that. The delays and shortages affecting the industry are impacting us indirectly since they affect our customers. For example, if there is a shortage of paint or painters, it can delay our product installations, which often occur just before someone moves into a space. We have focused on ensuring we can consistently deliver for our customers and support them through the challenges they face. Our shift to direct deployment has proven beneficial, enabling us to assist with sourcing challenges and leverage our supply chain capabilities to help our customers fulfill their delivery needs.

Okay, that's helpful. Thank you. And then, Luke, just want to get a few more details around some of the direct sales efforts in the quarter. Granted, you're building up that organization; it's still very early, but maybe you can just give us a few more details there and also remind us of your plans for headcount growth this year in that group?

At a high level, we view our sales organization focusing on the top 1,000 accounts, which account for approximately 60% of the market. Our account-based selling strategy is directed at these key accounts. During the last quarter, we did not experience any growth in our ramped sales capacity. Although we brought on an impressive team led by Chris Lee, our Chief Revenue Officer, who joined in the first quarter, none of the new team members have fully ramped up yet. The results we achieved in the second quarter were accomplished without any increase in ramped sales capacity. We are very optimistic about this ramped sales capacity coming online and contributing to growth throughout the year and beyond. Garth, have we detailed the specific headcount in that area?

No. No, we haven't. But, Mark, I can give you a little bit of background on this. We've transitioned parts of our operations organization to focus on managing direct deployments for our customers. We're building the organization, off of a base that still exists already, and we expect to see meaningful headcount growth in that department. We are not getting sort of department by department headcount growth targets, but you should expect to see more Latch pros being supported by Latch field installation managers, who are going to manage everything from quoting, all the way down to ensuring that the deployments happen successfully at the building level for our key and enterprise account customers, who elect to have us manage the deployment process for them.

Okay, thanks. And then, one final question, Luke, with respect to the recent entrance into the emerging commercial office market. Could you just give us a quick update on the pilots for Latch Visitor Express and maybe the progress you're seeing or where they're at?

Yeah. Absolutely. So we're moving forward, exactly at the sort of pace that we're anticipating. We'll have more announcements as those buildings are officially announced, is going live. But we're very excited. I can tell you that I was walking through a turnstile in our office yesterday using the installed Latch products, so we're very excited about being able to deliver that, and we’ll of course give official updates as those products become commercially available to the commercial office market.

Thank you.

Thanks, Mark.

Thank you. Our next question comes from Stephen Sheldon with William Blair. You may proceed with your question.

Hey, guys. Thanks for taking my questions. I wanted to ask two questions about the updated 2021 guidance. Clearly, some mix trends there. So, one, can you share any more detail on where booking expectations have been exceeding your expectations? Is it traction with new developments or retrofits or the better module attach rates? And then, two, on the push-out in revenue generation due to delays. Has that mainly been in new developments or have there been any notable delays or pushouts in retrofits going live too?

Great questions. I'll start with the second one first. According to the National Multifamily Housing Council survey from June, 47% of members reported labor shortages, and 86% reported shortages of construction materials. For us, even in a retrofit environment, there needs to be personnel to install the product and retrofit the unit. These shortages are definitely impacting both areas. This is not just a challenge associated with new construction. In looking at the broader market and our bookings, we see a wide range of activity. We're thrilled to report a 90% attach rate of two or more LatchOS modules, which is up from 44% in the fourth quarter of last year, more than doubling in less than a year. This is very encouraging and reflects the broader needs of our customers and the solutions we are providing, which is very exciting. We're experiencing broad-based growth in both retrofitting and new construction. We've mentioned previously that we typically hover around a 50-50 split and are eager to continue witnessing growth in software adoption across the board, along with increased uptake in both retrofit and new construction.

Yeah, Steven. Let me just add something there. I think I point you back to some of the customer stories that we provided in the prepared remarks. What we're seeing from a lot of our customers is that they have both retrofit and new construction opportunities in their portfolios. The crux of a lot of the activity that we saw in the second quarter resembled some of the stories that we talked about earlier, where a customer has installed a building or two, had a good experience, realized the ROI of LatchOS in their buildings, and have decided to deploy Latch more broadly into their portfolio, oftentimes taking more incremental LatchOS modules. I understand the question, and we're excited to talk more about the development of Latch's direct deployment capabilities for the retrofit market. But I'd urge you to think about this more at the customer level and recognize that customer portfolios include both retrofit and existing buildings, and opportunities with new construction. We are going to grow with our customers' growth as they again experience the ROI that LatchOS can provide to their buildings.

