Latch: No So Deep Dive
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(Ryan) What they do: Latch says their mission is to revolutionize the way people experience spaces (seems like a bit much), but they essentially sell a combination of hardware and software to help operate residential buildings. So they’re hardware suite consists of door locks, lights, temperature control devices, cameras for guest access, and there might be some other stuff but those are kind of the big ones.
Then they sell subscriptions to the LatchOS which is comprised of modules and customers (building management teams) can select which modules they need to fit their building needs. These modules include Smart Access (this is basically giving controls to who is allowed in any door) then people open it with their phone, Delivery and Guest Management (basically their intercom system which sounds like it has video capabilities), Smart Home and Sensors (this is just allowing residents and management to control their smart devices from the app), Connectivity (this is monitoring and providing cellular internet across buildings), and lastly is Resident Experience (this is just what residents that use the Latch App get to see and the capabilities are constantly being expanded).
In terms of the sales process. They usually connect with management teams and developers early in the building process. So 1 in 10 newly constructed multi-family apartments in the US are equipped with Latch, but they can also retrofit older buildings with their tech. And then since installation timelines can vary, hardware bookings result in revenue being recognized over 6-18 months, whereas the software is often contracted out longer than 6 years but often gets paid for totally up front.
(Ryan) History: I couldn’t find too much history on the company, but Luke Schoenfelder (CEO) co-founded Latch in 2014 with 3 other people. Luke and one of his co-founders were ex-Apple employees. They have brought on several other ex-apple employees along the way.
They’ve had several fundraising rounds along the way including from their now SPAC sponsor Tishman Speyer who is also a real estate developer, so they’ve got an in there. Then they’ve obviously expanded the software modules and hardware suite along the way. And it looks like Latch officially went public on June 3rd, so 2 months ago. But they had apparently first considered the SPAC route back in 2019 and considered a bunch of different offers throughout 2020.
A bit of a pesky industry since doorknobs and/or apartment manager software not well-known markets
They estimate US rental owners and operators represent $54 billion TAM. Add on Europe and commercial buildings (which they are currently going after) and you can much more than double that
This is based on $7 – $12 in subscription fees per month per apartment suite
Competitors: OpenPath (for Offices), Ubiquiti Networks (for offices), August Home, Unikey, Lockitron, tons of others. Most aren’t directly competing for the larger apartment buildings (at least right now)
August Home and Unikey seem like the best competitors after a quick glance, but they are focused more on individuals
(Ian) Management and Ownership:
Luke Schoenfelder is the CEO (He’s 31 years old, an ex-Apple employee, graduated from Georgetown)
Thomas Meyerhoffer is the chief design officer (co-founder)
Garth Mitchell is the CFO (he’s held several finance roles in the private realm)
Average age of executive officers is in the young 30s.
There are 2 executive officers that own more than 1% of the shares outstanding. Luke the CEO and Brian Jones who is another co-founder. Assuming redemption of all public shares, Luke will own 4.2% and Brian would own 1.7%
Other large investors include Lux Ventures who would own roughly 12% and Avenir Latch Investors which would own 13.4%
Each of the executive team members made about $280k in base salaries. Moving forward those base salaries will be a bit higher.
But they bonuseses through a combination of cash and stock awards. With most of the current unexercised options outstanding belonging to the CEO.
Market cap of $1.91 billion, ticker LTCH
EV of $1.41 billion, but expected to burn $150 mil – $200 mil in cash over the next few years
Forward EV/s of 28.8 (Ev/bookings of 4.58)
No other valuation metrics are particularly relevant, except guiding for huge FCF inflection 2023 – 2025
One key is to watch hardware/software revenue/bookings mix
(Ryan) Earnings: Really tricky financial statements
First quarter revenue was only $6.6M, up 143% YoY
But total bookings for the first quarter was ~$72M, and grew 89% YoY
They’ve now cumulatively booked roughly 369k homes, which is 109% more than the year prior.
Booked ARR which is a pretty good metric to track for the company was $39M, up 120% YoY
For reference, between cost of revenue and operating expenses they spent roughly $80M last year. But remember they recognize costs early and revenue late.
If you take cost of revenue as a percentage of bookings, the company has 86% gross margins. But that’s probably not the right way to go about it.
Historically they’ve spent very little on SBC, but this most recent quarter they had $13.8M in non-recurring SBC and warrant expenses due to part of the SPAC transaction
The most important number to pay attention to is total booked homes and churn. By the way, they’ve never churned a customer.
As far as just gut reaction. I like Luke, and I like the relationship Latch has with their SPAC sponsor.
(Ian) Balance sheet and liquidity:
Pre merger Latch had: $46.5 million in cash, $56 million in convertible notes, $6 million in term loans
Post merger will add: $450 million in cash to the balance sheet
In the latest Q1 results they did not give an update on the balance sheet, but like most SPACs there will be a lot of cash and not much else
(Brett) I have it in my apartment. Product has a 100% success rate so far. Using it you can understand why the property managers find lots of value in it
Future growth opportunities:
(Ryan) Europe. So they mentioned on the conference call that thanks to the cash from the transaction they’ll be able to better fuel expansion into Europe. They plan to start with a focused approach and leverage their relationship with Tishman Speyer who I believe does a lot of business internationally. In the first stage of expansion they said they will be going after the 23.5 million apartments in Germany, the 9.9 million apartments in France, and the 4.2 million apartments in the UK. Beyond that, I would say channeling down service provider and the onboarding process into a single place, but Brett’s going to talk about that.
(Brett) The onboarding process for new tenants. They already do a fairly good job here but there’s an opportunity for the payment/onboarding/security deposit process that is frustratingly antiquated. In the SPAC presentation they mention getting into services for tenants. This could mean rental payments, while also offering the core services people want/need (utilities, WiFi, insurance) through the application.
Highlights and lowlights:
(Ryan) Highlights: This is an exceptional business with conservatively misleading financials. Chamath may have been right calling it the stickiest software business he’s ever seen or whatever he said. Never lost a customer, though that will probably change as some spaces just get torn down or replaced or something like that. Cumulative homes booked has increased by 583% in the last two years. Lowlights: It feels like they’re undercharging, and the contracts are way too long.
(Brett) Highlights: Margins, cash conversion, low churn, strong understanding of what they offer compared to competitors, product inserts itself as a win-win-win scenario (owners, renters, Latch), relationship with Tishman Speyer may almost give them an unfair advantage (firm operates 213 million sq feet across the globe) Lowlights: How much is too much early cash conversion? Does that “blow their wad” on cash flow too early? Other than that hard to find lowlights outside of typical SPAC concerns
(Ryan) Bull case is pretty strong. Their total booked homes count continues to expand at a similar rate. They bolt on new modules to the LatchOS. They channel a bunch of different services that would previously be fragmented into a single place for both residents and management. And they keep costs consistent. There’s a realistic world where the company hits $500M-$1B in booked ARR.
(Brett) Booked units 10x’s over the next 5-7 years. With de minimis churn and easy modules to upsell (property management, services, delivery) the most important thing is getting into buildings. At low starting point will likely need $1 billion in software ARR to make sense.
(Ryan) It’s more competitive than I think. Real estate customers prove to be slow adopters since they don’t see Latch as that much of an upgrade to some existing provider and cash flow is harder to come by.
(Brett) Valuation, and slower moving market than investors think. If retrofit, commercial, and/or international is hard than expected, growth will not be as explosive.
Disclosure: The authors and podcast guests are not financial advisors. Brett Schafer and Ryan Henderson are portfolio managers at Arch Capital. Clients of Arch Capital may hold securities discussed on this podcast.