Q4 2021 Latch Inc Earnings Call

Good afternoon, and thank you for standing by welcome to the latch March quarter earnings call. At this time, all participants are in a listen only mode. After the speaker's presentation. There will be question and answer session to ask a question. During the session you will need to press star one on your telephone.

Thank you Peter and if I go assistance. Please press Star Zero I would now like the conference over to your Speaker today, Kevin Toomey. Please go ahead.

Thank you operator, good afternoon, and thank you for joining us today to review <unk> fourth quarter and fiscal year 2021 financial results with me on the call today are Luke Schoenfelder, Chief Executive Officer, and co founder and Garth Mitchell Chief Financial Officer. After prepared remarks, we will open up the call for <unk>.

Question and answer session.

During this call we may make statements related to our business that are forward looking statements under federal Securities laws. These statements are not guarantees of future performance, but rather are subject to a variety of risks and uncertainties. Our actual results could differ materially from these expectations reflected in any forward looking statements.

Forward looking statements made today speak only to our expectations as of today and we take no obligation to publicly update or revise them.

For a discussion of the material risks and other important factors that could affect our actual results. Please refer to the risk factors section in our SEC filings available on the SEC's Edgar system and our website.

As well as other risks and other important factors discussed in todays results.

Additionally, non-GAAP financial measures will be discussed on this conference call. Please refer to the tables in our earnings release and the Investor Relations portion of our website for a reconciliation of these measures to their most directly comparable GAAP financial measure with that I'd like to turn the call over to Chief Executive Officer Luc Shouldnt.

Alder.

Thank you Kevin it's great to be here to discuss <unk> fourth quarter and full year 2021 results and our strategic outlook for 2022. Our Q4 results were in line with our guidance as we delivered nearly 100% total revenue growth for the quarter. We delivered those results even as we saw real impacts from the COVID-19, omicron variant surge impact our customers' concern.

Timeline, and our infield sales and installation teams the market landscape continues to be enormously exciting and we are continuing to see increased demand from real estate owners, increasing buyers sophistication and increase recurring monetization opportunities that drive our confidence in the market opportunity, we delivered 129% year over year growth in 2021.

And we anticipate delivering more than 100% year over year growth again. This year, we've created hardware software and services that our customers love and this market is expanding now as we turn to 2022 I want to take the opportunity to reflect on the market landscape things that went well in 2021 areas, where we fell short in 2021 and opportunities for strategic improve.

But going forward.

As we look back on last year, we did a lot well across hardware software and services. Our teams continued to deliver products for our customers. Despite some of the most significant supply chain and labor shortages, we've seen in modern times, whether working overtime to ensure shipments made to customers redesigning products on the fly to work with two components. We're scaling direct deployment efforts helped <unk>.

<unk> have an even more white glove experience I'm very proud of our team for delivering in these areas. Despite the short term impact of our unit economics on the hardware product development side. We are very excited to announce products and intended partnerships with leading market access device manufacturers, including town steel marks USA division of NAPCO security and door macabre.

It was really great to see such early positive reception to the lab partner approach of enabling second and third party lock hardware to deliver our software experiences through partner devices. We began planning for these types of partners in 2019, and we are very excited to see them come to fruition in 2021.

Powerful collaboration embodied by these partnerships will allow us to bring lots of ways to even more residence property managers and guests and help accelerate our growth in new ways that we'll discuss in more detail. Later, we also successfully focused our product development efforts on serving retrofit customers. The <unk> are new deadbolt product designed primarily for retrofit customers. So I 278.

Percent year over year growth in the deadbolt category for us demonstrating a very strong interest from customers for retrofit products and of particular excitement about the retrofit capabilities less product given that they can be operated without the need for cellular internet services without the need for hubs and without the need to swap doors to account for all of their apartment conditions. We saw this differentiated approach to.

Product development yields real results last year.

Turning to software with rising labor cost and shortages many of our customers began looking for even more ways to leverage software to offset labor shortages and cost and theyre turning to lot to ask for an expanding set of new capabilities and efficiencies. We saw customers like Avalon Bay with their console brand, specifically delivering projects with reduced and remote staff tightening the <unk>.

To further technology deployment on their overall operations the capabilities of our software to enable remote management and staff augmentation use cases, it's something we saw the market really recognized in a new way last year last year. We also heard from customers that they wanted more integrations and we successfully expanded our property management software integration, adding both <unk> and <unk> as follows.

The company's previous integration of real page, resulting in lateral asked now integrating with the three largest etfs providers had netted dates with our growing set of <unk> integration property managers can save on average over four hours of their time for every hundred residents yielding ongoing net operating income savings for our customers across asset classes and markets. We're also excited to see.

The continued growth of partners building on top of Latches open API as an infrastructure serving customers with differentiated offerings and unintended leasing flexible living and more life partners, two or 'twenty, four and pinwheel have delivered compelling leasing offerings to the market based on our API is in infrastructure and we are also excited to enable real pages me go home sharing platform with lots of <unk>.

<unk> it infrastructure as well, we believe that partnerships like this can be powerful tools for enabling new use cases and recurring revenue for <unk> going forward.

