Earnings Call Transcript - SMRT Q2 2025

Operator, Operator

Thank you for standing by. My name is Karen, and I will be your conference operator today. At this time, I would like to welcome everyone to the SmartRent quarter 2 2025 earnings release. I will now turn the call over to Kelly Reisdorf, Head of Investor Relations. Please go ahead.

Kelly Reisdorf, Head of Investor Relations

Hello, and thank you for joining us today. My name is Kelly Reisdorf, Head of Investor Relations for SmartRent. I'm joined today by our President and Chief Executive Officer, Frank Martell; and Daryl Stemm, Chief Financial Officer. Before the market opened today, we issued an earnings release and filed our 10-Q with the SEC, both of which are available on the Investor Relations section of our website. Before I turn the call over to Frank, I would like to remind everyone that the discussion today may contain certain 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 in our annual report on Form 10-K and quarterly reports on Form 10-Q. We undertake no obligation to provide updates regarding 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 presentation is available on the Investor Relations section of our website. And with that, I will turn the call over to Frank.

Frank D. Martell, CEO

Thank you, Kelly, and good morning, everyone. We appreciate you joining us for our second quarter 2025 earnings call. Before we dive into the quarter, I want to start by saying how energized I am to be stepping into the CEO role at SmartRent. Over the past year, my service on the Board of the company has provided me with critical insights into both the company's foundational strengths as well as areas we need to address to fully realize our potential. I believe I bring to SmartRent and all of our stakeholders a significant and long-established track record of generating growth and profitability while successfully navigating challenging internal and external factors. From my point of view, SmartRent's opportunities for profitable growth and sustained market leadership are compelling. We operate in a large expanding market with a purpose-driven, differentiated platform and a growing SaaS footprint. As a hardware-enabled SaaS company with meaningful scale, our foundation is domain expertise and close alignment with the needs of our customers, both property owners and operators. Our solutions are retrofit-friendly, integrate seamlessly with third-party hardware and property management systems, and are designed to deliver measurable ROI. With roughly 850,000 units deployed, we believe that we have a significant scale advantage and are increasingly poised to leverage that advantage through continued operational efficiency. The introduction of new and enhanced capabilities across such areas as IoT, data and analytics as well as the infusion of AI into our products and operations, SmartRent delivers strong value that our customers rely on. As a result, we've built sticky and long-term customer relationships. In a recent survey, 90% of property managers cited net operating income expansion as a key reason for continued investment in SmartRent. As a further proof point, our second quarter net customer revenue retention rate was 108%. We believe that our customers recognize the power of our deep domain expertise and strong platform. For these reasons and others, we believe that we are uniquely positioned to lead the category during the next phase of growth. Our continued leadership will be built on a relentless focus on operational rigor and financial discipline as we continue innovation and close customer engagement. In this regard, I will focus my remaining remarks today on key actions the company has, is, and will be taking to address our near-term challenges, namely resetting our cost structure, returning the company to profitability, and accelerating top-line growth. Regarding our cost productivity and reduction initiatives, at the end of the first quarter of this year, the team implemented cost actions resulting in more than $10 million in annualized savings. Over the past month, we expanded our cost reduction program by an additional $20 million. The majority of our cost reductions come primarily from workflow optimization, lower staffing levels, and reduced third-party spending. The $30 million in cost reductions I just discussed should progressively benefit our financial results over the remaining months of this year. Given our expected revenue run rates over the balance of this year and the impact of the cost reduction program, we believe the company is on track to achieve adjusted EBITDA and cash flow neutrality on a run rate basis exiting 2025. As of June 30, 2025, the company has a significant cash balance of $105 million. Achieving cash flow neutrality together with a disciplined push on working capital execution, which is expected to generate approximately $15 million of working capital from our balance sheet should result in us maintaining a significant cash balance as we head into 2026. Our cash reserves will allow us to continue to fund product innovation and further operating efficiencies, resulting in a strong base for long-term success. At the same time, we are resetting our cost structure. We have taken important steps towards accelerating top-line growth rates as we approach 2026. As you may recall, about a year ago, the company announced a $10 million investment to accelerate product development, enhance deployment capabilities and strengthen our go-to-market team. We are seeing these investments beginning to bear fruit. The rebuild of our sales organization is yielding increased customer engagement and product enhancements are gaining traction. In Q2, we recorded over 24,000 new units booked, our highest total in over a year. In addition, our SaaS revenues continue to grow, and we saw strong interest in new solutions and product enhancements like our energy dashboard and SMRT IQ, which are fueled by SmartRent's unique data advantage from having nearly 850,000 deployed units comprising over 3 million connected devices. As Daryl will discuss in a few minutes, our revenue growth profile has been negatively impacted over the past 1.5 years by a conscious decision to transition away from onetime bulk hardware deals, lacking alignment to customer implementation timelines. As we enter 2026, we believe our reported growth rates will benefit from better alignment to customer buying cycles. This alignment should result in a shift towards more consistent, predictable, and recurring revenue models. In closing, I want to thank the SmartRent team for their focus, resilience, and commitment to execution. I believe in the company and that we are aggressively taking the right steps to realize its full potential. I look forward to sharing our continued progress in the quarters ahead. With that, I'll turn the call over to Daryl, who will take everyone through our quarterly financials for Q2.

