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?

Thanks, Luke. Q4 was another quarter of growth for the company. I'm going to share our Q4 results in addition to providing our fiscal year 2022 and Q1 2022 guidance. I'd like to quickly point out that I'll be discussing some non-GAAP metrics going forward. A reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the earnings release we issued earlier today. The company delivered revenues of $14.5 million in the quarter, up 94% year-over-year. Revenues were near the high end of our fourth quarter guidance range, despite the impact of labor and building material shortages through the quarter. For fiscal 2021, our total revenues were $41.4 million, up 129% from fiscal 2020. Now turning to bookings. For the fourth quarter, bookings were $96.8 million, up 113% year over year and at the midpoint of our prior guidance. For the full year in fiscal 2021, we generated $360 million in bookings, up 118% from the prior year. Growth in cumulative booked home units in Q4 also accelerated to a total of 590,000 units, up 94% year over year. Booked ARR grew to $71.5 million, up 130% year over year. Booked home units represent the total number of apartment units or similar dwellings installed cumulatively, as well as committed to be installed with Latch products. Booked ARR is defined as the cumulative value of annual recurring revenue from Latch software subscriptions that are under assigned LOI. As Luke mentioned earlier, we believe bookings as a metric has provided insight into the forward direction of our business. Bookings have always been a look into the many steps in our sales process that happened prior to activation. Because of long sales cycles in our space, we've given investors this visibility into our sales process to provide a fuller picture of market demand and adoption for our products than is reflected in our realized and gapped financial metrics. Now, our cumulative bookings demonstrate how robust demand has been and give us a lot of confidence in our forward revenue outlook. To date, we've reported a cumulative annual bookings pipeline of roughly $674 million net of all LOI cancellations. Even after accounting for 25% promotional discounting, that's roughly $500 million of bookings that have target delivery dates in the next 24 months, which gives us greater than 100% bookings pipeline coverage to drive the next two years of our expected revenues. Importantly, even after netting out adjustments for cancellations and dated bookings, Roughly 200 million of these bookings have been signed in the last six months, which gives us confidence that our bookings pipeline is relatively fresh with recent customer indication to purchase Latch products. Whereas this cumulative bookings number gives us confidence that we can achieve our revenue goals, rolling delays in conversion due to the ongoing pandemic and the historic indirect and direct supply chain issues have led to challenges pending down the specific timing of conversion for our bookings pipeline. We've also found that accelerating adoption of technology in our market gives us clearer sight to realize metrics based on product installation and activation than we've had previously. So we're shifting our sales process and sales compensation away from bookings in order to give our reps and customers better tools to get to the firm commitments our customers want to make earlier in our sales process. Going forward, we're focusing the team on delivering on the backlog we already have and incentivizing in-year performance for activations. This change is intended to better align our internal priorities with our external disclosures. Because of this change in sales process and compensation, we're no longer incentivizing bookings in the same way we did previously and have decided to suspend quarterly bookings reporting and guidance to reflect the structural change to our sales process. Accordingly, we intend to begin quarterly disclosure and guidance for metrics closer to installation and activation that will align more closely with our quarterly financial performance. Beginning today, we have provided guidance for the first quarter and full year 2022 for total revenue and software revenue. Additional metrics we intend to provide starting in Q1 2022 include ARR, net of term discounts, and spaces that are active on the platform, which will tie more closely to our new sales process and to the results investors care about, the scale of our active platform, and the recurring cash collected from our customers to provide our services. Turning now to margins. Our priority remains meeting our customer needs, and our team should be proud of our differentiated ability to simultaneously deliver 94% year-over-year fourth-quarter revenue growth during these unprecedented global supply chain and electronics shortages, which has impacted almost every company that distributes physical products. We did experience a sequential quarter-over-quarter decline in hardware margin from negative 21% to negative 54%, largely due to spot buying and elevated shipping costs, as Luke mentioned earlier. We estimate that supply chain disruptions had a roughly $6.5 million negative impact on hardware gross margins in the fourth quarter, mostly driven by higher shipping costs and discounting. Altogether, this contributed to 2,100 basis points of pressure on hardware margins in the quarter. Though this macro environment may continue to challenge our margin performance in 2022, We have confidence that this temporary market dynamic will not impede long-term hardware margin improvements. Gross margin for 2021 was negative 6%, a 600 basis point improvement from 2020, which would have been a larger improvement if not hampered by the previously explained headwinds in 4Q and throughout much of the year. As Luke discussed, we view our hardware as a vehicle for the delivery of our high margin software and services. In order to maximize software adoption, We expect to keep our long-term hardware margins in the zero to low single-digit percentage range and do not expect it to contribute meaningfully to our bottom line. We believe that the value our products deliver to our customers exceeds the price we charge them, which gives us decent flexibility to adjust pricing if we need to. We are actively running pricing experiments on adjustments that are intended to mitigate the impact of supply chain volatility on our gross profitability without compromising demand. That said, Our customers benefit from stability in our pricing. There have indeed been numerous instances in 2021 in which we won customers because of the accessibility of our products and the stability of our pricing. We remain committed to balancing the economic realities of the current supply chain environment against our institutional commitment to building and deepening relationships with our customers as a primary corporate priority. Turning now to software. Our software margin was 91% in the fourth quarter, consistent with the third quarter and a year ago. We believe the software margins continue to demonstrate the strength of Latch's business model and highlight our scalable and modular software stack, which enables all of LatchOS functionality, including integrating first, second, and third-party hardware devices. Over time, we expect software revenues to increase as a percentage of our revenue mix, which is a key driver for our long-term gross margin expansion. Software margin for the full year 2021 was 91%, generally consistent with our 2020 result of 92%. Operating expenses were $57.1 million in the fourth quarter, up 267%, with significant investment in sales and marketing, including building out our marketing organization from scratch. We're also ramping our sales team to cover the growth in leads, driving fourth quarter sales and marketing expenses higher year over year. Since joining last year, Sales leadership is focused on growing infrastructure, training, operations, and sales capacity. We are excited to continue to invest in our sales and go-to-market functions to support accelerating growth in customer demand. Operating expenses were $145.9 million for fiscal 2021, up 145% from 2020. Adjusted EBITDA in the fourth quarter was a loss of $44.4 million, as compared to a loss of $12.9 million in the fourth quarter of 2020, and toward the lower end of our guidance range, owing to the higher OPEX and lower gross margins driving the sequential change. Adjusted EBITDA for fiscal 2021 was a loss of $101.9 million, as compared to a loss of $54.8 million in 2020. 