In this Industry Focus: Wildcard episode, host Jason Moser sits down with Latch (LTCH +8.95%) co-founder and CEO Luke Schoenfelder. Tune in as they talk about Latch's most recent quarterly results, the opportunities the company is focused on going forward, and much more!
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This video was recorded on Aug. 18, 2021.
Jason Moser: It's Wednesday, Aug. 18th, I'm your host Jason Moser, and on this week's Wildcard show, we're sitting down with Latch co-founder and CEO Luke Schoenfelder to talk more about the company's most recent quarterly results, the opportunities Latch is focused on going forward and much more. I hope you enjoy our conversation. Luke, thanks so much for joining us. It's great to have you back talking with you again about Latch and all the cool stuff you're doing there at the company. Before we get into the core and what you all are doing there at Latch, explain to our listeners, who might not be so familiar with the business, explain to our listeners briefly what Latch does.
Luke Schoenfelder: Absolutely. Thanks so much for having me again, Jason. Great to speak with you again. Latch is an operating system for buildings. We create software and devices that make buildings better places to live, work, and visit. We focus on apartment buildings, that's where we started. We've also announced that we're expanding to commercial offices, but imagine you're renting an apartment, you sign your lease. The first thing that's going to happen is you'll get sent your virtual keys via Latch, you'll download the app, and then Latch guides you through setting up your apartment, getting moved in, and you're able to control the locks with your phone, so you don't need keys anymore, you can control your thermostat, control your smart home, let people in when you're not there, it manages your package delivery. Most of the stuff you need to do in your day-to-day living in one of our buildings is handled through the Latch app in the partner devices and first-party devices that we make and we work with. That's what we do.
Moser: Are you primarily apartment buildings and whatnot? If I'm just an individual with a home, a single-family detached home, am I an ideal Latch customer?
Schoenfelder: No. The person who purchases our products today is a building owner. A building owner will purchase it for the entire building and so you as a user when you move into the building, you get Latch just as part of moving into the building. That's how the business model works and how you experience our products.
Moser: Got you. You just released your earnings results here recently. Let's talk about this most recent quarter because I was going through the release, went through the call. The results were strong, and growth in bookings looked great. I thought you did pull back on guidance a little bit.
Schoenfelder: Yeah.
Moser: That's understandable. Walk us through the quarter, what you felt was going really well, what you feel the company needs to focus on here in the coming quarters?
Schoenfelder: Totally. It was a fantastic quarter, 227% year-over-year growth which is pretty wild. We had bookings growth of over 100% year-over-year growth, so 95 million bookings in the quarter which is the total of our software and our hardware LLYs from the quarter. It was one of our biggest quarters ever. I think where we revised guidance was all related to supply chain stuff and not our products, which is what's tough. Our products were continuing to ship and make everything despite these really crazy supply chain times that we're in. But what we're seeing is that because we're one of the last set of products that gets installed in a space. If there was a delay on paint, if there was a delay on lumber, we're at the end of the process. If you think about it, if we're the dessert, if your main course is late and your salad course is late, dessert is going to be late, too, and that's what's frustrating because this is the world right now and we're doing everything we can to help our customers get their spaces on line faster so that people can move into them.
One of the things we did announce that we're rolling out in the quarter is what we call direct deployment. We're actually helping our customers do the installation and setup of our products, as opposed to relying on third parties which does help bring them on line faster. We're trying to do whatever we can to make sure our customers always get their spaces on line with our stuff. But we saw the effects of global supply chain shortage and labor shortage in the second quarter. We just said, "Hey, if things stay this way for the rest of the year, this is what you can expect," but we're obviously hoping that that isn't the case, that we are able to just continue to grow as we pre-planned before this moment.
Moser: Yes. It's so funny and we were thinking about this. Every quarter, we look for whatever types of themes that may be playing out in companies' reports. It seems like you always hear companies talk about how weather may impact their business.
Schoenfelder: Yeah.
Moser: Particularly in the retail space obviously. But really it does feel like and every company is referring to the supply chain crunch. It is not a cop-out. If you are a consumer, if you are a business, if you're an investor, you're seeing this in every facet of your life today.
Schoenfelder: That's right. I think for us, it's really important that we continue to deliver for our shareholders and build that reputation for always exceeding expectations and always trying to report about where we are. We felt like it was important to get ahead of this and just say, "Hey, this is what we're seeing," and revise guidance accordingly but it has nothing to do with the larger picture of what we're doing. This is a blip and we're excited to continue to push forward with everything we've laid out and it's going to be awesome.