On the services side of the business, we're very happy to launch direct deployment and see over $1 million of revenue derived from those activities and just the second half of the year with a Nathan team and early offering our investments here helped us win more business better square off with competitors that previously offered a deeper level of infield installation support and have set up a foundation for more service offerings going forward.

<unk>.

Looking ahead, we see 2022 is a high growth year in our core North American multifamily market with lots of opportunities for future expansion largest focus on making spaces better places to live work and visit is not going to change our focus on near term revenue execution in our core vertical is going to be our leading priority as a private company, helping to create a new <unk>.

Product category, we were a lot of bookings as a way to guide investors towards the broader growth in the market or specific opportunity and market excitement for our products.

<unk> serves an important purpose during that phase of our growth and helped us shape, our sales marketing and product development strategies around where our customers were going not just where they were at the time as we built extensive market momentum and increase the size of our sales teams, we didnt appropriately adjust our sales incentives to match our growth we kept compensating our revenue teams on bookings metrics and while those metrics.

Were helpful and continuing to predict the broader future market opportunity. We found that they also distract our internal teams from delivering on the massive revenue opportunity that we have today going forward and with a brief transition period, we will stop compensating our sales teams for bookings and sunset all booked metrics, both internally and externally removing all distractions from our red.

New teams will help us to focus on what matters continuing to grow recurring software and services revenue and delivering for our shareholders and customers in 2022, beginning with Q1 2022 earnings and going forward. After that we will guide quarterly and annually to total revenue specific software revenue and adjusted EBITDA. We will also begin to guide annually to and report on.

On <unk> and our new spaces metric defined as units with an active software services subscription. We believe this better aligns our external metrics with our internal business priorities Garth will discuss in more detail. How this impacts our specific guidance moving forward later in this call.

Before going into further detail about our strategy for 2022. It is important to say that we remain confident in our ability to fully fund our business based on our existing growth plans with the current cash on our balance sheet will.

We will do that while continuing to create and expand an open ecosystem. Our first second and third party infrastructure devices scaling new high margin recurring software and services, providing some really special products and experiences and delivering for our customers and shareholders in the short medium and long term I'd like to talk now about some of the specific changes we're making in 2000.

'twenty two to make us all a reality.

We will start with hardware from the beginning we've had a focus on bringing better experiences to more spaces. When we're just getting started eight years ago, we looked across the landscape for device manufacturers that we could partner with to enable our software service and experience vision at that time, we could not find partners that can deliver the set of devices necessary to activate this space is that an entire <unk>.

And they are missing critical features like Internet independence hub independent and smartphone first design back then you saw the technological changes that we're going to come to the multifamily market and we knew we had to do the difficult work of creating an all encompassing enabling ecosystem of hardware software and services on our own helping set the technology bar for the whole <unk>.

History.

Fast forward to the present and we delivered the most advanced first party device ecosystem to the multifamily market and we hope create a whole new category of products. While we're at it from access to delivery management to sensors, we solve customer problems all across the continent everyday we built these devices because it was what we needed to do at the time to create a standard of innovation in the market.

And to serve our customers we know that once we have proven the market opportunity. Other players would want to follow us into this market. So in 2019, we began development of the <unk> program that enables third parties to build latched compatible access products. We're really excited to announce our first partners officially in Q4, and we see many more opportunities going forward. Similarly, we saw that.

The broader device market was going to evolve beyond many of the existing legacy Iot protocols like Z wave Zigbee, and we began investments and what would eventually emerge as the matter standards in partnership with the connectivity standards Alliance Apple, Google Amazon, Samsung and others lapsed made this differentiated investment decision more than two years ago, and we believe that this commitment in <unk>.

Investment in an open device ecosystem will pay dividends for us this year and beyond the combined effects of the <unk> program and our active support of the matter device standard allows us to continue to rapidly scale latch enabled spaces through second party and third party products that are brought to life with differentiated lapsed software and services building on our strategic progress and going forward.

We will concentrate our specific hardware product development efforts on a limited set of devices that we are uniquely positioned to create arent available from partners and can drive significant returns for our shareholders. This year's long planned shift to second and third party devices wont happen overnight and while we will from time to time, you'll see a market need that requires us to develop first party devices.

We view the direction of our business as working increasingly through second and third party device partners that enable let software and experiences.

For the sake of clarity moving forward, we defined second party devices as devices that are built by other manufacturers using embedded last technology, such as the latch lens and work with the lateral that software ecosystem. An example of a second party device is the town steel interconnect lock, which puts <unk> as the control mechanism for their electromechanical systems and links there.

<unk> product collateral S D.

Second party collaborations also enable broader distribution of our products and tight partnerships with companies that recognize our joint ability to recognize new revenue opportunities and markets together.

Our announcement of our initial second party products in the fourth quarter following years of research and development and collaborative partnership and we're very confident in our ability to scalar spaces on the last platform because these types of products and relationships.

We can find third party devices as devices that are built by other manufacturers and tightly integrate with lapsed OS software lots of US management of Google NAS devices. As an example of a third party device partners that it's live today, we do not require any proprietary changes to third party hardware to work with lots of west instead concentrating on software collaboration in these instances.

