Matterport, Inc.

Good day and welcome to the Matterport Inc. Fiscal 2023 First Quarter Results Conference Call. Today, all participants will be in a listen-only mode. Should you need assistance during today's conference, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Please note that today's event is being recorded. I would now like to turn the conference over to Mike Knapp, VP of Investor Relations. Please go ahead, sir.

Thanks, and welcome to Matterport's first quarter 2023 financial results conference call. After the market closed today, Matterport released results for the quarter ended March 31st, 2023. The release is available on the company's website at investors.matterport.com. This call is being recorded and webcast live, and a link to the recording can be found on the investor relations section of the Matterport website. Before we begin, I'd like to remind you that today's call contains forward-looking statements within the meaning of federal securities laws, including, but not limited to, statements regarding Matterport's future financial results and management's expectations and plans for the business. These forward-looking statements are subject to numerous risks and uncertainties that may cause actual results to differ materially from those discussed in today's call. Additional information regarding the risks and uncertainties can be found in our filings with the SEC. All forward-looking statements are made as of the date of this call, and Matterport assumes no obligation to update or revise them except as required by law. In addition, financial references on this call will be on a non-GAAP basis unless otherwise indicated. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliation of each of these non-GAAP financial measures to the most directly comparable GAAP measure can be found in today's earnings slides, which are available on the company's website. Hosting today's call are RJ Pittman, Chairman and Chief Executive Officer, and JD Fay, our Chief Financial Officer. And with that, I'd like to turn it over to RJ to begin.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us today. I'm pleased to report that we are off to a great start in 2023, with first quarter revenue of $38 million, $2 million above the high end of our guidance range, and up 33% from the year-ago period. We set new records across key metrics with our spaces under management reaching 9.9 million by the end of the quarter, more than double the number of spaces we managed at the start of 2021. And we just crossed the 10 million spaces milestone last month. Our subscriber base expanded to 771,000, buoyed by strong enterprise adoption and improving subscriber growth rates in small and medium businesses in the quarter. Our platform's ability to increase productivity and reduce costs for our customers continues to drive this strong adoption. It has also enabled us to add new blue chip names to our growing customer list as companies use our digital twins to better manage their building life cycles. From planning and construction, to facilities management and operations, to documentation, appraisal, and marketing. Our customers across the verticals we serve are seeing strong returns on investment with our solution, saving them time and money while simplifying collaboration across their organization. The criticality and value of our solution helped propel subscription revenue to a new record of $19.8 million, also above the high end of our guidance range for the quarter. By the end of Q1, we have recorded over 100 enterprise accounts with greater than $50,000 in annual recurring revenue as we continue to grow and diversify our customer base. The strength in our business and our continued focus on operating efficiency has also resulted in strong outperformance on the bottom line. With net loss per share of 7 cents, that's 3 cents better than the midpoint of our guidance range as we accelerate our path to profitability. These results are bolstered by our continued investment in highly scalable technology solutions for our customers. Since the beginning, Matterport has built its foundation around Cortex, our AI-driven 3D reconstruction engine. In our case, AI-driven means fully automated. We are currently the only company that can generate dimensionally accurate, photorealistic digital twins from an AI engine like Cortex. The first and only fully automated technology of its kind, this breakthrough enables us to create thousands of digital twins every day. And because we employ a sophisticated deep learning neural network, the more digital twins we create, the more efficient they become. Matterport created this category more than a decade ago, and we have a lot more in store. In 2022, the AI industry reached a significant inflection point with the introduction of new generative AI technologies that have captured the world's attention. These disruptive advancements in data science have marked a turning point in the industry, delivering human-like intelligence and functionality that has already begun revolutionizing the way we do business today. The unlock here is the data. Without vast amounts of data to train these new AI models, none of this would be possible. The same has been true for Matterport since the beginning. Our digital twin platform depends on AI, and our AI depends on an enormous amount of spatial data to train and learn how to automatically construct precision 3D digital twins from any digital capture device, including the smartphone in your pocket. To put this in perspective, Matterport has now digitized over 30 billion square feet of physical space in over 177 countries around the world. We have enough data to synthesize a complete picture and deep understanding of the built world. The possibilities from here are limitless, and our experience in the field is catapulting Matterport's solution into exciting new areas for our customers every day. Property Intelligence is our latest offering that unlocks the power of every digital twin we create and is the cornerstone of our future in the built world. This fully automated software platform generates powerful property insights from our extensive spatial data library, enabling clients to easily manage their properties online and discover new operational efficiencies. We help them resolve a wide range of critical operating challenges in their buildings while significantly cutting down the time needed for onsite inspections and analysis. And for our larger customers, it enables them to manage multiple facilities from any single remote location. We're currently piloting property intelligence with select customers and expect to announce general availability in the second half of 2023. We