Latch, Inc.

Good day, and thank you for standing by, and welcome to the Latch's first quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised this call is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your host today, Kevin Toomey, Latch's Director of Investor Relations. You may begin.

Thank you, Operator. Good afternoon, and thank you for joining us today to review Latch's first quarter 2022 financial results. With me on the call today are Luke Schoenfelder, Chief Executive Officer and Co-Founder, Barry Schaefer, Interim Chief Financial Officer, and Garth Mitchell, Transitioning 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 security 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 assume no obligation to publicly update or revise them. For a discussion of the material risks and other important factors that could affect our actual results, please refer to the risk factors section in our annual report on Form 10-K, available on the SEC's EDGAR system, and our website, as well as other risks and other important factors discussed on today's call. 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 first quarter 2022 results and provide an update on the progress we've made on our strategic priorities. Latch continued its strong growth trajectory this quarter. We delivered software revenue growth of 88% year-over-year to $3 million in Q1, which exceeded the high end of our guidance range as we were experiencing shortened timelines between hardware sales and the initiation of software agreements. Our total revenue guidance for the full year implies 112% year-over-year growth at the midpoint. Now, in addition to reporting and guiding to software revenue on a quarterly and annual basis going forward, we are now reporting ARR each quarter and providing guidance on an annual basis. Our ARR is defined as the annualized value of our active software contract and is net of promotional term and any other discounts. Our ARR at the end of the first quarter was $7.9 million, representing 137% year-over-year growth. We are also now reporting a new metric, SPACES. which is defined as the quantity of units with active software contracts in buildings that generate ARR, where units represent apartments, other dwelling units are commercial spaces in a building. We now have almost 127,000 spaces at the end of the first quarter, up 129% year over year, or 22% sequentially. The spaces metric is an important concept to Latch, as it is the leading indicator and factor in our resident engagement strategy and the revenue potential that it brings to both Latch and our building owner customers. We're excited about the growth in the Latch software business demonstrated by these metrics, and Barry's going to speak more about our full-year guidance in his prepared remarks. We continue to see opportunities to better serve our customers' needs across the lifecycle of a project's activation and ongoing operations. Direct deployment contributed over $1.5 million of revenue from these activities in the first quarter alone, despite its recent introduction, accounting for 10% of our total revenue in the quarter. Our investments here helped us win more business, better square off with competitors that previously offered a deeper level of infield installation support, and now set up a foundation for more service offerings going forward. The market for our products and services remains incredibly exciting, and we continue 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've created hardware, software, and services that our customers love, and the market is expanding. Now I'd like to speak to progress and some of our strategic initiatives outlined last quarter. We continue to see 2022 as a high growth year in our core North American multifamily market, with lots of opportunities for the expansion of Latch's initiatives to make more spaces better places to live, work, and visit. We're focused on executing on this massive market opportunity, and we've made and will continue to make the required changes to continue to be successful. In February, we outlined a number of these strategic initiatives, And I'd like to quickly speak to supply chain, organizational changes, sales compensation, partnerships, and product progress. I'll start first with construction delays and supply chain. As we look back on the first quarter, our teams continue to deliver products for our customers despite a challenging macroeconomic backdrop. We've not seen significant changes in our customers' construction timelines due to their own supply chain constraints. with extended shutdowns internationally due to COVID and ongoing geopolitical conflicts adding more uncertainty. But our own teams have continued to deliver with improved efficiency in the first quarter. We made fewer spot purchases in the short-term electronics market, and we were able to recognize improvements in our hardware gross margins in the first quarter as a result. While we were pleased to see these positive results, and over the long term the trend in margins will be positive, we expect spot buying in the current environment to put pressure on hardware margins for at least the remainder of 2022. Turning to organizational changes, in Q1, we announced some key changes to the leadership team. After more than three years, Garth Mitchell transitioned out of the company to pursue other opportunities, and Latch's Senior Vice President of Finance, Barry Schaefer, was appointed as Interim Chief Financial Officer, and we're excited to continue with his expertise in the business. We're in the midst of an ongoing search process for a new CFO to support Latch's continued growth. As part of this organizational evolution, Junji Nakamura also assumed a new role as chief accounting