NEW
YORK, Feb. 13, 2024 /PRNewswire/ -- Today,
Harris R. Heyer and Michael J. Holder, Partners of 10th
Mountain Management LLC ("we"), as Investment Managers to Scout
Fund I, LP, which is a beneficial stockholder of SmartRent, Inc.
(NYSE: SMRT) ("SmartRent" or the "Company"), issued the following
open letter to the SmartRent Board of Directors (the "Board"), Mr.
Lucas Haldeman (Chairman & CEO)
and all shareholders:
Dear Members of the Board, Mr. Haldeman, and SmartRent
shareholders,
Since merging with Fifth Wall Acquisition Corp. I (FWAA),
SmartRent's shares have plunged more than 70%1. We
believe this alarming decline reflects investor
disappointment2, confusion, and skepticism. We are
troubled by management's downplay of new unit deployments, and
their insufficient efforts to address valid concerns, whether due
to poor communication or deliberately avoiding discussion of
worrying trends. Though we engaged with management privately
on multiple occasions, our line of questioning about corporate
governance prompted a swift referral to external counsel.
Management ignored our repeated requests for a phone call to
discuss these matters. The optics are terrible.
We are calling on SmartRent's management team and Board to
promptly address and clarify the unresolved issues outlined below,
and we urge fellow shareholders to do the same.
#1. Inconsistent Messaging, Especially Regarding
Strategy
While Total Units Deployed has grown 35% year over year, the
pace of New Units Deployed is declining quickly—down
24%3 year over year on a trailing twelve-month basis. In
most communications leading up to Q3'23, management highlighted
Units Booked, Shipped and Deployed as Key Performance Indicators
("KPIs") – consistent with public filings. Unit pipeline metrics
illustrate the growth of the hardware ecosystem into which software
is sold. We believe software revenue, which is recurring and high
margin, is the main contributor to SmartRent's enterprise value.
Therefore, when metrics crucial to its growth exhibit a rapid
decline, we consider it a significant issue.
However, Mr. Haldeman has increasingly minimized the
significance of new units as a KPI4, defensively
and ex post facto, in our view. This shift contradicts
prior statements, filings, and the current investor
deck5, in which "new unit deployments" and bookings were
rightly identified as primary growth drivers. While we acknowledge
that the correlation between new units and total revenue may be
weakening6, the critical correlation—between new units
and software revenue—remains strong.
More troubling is the "intentional" de-emphasis of new deployments
to reach Adjusted EBITDA profitability7, by limiting the
delivery of professional services. Mr. Haldeman attempted to
justify this approach by stating, "We've heard from the investment
community […] that getting to profitability […] is more important
than achieving top line results"8. Considering
SmartRent's approximate 10% penetration into the existing customer
base9, how does this decision maximize shareholder
value?
"You don't seem to realize what business you're
in."10 Growing SaaS revenue via
new deployments is a strategic imperative. SmartRent is in the
software business. Sacrificing new deployments for profitability
indicates a misunderstanding of SmartRent's value drivers. The
Company has a cash balance exceeding $200
million11, a vast untapped market, and SaaS unit
economics that justify continued investment in deployments. Our
analysis indicates that deploying new units yields an impressive
IRR of nearly 30%12, after considering the total cost
and unit lifetime gross profit. If these dynamics have changed,
management should say so. Regardless, we urge management to
establish and communicate a transparent capital allocation
framework to:
- Quantitatively justify the intentional slowdown of new unit
deployments to achieve EBITDA profitability
- Explain its M&A strategy. (Accordingly, management should
refrain from using shareholder capital for M&A, unless it
offers a demonstrably higher ROIC than deploying new units)
- Demonstrate a commitment to capital returns (via buybacks or
dividends), in the absence of attractive reinvestment
opportunities
#2. Insufficient and Unclear Disclosures, Especially in
SaaS
SaaS revenue disclosures lack clarity, leaving investors in
the dark. While management highlights a 0%13
customer churn rate, this metric fails to depict activity
within the installed base. To provide investors insight into
the trajectory of SaaS revenue, we strongly encourage management
to:
- Disclose Gross and Net Revenue Retention and
Unit-Based Retention metrics
- Disaggregate units (or revenue) into categories, distinguishing
IoT-only units from those with WiFi
Unit pipeline metrics and trends require clarification.