are incredibly excited about the growth potential of our new AI-driven solution for both new and existing customers around the world. This will be a significant unlock for Matterport in the quarters and years to come. Let's turn our attention to a few key industry milestones that are fueling our growth around the globe. And then I will pass the discussion to JD Fay, who will elaborate on our financial results and provide an outlook for the remainder of the year. Last month, we announced the general availability of new integrations with Amazon's AWS IoT TwinMaker, enabling enterprise customers to seamlessly connect data into visually immersive and dimensionally accurate Matterport digital twins. This solution makes it easier for developers to create digital twins of real-world systems, such as buildings, factories, industrial equipment, and production lines. Our new offering supports enterprise digital transformation efforts by providing customers with an efficient and cost-effective solution to remotely optimize building operations, increase production output, improve equipment performance, and enhance environmental health and safety at their facilities. We were extremely excited to showcase our new integrations and platform in April at Hannover Messe 2023 in Germany, alongside our partner, AWS. Anno Vermessa is the world's largest trade fair focused on industrial technology. It is a renowned event for showcasing cutting-edge technologies, innovation, and trends in areas like digitization, automation, robotics, industrial software, and more. The event brings together international exhibitors and visitors from diverse industries to exchange ideas, explore business opportunities, and discuss the latest developments in industrial technologies. It was the perfect venue for Matterport to announce our latest AWS integration and demonstrate the benefits of our solution to potential as well as existing customers. During the quarter, we also announced new integrations with Autodesk Construction Cloud, making it easier for project teams using Matterport and Autodesk Build to collaborate within critical project management workflows. This new solution allows project stakeholders to simplify and feed the request for information or RFI process in Autodesk Build. The RFI process is vital dialogue between contractors and architects on every construction project. And by moving from traditional methods of communication to immersive digital twins, the RFI becomes a detailed visual context of the current state of the project. Historically, this process has been tedious and time-consuming, as documentation typically spans multiple formats that constantly evolve as stakeholders weigh in, making it difficult for teams to track the latest information. According to Navigant Construction Forum survey, the average construction project will result in more than 800 RFIs, averaging more than 50 RFIs submitted per week. Inaccurate or incomplete documentation is responsible for almost half of the rework that occurs in the construction industry in the United States. The Matterport plus Autodesk build solution simplifies and streamlines this documentation process by creating a visual system of record for site conditions, allowing users to create and track requests directly within the digital replica of the space. This dramatically speeds up the project while reducing errors along the way. We continue to add additional blue-chip organizations to our growing roster of customers. In fact, we are proud to call 25% of the Fortune 1000 companies our customers. We are fortunate to have such an important set of customers across a diverse set of end markets because it has been critical in maintaining our strong revenue growth, reducing our reliance on any single market, driving innovation across our organization, and strengthening the Matterport brand. It is a testament to our value proposition that industries from retail, insurance, and construction to travel and hospitality, facilities management, and real estate all recognize the many benefits of our solution and their ability to increase productivity and reduce costs for organizations around the globe. Next, I'd like to provide an update on the tremendous success we are seeing with our new Pro3 cameras. This product has revolutionized 3D capture for the built world and opens new horizons with its ability to capture virtually any type of physical space with no limits on size, location, and condition, both indoors and outdoors. The fastest camera of its kind, you can capture large spaces in stunning detail thanks to its 20 megapixel sensor and LiDAR power capture range of up to 100 meters. and our customers agree that our price performance package is unbeatable and in a class all its own. We've received overwhelmingly positive reviews from customers, and we are collecting their feedback and creative ways they've put the Pro 3 to work in the field. The market response has exceeded expectations since its debut last fall, and Pro 3 sales continue to top our original sales plan. Moving on to services. In Q1 of this year, we introduced our second flagship offering to the market, Digital Pro. Digital Pro is the most innovative and affordable all-in-one property marketing solution in the industry. It provides property marketing professionals with HD photos, a 2D floor plan, a stunning Matterport 3D tour, and a preview video great for social media, all delivered within one to two business days for less than $300. I think the most compelling aspect of this offering is that the entire offering is produced from one digital twin in one appointment for one flat rate. In this challenging real estate environment, the value and convenience of DigitalPro is a game changer for agents and their sellers. The initial response has been excellent. A large portion of new customers are choosing DigitalPro, while a significant number of agents are upgrading from using photos only to the complete Digital Pro package, often for the same or lower price. It's no surprise that Digital Pro has doubled the attach rate of digital twins in real estate listings here in the US with VHT Studios, the marketing arm of Matterport that we acquired last year. Agents, brokers, and sellers are excited about getting the power of the Matterport 3D Tour and much more, all for the same great price or less than traditional 2D photography packages for their listing. We are confident that DigitalPro will be the catalyst to accelerate Matterport's share of total property listings in the U.S. and eventually around the world. I would now like to turn it over to JD to discuss our financial performance for the first quarter and the outlook for Q2 and the full year 2023.