Got it. Makes sense. And then just I guess one follow-up. I think on the installation side, I wanted to kind of ask about capacity there. I know you have licensed and kind of trained contractors if you call them the Latch pros, but just how – as we think about maybe moving past the supply chain issues and maybe construction getting completed, I guess what's your capacity like on the installation side with the Latch pros and with channel partners?

Yeah. What's interesting about that is the Latch Pro program is something that the market is really excited about. Our customers really want to be served holistically, and this allows us to provide a better experience for the customer, which is really important, but also allows us to have even better margins on our installed products, which is super exciting for us. In terms of capacity, if you think about the labor base that we're working with, we have a very differentiated brand and a very exciting brand. So our ability to attract the best talent to work with Latch products is very high, and that initially started when we were aware of that as folks from the industry continued to join our team. Now, as we go and we build out our Latch Pro network, people are just really excited about our products and are excited to be associated with Latch and taking on that Latch Pro mantle.

Yes, and just to add on that. The development of our Latch program is one component of an evolution of the way Latch interacts with channel partners of all kinds. We are not just going to them and asking exclusively to do the direct employment work for Latch on Latch’s direct sales; we're also offering them incremental incentives, co-marketing opportunities, and all kinds of other opportunities for them to really grow their businesses with Latch. So it is an output of us building a deeper relationship with our nationwide network of Latch pros that we think will help us meet our customers' demands for direct employment opportunities, but also use those channel partners' demand to drive more broad demand for LatchOS and deeper deployments into our customer portfolios.

Great, thanks for taking my questions.

Thanks, Steven.

Thank you. Our next question comes from Ben Sherlund with Cantor Fitzgerald. You may proceed with your question.

Hey, guys. Thanks for taking my question. I'm kind of thinking a little bit longer term. With regard to the residential experiences, how big of an install base do you think you have to see before you're able to really start monetizing there?

Hey Ben, thanks so much for the question. Yes, I think what we're really focused on is making sure the experience is really fantastic when we begin that monetization, and in my mind that sort of threshold, minimum threshold was about 100,000 units, and we're very excited to be in a position now where we can really start to look at those opportunities and as we've said before, we're continuing to be excited about the products we have on the roadmap to deliver differentiated experiences for the resident, a better product experience for the resident, a better service experience for the resident and monetize that. We don't have any specific updates to make on this call, but we are still making progress on the product side and are really excited to be able to launch those features for our residents.

Okay, great. Thank you.

Thank you, Ben.

Thank you. Our next question comes from Joe Vruwink with Baird. You may proceed with your question.

Great. Hi, everyone. Maybe to begin I was hoping just to get a little more detail on the quarter itself. It seems like the upside and booked revenue, there was definitely a unit component, healthier sequential growth in booked units. I'm just curious is there any particular drivers to that and then maybe from a seasonality standpoint, because I think the guy probably entails a sequential step down in units, is that just the normal course of business or is anything else happening in the second half?

I'll take this one. So Joe, it's great to connect with you. Regarding the second part, our guidance range assumes that the macro disruption we experienced in June continues for the rest of the year, and our estimates account for a situation where there is additional macro disruption. As we mentioned earlier, the fourth quarter is typically one of the lower demand periods for Latch since many of our clients are on holiday, but we still anticipate being able to exceed these ranges if the macro environment improves.

Okay, and then, maybe just more from a high level so I'm thinking about the financial projections Latch provided at the start of the year. At this point, it does seem like quite a bit has changed about the business; substantial number of new software products have been launched. You referenced the C2 earlier so that's retrofit. But I think it also has slightly lower price points in the grand scheme of your product lineup. I'm just wondering, as you think about the projections and you start to appreciate, yeah, in some cases the unit opportunity seems better because of retrofits, the price point with software and getting attached rates is higher so that's good. There's maybe some offsets in that. Retrofits maybe lower price point on hardware, where I'm going with this, as you think about, again just high level. How do you think that business is tracking relative to some of those projections? And where might there be slight deviations, either good or bad?