We can also have meaningful go to market partnerships with third party partners as well such as our previous joint digital in out of home marketing campaigns with Google maps, the world of potential third party partnerships for <unk> is also expanding rapidly and we're very excited as to the availability of matter enabled devices and a wider set of access devices in API that can deliver a great experience for our users with the euro.

Rival of some of these standards many new third party devices are going to start to be able to provide an uncompromised lateral loss experience and we're excited to leverage the work of these types of partners to deliver an even more complete solution to our customers at a lower cost of internal R&D than was previously required building on a trusted high experience quality ecosystem, our first second and third.

Party devices provides us the ability to generally drive equal software and recurring revenue per latch at each basically serve irrespective of which type of devices installed while we anticipate software revenue being very consistent and predictable across these spaces. We also know that hardware revenue in first second and third party scenarios could vary depending on the relationship we have with each partner to take in.

Example, the sale of the latch and built with the 2021 latch lens module inside can result in $599 of hardware revenue, whereas the sale of a lot second party product such as the <unk> interconnect product with the same 2021 lapsed lens inside they only result in 50 to $100 of hardware revenue to latch, depending on purchase quantity and instances.

Where lots of selling the second or third party device. The revenues will be similar but we want to be able to collaboratively work with our partners to more widely distribute lots or less and in many cases, we may only receive revenue from the embedded latch modular technology itself, which will be lower than if we're selling a lot first party product because of the sale of a first second or third party device would result in commensurate software and recurring revenue to <unk>.

With recurring revenue being what we're most focused on we're excited to expand the availability and reach of our technologies through these deep collaborations go.

Going forward, our top priorities remain continuing to add new spaces to the platform and generating increasing amounts of recurring revenue from those spaces. This mix shift towards more second and third party devices will have a positive long term impact on our unit economics and also expand our distribution overtime, but it may also result in lower and less predictable hardware revenues from activating the same number.

Of spaces in the short term 2022 is going to be a transition year for our product mix and we believe this will result in long term positive impacts to the business. We're very grateful to have so many strong partners and expanding the availability of lots enabled experiences in spaces and we fervently believe in this collaborative partnership strategy going forward.

Shifting to the software we deliver on top of our infrastructure, we did some things well, but we also have real opportunities for improvement going into 2022, while we quickly scaled our 2020 software offerings throughout 2021, we did not deliver on some of the largest new recurring revenue opportunities that we saw during the year delays and activating devices also resulted in a lower ratio of.

Software revenues per dollar of hardware revenues in 2021, but we believe that these delays are transitory and won't present long term headwinds as mentioned before we are now providing specific software revenue guidance for the full year help people more accurately assess our performance in this area.

Beyond activation delays are shipping velocity of new revenue generating software in the second half of the year wasn't what it should have been as a result, we have reorganized our product development teams for 2022 to solve these challenges specifically, we've mapped our product development organization to match the needs of each specific customer stakeholder, replacing our previous organization.

Product category, we think this shift will allow us to better serve our customers and prioritize new experiences and we're specifically excited to ship. Our previously discussed rent payment work order and resident communications products. This year all of which we believe lay the groundwork for recurring revenue growth from a wide set of customers and stakeholders. We also have several new software.

In development and we're looking forward to announcing and bringing to customers. Later this year that will enable greater flexibility accessibility and integration possibilities for some of our largest customers as the breadth of activities occurring at a multifamily apartment building expand and labor shortages and rising labor cost persist. We are excited to continue to deliver differentiated products that specifically.

Tackled new use cases around flexible living short stay hospitality and a bolt leasing models. We're in the earliest innings of software capabilities impacting the day to day experience at spaces, and we're looking forward to working closely with our customers and resident to make each space better through our software products.

We look at expansion markets, where our software we want to balance our focus on existing north American multifamily growth with setting ourselves up for strategic growth beyond that we don't need to make significant investments and other long term opportunities in the short term, we don't foresee meaningful revenue from these activities in 2022, but we still see value in providing visibility around our efforts in these strategic growth markets.

We remain excited about expanding the lateral that software platform to European multifamily operators and our focus on second and third party device partners will enable this expansion we want to make sure that we expand our operations methodically accounted for local product nuances regulation and watches long term strategy, we don't foresee significant investments in European expansion or meaningful revenue from European.

Expansion in 2022, and we remain committed to working with partners on international expansion as a long term growth opportunity.

Turning to commercial office, we see continuing opportunities for lapsed channel partners to activate lots of us at small offices as they have for years on an informal basis, because the small office customers by our existing product without customization. We expect incidentally continue to serve small office customers with immaterial investments and product education, while we continue to.

Floor, bringing lateral up to the largest commercial office customers. We expect revenues from the small commercial office segment to be too small so break out independently in 2022.

Meanwhile, our large commercial office pilots have validated the excitement about last west offices and I've also highlighted the need for the right mix of partners come together does that is by the needs of the most complex office environments. We had not previously expected revenue from a large commercial lots of segment and we do not anticipate driving meaningful revenue from the large commercial office segment. In 2022. However, we believe we have a.