Thank you, RJ. We delivered $38 million in total revenue for the first quarter, up 33% from the year-ago period and well above our guidance range. The strength in our revenue was across subscription services and product categories, with subscription revenue achieving a new record in the quarter. Subscription revenue rose to $19.8 million in the quarter, which was up 16% from the year-ago period and above the high end of our guidance range. In addition, our annual recurring revenue grew to $79.4 million. Of our 771,000 subscribers at the end of the first quarter, we had 704,000 free subscribers and 67,000 paid subscribers. Positively, free subscribers grew by 11% from the last quarter and paid subscribers grew by 5% sequentially. Both growth rates were higher compared to what we have seen in those cohorts for the past several quarters. Our net dollar expansion rate was 103% in Q1 as subscribers continue to increase their spend with us. This was unchanged from the prior quarter as enterprise retention and expansion remains strong and small customers remain more cautious on growing their spending. Approximately 50% of our subscription revenue comes from non-real estate customers. While revenue from our real estate and market increased from the year-ago period, this growth was eclipsed by strong double-digit growth in facilities management and retail, construction, insurance, and travel and hospitality. Services revenue for the first quarter was $8.7 million, more than double from the year ago period, driven by growth in all of our services offerings. Customers continue to embrace capture services where we perform the capture and onboarding of digital twins into subscription accounts for the customer. We also saw strong demand on the launch of our new digital pro offering that RJ described earlier. Our product revenue was $9.4 million in the first quarter, up 28% from the year-ago period. This was primarily driven by continued robust demand for our new Pro3 camera. Moving on to gross margin, our total non-GAAP gross margin for the first quarter improved to 49%, up significantly from 36% in the prior quarter, attributable to higher product margins and enhanced services margins. Our subscription gross margin was 74%, roughly flat from the prior quarter and the year-ago periods. Subscription gross margin can vary 100 to 200 basis points from quarter to quarter as we release new features into the subscription platform. We expect subscription gross margin to be in the mid-70s over the next several quarters. Product gross margin improved to 17% in the first quarter compared to negative 14% in the prior quarter. as we made excellent progress with our supply chain, and we believe that the issues that challenged us last year are behind us. And with a strong positive market reception for our Pro3 camera, we expect that product gross margin will be roughly consistent with the first quarter for the balance of 2023. Turning to operating expenses, research and development spend was $10.1 million, down 17% from the year-ago period. This reduction in R&D spend reflects our commitment to operate more efficiently as we continue to drive innovation in our technology platform and data insights for our customers. SG&A expenses for Q1 were $31.9 million, up 8% from the year-ago period, the lower by 4% from the prior quarter. The growth year-over-year was primarily related to greater sales and marketing spend, though it grew much more slowly than our growth in total revenue as we continue to drive efficiency in operations. The result is a first quarter non-GAAP net loss of $20.5 million and non-GAAP loss per share of 7 cents, 3 cents above the midpoint of our guidance range of a 9 to 11 cent loss. This is also a 20% improvement in bottom line performance from the prior quarter. I'm very pleased with the significant progress on the bottom line as we are actively driving the company to achieve profitability. Our weighted average share count was 293 million shares. Moving on to the balance sheet, we ended the quarter with $456 million in cash and investments, and we remain debt-free. We have improved our free cash flow by more than 20% from the year-ago period and continue to believe we are more than fully funded to achieve our business plan. Today, we are introducing financial guidance for the second quarter and raising our full year 2023 financial guidance. We remain on track to deliver another record year for the company as we grow the top line and improve profitability metrics. Strong customer adoption and our continued focus on operating efficiency has resulted in an improving outlook for 2023. Accordingly, for the second quarter, we expect total revenue to be in the range of $38 to $40 million and subscription revenue to be in the range of $20.7 to $20.9 million. We expect the balance of revenue to be roughly split evenly between the services and product revenue lines. We anticipate second quarter non-GAAP loss per share to be in the range of $0.07 to $0.09. We now expect full year 2023 total revenue to be in the range of $155 to $169 million, with full year 2023 subscription revenue expected to be in the range of $84.5 to $86.5 million. For the full year of 2023, we expect a 27 to 31 cent non-GAAP loss per share. This represents an improvement of 5 cents at the midpoint. compared to the guidance we articulated last quarter, and represents a 29% improvement from 2022. We have taken specific and measurable actions to accelerate our path to profitability, including taking out $20 million in annualized operating expenses in the latter half of last year, and now these actions are becoming visible in our financial performance. We will continue to pursue our path to profitability while at the same time execute on our plan to grow revenue by helping customers increase productivity and reduce their costs with ever more valuable Matterport solutions centered around AI-driven data insights and digital twins of the real world. Now, I would like to turn the call back over to RJ.

