Thank you for standing by. My name is Mandeep and I'll be your operator today. At this time, I'd like to welcome everyone to the SmartRent Q2 2024 Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Kristen Lee, Chief Legal Officer. You may begin.

Hello, and thank you for joining us today. My name is Kristen Lee, Chief Legal Officer for SmartRent. I'm joined today by Daryl Stemm, CFO and Interim Principal Executive Officer; and Frank Martell, Director and Chair of the Operating Committee. 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, smartrent.com. Before I turn the call over to Daryl, I'd 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 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 a second quarter earnings presentation is available on the Investor Relations section of our website. And with that, I will turn the call over to Daryl.

Good morning, everyone, and thank you for joining us today. Before we delve into our financial performance and strategic updates, I'm honored to introduce Frank Martell, our Director and Chair of the Operating Committee. Frank joined our Board in 2024 and has quickly become a valued member, bringing fresh perspectives and experience that will support our company through our leadership transition. His leadership and experience are extremely impactful as we focus on enhancing our operational capabilities and efficiencies, and capitalize on growth opportunities in our dynamic market environment. Frank's oversight is critical as we discuss today's updates on our leadership and strategic business objectives. And now, I'll turn the call over to Frank.

Thank you for the introduction, Daryl. Good morning, everyone. I appreciate all of you being on the call today. Before Daryl provides us with an operational update and discusses our second quarter results, I wanted to say a few words about last week's news and the future of SmartRent. I recently joined SmartRent as an Independent Board Director because I was intrigued and excited by the innovative company that SmartRent is, which is leading in the smart home technology movement and revolutionizing the rental housing industry. Since joining the Board, it's become very clear to me that this company is a category creator with a unique and leading market position, compelling competitive strengths and exceptional growth opportunities. Speaking on behalf of our Board, we are as confident as ever in SmartRent's long term potential, and are focused on working with the management team to enhance our operations, provide increased value to our customers and their residents, and to drive significant value for shareholders. Because we are in such a strong competitive position with significant opportunities, and because we have such promise on the horizon, the Board believes that now is the time for a change in leadership. As I'm sure you saw, last Tuesday we announced that Lucas Haldeman has stepped down as CEO and resigned from the Board. We commend Lucas on his achievements and thank him for everything that he's done. As SmartRent's Founder, Lucas did an extraordinary job driving innovation and product development, building strong customer relationships, and making the company the leader that it is today. We know that companies need different types of leadership at different stages of its development. As we evolve and scale SmartRent into its next phase of growth, we believe the company will benefit from a CEO with a different skillset…

Thank you, Frank. And again, good morning everyone. I'm pleased to provide an update on SmartRent's financial performance and I'm proud of the momentum our team has built to position SmartRent for sustainable growth. This momentum has resulted in three consecutive quarters of positive adjusted EBITDA, reflecting our continued focus on improving profitability. Additionally, we're steadily driving growth in recurring revenue and enhancing gross margins, providing for greater stability and visibility in this evolving market. We continue to operate in a challenging economic landscape characterized by shifting capital expenditure patterns, influenced by interest rate uncertainties and other macroeconomic factors. In response to these dynamics, we continue to actively position our company for long term success. We're further enhancing our customer engagement. Better understanding and meeting the needs of our customers helps ensure that our products and services align more closely with their expectations. This includes making organizational changes and refining processes within our sales team. These adjustments are designed to improve our accuracy in predicting business trends and customer behaviors. We're refocusing back on direct sales. In 2023, we launched a channel partner sales program designed to leverage external partnerships to extend our reach within our market. Despite the strategic alignment and potential benefits we anticipated, the program did not meet our expectations. In response, we're currently seeking a new sales leader to guide our sales efforts. Concurrently, we're also enhancing our sales operations organization to refocus and strengthen our direct sales efforts. These strategic adjustments are designed to better align with our core objectives and drive improved sales performance. Our approach to organic reinvestment prioritizes enhancements to our products, significantly informed by customer and end user feedback. This deliberate focus is directly reflected in our low customer churn and our net revenue retention rate north of 100%, both of…

[Operator Instructions] Our first question comes from the line of Ryan Tomasello with KBW. Please go ahead.

Hi, everyone. Thanks for taking the questions. Wanted to start by asking about how the Wi-Fi strategy fits into all the recent developments and changes at the management level, has the outlook and optimism there changed at all? Obviously, 2024 included a step up in the investment to build out that opportunity, so curious how the investment plans there might be changing going forward in light of these recent developments. Thanks.

Yes, thank you, Ryan. The Wi-Fi component remains a very bullish opportunity in our minds, and we've continued to invest in the Wi-Fi program. As you're aware, we have a limited number of Wi-Fi projects that are currently underway, and we did not expect much of an impact from Wi-Fi on 2024 results. We are, as I said, continuing to invest in the Wi-Fi line. We might expect that a new CEO who would come in with a fresh perspective might consider some changes. But I would say, fundamentally, we believe very strongly in the Wi-Fi opportunity, and it will remain a compelling part of our offering to our customers.