Unique role to play in the broader commercial office market and the excitement around our software experiences have us well positioned to take advantage of this opportunity by working with a set of select partners. We look forward to providing updates about our software expansion strategies for these new verticals as they become material in the future.

Turning to services revenue, we have historically under monetize customer success support and activation and we see great opportunities to better serve our customers and monetize their activities. In this segment, we see direct deployment activation in training is all presenting real opportunities for growth in services revenue in 2022, one of the additional services that we spoke about last year with Internet services.

Since the change of presidential administration, the market for Internet services, and Internet management, an apartment building is going through a major transition with new rules formally proposed by the FCC last month and formally adopted just last week intending to promote additional competition for Internet services that apartment buildings, while the specific way. This will play out in the market will take a bit of time to be fully known.

That's the entirety of 2022, we believe that watches unique position at the Nexus between building operators residents and external partners could position us well for this underlying market shift we've been watching these developments very closely working with the leading experts in the field and reserving investments in this category until the path and opportunity are more clear we're excited for that additional clarity to emerge.

<unk> and to continue to play a role in this evolving landscape.

As part of our broader product development reorganization. We've also established a specific product team that will focus exclusively on the resident experience building on our high App utilization by residents one of the unique attributes of our market is that our multifamily customers are often effectively reselling or at least remarketing less product as part of their total apartment experience, which they mom.

The types of increased rent our ability to drive new resident experience value provides multifamily customers the ability to resell and re market that experienced value driving greater revenue per that this has always been core to our model and we think there are numerous opportunities to give our multifamily building customers the tools they need to better serve their customers. The end residents are.

Focus on serving the resident as an independent stakeholder not just tied to a specific building helps us better serve multifamily customers by giving them opportunities to improve the overall experience at a particular building or in a wider portfolio of assets. Our announcement of last night, Our cross building identity platform last year laid the groundwork for us to activate our first resident services this year.

And help residents keep their preferences with them as they travel between spaces, we envision a world where residents preferentially choose to live and latch enabled spaces, bringing their financial lifestyle and service preferences with them through the latch account and accruing additional revenue for multifamily customers and for lapse as a result, while it's very early we believe the continued activation of the resident as a core lab.

Stakeholder will result in predictably higher revenues and longer lease terms for our multifamily customers over time and deliver a differentiated revenue and growth vector for latch, we look forward to sharing more about how we see this opportunity and experience evolving throughout the year.

Those are our highest level priorities for 2022 across hardware software and services and I'm really excited to get going in closing we had a good Q4 had a clear plan for execution in 2022, and I've never been more excited to lead this company into the future I am grateful to get to work alongside such a dedicated set of teammates to continue to deliver for our customer.

<unk> users and our shareholders. Thank you for your support and with that let me turn the call over to Garth Mitchell lots of CFO Garth.

Thanks, Luke Q4 was another quarter of growth for the company.

I'm going to share our Q4 results. In addition to providing our fiscal year 2022 in Q1 2022 guidance.

I'd like to quickly point out that I'll be discussing some non-GAAP metrics going forward a reconciliation of GAAP to non-GAAP financial measures has been provided in the financial statement tables included in the earnings release, we issued earlier today.

The company delivered revenues of $14 $5 million in the quarter up 94% year over year.

<unk> were near the high end of our fourth quarter guidance range, Despite the impact of labor and building material shortages through the quarter.

For fiscal 2021, our total revenues were $41 4 million up 129% from fiscal 2020.

Now turning to bookings for the fourth quarter bookings were $96 8 million up 113% year over year and at the midpoint of our prior guidance.

For the full year in fiscal 2021, we generated $360 million in bookings up 118% from the prior year.

Growth in cumulative booked home units in Q4 also accelerated to a total of 590000 units up 94% year over year booked.

<unk> grew to $71 5 million up 130% year over year.

Book home units represent the total number of apartment units for similar dwellings installed cumulatively as well as committed to be installed with <unk> products booked.

Is defined as the cumulative value of annual recurring revenue from software subscriptions that are under a signed LOI.

As Luke mentioned earlier, we believe bookings as a metric has provided insight into the forward direction of our business bookings have always been a look into the many steps in our sales process that happened prior to activation.

Because of long sales cycles in our space, we've given investors with visibility into our sales process to provide a fuller picture of market demand and adoption for our products than is reflected in our realized in GAAP financial metrics.

Now our cumulative bookings demonstrate how robust demand has been and give us a lot of confidence in our forward revenue outlook.

To date, we've reported accumulative annual bookings pipeline of roughly $674 million net of all LOI cancellations.

Even after accounting for 25% promotional discounting that's roughly $500 million of bookings that have target delivery dates in the next 24 months, which gives us greater than 100% bookings pipeline coverage to drive the next two years of our expected revenues.

Importantly, even after netting out adjustments for cancellations and David bookings roughly $200 million of these bookings have been signed in the last six months, which gives us confidence that our bookings pipeline is relatively fresh with recent customer indication to purchase <unk> products.

Whereas this cumulative bookings number gives us confidence that we can achieve our revenue goals rolling delays in conversion due to the ongoing pandemic and the historic indirect and direct supply chain issues have led to challenges pending down the specific timing of conversion for our bookings pipeline.

