SmartRent (SMRT) Q3 Results and ARR Runway Dive

Investment Analysis Clubs Saul’s Investing Discussions
1

I’m not sure I want to even post this today because there are so many posts I feel like it will get lost and is basically a waste of my time, but I promised to give an update after earnings for the few members who reached out to me at least… Just got off the earnings call and had time to finish putting this together.

The Company:
“SmartRent is an enterprise smart home automation company developing software and hardware that empowers property owners, managers and homebuilders to effectively manage, protect and automate daily operational processes.”

Essentially a combination of hardware with ARR SaaS revenue for monitoring and operating units. As it currently stands hardware is still the vast majority of revenue-- which makes sense as they are growing and have to install the hardware before they can obtain the ARR.

That being said, the runway for ARR is tremendous and very sticky (0% churn)

SMRT hardware and technologies has a significant advantage over several of its competitors as it can be utilized in new construction, OR existing (very little impact from construction cycles). SMRT is partnered with some of the biggest names in the industry including 15 of the top 20 multifamily rental owners, and as such, benefit from institutions that have capital allocations for property improvements.

SMRT’s products generate value for the customer by reducing energy use, preventing / early alerting regarding water damage (the single most costly common and unforeseen expense as a rental owner)–

Some Q3 Highlights:
Partnered with AppFolio-- a cloud-basted complete property management solution. AppFolio has nearly 17,000 customers representing six million rental units.

SMRT has more than doubled in size with 587 employees (+137% YoY)

**Guidance for installs through Year-End did not change, however Revenue was revised slightly due to supply chain delays for two hardware products which account for the revenue reduction. **

Several student-housing facilities are in trial periods right now, representing another market opportunity for SMRT.

I was concerned about supply chain delays, but all-in-all I was impressed by the progress for Q3:

Revenue $35.1M (112% YoY, 62%QoQ)
Deferred Revenue $84.7M (14%QoQ)
ARR $8.7M (For Q3 only, a +24%QoQ.
Installs 59,347 (+111%YoY)
Booked units (signed for next quarter) 49,706 (+134%YoY)
Total Committed units (under contract within 24months) 704,000 (up 100,000 from last quarter, not including the 59,000 installs in Q3-- representing over 155,000 net new units committed)

There is a link below to my spreadsheet that may be a little easier to read. While there isn’t acceleration every quarter, the cash on the balance sheet ($450M vs. $35M Q3’20), employee expansion, and partnerships create an intriguing hypergrowth opportunity ahead.

The current installed units plus committed units (975,000) at the current reflected revenue per unit (actual number $10.71/month) reflects an ARR of nearly $10.5M / month, or $31.5 / quarter. this is an increase of 262% from current quarterly ARR without booking a single additional unit or upselling!

With new product offerings and upselling to existing customers, SMRT forecasts a product offering in a range of $14-$47/unit/month. At the nearly one million units listed above, at the midpoint of $30/unit that’s $90M ARR per quarter for the existing installed and committed units only. That’s 10x the current ARR by rolling out their new product lineup without booking a single additional unit. (Back of the Napkin Math)

Institutional partners account for over 4 Million units, plus 6 million accessible through the AppFolio partnership–

On top of this, Expansion into the Europe where 46% of residents rent and a market representing 90Million apartments.

Expansion into Student Housing / University partnerships, Class A Office Buildings, and the nice little ESG component with smart utilities / carbon footprint reduction-- I see a good business, a growing business, and a massive TAM with sticky ARR.

Share price is down 3.6%AH.

Doesn’t change my conviction personally-- there’s an awful lot happening in the market. In fact I think I just might be in this company a little too early-- Recent SPAC, recent analyst coverage initiated-- More to come for this company I think.

I’d love to hear your input directly via email**, please don’t respond to the board post unless you have something really vital.**

Thanks–

MillennialFalcon

My Spreadsheet:

https://docs.google.com/spreadsheets/d/1oMntWECxKTl-FuE7F0SD…

Previous Post with Additional Links:

https://discussion.fool.com/smartrent-smrt-update-goldman-sachs-…

Knock. Knock.
Who’s there?
Orange.
Orange Who?

Orange you glad this isn’t another Upstart Lamentation?

69 Likes
2

**Guidance for installs through Year-End did not change, however Revenue was revised slightly due to supply chain delays for two hardware products which account for the revenue reduction. **

First off, a big thanks to MillennialFalcon for bringing Smart Rent to the Board and continuing the write ups.

Having initiated a starter position in SMRT, I too listened to the conference call. Full year revenue guided downward, from $120M to $100-105M. The interesting thing here is that as soon as the supply chain catches up, SMRT simply goes back to installed units, adds the missing hardware and adds revenue accordingly. There is a slingshot effect of $15-20M into 2022.

One of the items on my list was to review the 3rd Qtr 10Q. I was impressed that the company had already posted the report to its website. As this is SMRT’s first complete filing as a public company, I spent an hour reading through it. I am far from an expert on reading reports, but will say that I did not come across any red flags related to the SPAC merger. Confirmed: There were no pesky warrants issued that have given SPACs such a bad name.

