Good afternoon, and welcome to the SmartRent Second Quarter 2023 Earnings Call. This call is being recorded. All lines are currently on listen-only mode. After the speakers' remarks, there will be a question-and-answer session. 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 overview of our arrangement, which will provide us with needed hardware on demand while reducing our cash investment in inventory. At the end of Q2 2023, we had over 60 million in inventory. And as a result of this agreement, we expect our cash to increase as we transfer a large portion of our existing inventory to ADI. Our customers will continue to receive products in a timely manner, while we remain focused on the innovation and product enhancements that keep us at the forefront of our industry. Last week, we announced a preferred resale agreement with Position Imaging, the leading provider of Smart Package Room solutions. Smart Package Room's complement and expand our offerings and address a major pain point for rental housing operators. Using patented technology, the Smart Package Room solution guides couriers through a login process that automatically directs residents to their packages. This solution relieves onsite associates from the time-consuming process of package storage and distribution. Smart Package Room is enhanced by our existing products like Alloy Access and Work Management, and solves many of the industry's longstanding package management issues, while modernizing the renter experience. During the quarter, we publicly announced the rollout of our Community WiFi solution, which we discussed on our last call. SmartRent’s Community WiFi is different from traditional internet service providers because it integrates seamlessly with property management systems, creates a secure community-wide private network, delivers immediate connectivity to residents through our SmartRent resident app, and provides an additional revenue stream to our customers, all while delivering an enhanced resident experience. Given the many benefits, we view Community WiFi as a large addressable market opportunity for our company. On Slide 9 of the presentation, we provide an example of anticipated Community WiFi economics based on the deployment of a 200-unit apartment community. We have robust demand for our solution and a large percentage of our customers are looking to incorporate our offering. Community WiFi is complex and has long lead deployment time, and we expect to see revenue contribution beginning in 2024, with more significant revenue traction in 2025. The relationships we've built and the insights we gained from our clients are invaluable in informing our strategic areas of focus and product roadmap. The offerings we discuss today, Community WiFi and Smart Package Room, solve for pain points and needs that our clients share with us. I'd also like to provide an update on our channel partner program that we launched last quarter. This program gives us greater ability to expand our influence with small and mid-sized business prospects in the long tail, which we view as a critical revenue driver. Our channel partner network has grown and we have onboarded and trained partners in 41 states who are actively bringing new opportunities to SmartRent. We are pleased with the groundwork we are laying in 2023 to make this a meaningful revenue vertical in 2024. I will now turn the call over to Hiroshi to review the financials in more detail.

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: 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 Q2 of last year and professional services increased 39% compared to last year. Our scale and credibility built over years allows us to drive revenue based primarily on the value of our solutions, as the breadth of our offerings now far exceeds any other company in the industry. There's ample organic opportunity to upsell and cross sell our expanding suite of products and our entry into other promising areas such as Community WiFi will drive higher ARPU. Now turning to gross margin. Total gross margin increased from 14% in Q1 to 18.5% this period. On a year-over-year comparison, gross profit increased roughly 9 million from under 1 million in Q2 2022. Hardware margins surpassed 20% for the first time, up from 13% last quarter and a negative percent last year. The dual effects of increasing ARPU and decreasing costs through initiatives to improve efficiencies in manufacturing, logistics and distribution are resulting in expanding margin. Professional services margin declined sequentially to negative 57% from negative 38% because of reduced unit deployments during the quarter. We are working on long-term initiatives to reduce our fixed cost basis and believe that professional service margin will improve significantly, beginning in Q4 2023. SaaS margin increased to 75% in Q2 from 73% in Q1. Improving SaaS margin is a combination of increasing SaaS revenue, gaining economies of scale and efficiencies, and reducing costs supporting the SaaS revenue stream. Next, turning to profitability. We are on track to become adjusted EBITDA positive in Q4. Adjusted EBITDA for the quarter was negative 6.4 million, an improvement of 24% from Q1 at negative 8.5 million. Compared to Q2 of last year, we saw a dramatic 68% improvement, or in absolute dollar terms, an improvement of 13.4 million. Along with margin expansion, we have been aggressively pursuing ways to reduce operating expenses by improving internal processes, substituting technology to improve efficiency and accuracy, and optimizing deployment of the company's resources to maximize returns. Total operating expenses were reduced to 22 million in Q2 from 28 million in Q2 2022, a decrease of 6 million year-over-year. Cash burn is down considerably from the average quarterly burn of 20 million in 2022. Our cash balance declined from approximately 204 million at the end of Q1 to 197 million at the end of Q2, a decrease of about 7 million. We expect the ADI agreement will further reduce our inventory levels over time and will allow the company to deploy cash in other ways. We continue to maintain an undrawn credit facility of 75 million and believe we will begin to generate free cash flow in 2024. Guidance for Q3, Q4 and full year 2023 are as follows. Q3 guidance for revenue is from 57 million to 62 million and adjusted EBITDA from negative 6.5 million to negative 4.5 million. Q4 guidance for revenue is from 58 million to 70 million and adjusted EBITDA from breakeven to 2 million. Full year guidance for revenue is from 233 million to 250 million and adjusted EBITDA from negative 22 million to negative 18 million.

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. 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 deployments 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.