Thanks, JD. Despite the headwinds and difficult challenges in the current macro environment, and especially those facing the residential and commercial real estate markets, our record Q1 results demonstrate the growing demand for our innovative property solutions built around our digital twin platform. Our diversified platform offering is essential to helping brokers, agents, property managers, and enterprise customers in the Fortune 1000 alike keep their businesses moving forward. while delivering critical cost savings, operating efficiencies, and productivity improvements. Matterport's digital twin solutions are an essential productivity driver that businesses can no longer ignore. The digital transformation of the built world is in full swing, and Matterport delivers immediate ROI by automating some of the most costly and inefficient tasks associated with managing buildings and spaces on location. Matterport has the world's largest subscriber base for digital twins and the largest 3D spatial data library of the built world, and it's growing every day. Powered by Cortex AI, our platform is rapidly scaling to readily generate a digital twin for every building on the planet. We're at the dawn of a new era in data science and AI, and Matterport will continue to play a central role in harnessing new technologies solutions for the built world for years to come. We continue to lead the category we created more than a decade ago and will boldly lead the industry through the next decade of digitization and datafication of the built world. Thank you for joining us today.

Operator, we are now ready for questions. We will now begin the question and answer session.

As a reminder, to ask a question, you may press Star then 1 on your telephone keypad. If you are using your speakerphone, please pick up your handset before pressing the keys. If you would like to withdraw your question, please press star then 2.

At this time, we will pause momentarily to assemble our roster. Today's first question comes from Yoon Kim with Leap Capital Markets.

Please proceed.

Thank you very much. First, congrats on another solid quarter, RJ and JD. All the metrics seem to be stabilizing, which is always good news. Good to hear that the supply chain is now largely behind us. I just want to make sure, is Pro3 now available worldwide today, not just in certain regions when you first launched it?