Daryl Stemm, CFO

Thank you, Frank, and good morning, everyone. We appreciate you joining us today to discuss our second quarter 2025 results. I'll now walk through the financials and provide some additional context on how we're executing against our plan, managing the business with discipline, and making targeted investments to drive long-term growth and operating efficiency. For the second quarter of 2025, total revenue was $38.3 million, down 7% sequentially from $41.4 million in the first quarter and down 21% year-over-year. The year-over-year decline was primarily attributable to the decision to move away from bulk hardware sales, which Frank alluded to earlier. This approach is expected to result in more predictable revenue through better alignment with our customers' buying cycles. Hardware revenue totaled $15.1 million in the second quarter, representing a 20% decrease sequentially and a 39% decline year-over-year, reflecting the decision to move away from bulk hardware sales, which I just discussed. Professional services revenue came in at $4.3 million, up 10% sequentially from $3.9 million in Q1 and down 26% from the same quarter in the prior year. The sequential growth reflects stronger sales organization execution, while the year-over-year comparison continues to reflect the broader slowdown in new unit deployments. Hosted services revenue reached $18.8 million, representing a 1% sequential growth and a 5% increase year-over-year. This category now makes up nearly half of our total revenue and continues to benefit from expanding platform usage, high retention, and increasing demand for our software capabilities across our installed base. As Frank and I both discussed, these results highlight the underlying transformation in our revenue mix as we move towards a more predictable recurring model that supports long-term margin expansion and financial stability. Importantly, SaaS revenue, which is a component of our hosted services revenue for the second quarter totaled $14.2 million and now comprises 37% of the company's total revenue, up from 34% in Q1 and 26% from the prior year quarter. Our annual recurring revenue reached $56.9 million, up 11% year-over-year. This growth reflects the continued expansion of our recurring revenue base and the successful execution of our strategy to drive higher-margin platform-led value. SaaS ARPU reached $5.66, which is up slightly from $5.63 year-over-year, while Units Booked SaaS ARPU rose to $8.21, up from $8.07 in the same quarter last year. These improvements reflect disciplined pricing, enhanced value delivery, and our ability to drive more revenue per booked unit as our platform capabilities expand. SaaS gross profit came in at $10 million, up 1% sequentially and up 4% year-over-year, resulting in a gross margin of roughly 70%. This continued strength underscores the efficiency and scalability of our software infrastructure and reinforces the core thesis behind our shift to a higher quality revenue mix. As of the end of Q2, SmartRent has approximately 850,000 units deployed, an increase of 3% sequentially and 10% year-over-year. This continued growth in our installed base reflects steady adoption across our customer portfolio. Importantly, the quality of our installed base remains strong. Churn is exceptionally low, less than 0.1%, and net revenue retention continues to exceed 100%, supported by consistent customer engagement across the platform. These characteristics position us to drive increasingly predictable cash flows as we continue to execute against our financial and operational targets. We booked over 24,000 units in the quarter, representing our highest quarterly booking performance in more than a year and signaling early commercial traction following our go-to-market rebuild. Total gross profit in the quarter was $12.7 million compared to $17.3 million in the prior year quarter, reflecting the impact of lower hardware shipments and associated margin mix. By segment, hardware gross profit was $2.3 million, down from $8.4 million in the prior year, reflecting lower shipment volume and continued transition away from bulk hardware deals and changes in product mix. Professional services gross loss improved to $1.9 million compared to a loss of $3.1 million in the prior year quarter, driven by operational efficiencies and improved unit economics. Finally, hosted services gross profit totaled $12.3 million, essentially in line with the prior year quarter. Gross margin in Q2 was 33%, down from 36% in the prior year quarter, reflecting the impact of unfavorable changes in hardware product mix, partially offset by continued strong SaaS gross margins of 70% in the quarter. We continue to believe SaaS margins can expand over time with scale and further infrastructure optimization. Operating expenses were $24.4 million compared to $24.2 million in the prior year. Q2 2025 included approximately $2 million of severance and legal expenses, which have no prior year counterpart. Net losses increased to $10.9 million compared to $4.6 million in the prior year quarter, primarily reflecting lower hardware sales, which were discussed previously. Adjusted EBITDA was negative $7.3 million, a year-over-year decline of $8.3 million. We ended the quarter with $105 million in cash, no debt, and $75 million in undrawn credit, giving us a strong balance sheet and the flexibility to execute from a position of strength. During the quarter, we used a total of $20.6 million of cash. Cash use was primarily a result of $6 million from operating losses, net of noncash expenses, $8.5 million of accounts receivable growth, and we repurchased $3.7 million of our stock. As we've discussed, one of our key short-term financial goals is to achieve a cash flow neutral run rate as we exit 2025. To support that, we remain focused on driving operating efficiency while continuing to reinvest in our highest return areas of organic growth. During the second quarter, we continued to take aggressive actions to rightsize our cost base and invest in our future growth as well as our operational effectiveness. The majority of our targeted cost reductions have been actioned, and we believe they'll contribute to achieving adjusted EBITDA profitability and run rate cash neutrality exiting 2025. As I discussed earlier, we're taking actions to reduce our cash burn and to preserve a significant cash position as we head into 2026. These funds will allow us to fund additional value-creating opportunities, including investments in our go-to-market organization as well as new products and solutions that should promote growth within existing customers as well as potential new customers. We are executing with clarity, operating with discipline, and building a stronger business every quarter. Our strategy is focused, our team is aligned, and we believe the foundation we're putting in place positions us for long-term value creation. Thank you for your continued support.

