SmartRent, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; amounts below are in U.S. dollars. SmartRent provides real-estate technology combining smart-building hardware, installation services and cloud-based software subscriptions.
Financial highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $58.1 million | $47.5 million | $176.6 million | $127.3 million |
| Gross profit (loss) | $13.5 million | $1.2 million | $32.5 million | $(2.6) million |
| Gross margin | 23.3% | 2.5% | 18.4% | (2.0)% |
| Operating loss | $(9.9) million | $(26.7) million | $(37.3) million | $(82.0) million |
| Net loss | $(7.7) million | $(26.0) million | $(31.3) million | $(74.9) million |
| Adjusted EBITDA (non-GAAP) | $(5.0) million | $(17.6) million | $(19.9) million | $(60.6) million |
Q3 basic and diluted loss per share was $0.04, versus $0.13 a year earlier; the nine-month figures were $0.16 and $0.38, respectively. Revenue grew 22% in Q3 and 39% year to date. Hardware and hosted-services revenue rose, while Q3 professional-services revenue declined 20%. For the nine months, hardware revenue increased 45%, professional services 22% and hosted services 38%.
Hardware margin dynamics were affected by shipping distinct Hub Devices, whose revenue is recognized when shipped; some earlier devices were bundled with subscriptions and recognized over time in hosted services. Management attributed revenue growth to higher average revenue per unit, more cumulative subscriptions, distinct Hub Device shipments and, year to date, SightPlan contributions. Lower operating expenses and higher interest income also helped narrow net losses.
Cash flow, balance sheet and debt
- Cash and cash equivalents were $211.0 million at September 30, 2023; including restricted cash, total cash was $211.5 million. Cash and cash equivalents were $210.4 million at December 31, 2022.
- For the first nine months, operating activities used $1.4 million of cash, compared with $79.4 million in 2022; investing activities used $3.3 million, compared with $132.4 million, largely reflecting the prior-year SightPlan acquisition; financing activities used $1.5 million.
- Current assets were $344.1 million and current liabilities $123.6 million, implying working capital of $220.5 million. Total liabilities were $172.3 million. The balance sheet reports no drawn debt.
- The company had an undrawn, secured $75 million revolving facility maturing in December 2026. It reported compliance with facility financial covenants. The facility requires a minimum cash balance or, if that is not maintained, a minimum liquidity ratio.
- Inventory declined to $47.5 million from $75.7 million at year-end. The company recorded $2.1 million of inventory write-downs in the first nine months of 2023.
Operating trends and material changes
- Units deployed reached 682,632, up from 504,409 a year earlier. New units deployed were 32,308 in Q3 versus 53,399, and 135,436 for nine months versus 164,924.
- Binding Units Booked fell to 46,272 in Q3 from 67,285 and to 131,347 for nine months from 218,073. Committed Units, which also include non-binding customer intentions, were 907,860, compared with 811,312 a year earlier.
- Annual recurring revenue was approximately $43.3 million, versus $31.8 million. Management cautions that units booked and other operating metrics are not necessarily predictive of future GAAP results.
- Operating expenses declined 16% in Q3 and 12% for nine months. The prior-year comparisons included a $2.4 million impairment of a prepaid license agreement; lower insurance, consulting and other costs also contributed.
- Deferred revenue was $137.6 million, including $39.8 million of prepaid fees on contracts that may be terminable for convenience and refundable at customer request. The company expects to recognize 61% of total deferred revenue within 12 months.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided. Management says available resources are expected to fund obligations for at least 12 months after issuance of the financial statements, while noting that additional capital may be needed if operating cash flows do not turn positive. Future capital needs depend on sales, investment and market adoption.
- Management expects cost of revenue to rise in absolute dollars; hosted-services costs are expected to grow more slowly than hosted-services revenue. It expects the ADI Global Distribution agreement, under which ADI will fulfill hardware orders in the U.S., Canada and Puerto Rico, to have a positive cash-flow impact in future periods. No inventory transfer had occurred by September 30.
- Risks include adoption and competition, macroeconomic conditions, supplier and manufacturing dependencies, tariffs on some imported hardware, privacy and regulatory compliance, currency movements, and execution of new products and acquisitions. Management says supply-chain conditions improved and expects that trend to continue into next year.
- A product-supplier dispute is in discovery following claims and cross-claims; the company denies the supplier’s allegations and reported no loss-contingency accrual. It says ordinary-course legal matters are not expected to have a material effect. A previously identified battery deficiency remains covered by the warranty allowance; $0.9 million of that allowance related to the battery replacement program at quarter-end.
- The company recorded $225,000 of fair-value expense on acquisition earnouts for the first nine months and paid $1.7 million on an earnout during the period. SightPlan-related employee contingent consideration also generated compensation expense; $6.0 million was paid in the period, including payroll taxes and benefits.
- The 2022 comparative cash-flow statement was immaterially restated to classify $2.7 million of capitalized software costs as investing rather than operating cash flow. Management reported disclosure controls effective and said the previously disclosed control deficiency had been remediated.
Important facts for investors to verify
- Whether bookings and new deployments stabilize or recover, given their declines despite growth in deployed units and ARR.
- How much future revenue growth and margin are attributable to recurring SaaS subscriptions versus hardware shipments and accounting timing for Hub Devices.
- Whether operating cash flow remains near break-even after inventory and deferred-cost reductions, and how long cash will fund operations if losses continue.
- Whether inventory write-downs, hardware warranty claims, including the battery issue, or supplier and tariff costs put further pressure on gross margins.
- The terms and conditions of the revolving facility, including its liquidity covenant, and the potential cash-flow and refund exposure in deferred-revenue contracts.
- The outcome and potential financial exposure of the supplier litigation and acquisition earnout obligations.