We've also found that accelerating adoption of technology and our market gives us clear sight to realize metrics based on product installation and activation. When we've had previously so we're shifting our sales process and sales compensation away from bookings in order to give our reps and customers better tools to get to the firm commitments our customers want to make earlier in our sales.

Process.

Going forward, we're focusing the team on delivering on the backlog, we already have and incentivizing in your performance for Activations.

This changes intended to better align our internal priorities with our external disclosures.

Because of this change in sales processing compensation, we're no longer incentivising bookings in the same way. We did previously and have decided to suspend quarterly bookings reporting and guidance to reflect the structural change to our sales process.

Accordingly, we intend to begin quarterly disclosure and guidance for metrics closer to installation and activation that will align more closely with our quarterly financial performance.

Beginning today, we have provided guidance for the first quarter and full year 2022 for total revenue in software revenue.

Additional metrics, we intend to provide starting in Q1 2022 include <unk> net of term discounts and spaces that are active on the platform, which will tie more closely to our new sales process until the results investors care about the scale of our active platform and the recurring cash collected from our customers to provide our services.

Turning now to margins our priority remains meeting our customer needs and our team should be proud of our differentiated ability to simultaneously deliver 94% year over year fourth quarter revenue growth. During these unprecedented global supply chain and electronics shortages, which has impacted almost every company that distributes physical products.

We did experience a sequential quarter over quarter decline in hardware margin from negative 21% to negative 54% largely due to spot buying an elevated shipping costs as Luc mentioned earlier.

We estimate that supply chain disruptions had a roughly $6 $5 million negative impact on our hardware gross margins in the fourth quarter, mostly driven by higher shipping costs and discounting.

Altogether. This contributed to 'twenty 100 basis points of pressure on our hardware margins in the quarter.

So the macro environment may continue to challenge our margin performance in 2022, we have confidence that this temporary market dynamic will not impede long term hardware margin improvements.

Gross margin for 2021 was negative 6%, a 600 basis point improvement from 2020, which would've been a larger improvement if not hampered by the previously explained headwinds and <unk> and throughout much of the year.

As Luke discussed we view our hardware as a vehicle for the delivery of our high margin software and services.

In order to maximize software adoption, we expect to keep our long term hardware margins in the zero to low single digit percentage range and do not expect it to contribute meaningfully to our bottom line.

We believe that the value our products deliver to our customers exceeds the price, we charge them, which gives us decent flexibility to adjust pricing if we need to.

We are actively running pricing experiments on adjustments that are intended to mitigate the impact of supply chain volatility on our gross profitability without compromising demand.

That said our customers benefit from stability in our pricing.

Indeed been numerous instances in 2021, and which we won customers because of the accessibility of our products and the stability of our pricing.

We remain committed to balancing the economic realities of the current supply chain environment against our institutional commitment to building and deepening relationships with our customers as a primary corporate priority.

Turning now to software.

Our software margin was 91% in the fourth quarter consistent with the third quarter and a year ago.

We believe the software margins continued to demonstrate the strength of <unk> business model and highlight our scalable and modular software stack, which enables all of last year west functionality, including integrating first second and third party hardware devices.

Over time, we expect software revenues to increase as a percentage of our revenue mix, which is a key driver for our long term gross margin expansion.

<unk> margin for the full year 2021 was 91% generally consistent with our 2020 results of 92%.

Okay.

Operating expenses were $57 $1 million in the fourth quarter up 267% with significant investment in sales and marketing, including building out our marketing organization from scratch we're all.

So ramping our sales team to cover the growth in leads driving fourth quarter sales and marketing expenses higher year over year.

Since joining last year sales leadership is focused on growing infrastructure training operations in sales capacity.

We are excited to continue to invest in our sales and go to market functions to support accelerating growth in customer demand.

Operating expenses were $145 9 million for fiscal 2021 up 145% from 2020.

Adjusted EBITDA in the fourth quarter was a loss of $44 4 million as compared to a loss of $12 $9 million in the fourth quarter of 2020.

Towards the lower end of our guidance range, owing to the higher opex and lower gross margins driving the sequential change.

Adjusted EBITDA for fiscal 2021 was a loss of $101 $9 million as compared to a loss of $54 $8 million in 2020.

2021 was the year in which you went public in a year that showed marked acceleration in customer adoption of our products.

Of this we grew our investment significantly to build the operating foundation necessary to deliver for our customers at scale.

So we anticipate continued growth in our core areas of focus product development and go to market, we expect slower growth going forward as we believe we have the core foundational pillars in place.

Although this growth led to 2021 deleverage in many of our Opex lines investors should expect to see leverage beginning in the second half of 2022 that will become more pronounced into 2023.

As a reminder, there are three key drivers with <unk> gross profitability.

First hardware margins on Bom costs, and logistics second distributor cuts of hardware revenue and third software revenue percentage of our total revenues.

In 2021, bill of materials, and logistics costs skyrocketed due to the unprecedented supply chain situations impact on the spot electronics purchasing market.

The supply chain impact offset dramatic improvements in the underlying unit economics of our hardware products released in 2022.