Here is a link to the company’s most recent investor presentation, dated 9/8/21: https://investors.smartrent.com/events-and-presentations/def…

Buried deep on slide 11 is what gets me excited about SMRT. $1.8B potential annual recurring revenue from existing customers. Given what SMRT has proven to date (including zero customer churn), this now looks to me to be a straight over tackle execution play.

Share price is down approx 10% today. I took the opportunity to add some additional shares.

–John

3 Likes
3

Revenue is increasing fast. But look deeper, the professional service loss margin is increasing from negative -20% to negative -68%. and the professional service revenue is increasing at twice as fast as the only profitable item: hosted service.

Total Net loss margin has decreased further from negative -3.5% to negative -9%. This is not investing but pure speculation. I learned a good lesson from Mohawk(Now as Aterian) and only buy high quality companies.

The stock has been trending down for bad reasons and you guys kept pushing this company. Why? This board is not for MEME stocks but for high quality fast growing disrupting companies with strong fundamentals.

We have so many excellent stocks to invest here: MNDY, BILL, NET, DOCN, DDOG, CFLT etc… Why get distracted?

7 Likes
4

Revenue is increasing fast.

Yes, 95% YoY and 62% QoQ.

But look deeper, the professional service loss margin is increasing from negative -20% to negative -68%.

Why might this be? An even deeper look, into the footnotes, shows a one-time warranty expense of $6M due to replacement costs associated with the removal and replacement of defective batteries. Remove this non-recurring charge from the professional service expense and the YTD loss margin is a negative -29%. And when it is removed from the third quarter alone, professional services contributes a positive 1% vs a negative -3% in Q3 of 2020.

and the professional service revenue is increasing at twice as fast as the only profitable item: hosted service.

I believe it’s the other way around, the more profitable revenue service is increasing twice as fast (exactly the trend one wants to see):

Professional service revenue, YoY 2020 to 2021, $9,588M to $15,345M, a 60% increase
Hosted service revenue (ARR), YoY 2020 to 2021, $5,419 to $12,172, a 125% increase

Total Net loss margin has decreased further from negative -3.5% to negative -9%.

Again, remove the warranty expense and Total Net loss margin improves from a negative -3.5% to a negative -1% (another positive trend).

This board is not for MEME stocks but for high quality fast growing disrupting companies with strong fundamentals.

It is my understanding that this board is not for insults but rather for the crowdsourcing of hypergrowth companies. If I have this wrong, then email me off-board and I will refrain from posting anything more on SMRT. Anyone here is free to conclude that SMRT does not fit their personal criteria. In fact, that is encouraged; do your own research, come to your own conclusion. But please don’t dump on the posters here without respecting the amount of research that they have done and without double checking your own work.

imho SMRT is poised for 2+ years of hypergrowth which is deserving of a starter position in my portfolio. I’m wrong a lot.

25 Likes
5

Contributing to the loss is a warranty charge, recorded as a component of hardware cost of revenues, for $5.7 million related to a battery defect in a portion of our SmartHubs.

So we remove 6m from the cost of hardware. That only changes the hardware margin. So the hardware margin is 10.8% instead of -1.6%.

Total margin did improve from -3.5% to -1.2%

The margin for professional service remains the same. The professional service loss margin is increasing from negative -20% to negative -68%.

I did make a mistake on reversing the professional service and hosted servcie growth rate. Yes, it’s the other way around.

But again, with so many negatives, why invest in SmartRent if we have so many more sure-thing choices and we only need less than 10 companies in our portfolio?

P.S.

The reason I replied to this post is I saw this company mentioned a few times. I don’t think it’s a good investment even without using Saul standard! It’s not that the growth rate is slow. Revenue growth rate is hyper growth but the numbers don’t show it’s good investment. Growth rate alone is not indication of good investment.

I want others on the board to make money. I don’t want people to lose money or missing out gains. That’s my intend to spend some time to reply to this post. I am not here to insult people. My whole post was about this company. I don’t think I insulted anyone personally here. I did point out this is a bad investment.

Remember: there’s opportunity cost if Smartrent stock stays flat or goes down more like many SPACS.

8 Likes
6

MillennialFalcon,

Thanks for bringing this idea to the board. From your post and spreadsheet, I get the feeling the focus has been more on topline growth. I took a look at the margins to get a better sense of the company.

Hardware and Professional Services gross margins were negative in 2020 and 9mo 2021. The smart home automation software space is pretty crowded and competitive. It’s worrying to me that they have to price their main product segments (86% of rev) at a loss to grow and gain market share.

In addition, the SaaS part of the business (Hosted Services) achieves only 34% gross margin. At a time where software companies routinely post 60-80% gross margins, SmartRent’s software gross margins look really poor in comparison.

Company gross margin has worsened since 2019 and Q3 21 non-GAAP operating margin worsened YoY from -46% to -63%.

Seems like a company that has so far not shown signs of profitable growth.

Cedric

8 Likes