SmartRent, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results are compared with the corresponding 2022 periods. SmartRent provides real estate technology combining smart-building hardware, installation services and cloud software subscriptions.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages. Gross margin is calculated from reported revenue and cost of revenue.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $53.4 | $42.4 | $118.5 | $79.8 |
| Gross profit (loss) | $9.9 | $1.0 | $19.0 | $(3.8) |
| Gross margin | 18.5% | 2.3% | 16.0% | (4.7%) |
| Operating loss | $(12.1) | $(27.0) | $(27.4) | $(55.3) |
| Net loss | $(10.3) | $(25.6) | $(23.6) | $(49.0) |
| Basic and diluted loss per share | $(0.05) | $(0.13) | $(0.12) | $(0.25) |
| Adjusted EBITDA (non-GAAP) | $(6.4) | $(19.8) | $(14.9) | $(43.0) |
- Q2 revenue rose 26%; first-half revenue rose 49%. Growth reflected higher average revenue per unit, more active subscriptions, distinct Hub Devices recognized as hardware revenue upon shipment, and—particularly in the first-half comparison—SightPlan.
- Q2 revenue by category: hardware $27.8 million (+33%), professional services $10.1 million (+10%) and hosted services $15.6 million (+26%). For the first half, the respective amounts were $65.1 million (+51%), $22.8 million (+42%) and $30.5 million (+47%).
- Gross margin improved substantially, but professional services remained loss-making at the gross-profit level: Q2 professional services cost of revenue was $15.8 million against $10.1 million revenue. Hosted services cost of revenue was $5.7 million against $15.6 million revenue.
- Operating expenses declined 22% in Q2 and 10% in the first half. Management cited lower personnel-related, consulting and insurance costs among the drivers; Q2 R&D expense also benefited from payroll tax credits.
- At June 30, cash and cash equivalents were $197.0 million and total cash, cash equivalents and restricted cash were $197.5 million, down from $217.7 million total at year-end 2022. Current assets were $346.2 million and current liabilities $120.6 million. Inventory declined to $60.5 million from $75.7 million.
- Six-month operating cash use was $15.7 million, versus $34.9 million in 2022; investing cash use was $2.3 million versus $131.3 million, largely reflecting the prior-year SightPlan acquisition. Financing cash use was $2.3 million. The 2023 operating cash use included approximately $6.0 million of SightPlan-related payments.
- No borrowings were outstanding under the $75 million secured revolving facility, which matures in December 2026. The facility is secured by substantially all company assets and includes a minimum-cash covenant (with a minimum-liquidity-ratio requirement if that cash threshold is not met). The company reported covenant compliance.
Changes, operating indicators and outlook
- Net losses narrowed year over year, while revenue increased. Interest income also increased materially, to $1.8 million in Q2 and $3.8 million in the first half, primarily from interest-bearing cash balances.
- Units deployed reached 650,324, up from 451,010 a year earlier. However, new units deployed declined to 47,768 in Q2 from 60,329, and units booked fell to 19,967 from 59,306. First-half bookings were 85,075 versus 150,788. Committed units were 897,686 versus 780,036; that measure includes nonbinding customer intentions.
- Annual recurring revenue, as defined by the company, was approximately $38.8 million at June 30, 2023, versus $30.6 million a year earlier. Management says hosted-services revenue from hub amortization may decline as more distinct hubs are recognized as hardware revenue at shipment.
- No quantified full-year revenue, earnings or cash-flow guidance is provided in the filing. Management expects supply-chain conditions to continue improving and says the August 2023 preferred-distribution agreement with ADI may improve future cash flow through supply-chain optimization and reduced inventory. The three-year agreement provides for inventory transactions and distribution of selected products.
- Management says existing cash, available revolver capacity and other resources should fund operations for at least 12 months beyond the financial-statement issuance date, while noting that additional capital may be needed if positive operating cash flow is not achieved. It identifies customer adoption, competition, product development, suppliers, macroeconomic conditions, tariffs, interest rates, foreign exchange and access to financing among relevant risks.
Unusual items, contingencies and controls
- Management identified an immaterial prior-period cash-flow classification error: $1.829 million of capitalized software costs was reclassified from operating to investing activities for the six months ended June 30, 2022. The company says the error did not materially affect previously issued financial statements.
- The company continues litigation with a supplier over allegedly defective products and contract claims. It denies the supplier’s allegations, reports that discovery is underway and had no accrual for the matter at June 30, 2023. Management does not expect ordinary-course legal matters to have a material effect, but notes outcomes and potential adjustments cannot be assured.
- The warranty allowance was $1.735 million, including $0.869 million for replacing batteries identified as deficient in previously deployed devices. Q2 inventory write-downs were $0.207 million.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2023 because of omissions in the 2022 Form 10-K: management’s internal-control assessment and required language in certification exhibits. Management said it was reinforcing the relevant control and expected to restore effectiveness during 2023; it nevertheless stated the current financial statements fairly present the company’s results in all material respects. No material changes in internal control over financial reporting were reported during the quarter or half-year.
- The 2023 effective tax rate was near zero; the company maintains a full valuation allowance on U.S. federal and state deferred tax assets. SVB’s March 2023 closure caused no reported loss or material operating impact, but the filing adds banking-condition risk disclosure.
Important facts for investors to verify
- Whether the fall in bookings and new deployments persists, and how it translates into future hardware shipments, SaaS growth and revenue.
- How much reported hardware growth and margin improvement reflects the accounting and shipment mix shift to distinct Hub Devices, versus underlying unit and customer demand.
- Whether gross-margin improvement is sustainable, particularly given continuing professional-services gross losses and third-party labor costs.
- Cash-burn trajectory, inventory conversion and the expected effect of the ADI agreement; confirm revolver availability and ongoing covenant compliance.
- Progress on remediation of the disclosure-control deficiency and developments in the supplier litigation and battery-replacement obligations.