Latch, Inc.

Good afternoon and thank you for standing by. Welcome to the Latchport Quarter Earnings Call. At this time, all participants are in a listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Kevin Toomey. Please go ahead.

Thank you, operator. Good afternoon, and thank you for joining us today to review Latch's fourth quarter in fiscal year 2021 financial results. With me on the call today are Luke Schoenfelder, chief executive officer and co-founder, 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 are 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 take no obligation to publicly update or revise them. To our discussion of the 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 a reconciliation of these measures to their most directly comparable GAAP financial measure. With that, I'd like to turn the call over to Chief Executive Officer Luke Schoenfelder.

Thank you, Kevin. It's great to be here to discuss Latch's fourth quarter and full year 2021 results and our strategic outlook for 2022. Our Q4 results were in line with our guidance as we delivered nearly 100% total revenue growth for the quarter. We delivered those results even as we saw real impacts from the COVID-19 Omicron variant surge impact our customers' construction timelines and our infield sales and installation teams. The market landscape continues to be enormously exciting, and we are continuing to see increased demand from real estate owners, increasing buyer sophistication, and increased recurring monetization opportunities that drive our confidence in the market opportunity. We delivered 129% year-over-year growth in 2021, and we anticipate delivering more than 100% year-over-year growth again this year. We have created hardware, software, and services that our customers love, and this market is expanding. Now as we turn to 2022, I want to take the opportunity to reflect on the market landscape, things that went well in 2021, areas where we fell short in 2021, and opportunities for strategic improvement going forward. As we look back on last year, we did a lot well across hardware, software, and services. Our teams continued to deliver products for our customers despite some of the most significant supply chain and labor shortages we've seen in modern times. Whether working overtime to ensure shipments made it to customers, redesigning products on the fly to work with substitute components, or scaling direct deployment efforts to help customers have an even more white glove experience, I'm very proud of our team for delivering in these areas despite the short-term impact to our unit economics. On the hardware product development side, we were very excited to announce products and intended partnerships with leading lock and access device manufacturers, including Townsteel, MarksUSA, a division of NASCO Security, and Dormacaba AG. It was really great to see such early, positive reception to the Latch Partner approach of enabling second- and third-party lock hardware to deliver our software experiences through partner devices. We began planning for these types of partners in 2019, and we are very excited to see them come to fruition in 2021. The powerful collaboration embodied by these partnerships will allow us to bring LatchOS to even more residents, property managers, and guests and help accelerate our growth in new ways that we'll discuss in more detail later. We also successfully focused our product development efforts on serving retrofit customers. The C2, our new deadbolt product designed primarily for retrofit customers, saw 278% year-over-year growth in the deadbolt category for us, demonstrating a very strong interest from customers for retrofit products and a particular excitement about the retrofit capabilities of last product, given that they can be operated without the need for cellular internet services, without the need for hubs, and without the need to swap doors to account for older apartment conditions. we saw this differentiated approach to retrofit product development yield real results last year. Turning to software, with rising labor costs and shortages, many of our customers began looking for even more ways to leverage software to offset labor shortages and costs, and they're turning to LatchOS for an expanding set of new capabilities and efficiencies. We saw customers like Avalon Bay with their Conso brand specifically delivering projects with reduced and remote staff, citing the benefits of further technology deployments on their overall operations. The capabilities of our software to enable remote management and staff augmentation use cases is something we saw the market really recognize in a new way last year. Last year, we also heard from customers that they wanted more integrations, and we successfully expanded our property management software integration, adding both Yardi and Entrata to LatchOS. This follows the company's previous integration of RealPage, resulting in LatchOS now integrating with the three largest ePMS providers in the United States. With our growing set of ePMS integrations, property managers can save, on average, over four hours of their time for every hundred residents, yielding ongoing net operating income savings for our customers across asset classes and markets. We are also excited to see the continued growth of partners building on top of Latch's open APIs and infrastructure, serving customers with differentiated offerings in unintended leasing, flexible living, and more. Latch Partners, Tour24, and Pinwheel have delivered compelling leasing offerings to the market based on our APIs and infrastructure, and we are also excited to enable RealPage's MeeGo home sharing platform with Latch APIs and infrastructure as well. We believe that partnerships like this can be powerful tools for enabling new use cases and recurring revenue for Latch going forward. On the services side of the business, we are very happy to launch direct deployment and see over a million dollars of revenue derived from those activities in just the second half of the year with a nascent team and early offerings. Our investments here helped us win more business, better square off with competitors that previously offered a deeper level of infield installation support, and have set up