Thanks, Yoon. And a quick response there. Pro3 is rolling out around the world, and it's driven by two things. So it's not truly worldwide and in every country, but in the markets that we've served Pro2, we will be delivering Pro3. And that's gated by just a few more steps in the process, unrelated to supply chain, but related to country certifications. And that could be for the Wi-Fi, or it could be for the power components in the camera. And so, but as of now, there are no blockers in the supply chain that are inhibiting us from getting our cameras out into Europe and Asia. And as we get more certifications from the local governments, we'll continue to make the product available in more countries.

Okay, great. Thank you. And then I guess we haven't asked in a couple quotas, but If you can give us an update on the partner ecosystem front, you know, how much, you know, how, I know that's a key part of your overall enterprise strategy. Just if you can give us some update on the partner traction, maybe how much of your business is driven by partners today and where do you see that mix trending towards to?

Sure. Partners play a huge role at Matterport in the ecosystem. And if you take a half step back, it's, that's true in residential real estate with great partners like Redfin, Realtor.com, Zillow, CoStar, Compass Realty, Keller Williams, just to name a few, right? And these are massive organizations that have huge reach and huge success across the channel of residential real estate, home listings, homes for sale and rent, etc., And they provide tremendous value distribution and really value add as well on top of what Matterport can bring to that industry. In the enterprise and commercial real estate, the story is the same and it's getting better by the day. A couple of announcements and things we discussed on the call already, a flourishing relationship with Amazon and AWS and a global partnership there. to bring our digital twins to the industrial and manufacturing category at full speed. And I can tell you that the event in Hanover, Germany was hugely successful. That's when we went general availability with the digital twins and IoT TwinMaker from Amazon AWS. And that has really opened the doors to large scale enterprises and especially manufacturing companies around the world where we can turn them up very quickly with the combination of a Matterport digital twin and visually incorporate and align real-time performance data from inside factories and production lines seamlessly and provide customers with a never-before-seen dashboard and visual context right into the factory floors. It's really quite extraordinary, and that has pushed our pipeline of interest in this category, you know, to new levels, we'll put it that way. The same is true with our new integrations and partnerships with companies like Autodesk. Obviously, a major influencer and bellwether in the category of architecture, design, and construction. Most projects in the U.S. and around the world start with Autodesk, and it's fantastic that we can have a similar type of integration for earlier in the stage than perhaps AWS and TwinMaker, which are live operating facilities, to move upstream in the building lifecycle to deliver value at the design, build, and construction phase for those same kinds of buildings, small and large. So I think that gives you a picture. And we are continuing to invest in the channel and partner strategy not just here in the U.S., but also around the world because it provides great access to these industries and verticals that we're continuing to scale into.

Good to hear. Hey, I just have a quick follow-up on the comments that you just made. It sounds like you have a lot of value-added products being introduced, like property intelligence. You just introduced AWS TwinMaker products. I'm just curious, how much of your enterprise business is driven by those type of products and not just simply beyond the scan services and storage components for your subscription business?

Sure. As we like to say, come from the digital twin and stay for all of the value-added services and add-ons and insights. that our data analytics and our AI engine can provide, especially in the enterprise. But as we've also mentioned with property intelligence as a whole, we're bringing that to RRE as well as commercial real estate in all vertical markets. And what I would tell you is since the middle of last year, when we introduced the next generation of Matterport for the enterprise, and we introduced the Pro3 camera, these were two really important pieces of the puzzle. and of the solution for our larger customers because what they're looking for is absolutely to go beyond the core power of that digital twin and provide everything from those real-time and performance data insights to also predictive analysis for predictive maintenance and predictive property management and new forms of operating efficiency that come from analyzing and providing insights against all of that spatial data, all of that information that we are able to collect about a building and its operations. So that's going to continue, and that's probably the area with some of the most exciting advancements, both in our data science technologies, but also across the board for solutions in each of these vertical end markets for us. So good question that you asked there. I've talked about this quite a bit over the last several quarters that the real future growth opportunity in this business is going to be driven by these kinds of add-ons and data insights that we can provide on top of the digital twin.

