SMRT - Concerned Stockholder Urges SmartRent Leadership to Address Strategy Communication and Governance Matters | Benzinga
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 ...