For example, our second generation C series has a roughly 30% lower bom than our first generation Z series devices, but all of that incremental margin improvement was lost due to the supply chain environment.

Significant dramatic improvements in our distributor accounts of hardware revenue, which in the fourth quarter decreased 28% year over year, despite 91% year over year growth in the fourth quarter hardware revenue.

Though the impact of this macro environment has been extreme we consider this disruption to the cyclical and expect it to shrink into 2023.

Once they're a sustained relief the improved channel partner incentive agreements and improved the unit economics of our hardware it will become much more clear.

Those two drivers plus continued focus on delivering incremental value to our customers via more software gives us confidence that Q4 hardware margins represent more of a floor than a sustained phenomenon and investors should see steady improvement through the year.

Turning now to our balance sheet.

As of December 31, we had cash and cash equivalents of $124 8 million compared to $65 million as of December 31, 2020.

We also had $261 9 million and marketable investments upfront zero and marketable investments as of December 31, 2020.

The increase in cash and cash equivalents and marketable securities was primarily due to proceeds received in connection with the closing of the business combination with TFS innovation.

Now, let me turn to guidance.

In 2022, we're providing full year software revenue guidance of $14 million to $15 million of 70% to 82% year over year increase for.

First quarter software revenue guidance, we're projecting a range of $2 7 million to $2 8 million or 67% to 73% year over year increase.

For a full year total revenue guidance, we're projecting a range of $75 million to $100 million.

81% to 142% year over year increase.

For our first quarter total revenue guidance, we are projecting a range of $12 7 million to $14 8 million, a 92% to 123% year over year increase.

This guidance assumes no meaningful improvement in the current global macro and supply chain environment.

We are providing adjusted EBITDA losses guidance for fiscal 2022 of $180 million to $160 million for our first quarter. We expect an adjusted EBITDA loss of 42 million to $38 million.

In 2022, we are expecting total revenues to grow 112% year over year at the midpoint of our guidance a slight deceleration from our strong 2021 revenue growth.

Though this growth remains high and it is slower 2022 growth in Wisconsin played in our spec marketing materials presented last year.

As Luke mentioned, we're as confident as ever about the market opportunity, but our unique exposure to construction delays due to continued macro volatility rapidly evolving customer expectations and a slower than expected ramp of our sales and marketing investments has allowed us to take a more measured view on our 2022 revenue acceleration than we had in our spec marketing.

Reals.

Our guidance ranges assume these factors persist for the entirety of 2022 should we see sustained release and these factors, we would expect upside to our guidance ranges.

We've made enormous progress in finding ways for our customers to get the benefits of lateral west without needing to buy first party hardware devices.

This includes many of the partnerships that Luke mentioned previously and many more that will be announced through the year.

These offerings create a win win for latch and our customers.

We get to increase the number of ways, our customers can benefit from <unk>, while offering the ability to do so with an ever growing number of second and third party devices from device partners, while also improving latches cash efficiency.

These partnership products deliver the software experience for our customers and the exact same software revenue for lunch, but it could introduce very wide hardware revenues per unit ranges.

Importantly, our recurring software revenue model and stability in software pricing, regardless of hardware allows us to be much more confident in the accuracy of our software revenue forecasting which is reflected in a much tighter range of guidance for software revenues.

The profitability and predictability of our business only go up as our software based groups.

Despite potentially volatile short and medium term hardware revenue per unit the initiatives to diversify our hardware options away from last first party devices only serves to support accelerated growth in our software base.

Although this requires an adjustment to short term performance expectations. We believe it will lead to faster adoption of lateral west accelerate software revenue growth and accelerate the time to profitability for latch.

Given our exposure to new construction, which has been more heavily impacted by macroeconomic volatility our guidance reflects no improvement in the deterioration of the macro environment and reflects a slower than expected ramp and go to market investments in software launches.

This was reflected in the wider than normal implied range of hardware revenue outcomes in our provided guidance ranges again. This is good for our customers and good for the business while it could introduce short term volatility in our hardware revenue per unit. It should allow more customers to use <unk> and increase the profitability of flash.

Importantly, expect upside to these guidance ranges, if we see sustained relief in the macro and supply chain environments in 2022.

In summary, we delivered strong growth in the fourth quarter and remain committed to delivering sustainable growth for the long term.

We remain proud of our team's ability to continue to deliver such high growth rates, despite the volatile macro environment.

While supply chain issues have marginally affected our short term results. We are seeing accelerating growth in customer adoption of technology, which is the foundational driver of <unk> long term growth.

With our positioning in this massive and growing market. We believe we are positioned to deliver value for our shareholders by delivering value for our customers.

With that said, we will now open the call up for questions operator.

Okay.

Hi, everyone.

Okay.

Got it.

Okay.

Okay. That's helpful.

Yes.

Thanks, Tim.

The first question.

Steve shelter from here.

Okay.

Okay.

Hey, guys.

Thanks, Martin Thanks for taking my questions.

So lots of lots of moving piece of this quarter I know you are changing reporting metrics, Tom but just on the software revenue guidance for 2022, it seems like the timeline between.

The book they are translating the software revenue is getting extended.

