Latch (NASDAQ: LTCH), which makes smart home hardware and offers a whole building operating system through a software-as-a-service (SaaS) model, just reported its first quarterly earnings since completing its SPAC merger with TS Innovation Acquisition. And although the numbers look quite strong, the stock is down significantly since the earnings report was released.
So, let's take a closer look at Latch's quarterly results, why the stock reacted negatively, and what investors should keep in mind going forward.
Latch by the numbers
First, let's take a look at how Latch's business grew during the second quarter.
Revenue came in at $9 million, which is more than triple where it was a year ago but still very low considering Latch has a roughly $1.4 billion market cap. However, it's important for investors to focus on Latch's bookings. One of the major advantages of Latch's model is that it receives commitments to have its property technology products installed on buildings while they're still in the planning stage, long before they're actually built and ready for occupancy. Bookings tell us how much future revenue Latch was able to accumulate during the quarter.
During the second quarter, Latch booked $95.8 million in revenue (looks a lot better than the $9 million figure), which represents 102% year-over-year growth. This is a combination of hardware and software sales, so it's also important to break recurring (subscription) revenue out of the numbers. Well, as of the end of the second quarter, Latch has booked annual recurring revenue (ARR) of $48.8 million, 122% more than it had a year ago.
Here's one key stat to watch in the quarters to come as Latch grows: Of the $9 million in revenue it generated in the second quarter, 80% was from hardware sales and 20% was from software subscription revenue. The hardware sales lost money, operating at a negative 11% gross profit margin. On the other hand, the software revenue only cost the company about $173,000 -- a gross profit margin above 90%. This is why the ARR number is so important to the long-term investment thesis and is where Latch's future path to profitability lies.
Why is the stock down?
Any experienced growth investor can tell you that there are few ways to cause a stock's price to drop that are more reliable than bad guidance.
Latch issued full-year revenue guidance calling for $38 million to $42 million, which was significantly lower than the $47 million to $51 million range Latch announced in its first quarter earnings. Guidance for adjusted EBITDA was revised significantly lower as well.
However, investors might be missing the point. Latch's guidance for total bookings (remember, that's future revenue) was actually increased from a range of $290 million to $325 million to an updated range of $325 million to $340 million.
Things to keep in mind
First and foremost, Latch is an early-stage growth company. $9 million in revenue is a pretty tiny amount for a company with a market cap in the billions, and the company has barely begun to scratch the surface of its market opportunity. So it's important to expect some volatility and growing pains along the way.
Second, I'm expecting things to get very interesting for Latch over the next few quarters as it recently got a massive influx of new growth capital that isn't reflected in the second quarter numbers. Specifically, Latch's SPAC merger wasn't finalized until June 7, more than two months into the second quarter, and the company received $453 million in cash as part of the deal. Latch has mentioned several uses for the windfall, such as investing in new product innovation, expanding to European markets, and expanding into office buildings.
In a nutshell, it's important to keep in mind that Latch's growth numbers are largely from before the company had a ton of cash on the balance sheet, which makes things even more impressive. So, although Latch's guidance might not be exactly what we wanted to hear, the long-term thesis is still very much intact.