Operator, Operator

The first question comes from Ryan Tomasello from KBW.

Ryan John Tomasello, Analyst

In terms of the $20 million of incremental cost savings, I know you gave some color in your prepared remarks, but maybe a bit more detail on the sources of those savings. And from here, do you think there could be more room to extract some efficiencies beyond the cumulative $30 million? Or do you feel like you're done with the expense side of the P&L for the time being?

Frank D. Martell, CEO

Ryan, it's Frank Martell. Yes, look, I think the three areas that I covered are where the predominant amount of the reductions are. A lot of it is from staffing reductions and third-party spending. Those are the two principal areas. To answer your question regarding the future, I think there is plenty of productivity yet to come for the company as we work on the fundamental workflows and bring in some automation and some additional talent. So I do think there are continued efficiencies as well as procurement and areas like procurement of hardware and that sort of thing. So there's more runway. And I think that the good news is we've executed substantially all of the actions necessary to achieve the $30 million. We're already seeing benefits in the P&L. I would expect, as I mentioned in my script, that by the end of this year, we'll see about $30 million substantially running through the P&L.

Ryan John Tomasello, Analyst

And Frank, now that you've had a few months as CEO, and I know you've had some tenure on the Board as well, maybe just another opportunity to give us your holistic view as it stands today on how you intend to evolve and refine SmartRent's strategy going forward. Just generally, where do you feel like some of the more attractive and low-hanging fruit opportunities are to reposition the business in order to drive growth from here?

Frank D. Martell, CEO

Yes. So a couple of comments there. Number one, the team is great here. It's really dedicated, smart, and creative. From my point of view, that's the basic building ingredient needed to go forward. I think our customers, I've been on a number of customer calls, and I think we've got really good relationships despite all of the ups and downs in the last year or two. So from that point of view, our customers are sticking with us. I think there's room in every account to grow. I think there are also new segments that we haven't played in that we're looking at. So I think there's plenty of opportunity for growth. The scale advantage that we have, with 850,000 deployments and 3 million connected devices, presents a great opportunity for us to expand. We're going to invest selectively in AI, as everybody is doing that, but we really have not done it to the degree that we should and could. That offers us both internal efficiency and more value for our customers. So there are plenty of opportunities to grow. It's just unfortunate that we've had this whipsaw effect of bulk hardware sales, which we're now seeing the end of. As we get into the fourth quarter, we'll have a more predictable revenue trajectory than we've had in the last 1.5 years.

Operator, Operator

The next question comes from Yi Fu Lee from Cantor Fitzgerald.