I think I think the stock the software revenue guidance for 2022 would be close to our book there are stood in the 2019.

I know its construction delays or the way that weighed on units going like I guess, just how are you thinking about the speed at which some of these recent bookings could actually go live.

Okay.

Yes.

Thanks for the question Stephen.

I think we.

We've talked about this in the past the macro volatility we experienced in 2022 led to a lot of changes in how we thought about the timing of conversion from bookings into revenues that having been said. We also we remain really confident about the value of the cumulative.

Matrix and Theyre likely likely conversion into revenues versus the next two years. The challenge is the macro volatility that we continue to experience in the fourth quarter and into 2022. It makes it more challenging to pin down the exact timing.

<unk> fridges that we provided assumes that boost but the macro volatility we experienced in the fourth quarter persists for the entirety of 2022, so to the extent that we see any sustained relief, we would expect upside to our guidance ranges, including software revenue.

Got it Okay, and then on lapsed wins good to see some of those partnership announcements I'm curious if these partners and apologies if I missed this if these partners are just pulling lab chain I guess when customers demand it or whether these partners are actually going to be channel partners to where they are pushing this and their go to market.

And then I guess.

The ladder how important are you too there are they integrating with multiple partners that can provide similar capabilities to what your provider I guess, how important are you in there.

Their whole evolution towards smart lock smart access things like that.

Thanks, so much for the question Steven So we I think offer a very differentiated approach.

Two large partners in that we're giving them a module that includes hardware firmware and then linked to our proprietary software is really unique and really special. We're also targeting form factors that and formats that may be new to lapse that havent previously existed and so we're both meeting customer demand for our format.

That latch on a first party basis Hasnt made previously, which we think is exciting because that unmet demand that we can now meet with the support of partners, but we're also looking at these relationships as one that can bring their channels and their distribution to bear.

Most traditional lock in access manufacturers sell almost all of their products through channel partners and we believe that we have a very unique opportunity to embed latched technology into the products made by the second party manufacturers and then also piggyback on their distribution capabilities. So we see a differentiated technology.

<unk> that we're providing to the market than being pushed through new channels as well, which we think is particularly exciting as we look at the long tail of customers that we may not necessarily touch with our direct selling efforts and so we see a really unique opportunity for deep and collaborative partnerships here.

Thank you. Your next question and just to remind again and then the rest of <unk>.

Please limit your question to one question at the time.

Our next question comes from the line of Rod Hall from Goldman Sachs. Your line is now open.

Hi, guys. This is Glenn.

On for Rod.

Just wanted to Jacob bout.

Any color that you can provide us on the progress on great.

Penetration through the new products.

Are you seeing any strong traction there and do you think that.

The mix has shifted more towards retrofit the construction behave.

Impacting the conversion from bookings to revenues.

The shift towards retrofit so shocked them back.

Thank you. Thank you.

Okay.

Thanks, So much for the question I'll take the first pass and guards felt.

Feel free to follow up we saw over 200% year over year growth in our deadbolt product line. So the <unk> was released in March.

We saw a really incredible sort of adoption of that which is primarily designed for the retrofit market. So we are seeing.

Growth on a percentage basis in the retrofit market in particular, we also have in the second party products that we've announced there is an interconnect product that is really designed for retrofits, particularly in the California market. So we're very excited about the shift towards retrofit next what that does allow is as we have a bigger.

Exposure to new construction in our business as we reduce that exposure and increased retrofit availability. It does have the effect of having generally creating faster time to revenue, which we think is obviously very positive I don't know if you have anything to add on that.

No I think I think you captured it but the only thing I would add is just the is that the guidance assumes that we.

The improvements that we've seen a retrofit.

Absolutely don't necessarily pan out for the entirety of the year. So the progress that we've seen in a retrofit product again, if they persist and continue to expand in 2022 would represent upside to the guidance ranges provided.

Thank you. Your next question comes from the line.

Moving from Baird. Your line is open.

Everyone. This is actually Peter on for Joe Tonight, Thanks for taking our questions.

On the bookings metric I understand why you would ship shift away from reporting this as a metric.

But one of the most encouraging things in 2020 was seeing the bookings do well against expectations.

Have you seen anything.

On the net new demand side to change going into 2022 or is this more just more second and third party hardware coming in and kind of diluting that metric. Thank you.

Yes.

Thanks, Peter the demand that we're seeing in the market is accelerating and something we're really excited about and in fact is that demand that allows us to have the competence to shift investments towards looking at in year revenue as the metric that's most important and because we've changed all of our internal priorities to focus on convert.

The demand that exists in the market immediately we feel like this is the right set of metrics and the right set of incentives to provide to our sales teams going forward.

I don't know if you want to add anything.

The only thing is Peter we were changing the sales process on the sales incentives.

I think we mentioned in our prepared remarks, I was just going to increase the volatility of the underlying metrics because of that we just want to make sure that we're providing investors information to understand our actual business processes and we're replacing bookings.

Sales process steps that actually get our customers to what they want to do which is get latch into their buildings and activate it much quicker.

That change is going to be reflected in the kpis, we start providing in the first quarter, which as mentioned include <unk> net of term discounts in spaces that are active on the lunch platform.

