SmartRent, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited results; comparisons are to the corresponding 2021 periods. Amounts below are in U.S. dollars unless stated otherwise.
Business context
SmartRent provides property owners, managers and residents with smart-building hardware, installation services and cloud-based software. In March 2022, the company acquired SightPlan, a property-operations software provider. At June 30, customers owned approximately 6.6 million units, including 1.3 million associated with SightPlan; 451,010 SmartHubs had been deployed.
Financial performance
- Q2 revenue: $42.4 million, up 96% year over year. Hardware revenue was $20.9 million, professional services $9.1 million and hosted services $12.4 million.
- Q2 profitability: Cost of revenue was $41.4 million, producing gross profit of approximately $1.0 million and a gross margin of 2.3%. Operating loss was $27.0 million; net loss was $25.6 million. Net loss per share was $0.13.
- First-half revenue: $79.8 million, up 95%. Cost of revenue was $83.5 million, resulting in a gross loss of $3.8 million and gross margin of approximately -4.7%. Operating loss was $55.3 million and net loss was $49.0 million; net loss per share was $0.25.
- Cash flow: First-half operating cash use was $36.7 million, versus $18.7 million in 2021. Investing cash use was $129.4 million, mainly the $129.0 million SightPlan acquisition payment net of acquired cash. Financing cash use was $2.9 million. Cash, cash equivalents and restricted cash totaled $263.2 million at June 30.
- Liquidity and debt: Cash and cash equivalents were $255.0 million; restricted cash was $8.2 million. No amounts were drawn on the $75 million senior revolving facility, which matures in December 2026. The company reported covenant compliance and said available resources were expected to fund operations for at least 12 months after issuance of the financial statements.
- Other metrics: ARR was approximately $30.6 million, versus $7.0 million a year earlier. Q2 new units deployed were 60,329, up 153%; committed units were 780,036. Deferred revenue was $125.4 million, up from $95.6 million at year-end 2021.
Material changes versus prior year
- Revenue growth reflected more deployments and subscriptions, as well as the SightPlan acquisition. Q2 hosted-services revenue increased 203% year over year; the company attributed much of the growth to a larger deployed base and acquired SaaS revenue.
- Costs and operating expenses increased substantially. First-half operating expenses rose 170% to $51.6 million; general and administrative expense rose 232% to $25.8 million, reflecting personnel, stock compensation, insurance and acquisition-related costs.
- Despite sharply higher sales, first-half cost of revenue grew faster than revenue, moving gross margin from slightly negative in 2021 to approximately -4.7% in 2022. Net loss increased from $19.3 million to $49.0 million.
- Cash declined from $430.8 million at December 31, 2021, reflecting operating cash use and the SightPlan acquisition. Goodwill increased to $117.9 million, largely reflecting SightPlan.
Outlook, risks and unusual items
- No specific revenue, earnings or deployment guidance was provided. Management expected COVID-related disruption through 2022, including Z-Wave chip shortages and production, sourcing, manufacturing and logistics delays. Some customer deployments were pushed into future periods; management said some, but not all, delayed units were expected to be deployed in 2022.
- Management expects cost of revenue and research, sales and administrative expenses to increase in absolute dollars. It also cited tariffs, competition, customer adoption, execution, privacy compliance and the need for possible additional capital among relevant risks.
- The SightPlan acquisition generated preliminary goodwill of $105.2 million and identifiable intangibles of $30.9 million. Acquisition-related employee compensation and other acquisition expenses contributed to reported G&A costs. Purchase accounting remained subject to measurement-period adjustment.
- A $5.8 million SightPlan employee payment is contingent on continued service and is recognized as compensation expense. The company also recorded a $5.8 million income tax benefit for the first half, primarily from releasing a valuation allowance due to deferred tax liabilities recorded in the SightPlan acquisition.
- A previously identified battery deficiency remained in the warranty allowance: $2.2 million of the $3.6 million total allowance related to replacement costs. SmartRent is suing a supplier over defective products; the supplier filed a demurrer and cross-complaint in July 2022. The company reported no accrual for these legal matters and said it did not expect ordinary-course proceedings to materially affect the financial statements.
- Management reported that disclosure controls were not effective as of December 31, 2021 and that material weaknesses involving journal-entry review and IT segregation controls had not yet been fully remediated. It expected remediation during 2022 and said supplementary procedures were used for this report.
- The company reported no material changes to the risk factors in its 2021 Form 10-K and no off-balance-sheet arrangements at June 30, 2022.
Most important facts to verify
- Whether supply constraints and delayed deployments eased, and whether unit bookings converted into deployments and revenue.
- Whether growth in hosted services and ARR improves gross margins and narrows operating losses, given first-half negative gross margin and cash burn.
- Cash consumption, acquisition-related payments and the availability of the undrawn revolver; management’s liquidity estimate is not a guarantee of future funding.
- Final SightPlan purchase accounting, goodwill and intangible-asset assumptions, and the timing and effect of acquisition-related compensation.
- Progress in remediating the disclosed internal-control material weaknesses and developments in the supplier dispute and battery warranty claims.