a foundation for more service offerings going forward. Looking ahead, we see 2022 as a high-growth year in our core North American multifamily market, with lots of opportunities for future expansion. Latch's focus on making spaces better places to live, work, and visit is not going to change, but our focus on nearer-term revenue execution in our core vertical is going to be our leading priority. As a private company helping to create a new product category, we relied on Booking as a way to guide investors towards the broader growth in the market, our specific opportunity, and market excitement for our products. Booking serves an important purpose during that phase of our growth and helped us shape our sales, marketing, and product development strategies around where our customers were going, not just where they were at the time. As we built extensive market momentum and increased the size of our sales teams, we didn't appropriately adjust our sales incentives to match our growth. We kept compensating our revenue teams on Booking's metrics, And while those metrics were helpful in continuing to predict the broader future market opportunity, we found that they also distract our internal teams from delivering on the massive revenue opportunity that we have today. Going forward, and with a brief transition period, we will stop compensating our sales teams for bookings and sunset all booked metrics both internally and externally. Removing all distractions from our revenue teams will help us to focus on what matters, continuing to grow recurring software and services revenue and delivering for our shareholders and customers in 2022. Beginning with Q1 2022 earnings and going forward after that, we will guide quarterly and annually to total revenue, specific software revenue, and adjusted EBITDA. We will also begin to guide annually to and report on ARR and a new spaces metric defined as units with an active software or services subscription. We believe this better aligns our external metrics with our internal business priorities. Garth will discuss in more detail how this impacts our specific guidance moving forward later in this call. Before going into further detail about our strategy for 2022, it's important to say that we remain confident in our ability to fully fund our business based on our existing growth plans with the current cash on our balance sheet. We'll do that while continuing to create and expand an open ecosystem of first, second, and third-party infrastructure devices, scaling new high-margin recurring software and services, providing some really special products and experiences, and delivering for our customers and shareholders in the short, medium, and long term. I'd like to talk now about some of the specific changes we're making in 2022 to make this all a reality. We'll start with hardware. From the beginning, we've had a focus on bringing better experiences to more spaces. When we were just getting started eight years ago, we looked across the landscape for device manufacturers that we could partner with to enable our software service and experience vision. At that time, we could not find partners that could deliver the set of devices necessary to activate the spaces at an entire building, as they were missing critical features like Internet independence, hub independence, and smartphone-first design. Back then, few saw the technological changes that were going to come to the multifamily market, and we knew we had to do the difficult work of creating an all-encompassing, enabling ecosystem of hardware, software, and services on our own, helping set the technology bar for the whole industry. Fast forward to the present, and we've delivered the most advanced first-party device ecosystem to the multifamily market, and we helped create a whole new category of products while we were at it. From access to delivery management to sensors, we solve customer problems all across the continent every day. We built these devices because it was what we needed to do at the time to create a standard of innovation in the market and to serve our customers. We knew that once we had proven the market opportunity, other players would want to follow us into this market. So in 2019, we began development of the Latch Lens program that enables third parties to build Latch-compatible access products. We were really excited to announce our first partners officially in Q4, and we see many more opportunities going forward. Similarly, we saw that the broader device market was going to evolve beyond many of the existing legacy IoT protocols like Z-Wave and Zigbee, and we began investments in what would eventually emerge as the Matter Standard in partnership with the Connectivity Standards Alliance, Apple, Google, Amazon, Samsung, and others. Latch made this differentiated investment decision more than two years ago, and we believe that this commitment and investment in an open device ecosystem will pay dividends for us this year and beyond. The combined effect of the Latch Lens program and our active support of the Matter device standard allows us to continue to rapidly scale Latch-enabled spaces through second-party and third-party products that are brought to life with differentiated Latch software and services. Building on our strategic progress and going forward, we will concentrate our specific hardware product development efforts on a limited set of devices that we are uniquely positioned to create, aren't available from partners, and can drive significant returns for our shareholders. This years-long planned shift to second- and third-party devices won't happen overnight. And while we will, from time to time, still see a market need that requires us to develop first-party devices, we view the direction of our business as working increasingly through second- and third-party device partners that enable Latch software and experiences. For the sake of clarity moving forward, we define second-party devices as devices that are built by other manufacturers using embedded Latch technology, such as the Latch Lens, and work with the LatchOS software ecosystem. An example of a second-party device is this Townsfield interconnect lock, which puts the latch lens as the control mechanism for their electromechanical systems