SmartRent has shipped 225,475 units in the last twelve
months14, but only 178,223 units have been deployed in
the same period, leaving 47,252 units (21%) sitting un-deployed.
For reference, shipped-but-not-deployed-units has historically been
an immaterial figure. Why is it spiking? While the Company's
definitions for New Units Deployed and Units Deployed, mean
all units deployed in a period, or as of the stated
date15, management has not mentioned replacements,
malfunctions, or de-activations. If the definitions of these
metrics are accurate, and they are capturing all deployed
units including replacements, then we encourage management to:
- Disclose Net New Units and Active Units, as they
are the primary indicators of SaaS ARR growth
- Provide guidance for Net New Units Deployed, ARPU and
ARR, and make them the focus of all discussions. (Management
provided guidance for Units Deployed until Q4'22. Why did they
stop?)
#3. Major Unaddressed Corporate Governance Issues
Lead Independent Director Frederick
Tuomi's Role at RET Ventures is an ongoing governance
hazard. Mr. Tuomi's position at RET Ventures, a venture
capital firm funded by SmartRent's biggest customers, creates a
glaring conflict of interest that has already resulted in a major
corporate governance issue. Through his affiliation with RET and a
separate personal investment, Mr. Tuomi personally
benefitted in multiple ways16 from SmartRent's
acquisition of SightPlan for a staggering $135 million (~13.5x LTM revenue17).
Despite his reported recusal from discussions about SightPlan, we
believe this incestuous web of conflicted interests would have
dissuaded most public company Boards from proceeding with the
proposed transaction.
We encourage shareholders to scrutinize the acquisition
process, its outcomes, and governance implications. If Mr.
Tuomi recused himself, how did the proposal to acquire SightPlan
originate and advance? In Mr. Tuomi's absence, was another
independent director designated to lead the discussions and protect
shareholders' interests? Did Mr. Tuomi want SmartRent to get a good
deal, or RET Ventures to get a big exit? Is his presence on the
compensation committee, which is responsible for approving Mr.
Haldeman's compensation package, creating a quid pro quo
dynamic? Management has not provided sufficient answers to these
questions.
We urge shareholders to examine CEO Lucas Haldeman's executive pay. Why is Mr.
Haldeman's compensation ballooning? In 2022, Mr. Haldeman received
a base salary of $781,25018, a 75% increase from 2021,
far exceeding typical CEO salaries at similar
companies19. Despite SmartRent missing
performance targets that would have triggered an eye-watering 125%
performance-based cash bonus, we were shocked to learn that the
compensation committee granted him 50% of the bonus ($468,75020) anyway "based solely on
leadership"21! Really? During this period, SmartRent
failed to meet targets, executed a large and questionable
acquisition, and shareholders incurred losses of $1.4 billion — while Mr. Haldeman received over
$1.2 million in cash
compensation.
Shareholders should also examine executive pay for Mr.
Haldeman's wife, Sarah
Roudybush. Ms. Roudybush's employment and pay have
major governance implications but management has been unwilling to
speak to her job description or responsibilities. General Counsel
ignored our attempt to discuss them over the phone. The Chief of
Staff position is rare in small-cap companies and usually does not
garner on-target earnings of approximately $750k, or 180% compensation growth over a
two-year period, concurrent with missed projections and a
10% workforce reduction22,23.
Disclosures about Ms. Roudybush are incomplete and
inconsistent. In 2021 filings, Ms. Roudybush is mentioned as
"employed as a Co-Founder", without any accompanying work history
or professional profile. "Co-Founder" is neither a job title nor a
job description. In the 2022 proxy statement, she is listed as
"employed as Chief of Staff"24 for the first time. It's
noteworthy that Ms. Roudybush did not appear on SmartRent's
"Executive Management" page until four days after our inquiry. Now,
she is listed as both Chief of Staff and
Co-Founder—again, without any named prior companies, which
are provided for her listed colleagues. Her profile
describes her as a "strategic advisor" that "facilitates
communication". While the specifics remain unclear, we view the pay
package as egregious and the role itself as likely unnecessary.