Moser: You see the strength in bookings, clearly, you're doing something right. You're giving your customers something that they want.
Schoenfelder: That's right.
Moser: Let's talk about that for a second because I think one of the most interesting dynamics of your business and it requires a little bit of a longer-term perspective and that's really what we specialize in here. I think in The Motley Fool, we take a longer view than most investors.
Schoenfelder: Yeah.
Moser: It's getting the hardware, getting the installation, that's the real hard work but getting that done, the margins on your software business are astounding.
Schoenfelder: It's fantastic.
Moser: Talk a little bit about that software business and how excited you are about it.
Schoenfelder: Absolutely. Every one of our devices, once it gets installed in a space, we get paid every month for the software. We get paid between $7 and $12 per apartment per month where our products are installed. But what's really powerful about our model as well Jason, is that over 90% of our customers prepay six years of software on day one.
Moser: Wow.
Schoenfelder: Not only are they signing up this incredibly like high-margin software contract, we're getting paid up front as well which enables us to have really positive working capital dynamics in the business and continue to invest in R&D and to deliver new features. That was one of the other big things out of the quarter. We announced that 90% of our customers are buying two or more of our LatchOS modules. We sell our software solutions in what we call modules. We have five of them. Smart Access, delivery and package management, smart home connectivity, and personalization and services. Ninety percent of our customers are buying two or more of those, which is up from 44% in Q4 of last year. We've over doubled in three quarters and we're really excited about that because what it's telling us is when we make a product, people buy it and that's what we love to see from our customers.
Moser: You are a young company, you are still getting your feet on the ground here so to speak. Probably came public a little bit earlier than you normally would have given the opportunity in all of these SPAC mergers lately.
Schoenfelder: Maybe.
Moser: Well, maybe, OK maybe and that's the one thing I wanted to ask you because it's only been a little while. I guess my first question is, do you have any regrets going public as early as you did, or have you learned anything so far as a publicly traded company that has changed the way that you approach the strategy of the business?
Schoenfelder: Oh, no. Our strategy has always been to be focused on the long term and independent. That's really been our goal to build the largest independent product company, the first product company really to serve this market and that's been our focus. When we had the opportunity to merge with the SPAC and go public, it was just cementing that strategy. If you look at who our investors were in our announced PIPE transaction, Fidelity, BlackRock, Durables, Spruce House. It's Wellington, it's an incredible set of a dream list of shareholders really who are supporting the business. For us, it was really important that we made sure we had folks that were long-term oriented irrespective of whether we are private or public and it was about being independent and building this independent future in this product company that would serve the space. We've been able to do that and I think you always learn things. You said have you learned anything about going public?
Of course, every time you do anything new, you learn a lot of stuff. If you would have told me 10 years ago that I'd be a public company CEO and know all the things that I know and I've learned all the things that I've learned, I don't know that I would have believed you. [laughs] It's amazing. But that's what you do is you put one foot in front of the other and you learn everything you can to best serve your customers and best serve your shareholders.
Moser: Given the nature of your business, your business is very much based on connectivity. The Internet of Things, I think, encapsulated.
Schoenfelder: Yeah.
Moser: We are seeing all over the place. Headlines regarding 5G connectivity. Everything is becoming connected now and I know you have a background in that space as well.
Schoenfelder: Yeah.
Moser: What role does 5G play in your business? Where does Latch fit into this whole 5G conversation?
Schoenfelder: Two things. One, I love infrastructure problems and solving things and infrastructure, and one of the things that we do at Latch is that almost all of our products actually work without a network connection. That was super important for high reliability. One of our devices in a hallway, you can communicate with it digitally even if your phone is not connected to the internet and the devices aren't connected to the internet because we do offline caching which enables you to have this really high-security, high-reliability system. Now to your point on 5G and connectivity, when you add those things in as backups and it fails-safes, the whole network just becomes stronger. When you talk about where we're going, every device in the world is going to be able to in some way talk to other devices and to get smarter and to learn. I think what we're seeing with 5G, is the ability for a whole new set of devices to connect with really high bandwidth in all sorts of locations.