and links the resulting product to LatchOS. These second-party collaborations also enable broader distribution of our products and tight partnerships with companies that recognize our joint abilities to recognize new revenue opportunities and markets together. Our announcement of our initial second-party products in the fourth quarter follows years of research and development and collaborative partnerships. and we're very confident in our ability to scale our spaces on the Latch platform through these types of products and relationships. We define third-party devices as devices that are built by other manufacturers and tightly integrate with LatchOS software. LatchOS management of Google Nest devices is an example of a third-party device partner that is live today. We do not require any proprietary changes to third-party hardware to work with LatchOS, instead concentrating on software collaboration in these instances. We can also have meaningful go-to-market partnerships with third-party partners as well, such as our previous joint digital and out-of-home marketing campaigns with Google Nest. The world of potential third-party partnerships for Latch is also expanding rapidly, and we're very excited to see the availability of Matter-enabled devices and a wider set of access devices and APIs that can deliver a great experience for our users. With the arrival of some of these standards, many new third-party devices are going to start to be able to provide an uncompromised LatchOS experience, and we're excited to leverage the work of these types of partners to deliver an even more complete solution to our customers at a lower cost of internal R&D than was previously required. Building on a trusted, high experience quality ecosystem of first, second, and third-party devices provides us the ability to generally drive equal software and recurring revenue for Latch at each space we serve, irrespective of which type of device is installed. While we anticipate software revenue being very consistent and predictable across these spaces, We also know that hardware revenue in first, second, and third-party scenarios can vary depending on the relationship we have with each partner. To take an example, the sale of a latch end built with the 2021 latch lens module inside can result in $599 of hardware revenue, whereas the sale of a latch second-party product, such as the Town Steel Interconnect product with the same 2021 latch lens inside, may only result in $50 to $100 of hardware revenue to latch depending on purchase quantity. In instances where Latch is selling the second- or third-party device, the revenues will be similar, but we want to be able to collaboratively work with our partners to more widely distribute LatchOS. And in many cases, we may only receive revenue from the embedded Latch module or technology itself, which will be lower than if we're selling a Latch first-party product. Because the sale of a first-, second-, or third-party device would result in commensurate software and recurring revenue to Latch, with recurring revenue being what we're most focused on, we're excited to expand the availability and reach of our technologies through these deep collaborations. Going forward, our top priorities remain continuing to add new spaces to the platform and generating increasing amounts of recurring revenue from those spaces. This mixed shift towards more second- and third-party devices will have a positive long-term impact on our unit economics and also expand our distribution over time. But it may also result in lower and less predictable hardware revenues from activating the same number of spaces in the short term. 2022 is going to be a transition year for our product mix, and we believe this will result in long-term positive impacts to the business. We're very grateful to have so many strong partners in expanding the availability of Latch-enabled experiences in spaces, and we fervently believe in this collaborative partnership strategy going forward. Shifting to the software we deliver on top of our infrastructure, we did some things well, but we also have real opportunities for improvement going into 2022. While we quickly scaled our 2020 software offerings throughout 2021, we did not deliver on some of the largest new recurring revenue opportunities that we saw during the year. Delays in activating devices also resulted in a lower ratio of recognized software revenues per dollar of hardware revenues in 2021, but we believe that these delays are transitory and won't present long-term headwinds. As mentioned before, we are now providing specific software revenue guidance for the full year to help people more accurately assess our performance in this area. Beyond activation delays, our shipping velocity of new revenue-generating software in the second half of the year wasn't what it should have been. As a result, we have reorganized our product development teams for 2022 to solve these challenges. Specifically, we've mapped our product development organization to match the needs of each specific customer stakeholder, replacing our previous organization around product category. We think this shift will allow us to better serve our customers and prioritize new experiences, and we're specifically excited to ship our previously discussed rent payment, work order, and resident communications product this year. all of which we believe lay the groundwork for recurring revenue growth from a wide set of customers and stakeholders. We also have several new software products in development that we're looking forward to announcing and bringing to customers later this year that will enable greater flexibility, accessibility, and integration possibilities for some of our largest customers. As the breadth of activities occurring in a multifamily apartment building expand and labor shortages and rising labor costs persist, We are excited to continue to deliver differentiated products that specifically tackle new use cases around flexible living, short-stay hospitality, and evolved leasing models. We are in the earliest innings of software capabilities impacting the day-to-day experience of spaces, and we're looking forward to working closely with our customers and residents to make each space better through our