Yi Fu Lee, Analyst

Welcome, Frank, to the seat. My question is similar to Tom's. I just want to get more clarity and color on your vision, your strategy in terms of what is new from your current plan. I know you were on the Board before, so you have experience with SmartRent compared to the prior CEO. What is different that we should expect? And I also have more follow-up.

Frank D. Martell, CEO

Yes. From my point of view, I'd like to have a SmartRent setup in every apartment in the country. I think we have that capability. I'd like SmartRent technology to be everywhere in the multifamily space. I think we have a good jump on that with certainly the big players. I believe we have some work to do to make sure that the economics work for smaller installations, but that shouldn't be a major issue for us because the heritage of the company is starting with really the large players and building out a big scale. Strategically, we want to expand the company and get more operating leverage, both on the hardware and software sides. It's essential to ensure that 1 plus 1 equals 3 in our operations. I think there is a big game to play in AI that will benefit customer engagement, operational effectiveness, planning, and product. We're working to leverage our data more effectively. There are significant opportunities for us over the long run, and we won't lack for opportunities. We just need to ensure that they result in profitability, which is what Daryl mentioned when we talked about financial discipline and rigor around tracking and measuring our success.

Yi Fu Lee, Analyst

That makes sense, Frank. For me, the follow-up is regarding the SaaS revenue model adoption, obviously standing at 37% of total revenue. Daryl, you can help out on this as well. By the end of this year, the hardware headwind will subside. Does that mean that in 2026, we should see expansion? That's number one. Can you also walk us through the journey in terms of getting customers to support SaaS? If I'm an existing customer, how hard is it to get them to SaaS? I understand SaaS enjoys a higher margin, over 70%, and there's more to grow.

Frank D. Martell, CEO

Let me hand it over to Daryl. I want to emphasize that when bulk hardware sales are eliminated, those sales don’t go away; they just have a different timing profile. The lumpiness will dissipate and result in a more progressive growth profile. I'm not saying every quarter will necessarily show growth, but you should expect to see a growth profile. We should see an acceleration of growth since we have a lot of new territories to pursue in terms of customers and products.

Daryl Stemm, CFO

Some additional thoughts on the SaaS revenue. Our primary driver of increased SaaS revenue is adding new units onto our platform. The number of units we currently have deployed is about 850,000, which represents a 10% increase year-over-year. So, expanding the installed base is crucial. We’ve been enhancing our product offerings to deliver more value to customers, which is reflected in a higher average SaaS ARPU. What's crucial to note is that our existing deployed base averages $5.66 per unit, while new bookings average in excess of $8. This shows we’re enhancing value, and we aim to continue booking SaaS at rates above our current rate.

Yi Fu Lee, Analyst

Got it. Lastly, Daryl, you mentioned adjusted EBITDA and free cash flow neutrality as you exit Q4. Should we expect either breakeven or above in 2026? And Frank, on the product side, what technology in your AI roadmap do you want to build into the product? As Daryl mentioned, new bookings are enjoying over $8 in ARPU, so I want to get a sense of the AI infusion.

Daryl Stemm, CFO

We believe that we're positioning ourselves to exit this year on a breakeven basis. We're not yet giving formal guidance, but we hope to provide that at some point soon. We've aligned our plan to match our costs with our existing revenue level, and with continued financial discipline, we anticipate profitable growth leveraging our current operating expenses. However, we are not instituting formal guidance yet.

Frank D. Martell, CEO

To answer your question on AI, we're already involved in AI to a certain degree, although it's small right now. We have a lot of data, and using that data to help our clients make better decisions is where AI will play a role. Additionally, servicing our installed base of 850,000 units involves considerable effort, helping us be responsive to customer inquiries. AI will also assist in diagnosing and detecting risks, such as leaks. There are many applications for AI in both our workflow and our customers' workflows, and this will be our focus in the next 12 to 18 months.

Operator, Operator

And that concludes our Q&A session. I will now turn the call over to Frank Martell for closing remarks.

Frank D. Martell, CEO

Okay. Thanks, operator. In closing, I want to thank all of our talented employees and all of our stakeholders for your ongoing support. It’s very meaningful. I think we've laid out a clear plan at this point to drive for profitability in the coming quarters and to grow our business with property owners and operators at a more rapid pace as we get into 2026. We're going to remain laser-focused on disciplined execution and market leadership, and that's the recipe for our long-term success. Thank you, everybody, and I look forward to reporting more on our progress in the coming quarters.

Operator, Operator

That concludes today's call. Thank you all for joining, and you may now disconnect.