2021 was the year in which we went public and a year that showed marked acceleration in customer adoption of our product. Because of this, we grew our investment significantly to build the operating foundation necessary to deliver for our customers at scale. Though we anticipate continued growth in our core areas of focus, product development and go-to-market, we expect slower growth going forward as we believe we have the core foundational pillars in place. Although this growth led to 2021 to leverage in many of our OpEx lines, Investors should expect to see leverage beginning in the second half of 2022 that will become more pronounced into 2023. As a reminder, there are three key drivers of Latch's gross profitability. First, hardware margins on BOM costs and logistics. Second, distributor cuts of hardware revenue. And third, software revenue percentage of our total revenues. In 2021, bill of materials and logistics costs skyrocketed due to the unprecedented supply chain situation's impact on the spot electronics purchasing market. This supply chain impact offset dramatic improvements in the underlying unit economics of our hardware products released in 2022. For example, our second-generation C-series has a roughly 30% lower BOM than our first-generation C-series devices. But all of that incremental margin improvement was lost due to the supply chain environment. We have significant but masked improvements in our distributor cuts of hardware revenue, which in the fourth quarter decreased 28% year over year, despite 91% year over year growth in fourth quarter hardware revenue. Though the impact of this macro environment has been extreme, we consider this disruption to be cyclical and expect it to shrink into 2023. Once there is sustained relief, the improved channel partner incentive agreements and improved unit economics of our hardware will become much more clear. Those two drivers, plus continued focus on delivering incremental value to our customers via more software, give us confidence that Q4 hardware margins represent more of a floor than a sustained phenomenon, and investors should see steady improvement through the year. Turning now to our balance sheet. As of December 31st, we have cash and cash equivalents of $124.8 million compared to $60.5 million as of December 31st, 2020. We also had $261.9 million in marketable investments, up from zero in marketable investments as of December 31st, 2020. The increase in cash and cash equivalents in marketable securities was primarily due to proceeds received in connection with the closing of the business combination with TS Innovation. Now let me turn to guidance. In 2022, we are providing full-year software revenue guidance of $14 to $15 million. a 70% to 82% year-over-year increase. For our first quarter software revenue guidance, we're projecting a range of $2.7 million to $2.8 million, a 67% to 73% year-over-year increase. For our full-year total revenue guidance, we're projecting a range of $75 to $100 million, an 81% to 142% year-over-year increase. For our first quarter total revenue guidance, we are projecting a range of $12.7 million to $14.8 million, a 92% to 123% year-over-year increase. This guidance assumes no meaningful improvement in the current global macro and supply chain environment. We're providing adjusted EBITDA losses guidance for fiscal 2022 of $180 million to $160 million. For our first quarter, we expect an adjusted EBITDA loss of $42 million to $38 million. In 2022, we are expecting total revenues to grow 112% year-over-year at the midpoint of our guidance, a slight deceleration from our strong 2021 revenue growth. Though this growth remains high, it is slower 2022 growth than what's contemplated in our SPAC marketing materials presented last year. As Luke mentioned, we're as confident as ever about the market opportunity, But our unique exposure to construction delays due to continued macro volatility, rapidly evolving customer expectations, and a slower than expected ramp of our sales and marketing investments have led us to take a more measured view on our 2022 revenue acceleration than we had in our SPAC marketing materials. Our guidance ranges assume these factors persist for the entirety of 2022. Should we see sustained relief in these factors, we would expect upside to our guidance ranges. We've made enormous progress in finding ways for our customers to get the benefits of LatchOS without needing to buy Latch first-party hardware devices. This includes many of the partnerships that Luke mentioned previously and many more that will be announced through the year. These offerings create a win-win for Latch and our customers. We get to increase the number of ways our customers can benefit from LatchOS while offering the ability to do so with an ever-growing number of second- and third-party devices from device partners while also improving Latch's cash efficiency. These partnership products deliver the software experience for our customers and the exact same software revenue for Latch, but it could introduce very wide hardware revenues per unit ranges. Importantly, our recurring software revenue model and stability in software pricing, regardless of hardware, allows us to be much more confident in the accuracy of our software revenue forecasting, which is reflected in a much tighter range of guidance for software revenues. the profitability and predictability of our business only go up as our software base grows. Despite potentially volatile short and medium-term hardware revenue per unit, the initiatives to diversify our hardware options away from Latch first-party devices only serve to support accelerated growth in our software base. Although this requires an adjustment to short-term performance expectations, we believe it will lead to faster adoption of Latch OS, accelerate software revenue growth, and accelerate the time to profitability for Latch. Given our exposure to new construction, which has been more heavily impacted by macroeconomic volatility, our guidance reflects no improvement in the deterioration of the macro environment and reflects a slower than expected ramp in go-to-market investments and software launches. This is reflected in the wider-than-normal implied range of hardware revenue outcomes in our provided guidance ranges. Again, this is good for our customers and good for the business. While it could introduce short-term volatility in our hardware revenue per unit, It should allow more customers to use LatchOS and increase the profitability of Latch. Importantly, expect upside to these guidance ranges if we see a sustained relief in the macro and supply chain environments in 2022. In summary, we delivered strong growth in the fourth quarter and remain committed to delivering sustainable growth for the long term. We remain proud of our team's ability to continue to deliver such high growth rates despite the volatile macro environment. While supply chain issues have marginally affected our short-term results, we are seeing accelerating growth in customer adoption of technology, which is the foundational driver of Latch's long-term growth. With our positioning in this massive and growing market, we believe we are positioned to deliver value for our shareholders by delivering value for our customers. With that said, we will now open the call up for questions. Operator?