software products. As we look at expansion markets for our software, we want to balance our focus on existing North American multifamily growth with setting ourselves up for strategic growth beyond that. We don't need to make significant investments in other long-term opportunities in the short term. We don't foresee meaningful revenue from these activities in 2022, but we still see value in providing visibility around our efforts in these strategic growth markets. We remain excited about expanding the LatchOS software platform to European multifamily operators, and our focus on second- and third-party device partners will enable this expansion. We want to make sure that we expand our operations methodically, accounting for local product nuances, regulations, and Latch's long-term strategies. We don't foresee significant investments in European expansion or meaningful revenue from European expansion in 2022, and we remain committed to working with partners on international expansion as a long-term growth opportunity. Turning to commercial office, we see continuing opportunities for Latch Channel partners to activate LatchOS at small offices, as they have for years on an informal basis. Because these small office customers buy our existing products without customization, We expect to incidentally continue to serve small office customers with immaterial investments in product education while we continue to explore bringing LatchOS to the largest commercial office customers. We expect revenues from the small commercial office segment to be too small to break out independently in 2022. Meanwhile, our large commercial office pilots have validated the excitement about LatchOS in offices and have also highlighted the need for the right mix of partners to come together to satisfy the needs of the most complex office environments. We have not previously expected revenue from the large commercial office segment, and we do not anticipate deriving meaningful revenue from the large commercial office segment in 2022. However, we believe we have a unique role to play in the broader commercial office market, and the excitement around our software experiences have us well positioned to take advantage of this opportunity by working with a set of select partners. We look forward to providing updates about our software expansion strategies for these new verticals as they become material in the future. Turning to services revenue, we've historically under-monetized customer success, support, and activation, and we see great opportunities to better serve our customers and monetize our activities in this segment. We see direct deployment, activation, and training as all presenting real opportunities for growth in services revenue in 2022. One of the additional services that we spoke about last year was internet services. Since the change of presidential administration, the market for internet services and internet management in apartment buildings is going through a major transition. with new rules formally proposed by the FCC last month and formally adopted just last week, intending to promote additional competition for Internet services at apartment buildings. While the specific ways this will play out in the market will take a bit of time to be fully known, perhaps the entirety of 2022, we believe that Latch's unique position at the nexus between building operators, residents, and external partners could position us well for this underlying market shift. We've been watching these developments very closely, working with the leading experts in the field, and reserving investments in this category until the path and opportunity are more clear. We're excited for that additional clarity to emerge and to continue to play a role in this evolving landscape. As part of our broader product development reorganization, we've also established a specific product team that will focus exclusively on the resident experience, building on our high app utilization by residents. One of the unique attributes of our market is that our multifamily customers are often effectively reselling or at least remarketing Latch products as part of their total apartment experience, which they monetize through increased rents. Our ability to drive new resident experience value provides multifamily customers the ability to resell and remarket that experience value, driving greater revenue for them. This has always been core to our model, and we think there are numerous opportunities to give our multifamily building customers the tools they need to better serve their customers, the end resident. Our focus on serving the resident as an independent stakeholder, not just tied to a specific building, helps us better serve multifamily customers by giving them opportunities to improve the overall experience at a particular building or in their wider portfolio of assets. Our announcement of Latch ID, our cross-building identity platform last year, laid the groundwork for us to activate our first resident services this year and help residents keep their preferences with them as they travel between spaces. We envision a world where residents preferentially choose to live in Latch-enabled spaces, bringing their financial, lifestyle, and service preferences with them through their Latch account and accruing additional revenue for multifamily customers and for Latch as a result. While it's very early, we believe the continued activation of the resident as a core Latch stakeholder will result in predictably higher revenues and longer lease terms for our multifamily customers over time and deliver a differentiated revenue and growth vector for Latch. We look forward to sharing more about how we see this opportunity and experience evolving throughout the year. Those are our highest-level priorities for 2022 across hardware, software, and services, and I'm really excited to get going. In closing, we had a good Q4, had a clear plan for execution in 2022, and I've never been more excited to lead this company into the future. I'm grateful to get to work alongside such a dedicated set of teammates to continue to deliver for our customers, users, and our shareholders. Thank you for your support. And with that, let me turn the call over to Garth Mitchell, Latch's CFO. Garth?