Thank you. Your next question comes from the line of Brian CLO from <unk>. Your line is now open.

Good evening, everyone. Thanks for taking the questions.

Apologies if I missed this in the prepared remarks were juggling a few calls, but I was hoping you could provide an update on how the initial pilot of.

The <unk> product for office is progressing.

We're expecting to start to sign additional customers that are in 2022.

Yes, if there is what kind of feedback you've gotten so far on that launch thanks.

Hey, Thanks, Brian in our prepared remarks, we.

Continue to sort of bifurcate the market for lateral as an office into sort of two segments. So in the small commercial office market, which is the majority of the market. We continue to allow our channel partners to distribute <unk> in our results and products into the small commercial office market and we are going to support that with modest <unk>.

<unk> is really around product education, but allow folks to continue to install latch and those types of smaller environment in the large commercial office segment, where we announced pilots last year, we had really encouraging data and excitement around the <unk>.

Offering we also see a unique opportunity to partner with folks in the space to provide a real complete solution. When you think about the needs of a building like the World Trade center or at Rockefeller Center at Brookfield place. There's a lot of different components that go into it we think that latch hasn't really valuable role to play, but it's going to require a.

Relation of partners that come together to provide that complete solution. We are excited to have more partners come on board to complete that solution for the large commercial office segment, but we remain excited about our ability to participate in that market as well.

Thank you. Our next question comes from the line of Tom White from D. A Davidson your line is now open.

Great guys. Thanks for taking my questions.

Just on the changes to the incentives for the salespeople.

Just curious if.

You guys are anticipating kind of any.

Disruption related to that.

The elevated churn or attrition or anything.

Similarly on the on the EBITDA guidance for 2022 could you maybe just talk a little bit about kind of the opex assumptions underpinning that and maybe what the kind of one or two biggest levers might be to you guys either hitting kind of the high end or the low end of the EBITDA range.

Yeah.

I could start there so from a sales compensation standpoint, we feel like these are the right changes to make for the business and we've accounted for the potential impact of those changes within our guidance and also within our internal planning process around sales teams sides and an activity and then I think Garth if you want to speak a little bit to the opex.

Ranges I think the thing that I can say before I hand, it over to Garth is that we really tried to look at the market conditions that we saw in the spot buy market and on the supply chain side from last year and assume we're going to have no kind of no.

No real improvement this year and thats going to be one of the larger drivers there, but Garth I don't know if you want to add anything.

No you capture the gross margins perfectly with the only thing I'll say on the Opex. Tom is that in 2021, we invested meaningfully in building the operating foundation and we thought it was necessary to serve evolving customer expectations and accelerating customer demand, we believe that foundation to be in place now.

And we will start we expect to start to show leverage on our Opex lines, starting meaningfully in the second half of 2022 and sharply into 2023.

Thank you. Your next question comes from the line Ben Charlotte from Cantor Fitzgerald. Your line is now open.

Hey, guys. Thanks for taking my question and I appreciate the color on the.

The margin headwind from the supply chain issues at six 5 million I was just wondering if you could provide a little bit of color on the.

The impacts of higher labor costs to the installation of the units.

Entirely pass through to the consumer or if not.

If you could give a little bit of color around you know kind of what the headwind is there that'd be great. Thank you.

Hey, Ben Yes, and the majority of instances.

The labor costs are borne directly by the customer and are not something that lapsed takes on however, we also have our direct deployment efforts ongoing and in those instances latch contracts and provides us a firm price to our customer for the installation services up the products we have.

Capture the quote window any actually provision of the service very tight such that we have a quote in hand and are able to preserve margin or minimize any sort of disruption from labor fluctuation in the final price that we provide on the direct deployment side to our customer, but again the vast majority of instances today.

Our customers are procuring the services themselves and so higher labor costs are borne directly by the customer and don't impact our pricing.

Okay, that's great.

No.

Does show itself in the demand because some of our customers have had trouble getting labor to actually do the installations on the timelines that they've won.

So it's less of a margin consideration in more of a revenue consideration that is reflected in some of the timing something we've talked about on this call and prior calls.

Thank you and again, if you would like to ask a question. Please press Star then the number one on your telephone keypad. Please limit yourselves to one question on the your next question comes from the line of <unk> <unk> from Bank of America. Your line is open.

Hi, Thanks for taking my question. So I know you called out electronic spot prices and then also the improving hardware to go now.

Mike.

Thinking about how we should think about sequential progression for our gross margins.

<unk>, two and if you could give us some color around that.

Do you want to take that question.

Yes, yes happy to I think Luc mentioned, we assume that a lot of the supply chain disruption that we experienced in 2021 persistent to 2022, but we do have some gradual improvement to our hardware margin that's reflected in <unk>.

Largely being driven by some of the direct employment drivers that Luke mentioned.

In response to the last question and some steady small improvements in the supply chain and electronic sourcing environment. So you should see again small sequential improvement for the remainder of the year, but any any any material sustained improvement will lead to upside to the guidance ranges that we provided today.

Thank you there are no further questions at this time.

Thank you presenters.

Presenters.

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