In order to Hey, guys. Thanks for taking my questions. So lots of moving pieces this quarter.

I know you're changing reporting metrics, but just on the software revenue guidance for 2022, it seems like the timeline between, you know, the book ARR, you know, translating the software revenues, getting extended some, you know, I think the software revenue guidance for 2022 would be close to where book ARR stood in 2019. I know there's construction delays or the wait on units going live, but I guess just how are you thinking about the speed at which some of these recent bookings could actually go live? Thanks for the question, Stephen.

But I think we talked about this in the past. The macro volatility we experienced in 2022 led to a lot of changes in how we thought about the timing of conversion from bookings into revenues. That having been said, we remain really confident about the value of the cumulative bookings metrics and their likely conversion into revenues over the course of the next two years. The challenge is the macro volatility that we continue to experience in the fourth quarter and into 2022 makes it more challenging to tune down the exact timing. The guidance ranges that we provided assumes that the macro volatility we experienced in the fourth quarter persists for the entirety of 2022. So to the extent that we see any sustained relief, we would expect upside to our guidance ranges, including software revenue.

Got it. Okay. And then on LatchLens, good to see some of those partnership announcements. I'm curious if these partners, and apologies if I missed this, if these partners are just Pulling latch in, I guess, when customers demand it or whether these partners are actually going to be channel partners, too, where they're pushing this in their go-to market. And then I guess if it's the latter, how important are you to their overall, you know, are they integrating with multiple partners that can provide similar capabilities to what you provide? Or I guess how important are you in their whole evolution towards smart lock, smart access, things like that?