Thank you so much.

Again, congrats on the solid quarter. Thanks, Ian. Thanks, Ian. The next question comes from Bhavin Shah with Deutsche Bank.

Please proceed. Hi, everyone. It's Nick on for Bhavin this evening. Thanks for taking my questions. JD, starting with the guidance, it looks like the back half subscription revenue growth accelerates from the first half. Can you talk about what you see driving that acceleration and just any other comments around linearity we should be aware of?

Yes, thanks. there's a little bit of an acceleration, and we actually see that over the past several years. So overall, our trends that we see for this year will be consistent with prior years. In addition, as we've been chatting about here today, we're seeing strong growth in our enterprise cohort, including with existing customers growing their spend with us, as well as with new customers adopting, particularly around some of the integrations RJ was just discussing. So those accumulate over time and can help continue to drive the subscription growth sequentially and then year over year. So there's a little bit of a growth rate increase implied in the Q2 guidance from Q1 and then largely steady going forward is what we're looking for on a quarter-by-quarter basis to hit the full-year guidance we provided today.

Great, thank you. This is a follow-up after seeing the EPS raise. How should we think about the pace of spending investments for the rest of the year and just balancing that with, I think, if I'm remembering right, as you said, sort of flattish gross margins for the rest of the year?

Yeah, that's right. And in terms of

operating expense growth, we of course are focusing very closely on where we make our investments and making sure that they have strong ROIs, they're highly efficient, and that we continue to make progress down the path to profitability. And so that includes of course in the operating expenses lines. From the perspective of the rest of this year, I would see our quarterly operating expenses to be roughly flat with what we saw in Q1, perhaps slightly up in Q2 as we've got a couple of targeted investments in mid-flight that are performing well, and then trickling back down a little bit. Again, largely consistent with what we reported in Q1. On the margin front, gross margin front, I agree that our outlook for gross margins in total is roughly consistent as well with what we reported in Q1. So largely steady trends out through the rest of this year.

Great. Thank you. And then, RJ, one for you. More back on the expansion within the existing enterprise customers. Where do you think that could eventually grow? So in the future, from talking about, you know, I think it was 100 customers over 50,000 in ARR, What should we expect that ARR figure to look like in the future?

Sure. You know, it follows a trend. If you look back several quarters and maybe a few years back to when we entered the enterprise market with a real enterprise solution, two things occurred. One, of course, was growing that customer base Then the size of those companies and the size of the facilities and spaces that we have been digitizing also got larger. And then the number of those locations where we've gone from one, two, or three factories or production line operations to 10, 20, even hundreds, and going all the way up to thousands of retail locations for some of our large enterprise retail customers, all of those metrics of expansion continued. And we have been working really hard. I'll make this a comment about both your previous question and the one you just asked. In the last year, we invested significantly in the platform for enterprise, both hardware, software, and services. It was a big build year for us. It was a big commitment of investment. And really, 2023 is all about rolling out that. That's how we're able to control and keep our costs at bay and, in fact, create benefits. much greater operational efficiency because this is the year that we're bringing all of that great investment and all that capability to market. And a key part of that is to drive up the value proposition in those enterprise solutions, push us past the average 50,000 mark. And I will tell you that there are a number of customers in that list that are well past 50,000 and well into the six figures and even some that are higher than that. And that is predicated on us continuing to build those kind of new add-on capabilities that are of particular importance to enterprises running these larger, more complex, and more distributed facilities in many locations around the world. We feel like we've got a fantastic solution that now includes enterprise collaboration, enterprise access control and security, really taking this to, I call it a platinum class enterprise offering that can serve capabilities all the way up to government grade security if that's required.

Great, thank you so much. Our next question comes from Elizabeth Porter with Morgan Stanley. Please proceed.