Now, when you think about — before Latch I started a smart-metering company using cellular networks to do energy monitoring in very remote sites, those use cases are still going to exist and you're going to need effectively low-bandwidth communication options. If you look at Swarm which SpaceX just bought last week, I don't know if you all covered that on the show. But Swarm has developed a really incredible communication technology that works basically anywhere on planet Earth, but it's low bandwidth. If you need to get one reading from a sensor in Iceland, there's going to be a whole set of satellite providers that are going to do that better than has ever been possible before. But then once you get to these dense urban environments, they're very noisy, meaning there are a thousand different networks, a thousand different connectivity options, and so what 5G is going to need to be able to do is have really high reliability, high-bandwidth connections. I think what we're seeing in our spaces is so many multifamily apartment buildings are going to be off some sites to put these dense urban connectivity nodes, 5G networks, if you will, right co-located with the building because there are so many people there. That's something we are very excited about, is to see how 5G is going to be able to provide higher reliability and data to both our building owner customers for their center networks and also for the residents who want to do all the stuff that all of us want to do online inside their spaces.
Moser: I love that. Now, you are bringing about some partners. The partnerships you've formed I think with some very strong businesses out there and I think some would view them as probably competitors to some degree, or at least potential competitors to a degree. You forged partnerships with companies like Google [Alphabet] and Apple and RealPage. I wonder if you could just talk a little bit about how those partnerships actually work.
Schoenfelder: Yeah, absolutely. I think what's interesting is that in many cases I wouldn't say we're actually competitive with those companies but I think the reality is if you look at this digital convergence, there's a term I'm stealing from somebody else called co-opetition. I don't know if you've heard this.
Moser: Oh, yes. I've heard that one.
Schoenfelder: You've got the Amazon Firestick with the Apple TV running app on it, the software program running on their hardware. Then you have Fire TV running on the Apple TV because they want to sell their streaming services. I think like that is the world where we're moving to, where we need to serve customers and our customers, whether they own a building or they are residents in a building, they have needs, and we need to be as proactive as possible whether it's RealPage, whether it's us, whether it's Apple in meeting those customer needs. That's I think, where we all have common ground, and then we try to find ways to make sure that we always are good partners to deliver a good, complete experience but then also have our areas of specialization, right?
Moser: Yeah.
Schoenfelder: What Google and Apple do really well is serve end consumers. What we've done really well is not only serve end consumers but also serve entire building environments. That isn't really a place where they've played before. RealPage, that's a place where they've played for a really long time, but they haven't necessarily had that same end-user experience focus. They don't have an app that the average user uses 4.6 times a day. That's a different thing to them, and our app, the average user uses it 4.6 times a day, and so you end up with these very interesting ways that you can work with each other to leverage each other's capabilities, and sure will there be a feature where we compete with X company or Y company that's also a partner? Absolutely. But we have to stay focused on meeting our customers' needs and not just focus on what a competitor potential dynamic might be. We have to serve our customers fundamentally, all of us need to do that.
Moser: Yes, absolutely. Speaking of those customers, it sounded like the call that you all are starting to pursue some meaningful commercial opportunities. Could you dig in a little bit there or talk a little bit about these commercial opportunities and what you see coming on the horizon?
Schoenfelder: Absolutely. We're super excited about Latch Visitor Express, and what that's going to do is, if you're in a large office building in a major city, which is not everybody, that's a small sector of the population but for those folks, you spend so much time waiting in line at a security desk. Imagine like an airport, we have almost a boarding gate or a check-in process, a TSA check-in process just to get into the building, and what we've developed is through our trusted network with Latch ID and with our building partners, we can actually enable an EasyPass or Pre-Check-like experience where you can go straight to the turnstile, straight to the elevator and get into the building. This saves so much time, so much headache, so much hustle. It can be paperless, so it's more environmentally friendly. It's just way better, and we're piloting that at Empire State Building, Rockefeller Center, Brookfield Place in New York City, and we'll be rolling it out broadly beyond that. But this is really exciting to see this go live, and so many people are returning in some way or another to offices right now.
We just want to make that as easy as possible and make that transition as easy as it can be. But we're also seeing the way that people are going to work and offices in the future are going to be more flexible. I think everybody is talking about this, and so the idea that we can provide temporary access, on-demand access, access that lasts for a day, access that lasts for three hours through a digital platform is really, really powerful, and that's something that we're excited about, and we think it represents a unique opportunity and a unique moment of time for the commercial office market.
Moser: Absolutely. I think we're seeing that play out even in our workforce here at The Motley Fool.
Schoenfelder: Is this your office now, Jason?
Moser: This is my office now.