Thanks so much for the question, Steven. So we, I think, offer a very differentiated approach to large partners in that we're giving them a module that includes hardware, firmware, and then a link to our proprietary software that is really unique and really special. We're also targeting form factors and formats that may be new to Latch that haven't previously existed. And so we're both meeting customer demand for formats that Latch on a first party basis hasn't made previously, which we think is exciting because that's unmet demand that we can now meet with the support of partners. But we're also looking at these relationships as ones that can bring their channels and their distribution to bear. Most traditional lock and access manufacturers sell almost all of their products online. through channel partners, and we believe that we have a very unique opportunity to embed Latch technology into the products made by the second-party manufacturers and then also piggyback on their distribution capabilities. So we see a differentiated technology offering that we're providing to the market then being pushed through new channels as well, which we think is particularly exciting as we look at the long tail of customers. that we may not necessarily touch with our direct selling efforts. And so we see a really unique opportunity for deep and collaborative partnerships here.

Thank you. Your next question, and just to remind again, in the interest of time, please limit your question to one question at a time. Your next question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Hi, guys. This is Anul on Perod. Just wanted to check about any colors that you can provide us on the progress on retrofit penetration through the new products. I mean, are you seeing any strong traction there? And do you think that if the mix is shifted more towards retrofit, the construction delays, you know, impacting the conversion from bookings to revenues would – Thank you.

Thanks so much for the question. I'll take the first pass. And, Garth, feel free to follow up. We saw over 200% year-over-year growth in our deadbolt product line. So the C2 was released in March. And we saw a really incredible sort of adoption of that, which is primarily designed for the retrofit market. So we are seeing growth on a percentage basis in the retrofit market in particular. We also have in the second-party products that we've announced, there's an interconnect product that is really designed for retrofits, particularly in the California market. So we're very excited about the shift towards retrofit next. What that does allow is as we have a bigger exposure to new construction in our business, as we reduce that exposure and increase retrofit availability, it does have the effect of generally creating faster time to revenue, which we think is obviously very positive. I don't know, Garth, if you have anything to add on that.

No, I think you captured it. But the only thing I would add is that the guidance assumes that the improvements that we see in our retrofit mix actually don't necessarily pan out for the entirety of the year. So the progress that we've seen in our retrofit product, again, if they persist and continue to expand in 2022, would represent upside to the guidance ranges provided today.

Thank you. Your next question comes from the line, Joe Rubin from Baird. Your line is open.

Hey, everyone. This is actually Peter for Joe tonight. Thanks for taking our questions. On the bookings metric, I understand while you shift away from reporting this as a metric. But one of the most encouraging things in 2020 was seeing the bookings do well against expectations. Have you seen anything on the net new demand side to change going into 2022? Or is this more just more second and third party hardware coming in and kind of diluting that metric? Thank you. Thanks, Peter.

The demand that we're seeing in the market is accelerating and something we're really excited about. And in fact, it's that demand that allows us to have the confidence to shift investors towards looking at in-year revenue as the metric that's most important. And because we've changed all of our internal priorities to focus on converting the demand that exists in the market immediately, we feel like this is the right set of metrics and the right set of incentives to provide to our sales teams going forward. Garth, I don't know if you want to add anything.

No, the only thing is, Peter, we're changing the sales process and the sales incentives. And as I think we mentioned in our prepared remarks, that's just going to increase the volatility of the underlying metrics. Because of that, we just want to make sure that we're providing investors information to understand our actual business processes. And we're replacing bookings with sales process steps that actually get our customers to what they want to do, which is get Latch into their buildings and activate it much quicker. That change is going to be reflected in the KPIs we start providing in the first quarter, which, as mentioned, include ARR, Net of Term Discounts, and the spaces that are active on the Latch platform.

Thank you. Your next question comes from the line of Ryan Tomsello from PBW. Your line is open.

Good evening, everyone. Thanks for taking the questions. All of these, if I missed this in the prepared remarks, were juggling a few calls. But I was hoping you could provide an update on how the initial pilot of the Lash OS product for Office is progressing. And you're expecting to start to sign additional customers there in 2022. And I guess if there's what kind of feedback you've gotten so far on that launch. Thanks. Thanks.