Hi, this is Sophie Lee on for Elizabeth. I had a quick question on your software growth it seems like the beat this quarter came from product and services. And if you look at the guide for FY23, the raise was also coming from product and services. So I'm wondering why the software revenue isn't growing as fast as some of the other segments. And if you think about the AWS announcement and the integration with Autodesk Construction Cloud, I'm wondering how significant this is, especially to the growth of software revenue, subscription revenue, and if any of that is factored into the guidance.

Yeah, thanks, Sophie. Well, first, in our Q1 actuals, our $19.8 million of subscription revenue does top our guidance range that we gave last quarter for for that for that item so feel really good about the acceleration and subscription revenue growth there the sequential growth rate actually increased as well and so we're performing better than our expectations and better than our guidance on subscription revenue for the q1 results that we just we just issued our q2 is guidance also implies a further acceleration of our sequential growth in subscription revenue as we have kind of exited Q1 with strong subscription trends, good growth with enterprise customers, and that should carry through to the go-forward periods. And then if you were to kind of model it out from there to the full year, I think you'll see that the implied sequential growth is higher than what we've seen in some quarters in past periods. So feel really good about the improvements in the growth rates and subscription revenue. It's already modeled into the guidance. We have some good visibility into subscription revenue given its recurring nature and given the increasing proportion that is coming from enterprises on longer-term contracts. So I actually think that's part of the outperformance along with, as you noted, some strong growth in the services line and of course in the product line. On the partner side, with respect to some of the partners we've spoken about today, such as AWS TwinMaker and Autodesk with the construction cloud integration, we're in the early stages of and getting those enterprise partner deals concluded. But the pipeline is very strong with very large customers. It's quite exciting and all the companies in these partnership discussions are working together to help customers solve their efficiency and workflow needs. So I also expect that over time we'll see some progress including even more of those transactions, including, you know, in addition to those that we described in some of our recent press releases, which will further create a tailwind in that subscriber growth.

Got it. Thanks so much for the color there. My second question is, you mentioned seeing some SMB weakness continue into the quarter. So, Is there any recovery or incremental weaknesses we should be thinking about in terms of SMB and segment throughout this year? And also, what are you kind of factoring in as NRR for the full year? And I'm wondering if you can also provide us any commentary on the progress in diversification, especially from residential real estate.

Yeah. Yeah, thanks for those questions, Sophie. So first, perhaps the last question first, in residential real estate and real estate in general, that's about 50% of our subscription revenue. So while that continues to grow in absolute dollar terms year over year, in terms of the percentage of total revenue, it's moderating to around that 50% mark. And you may remember that we've said that or noted that the industry of real property in the world is about two-thirds residential real estate. So we'd always expect to have a healthy proportion of residential real estate in our business. But it's moderating around 50%. And then, of course, the other industry verticals, which are growing quite strongly, are coming up to, of course, make up the other 50%. With respect to SMB or small and medium businesses, It is true that their expansion has moderated, which we've talked about over the last couple of quarters, but I would say that the trends have been steady over the last couple of quarters, so no change in the trends sequentially in the SMB space. In terms of gross and net subscriber additions, we've actually seen an uptick in SMB subscriber growth, and some of that can be seen in our free and paid subscriber numbers that we reported today. It's quite encouraging that we're garnering new subscribers at a faster rate, including in the S&V cohort, as customers in all verticals, including in residential real estate, are looking for ways to achieve better productivity and efficiency in their operations. And then finally, With the launch of our digital pro offering, which is a service, but it is focused on in the residential real estate space, particularly in the United States, providing a very cost-effective and quick digital marketing package to meet all an agent's promotion needs. We've actually seen a very successful launch response from customers with that service, and that's helping to drive more interest in Matterport generally, more usage of Matterport across the real estate industry, but also more subscribers as agents and brokers first start out perhaps with DigitalPro and then come onto the platform more comprehensively. So we have a lot going on in the SMB space, and the early indications for this fiscal year are that There is some positive receptiveness as e-subscriber numbers actually have grown. In terms of our outlook for net dollar expansion or NDR for the year, I'd expect overall with SMB and the very strong performance that continues in enterprise that that metric stays roughly consistent with what we've seen over the last couple of quarters.