Great. And then in terms of these headwinds you're calling out from customers delaying these capital projects, is there a way to quantify the cumulative amount of units, deployments, or bookings that you think are being pushed out here out of 2024? As we think about next year, it seems like there's a high degree of confidence that those deployments and bookings will ultimately come through. Was hoping you can just put a finer point around the confidence level there, and what you think ultimately needs to play out for apartment operators and your customers over the next, I don't know, call it, six to nine months to alleviate some of those headwinds and get these projects back on track?

We do have a high degree of confidence that these deployments will incur in 2025. But in terms of what we are looking see in the macroeconomic conditions, I would say that the persistently high interest rates have had an adverse impact on the acquisition disposition market in particular. And it may not be directly intuitive, but many of our customers, when they're making acquisitions of new communities underwrite technology improvements, amongst other improvements into the purchase price. So, the high -- persistently high interest rates have had an impact on our forecast deployment. And that would be the first thing that I would look for Ryan to occur between now and the end of this year that would increase our confidence in the actual deployments that are being pushed out to 2025.

Okay. Thanks for taking the questions.

Thank you, Ryan.

Our next question comes from the line of Erik Woodring with Morgan Stanley. Please go ahead.

Good morning, guys. Thank you for taking my questions. I have a few as well. Daryl, maybe if we could just double click on the comment that you just made to Ryan. Again, you say that you have a high degree of confidence that what gets pushed in '24, lands in 2025. Obviously, this is a very dynamic environment. Things obviously, probably higher probability of shifting relatively rapidly. So, my specific question is, why do you have that confidence? Is it contractual terms? Is it spending that you see? I'd just love to really understand what leads you to say that you have that high degree of confidence? And then I have a follow-up, please. Thank you so much.

Yes. The first point that I would make is one that I made to Ryan as well, which is, we believe that the likelihood of interest rate softening is more likely than it has been in the past roughly one year. And so I would be looking specifically for a rate reduction as early as September, and perhaps multiple decreases to the interest rate between now and the end of the year. Our customers, we've had discussions with, as you might expect, and we have ongoing discussions with them on a regular basis, and they're expressing a higher degree of confidence in returning to more normalized CapEx investment in 2025. What's changed over the course of the last half a year to nine months most recently is that the statements with regards to what might have been deployed in 2024, the customers have said definitively will be pushed out to 2025.

Okay, that's really helpful. Thank you for that. And then maybe as a follow-up, Daryl, what I hear from you is a focus on SaaS, on ARPU, on recurring revenue, I would say over the last handful of quarters, maybe that messaging was a bit lost with a bit of a focus on hardware. Are you suggesting, again, to the degree that you can disclose now before you've gone through any changes and obviously hired a new permanent CEO, but are you suggesting that there could be maybe a change in the hardware approach and maybe get back to the roots of where SmartRent started, which was less of a focus on hardware and more of a focus on software and connecting the platform together?

Well, our platform is comprehensive and the hardware and the software are equally important. Where I think you'll see renewed focus and a return, really, to our core philosophy is how we're approaching the market. I repeated the statement about midway through my prepared remarks that the primary drivers behind increasing SaaS revenue are both improvements to the SaaS ARPU and the number of units deployed. So, what I'm really saying there, Erik, point blank, is we are renewing our focus on deployed units.

Okay, that's very clear. And then maybe just the last one from me, and this would be for anyone on the call, is just as you think about the next person that you want to bring in to lead this company, what are some of the characteristics or what's the type of background that you're looking for in a new CEO? Is this a real estate industry person? Is this a tech person? Is this an operational person? Just some general comments on what you're looking for in the next leader for SmartRent. And that's it for me. Thanks.

Yes. Well, Erik, thank you for the question. I think what you described would be our unicorn applicant to the position. But a very important point that Frank made and we made in our prior release is that we've really reached the point where scale is very important. So, one of the primary characteristics that we would be looking for in our next CEO is someone who can bring a history of successful scaling. Lucas did a wonderful job of building this company to a $200 million a year company. But the skill set that's required to get a company from $200 million to, say, $1 billion, is different than the skill set required to get you from zero to $200 million.

Great. Thanks so much for the color. Good luck, guys.

Thank you.

Our next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead.

Hi, guys. Thanks for taking my questions. If we could start on ARR, it grew nicely sequentially on lower units, I guess was it a relatively stronger upsell period? And like what really drove that big sequential improvement in SaaS ARPU?