officer, while Latch's chief operating officer, Ali Hussein, stepped down as an executive officer and principal operating officer, enabling him to focus his efforts on special projects and strategic initiatives across the company at this important inflection point. These changes are an important part of this next phase of our growth, and I am extremely grateful to have worked with Ali and Garth in their roles. Turning now to our sales compensation structure. We made a move early in the year towards compensating our sales teams on what we believe matters most to our growth, continuing to increase recurring software and services revenue and delivering for our shareholders and customers in 2022. We reported software revenue exceeding the high end of our guidance range today, and as a result, we are raising our outlook for full-year software revenue and introducing full-year ARR guidance. We're making continuing improvements to our go-to-market motion to continue to deliver a great experience around our existing products for our customers, but also find more efficient ways to deliver new products to them as well. We look forward to continuing to provide updates around our sales progress throughout the year. Turning to partnerships, we've made enormous progress in finding ways for our customers to get the benefits of LatchOS through an expanded set of hardware, software, and service partnerships. This includes many of the partnerships announced at the end of 2021 and more that we expect to announce later this year. In Q1, we had more than a million dollars of revenue from second-party devices and associated software. We're excited to see this strategy begin to contribute in the first quarter. The combined effect of the Latch Lens program and our active support of the OpenMatter device standard will allow 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 a trusted, high-experience, high-quality ecosystem of first-, second-, and third-party devices provides us the ability to drive recurring software per space without having to incur the cost of first-party product development for each of our spaces. This broader strategy is particularly helpful in the retrofit market as it allows Latch to more flexibly pursue the activation of a wider set of spaces through the addition of partner products. This further push into the retrofit market is having a positive impact on our near-term results as retrofit projects are less subject to construction delays. We expect to continue to build on this strategy throughout the year and grow the ecosystem of partners for LatchOS. As we spoke about on our last earnings call, we have reorganized our product and engineering organizations to get back to the basics of building, shipping, and selling amazing products to our customers. At our core, Latch has always been a product company, delivering hundreds of product and feature releases over our lifetime, with our work resulting in 131 pending or granted patents worldwide. Through this recent reorganization, we've returned to our foundation and are poised to deliver consistent and increasing value to all of our stakeholders through our products this year and beyond. Two years ago, in September of 2020, we announced the first version of our full building operating system, LatchOS, which now powers over 100,000 spaces, and we're excited to release our first major update later this year. Built in close partnership with some of the world's leading real estate companies, The products and features of this next FlashOS release, many of which we spoke about last quarter, will once again push the industry forward, solving customer problems and delivering on an enhanced user experience. From payments for rent and experiences to open standard matter-based smart home sensor management to new capabilities around deliveries and living services to new integrations and collaborations, to a conversational interface between residents and their spaces, LatchOS will further bridge the needs of real estate operators, their residents, and all of the partners and services that operate in spaces. To complement the expansion of LatchOS to more spaces, we will also be releasing two new retrofit products specifically tailored to the needs of the more than 30 million existing apartments in the U.S. They'll help us land and expand at new spaces with a more basic set of features and upsell our entire ecosystem over time. These retrofit products will provide us a unique and differentiated way to distribute our software and experiences relative to other players in the market. We've already begun piloting these specific retrofit products with customers and can't wait to officially announce and ship these products later this year. Through LatchOS, our suite of first, second, and third-party products, and our new retrofit products, Latch will be able to offer an unmatched range of functionality to the multifamily market, serving the needs of small legacy buildings and the largest multifamily skyscrapers, through a unified platform of software services and devices. We're grateful for the opportunity to serve our customers and our shareholders by consistently delivering value through our products, laying the foundation for years of software and services growth to come. In closing, we had a strong set of results in Q1, made significant operational improvements, and are anticipating strong continued growth in 2022. I have never been more excited to lead this company into the future, working alongside such a dedicated set of teammates to continue to deliver for our customers, users, partners, and shareholders. Thank you all for your support. And with that, let me turn the call over to Garth Mitchell, transitioning CFO at Barry Schaefer, Latch's interim CFO. Garth?