Yeah. So thank you so much for the question. Yeah. What's important to emphasize as you did is we're delivering a totally new product ecosystem into a massive market in a way that hasn't been done before. There's incredible opportunities all across all across the board. You referenced several products that we announced in this year, sort of post-announcing that we were going to go public. We typically have a two-year sort of product development cycle, and so if you think about that, the products that we're going to deliver next year were planned a very long time ago. The efficiencies that we've got from the C2 were two years before we announced them. We saw and anticipated many of the opportunities that we're capturing right now, and also some of the challenges. If you look at the C2 design, it was really about retrofit. It was really about taking the best aspects of our earlier products and being able to provide an even higher functionality product at a lower price point that was even better for again that retrofit customer. You'll continue to see us look long-term on product roadmap and continue to surprise and delight with new experiences and new capabilities that were not initially contemplated. We feel very excited about continuing to grow our product offering and scaling into this incredibly large and exciting market. I don't know, Garth, if you have anything you want to add to that?

Yeah, just to add to that to that Luke. Joe, as we've discussed in the past, the customer LTV that we get on a Booked Home Unit is really the lowest it's going to be on day one because that doesn't account for renewals, it doesn't account for upsells, it doesn't account for a number of different opportunities for us to increase the customer LTV over time. Because of that, the outperformance that you're referring to on the booked home unit growth is really what we're focused on to create the foundation for long-term revenue growth in the business. So the outperformance that you described during the increase in cumulative booked home unit additions really is the best parameter for the health of this business and for market adoption of our product. Given that over the long term, we will continue to release incremental LatchOS modules, driving higher LTVs for each individual Home Unit we bring on the platform. I actually forgot and missed your first question; I would refer you back to the customer stories to get an understanding of what's actually driving some of the growth in the home units. We're starting to see a lot of our customers that may have had a good experience with a building or flow of Latch start to come back to us and think about much larger deals that spread much more broadly across their portfolios. That's what's driving the underlying acceleration in booked home units. Again, we believe that sets the best foundation for us to grow those customer LTVs over time. So as a barometer of the business, we actually feel extremely confident about our opportunity ahead of us as presented by the performance year-to-date.

And then just one quick follow-up on this. So, obviously, we're discussing macro disruptions in 2021 that's impacting your customers' ability to complete your deliveries of product ultimately, and then the beginning of software recognition, but when we're thinking about booked units, that's more about this cumulative backlog that's in place. The backlog still exists and so the question is, at some point, the hope would be all these supply chain disruptions are going to normalize. Do you ultimately have a catch-up period, therefore, as things come back online and you get back to what may have been the original trajectory you hoped for?

Absolutely, Joe. I think in 2022, we're going to have a number of new sales and marketing investments that we've made throughout this year. The backlog of the additional booked home units that are set to deliver in the periods we've discussed with our customers gives us strong confidence in our ability to maintain sustainable long-term high growth rates and ongoing improvements in hardware margins over time.

Okay, great. Thank you very much.

Thanks, Joe.

Thank you. Our next question comes from Jason Celino with KeyBanc Capital Markets. You may proceed with your question.

Hey Garth, hey Luke. Thanks for fitting me in. The supply chain and construction delays units enrolled documented in the media, so not a total surprise here, but how have these trends maybe trended maybe compare this quarter to last quarter? And then any thoughts on maybe when the market corrects itself?

Thank you, Jason. We began noticing this issue in June, and the industry survey data indicates that this was when it started to impact many of our customers. It's challenging for us to forecast events beyond our control. Our primary focus has always been on delivering for our customers, ensuring that our products are not the bottleneck in the process. I'm very proud of our team for continuing to achieve this. Our strong supply chain relationships allow us greater control and provide us with more options compared to others who source materials indirectly. The shortages affecting our customers highlight how they have less control over their own supply chains, and we take pride in having that control. We remain optimistic about maintaining the supply of our products to meet customer demand, which is our main focus. Additionally, we're collaborating with our direct deployment teams to assist our customers in delivering more spaces with Latch, and we're also exploring sourcing for ancillary components related to our products.

Okay, great. No, that makes sense. And then, sorry, if this was already discussed, but was this one of the first quarters where you saw the uptick in the software module attach rates? Thank you.

Hey Jason. Yes, in Q4, we reported a 44% attach rate; in Q1, we reported an 81% module attach rate; in Q2, we’re now reporting a 90% module attach rate of two or more LatchOS modules. So, it is a continued increase relative to both Q4 and Q1.

Excellent. Thank you for the context.

Thank you. And I'm not showing any further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.