Yes, you may recall we had a bit of a mathematical anomaly on Q1, actually. And the primary reason for that was that the timing of the new deployments in Q1 were relatively late in the quarter. And so we didn't receive -- we can receive anywhere from effectively zero to three full months of SaaS revenue when we deploy new units in any particular quarter. So Q1, we deployed more units, but received relatively new low amount of revenue. On top of that, I would point to the bookings SaaS ARPU. Although the number in Q2 was down from a year ago at $8.07 per unit, it still remains above our existing SaaS ARPU. And it's a clear indicator that as we deploy new units and continue to deploy new units, they'll come on at higher prices, which will incrementally grow the SaaS ARPU from quarter-to-quarter.

Got it. That's helpful. Then secondly, on hosted services gross margins, it stepped back a little bit sequentially. And this is with the hub revenue within that declining by $800,000 and the SaaS revenue increasing by $900,000. So 75% gross margin went up, 40% gross margin went down. I guess, how did both services gross margin not go up in the quarter?

Posted services margin was relatively flat during the quarter. It did come down by about three-tenths of 1%. And I would say that that's not necessarily a statistically significant change. It is up year-over-year, and I would expect that generally it's going to approach 75% breadth over time, because the hub amortization portion of it is going down. During Q2, roughly two-thirds of the total hosted services revenue came from SaaS revenue, which is running at about 75%. So, not overly concerned about the small drop sequentially, it is up year-over-year from 63% to about 66%.

Got it. And then I know you guys are withdrawing guidance, but could you just help frame what you're expecting for the rest of the year? So like, if we look at deployments in the second quarter, are deployments going to be lower in the back half than what we saw in the second quarter? Any insights to how we should think about revenue and profitability over the next six months?

We're not prepared to give any specific guidance at this particular point. As our visibility improves and as the market macroeconomic climate does change, or as we expect it to, we would anticipate providing some specific guidance later this year and also around 2025.

Okay, maybe just lastly, timing for the new CEO? I know the search is underway, but is that something we should expect, call it, over the next couple of months before year end? I guess what's your base case there?

Yes. Thank you. The Board's working, presently engaged with the leading executive search firm to identify candidates and also evaluate those candidates. And we're really focused on making this a smooth and orderly transition. And we're not setting any particular timeline because of those factors. We really want to focus on getting the right candidate to lead this company going forward because we believe the long term value is so very compelling.

Thank you. Really appreciate it, guys.

Thank you, Brett.

Our next question comes from the line of Tom White with D.A. Davidson. Please go ahead.

Hi, Daryl. Hi, everyone. Thanks for taking my question. Two, if I could. I hopped on a little bit late, so apologies if this was covered. But the press release announcing Lucas' departure made reference to sort of a move away from kind of the channel partner strategy. I was hoping you could just maybe provide a little bit more detail about what's happening there? What's prompted that change? Why is that the right move? And then secondarily, Daryl, you mentioned expecting kind of a renewed focus on deployed units, and I'm curious whether that means also doing that profitably? Or is there a potential that focused on deployed units could see you guys kind of dip back into maybe a little bit of a cash burn period as you prioritize deployed units? Thanks.

Thank you for your questions, Tom. With regard to the channel partner program, we're scaling back the program, we're not totally eliminating the program. And one of the primary reasons for putting in place -- in the first place was really, we feel like it could be an effective way to address the long tail of our market. Rather than SmartRent directly engaging, fully engaging with smaller customers, we think it might be a more economical way to address the lower unit customers. So we're scaling it back. Last year it did not work. And we've got a phenomenal, I think, organic opportunity in front of us in that our existing customers own and operate more than 7 million units. So, what we're really doing is we're refocusing our team to directly sell to these customers so that we can maintain those deep customer relationships and enhance our service to them. With regards to remaining or profitability on deployment of units, I think that we've actually positioned ourselves very well to be able to expand our unit deployment volumes on a profitable basis. We've done a lot of investment internally on back office as well as field services, and done some realignment of our teams. And I think we've put ourselves in a position where we can expand deployed unit volume profitably.

Great. Thank you, Daryl.

Thank you again, Tom. And thank you all for joining us today. As we conclude this call, I'd like to reiterate a couple of points. Despite the broader economic uncertainty, our solid foundation and strategic foresight have accelerated our innovation path, leading to three consecutive quarters of positive adjusted EBITDA, while growing SaaS recurring revenue north of 30% to a record of $51.2 million. This was accomplished all while keeping operating expenses effectively flat. And these results speak to the early innings of creating a platform for value creation. The current economic conditions marked by delayed customer CapEx impact the near term performance of the business. But as I stated earlier, the primary impact of this environment is a delay in anticipated 2024 deployments that our customers have pushed to 2025. The long term overall opportunity remains unchanged and remains extremely compelling. Our commitment to innovation remains strong, informed by customer feedback, which has been instrumental in maintaining our impressive net revenue retention rate north of 100%. As we move forward, we believe we're well prepared to capitalize on market opportunities and continue to serve our customers and drive long term value for our shareholders. Thank you all for your time today.

This concludes today's call. You may now disconnect.