Schoenfelder: Great. For so many of us, it's changed. I don't know what your office strategies are at The Motley Fool, but I bet you'll have some times where you maybe see each other in person. You want to go into a space and having dynamic controls so you're able to do that is going to be really, really important.
Moser: Yes, it is going to be markedly different from what it has been over the last decade that I've been there for sure. We certainly are not the exception. I mean, we're seeing that everywhere and I think that I understand your excitement there because it really feels like there are a lot of opportunities.
Schoenfelder: One of the customers that needs this right now is Latch because our employee base is changing. In many ways, I love opportunities, where you can build tools, have you heard of dogfooding, where you eat your own dog food?
Moser: Yes.
Schoenfelder: It's like for us we have to eat our own dog food, we need this tool, so how can we build it to best serve our own needs? If it's not working for us, how is it going to work for our customers? That's been a great thing for us is to, we need these tools, too, so let's build them for everybody.
Moser: You talk about a couple of businesses that stand out to me that are very much the same way. A little business that you may have heard of Amazon, Jeff Bezos, it sounds very Bezos-esque. Also Cloudflare. I'm not sure how familiar you are with Cloudflare but Matthew Prince, he talks a lot about that, eating your own cooking, so to speak.
Schoenfelder: Totally.
Moser: It leads to some really amazing solutions.
Schoenfelder: It totally does. We try to get every one of our employees to either live in a Latch building or install the products at their home because they live with that and they see what are the areas for improvement and that's how you get better.
Moser: In the call here, you were talking about the underutilization of technology in real estate. It's been a long-term driver of your business. That stood out to me because it does feel like real estate is one of those markets that has been slow to disrupt in many, many ways. It's been the one where we still got the same old stereotypical real estate agent, and you buy the house the same way and the costs are just insane and you can't figure out why that rubber stamp cost $250 [laughs]. You're starting to see tech slowly and slowly change with companies like Zillow (ZG +6.60%) (Z +6.31%) and Redfin (RDFN +0.00%), but why do you feel like that underutilization is the case? Why has real estate been slow to adopt technology on the whole?
Schoenfelder: It's a great question. I think the space that I know the best is the rental side. But rent is the world's oldest subscription product and I haven't come up with anyone that could refute that, and maybe there is but I mean, I think 4,000 years ago, people were renting apartments in a city somewhere. I think because it's such an old business and because it's so lucrative in many cases, there hasn't been a need for disruption for change, and I think what we're seeing now is a realization that, to use the Marc Andreesen quote, "Software's eating the world." I think what we're realizing is that every environment where we spend our time is critical and is important, and if software can make that better, and technology can make that a better experience, people will be happier, people will stay longer, people will enjoy it more, and I think that's the opportunity that we're seeing, and I believe that why we're seeing that in a different way that others have is because we take a product-first approach. We were talking about eating your dog food, well, we looked at every little detail.
A lot of us came from Apple, including myself, and we say, how can every little detail of this whole experience be better? We're not there yet, we haven't done everything we want to do, but the reality is to start somewhere and work up from there, and we saw this problem with keys. People get locked out. People don't want to carry metal around, and you know what, we have this thing in our pocket now, this slab of glass that solves that problem. Well, if you get somebody in this slab of glass doing stuff, what other problems can you solve for them? That's really been how we've built this. I think as you look forward at all the problems we can solve, there's so many more in real estate, there's so many more in living that we can continue to iterate and iterate and iterate, and that's why if you look at 44% of our customers were buying something beyond access in Q4 of last year. Now 90% are, because the problem that we're solving, the solutions we're delivering are really resonating, and I'm so excited to continue to work in more technology, in more user experience thinking, in more product design throughout the entire real estate space, and you can tell I'm pretty passionate about that but I think we have an incredible opportunity to do it.
Moser: Well, I couldn't agree more. I think you have a tremendous opportunity in front of you. I love your passion. I really have enjoyed learning about your business and I'm going to enjoy following you all along because it's playing right in our wheelhouse here, and it's something that I think is only going to become more important. He's co-founder and CEO of Latch, Mr. Luke Schoenfelder. Thanks so much for joining us on Industry Focus today.
Schoenfelder: Thank you so much, Jason. Have a great day and I hope to see you soon.
Moser: That's going to do it for us this week. Folks, remember, you can always reach out to us on Twitter @MFIndustryFocus or drop us an email at [email protected]. As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks as always to Tim Sparks for putting the show together for us. I'm Jason Moser, thanks for listening, and we'll see you next week.