Thank you, Sidney, for the question. I'll start with the first part regarding our guidance. The forecasts we've provided are based on various scenarios we've developed. The range for Q4 is broader than for Q3 since it's further out. Overall, we do anticipate that revenue will keep increasing. Seasonality still impacts our installations. However, as we've mentioned before, there's a difference between our units and revenue. Even if the unit numbers remain stable, which is not what we're projecting, we still expect revenue to grow. This is why Q4 shows higher expectations 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, I think we expected the professional services margin to decrease this quarter due to lower deployments in Q1 and our fixed costs. However, we have several initiatives that have been in progress for over a year, which are beginning to show results in Q3 and will have a significant impact in Q4. This gives us confidence in our guidance, and we are on track to align the professional services margin sustainably moving 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. Unpacking the SaaS metrics a bit more, I appreciate the detail provided. However, I would point out that the ARR growth has slowed down sequentially, and the SaaS ARPU has decreased quarter-over-quarter. It appears that this may have been influenced by weaker performance in the site plan, which could affect the ARPU since there aren't necessarily units associated with that. Could you clarify that calculation? Additionally, if possible, could you share your thoughts on the potential structural growth trajectory for SaaS ARR over the next few quarters?

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, everyone. Thank you for taking my questions. Lucas, I'd like to ask about ADI to gain a better understanding of the deal. I see that offloading inventory benefits your costs and working capital, but what motivates ADI to take on this business? From my perspective, it seems like they would simply be reselling your hardware to your existing customers, or are you also looking to attract new customers? I thought ADI mainly sells to remodeling integrators. I'm trying to grasp the rationale from ADI's standpoint for taking on this business, particularly since it appears there’s no impact on your P&L, which suggests they may be facing some costs from this agreement. I would appreciate your insights on these points, and I have a follow-up after this.

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.

Thank you for the question. Historically, the second and third quarters tend to have lower bookings for us. Budgets in the multifamily sector are typically established in the third quarter, so the fourth and first quarters usually see a rise in bookings. We also had a very strong fourth quarter and first quarter last year, and currently, we're not on track to double the units we deployed last year. Our backlog is solid, and while we are fulfilling existing orders, customers are not signing new ones at this moment. This situation might seem unusual, but we remain optimistic about the overall market dynamics and 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 improve 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 cost 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, you’re absolutely right in your assessment. In general, there are two key developments occurring in professional services. Firstly, we have been actively working on various technology initiatives aimed at enhancing efficiency. Secondly, these initiatives also provide better oversight of installations, enabling us to reduce our fixed costs by replacing some field personnel with technology. You will start to see the benefits of this strategy materializing. Additionally, we have reached a point where some of our partners, who have collaborated with us on installations, have successfully installed thousands of units and now require significantly less oversight than before. This year, we are witnessing a transformation driven by these technology initiatives, allowing us to shift towards more variable costs and lower our fixed expenses.

Understood. I have one more question about the Community WiFi build-out. I found the slide discussing the economics of that product very informative. How should we consider your efforts to reach breakeven on an adjusted EBITDA basis? Assuming this product starts to grow in the latter half of next year and into 2025, will there be significant additional costs on your end, whether in costs of goods sold or operating expenses, that might slow down the improvement in adjusted EBITDA margins? How should we think about those factors 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.

Thank you for my follow-up. I have a couple of quick questions. Looking at the SaaS ARPU in the bookings, it's encouraging to see that it has increased to over $8 this quarter. Can you explain what is driving this change? Is it mainly due to products like Community WiFi, or is it because the mix of legacy customers has decreased? Additionally, regarding the ARPU in revenue, I noticed it was relatively flat compared to an earlier question. How quickly do you anticipate it will grow given the strong bookings you're experiencing?

Yes, Sidney, I didn't catch the second part of your question, but regarding the bookings, I'm glad you mentioned that. It's really a reflection of our efforts in cross-selling and upselling starting to materialize. One of the products contributing to this is the self-guided tour, along with Alloy Access, which is our common area access. These are both playing a role in the bookings ARPU. Could you please repeat the second part of your question?

Yes. I wanted to mention that while your ARPU in revenue has remained relatively flat over the last few quarters, considering the strength in bookings, how quickly do you anticipate that will translate into revenue?

Right. So it's essentially just a math equation. We produce 47,000 units in a quarter, but there are 650,000 units in total. So it will take time for that number to grow. However, I believe the bookings ARPU is a very promising indicator for us.

Okay, that's fair. Lucas, you mentioned Community WiFi, which seems to be a beneficial option for your customers. I'm wondering why owners and operators haven't requested this solution sooner. Also, regarding future competition, what do you think differentiates you from others, and how long do you estimate it will take for competitors to catch up?

Thank you for your questions, Sidney. On the competitive side, looking across the rental real estate market, the challenges of being in second place are quite severe. It's difficult to catch up, if not impossible. Each quarter that we grow and expand our presence makes it even harder for others to compete with us. Regarding why our WiFi stands out compared to others, there are a few key factors. As I mentioned earlier, when residents download the SmartRent app, it serves as their key to access their apartment. Instead of receiving physical keys, they get the app, which allows us a unique marketing opportunity to prompt them to set up their Internet password right after. This creates a seamless and user-friendly onboarding process, eliminating the hassle of getting Internet set up—a common frustration when moving, often requiring waiting for the cable company and taking time off work. Our solution alleviates that friction while generating additional revenue for our customers, making it a win-win situation. Although I'm unsure why this concept took longer to gain traction in the multifamily sector—something I can't neatly explain—it's clear that there's an increasing demand for it now. This shift, largely driven by the experiences from COVID, has made owners more aware of the importance of Internet services. It has transitioned from being viewed as a secondary consideration to an essential service for work and school. We anticipate this change will be beneficial for us and are genuinely excited about the future. Thank you for your questions, Sidney.

Thank you.

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.