Got it. Thank you so much. Thank you, Sophie. As a reminder, if you do have a question, please press star, then one.

The next question comes from Luke Mott with Wolf Research. Please proceed.

Hi, this is Luke. I'm for Josh. Congrats on the results. Can you talk about some of the puts and takes which have led to the improved product gross margin?

Thank you.

Yes, the approved product gross margin was largely driven by two things. One is stronger or higher growth in the Pro3 camera sales. This is our new camera that comes with a higher average selling price that matches the great additional features and value it provides. That's the first element that helped improve gross margin. And then secondly, as we have started to put the remnants of the supply chain constraints behind us, we are in the process of selling through those higher-costed materials that went into the Pro2 camera that we were purchasing all of last year. We talked about about those impacts in the prior conference calls. So now that that supply chain constraint issue is behind us, we're able to sell through those Pro2 cameras that have higher cost of materials inside of them. And as that happens, it also helps increase the product margin. So overall, those trends should remain steady through the rest of the year with the supply chain constraints behind us. continued robust demand expected for the Pro 3.

Great. Thank you so much. And just a quick follow-up. It's been a few quarters since the BHT Studios acquisition. How's that business doing, and is there any way you could help us to quantify the contribution to the quarter?

You know, I'll take the first part of it, and, JD, you can talk about quarterly contribution. You know, first, we're really excited to have EHT now fully integrated and part of Matterport, both operationally, organizationally, we're one company. And this was a really important acquisition for Matterport because residential real estate is such a significant part of our business and also an important, very key part of our future. And it is the largest cohort of the built world and always will be, there is so much more ground to cover, so much more to do, right? And these guys are on the front lines of residential real estate every day, you know, good, bad, and otherwise. And the reality is, you know, we are facing, you know, some pretty tough headwinds and challenges in the residential real estate market due to the macro environment, predominantly interest rates, inflation, et cetera, is really bearing down on listing volume, and real estate activity across the U S but also around the world. And, uh, so, you know, you heard us talk a lot about digital pro and this was, uh, the first. Project post merger that we both had our eyes on and the teams worked incredibly quickly, uh, to bring this to market. And we think it's a game changer because what we're offering to the market is something that's never been offered before. the opportunity to get and go far beyond digital photos for the same or lower price than what people pay for just traditional photos in the listing today. And you get the Matterport Digital Twin, the 2D floor plans, the video walkthroughs. It's a very, very competitive, if not transformational offering. And it's at the core of the spirit of this merger and these two companies coming together. And so it is early days. We just started rolling it this quarter. We have a lot of work to do to put some real brand and market awareness behind it. But for those markets and regions where we have brought it out, it's been a huge success. And this is how we're going to grow share in the RRE business and make some headway here, even though we're facing some headwinds. And we think that it couldn't be a more important product to be bringing to the market when realtors agents and brokers are all feeling particularly constrained and strapped in this tough economy to have a breakthrough in cost efficiency and maybe even a superpower when it comes to real estate marketing capability online so a lot of expectations for for digital pro and the partnerships come in the future it's going to take a few quarters for this thing to really get off the launch pad and into full swing, but we're feeling really good about the early progress and how well it's being received, most importantly, by our customers in RRE. JD, you want to talk a little bit about the near term and any other business impact?

Sure.

BHT's business rolls up into our services line in the income statement. And sequentially, while we don't break it out, sequentially, DHT's business was up double-digit percentage points, which was great to see for some of the reasons that I already just talked about, as well as it has a very strong reputation and market share presence in its key markets in the United States. And we're going to expand that further, as we discussed, in terms of bringing that to more markets as well as more verticals over time. So great performance sequentially, double-digit percentage growth that helps bring up services revenue in total year over year by well over 100%. So all around good news.

Great. Thank you so much.

At this time, we are showing no further questionnaires in the queue, and this does conclude our question and answer session. I would now like to turn the conference back over to Mike Knapp for any closing remarks.

Great. Thanks, everyone, for joining us today. As always, we appreciate your interest in Matterport, and we look forward to speaking with you on our next earnings call.

Thanks and goodbye. The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.