Hey, thanks, Ryan. No worries. Yeah, in our prepared remarks, we continue to sort of bifurcate the market for LatchOS and Office into sort of two segments. So in the small commercial office market, which is the majority of the market, we've continued to allow our channel partners to distribute LatchOS and our resultant products into the small commercial office market. And we are going to support that with modest investments really around product education, but allow folks to continue to, you know, install Latch in those types of smaller environments. In the large commercial office segment where we announced pilots last year, we had really encouraging data and excitement around the product offering. We also see a unique opportunity to partner with folks in the space to provide a real complete solution. When you think about the needs of a building like the World Trade Center or Rockefeller Center or Brookfield Place, There's a lot of different components that go into it. We think that Latch has a really valuable role to play, but it's going to require a constellation of partners to come together to provide that complete solution. We are excited to have more partners come on board to complete that solution for the large commercial office segment, but we remain excited about our ability to participate in that market as well.

Thank you. Your next question comes from the line of Tom White from DA Davidson. Your line is now open.

Great, guys. Thanks for taking my questions. Just on the changes to the incentives for salespeople, just curious if you guys are anticipating any disruption related to that elevated churn or attrition or anything. On the EBITDA guidance for 2022. Garth, could you maybe just talk a little bit about kind of the OPEX assumptions underpinning that and maybe what the kind of one or two biggest levers might be to, you know, you guys either hitting kind of the high end or the low end of the EBITDA range?

I can start there. So, from a sales compensation standpoint, you know, we feel like these are the right changes to make for the business, and we've accounted for for the potential impact of those changes within our guidance and also within our internal planning process around sales teams, size, and activity, and then I think Garth If you want to speak a little bit to the OpEx ranges, I think the thing that I can say, before I hand it over to Garth, is that we really tried to look at the market conditions that we saw on the spot-by market and on the supply chain side from last year and assume we're going to have no real improvements this year, and that's going to be one of the larger drivers there. But, Garth, I don't know if you want to add anything.

No, you captured the gross margins perfectly, Luke. The only thing I'll say on the OpEx, Tom, is that in 2021 – We invested meaningfully in building the operating foundation, and we thought it was necessary to serve evolving customer expectations and accelerating customer demand. We believe that foundation to be in place now, and we'll expect to start to show leverage on our OpEx lines, starting meaningfully in the second half of 2022 and sharply into 2023.

Thank you. Your next question comes from the line of Ben Charlotte. from Cantor Fitzgerald. Your line is open.

Hey, guys. Thanks for taking my question. I appreciate the color on the margin headwind from the supply chain issues at $6.5 billion. I was just wondering if you could provide a little bit of color on the impacts of higher labor costs, the installation of the units. Is that entirely passed through to the consumer? Or if not, if you give a little bit of color around what the headwind is there, that'd be great. Thank you.

Hey, Ben. Yeah, in the majority of instances, the labor costs are borne directly by the customer and are not something that Latch takes on. However, we also have our direct deployment efforts ongoing. And in those instances, latch contracts and provides a firm price to our customer for the installation services of the product. We've just kept the quote window and the actual provision of the service very tight, such that we have a quote in hand and are able to preserve margin or minimize any sort of disruptions from labor fluctuations in the final price that we provide on the direct deployment side to our customer. But again, the vast majority of instances today, our customers are procuring those services themselves. And so higher labor costs are borne directly by the customer and don't impact our pricing. Okay.

Yeah, Ben, just to add to that, though, it actually does show itself in the demand because some of our customers have had trouble getting labor to actually do the installations on the timelines that they've wanted. So it's less of a margin consideration and more of a revenue consideration for That is reflected in some of the timing stuff that we talked about on this call and prior calls.

Thank you. And, again, if you would like to ask a question, please press start and the number one on your telephone keypad. And please limit yourselves to one question only. Your next question comes from the line of Isha Vash from Bank of America. Your line is open.

Hi. Thanks for taking my question. So I know you've called out electronic spot prices and then also the improving hardware unit economics. I'm thinking about how we should think about sequential progression for gross margins for 2022, and if you could give us some color around that.

Garth, do you want to take that question? Yeah, happy to. I think, like Luke mentioned, we assume that a lot of the supply chain disruption that we experienced in 2021 persists into 2022, but we do have some gradual improvement to our hardware margin that's reflected in that's largely being driven by some of the direct deployment drivers that Luke mentioned in response to the last question, and some steady small improvement in the supply chain and electronic sourcing environment. You should see, again, small sequential improvement for the remainder of the year, but any material sustained improvement will lead to upside to the guidance ranges that we've provided today.

Thank you. There are no further questions at this time. You may continue, presenters.