The recurring trend is inconsistency, ambiguity, and
conflicting interests. Management should furnish detailed
job histories for all leaders receiving executive level pay,
including Ms. Roudybush. The Board must clarify the process through
which Mr. Haldeman and Ms. Roudybush's pay packages were approved.
We believe the compensation committee has failed in its core
mission (reasonable pay) because it is ill equipped and poorly
aligned. Specifically, we draw attention to two current committee
members: (1) Mr. Tuomi, whose potential conflicts are too numerous
to rehash, and (2) Ms. Beard, a former professional basketball
player, lacking experience in finance at a senior level, on
corporate boards, or in compensation-related roles. While Ms.
Beard's athletic achievements are impressive, their relevance to a
position as a public company director and a member of a
compensation committee is questionable.
In closing, we reiterate to the Board: your duty to
shareholders requires you to hold management accountable for
performance and to uphold standards of corporate governance
befitting of a public company. We firmly believe that all of
the highlighted issues can be addressed, if management prioritizes
transparency and promptly implements necessary changes. We
encourage management to respond proactively for the benefit of all
stakeholders.
Sincerely,
Harris
Heyer Partner
hh@scoutlp.com
|
Michael
Holder Partner
mh@scoutlp.com
|
|
1 FactSet, as of market close on
2/12/24
|
2 SMRT
Form 425 (7/21/21), Page 44; Cumulative Units and Revenue
forecasted to be 1.48m and $782m respectively (FY23). Actual
cumulative Units of ~682k as of Q3'23, 2023E revenue guidance of
$237.5m (midpoint), ~50 - 70% shortfall vs forecasts from 2 years
prior
|
3 SMRT
Form 10-Q (11/07/23), Page 32
|
4 SMRT
Q3'23 Earnings Call: "we're diverging from the primary KPI of
this business being new units"
|
5 SMRT
Investor Presentation January 2024: "10x Unit Growth Opportunity
with our existing customers" (Page 5)
|
6 Ibid
3
|
7 Ibid
4, "What you're seeing in terms of new unit deployment is
completely intentional"
|
8 Ibid
4
|
9 Ibid 3,
Page 31: SmartRent 682,632 Units Deployed / Customers aggregate
6.9m Units = ~10%
|
10 B.J.
Novak as Harry J. Sonneborn in 'The Founder' (2016)
|
11 Ibid
3
|
12 We
calculate SmartRent's LTM total cost of deployment at $20.9m
($19.3 million on S&M + $22.9 million in net cost for
installations, offset by $21.2 million of gross profit earned on
hardware) as of Q3'23, across 178,223 Units Deployed, equating to a
cost of ~$117 per New Unit Deployed. Annual SaaS revenue and gross
profit per unit of approximately $63 and $47, respectively, suggest
that deployed units earn an IRR of ~30%, assuming a 5-year useful
life, a conservative estimate based on CEO commentary: "once
they're on our platform, they're there forever, basically" (JPM,
5/24/22)
|
13 Ibid 5,
"0.01% customer churn"
|
14 Ibid 3,
TTM Units Shipped as of Q3'23
|
15 Ibid 3,
Page 32
|
16 SMRT
DEF 14A (4/5/23) - (1) RET Ventures had a 17% stake in SightPlan,
and (2) Mr. Tuomi was personally invested and received $458k at the
closing of the acquisition of SightPlan
|
17 SMRT 8-K,
EX-99.2 (3/24/22)
|
18 Ibid
16
|
19 E.g.
AppFolio, another real estate focused SaaS company (with nearly 3x
more revenue and over 13x more market value, per FactSet on 2/8/24)
paid its CEO a base salary of $440,000 and a $488,400 cash bonus
(for total cash compensation of $928,400) in 2022. AppFolio
exceeded all performance targets –warranting
performance-based bonuses to NEOs
|
20 Ibid
16
|
21 Ibid
16
|
22 Ibid 16;
Ms. Roudybush's total earnings were $111,852, $169,432, and
$316,462, in 2020, 2021, and 2022, respectively
|
23 SMRT
Q1'23 Earnings Call: "we had about a 10% reduction
company-wide" – Hiroshi Okamoto
|
24 Ibid
16
|
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SOURCE 10th Mountain Management, LLC