Business Overview and History
Latch, Inc., soon to be rebranded as DOOR, has emerged as a leading provider of innovative smart access and building management solutions for the multifamily residential market. With its roots tracing back to 2013, the company has undergone a remarkable transformation, navigating challenges and capitalizing on the growing demand for connected living experiences.
Latch was founded in 2014 with the mission of revolutionizing the multifamily real estate industry through the deployment of cutting-edge hardware and software technologies. The company's initial focus was on developing smart access control and smart apartment solutions for the multifamily rental market, aiming to digitize manual processes like building and unit access through its innovative hardware and software technology.
In 2019, Latch expanded its operations by incorporating subsidiaries in Delaware and Taiwan to support its growing business. This strategic move allowed the company to strengthen its global presence and enhance its ability to serve a broader customer base. During this period, Latch continued to invest heavily in research and development, focusing on enhancing its product offerings and expanding the functionality of its Latch Platform.
A significant milestone in Latch's journey came in 2021 when the company went public through a business combination with TS Innovation Acquisitions Corp. This move provided Latch with approximately $450 million in cash proceeds, which the company intended to use for funding various growth initiatives and expanding its market reach.
However, shortly after going public, Latch faced a major challenge when its Audit Committee commenced an internal investigation into the company's key performance indicators and revenue recognition practices. The investigation uncovered material errors and possible irregularities related to how Latch recognized revenue, particularly from hardware sales through third-party channel partners. As a result, Latch was compelled to restate its financial statements for 2019, 2020, and 2021, as well as the first quarter of 2022. This restatement process, along with associated professional fees, resulted in significant costs for the company. Additionally, Latch experienced turnover in its accounting and finance departments, which contributed to delays in its financial reporting.
As Latch's product suite expanded to include video intercoms, smart sensors, and a comprehensive building management software platform, the company solidified its position as a one-stop-shop for smart building solutions. This holistic approach resonated with customers, driving strong revenue growth in the years leading up to the company's public listing in 2021 through a business combination with TS Innovation Acquisitions Corp.
Financial Performance and Outlook
Latch's financial performance has been mixed in recent years, with the company reporting annual net losses of $166.3 million in 2021 and $65.9 million in 2020. The company's revenue has grown from $18.1 million in 2020 to $41.4 million in 2021, driven by increased adoption of its smart access and building management solutions.
The restatement process unveiled several accounting errors and irregularities, most notably related to the recognition of hardware and software revenue. These issues, combined with supply chain disruptions and construction delays, have weighed on the company's financial results. However, Latch has taken steps to address these challenges, including streamlining operations and implementing stronger internal controls.
Looking ahead, Latch has provided limited guidance for 2023 and 2024, citing the ongoing challenges of the restatement process and the need to stabilize its operations. The company has emphasized its focus on driving efficiency, improving profitability, and delivering value for its customers through its expanding suite of smart building solutions.
Financials
Latch's financial performance has been characterized by significant revenue growth coupled with substantial net losses. The company's revenue increased from $18.1 million in 2020 to $41.4 million in 2021, representing a year-over-year growth of approximately 129%. However, this growth has been accompanied by widening net losses, with the company reporting a net loss of $166.3 million in 2021, compared to $65.9 million in 2020.
In the most recent quarter, Latch reported revenue of $13.7 million and a net loss of $44.2 million. The company experienced a 29% increase in total revenue compared to the prior year quarter, driven by a 73.2% increase in software revenue and a 145.9% increase in installation services revenue, partially offset by a 6.6% decrease in hardware revenue.
For the third quarter of 2022, Latch's total revenue was $8.84 million, an increase of 29% compared to Q3 2021. This strong performance was driven by increases across all of Latch's product segments. Hardware revenue for the quarter was $4.03 million, a decrease of 6.6% compared to the prior year period. Software revenue grew significantly to $3.40 million, up 73.2% compared to the prior year period. Installation services revenue also saw substantial growth, reaching $1.41 million, up 145.9% from the same period in 2021.
For the first nine months of 2022, Latch's total revenue grew 73.5% to $32.23 million. Hardware revenue for this period was $18.02 million, an increase of 41.3% year-over-year. Software revenue grew 84.4% year-over-year to $9.35 million, while installation services revenue increased 552.9% to $4.85 million.
The company's profitability remains a challenge, with Latch reporting a net loss of $34.81 million in Q3 2022 and $133.26 million for the first nine months of the year. These losses are primarily attributed to significant investments in research and development, sales and marketing, and general and administrative expenses to support growth initiatives, as well as costs related to the investigation and restatement of prior financial statements.
Liquidity
As of the most recent financial reports, Latch's liquidity position has been bolstered by the cash proceeds from its business combination with TS Innovation Acquisitions Corp. The company received approximately $450 million from this transaction, which it plans to use for funding growth initiatives and expanding its market reach. However, the ongoing net losses and costs associated with the restatement process may impact the company's cash reserves, necessitating careful management of its liquidity position in the coming years.
As of September 30, 2022, Latch had $112.32 million in cash and cash equivalents and $136.81 million in available-for-sale securities. The company's debt-to-equity ratio stood at 0.000009, indicating a low level of debt relative to equity. Latch's current ratio was 8.16, and its quick ratio was 7.87, suggesting a strong short-term liquidity position.
It's worth noting that Latch had a $6.0 million revolving credit facility, which was subsequently cancelled in January 2023. This cancellation may impact the company's future liquidity options and financial flexibility.
Competitive Landscape and Growth Opportunities
Latch operates in the highly competitive smart building and access control market, where it faces competition from established players such as Brivo, Kastle Systems, and Openpath, as well as emerging startups. The company's ability to maintain its competitive edge will rely on its capacity to innovate, offer a comprehensive and integrated solution, and execute effectively on its growth strategy.
One of Latch's key growth opportunities lies in the continued expansion of the multifamily real estate market, both in terms of new construction and retrofitting existing buildings. As developers and property managers increasingly prioritize smart building technologies to enhance the resident experience and improve operational efficiency, Latch is well-positioned to capitalize on this trend.
Additionally, Latch is exploring opportunities to expand its footprint beyond the multifamily segment, targeting the commercial and hospitality sectors, which present additional avenues for growth. The company's recent acquisition of Honest Days Work, a leading provider of smart home and building solutions, is a testament to its strategic ambitions to broaden its market reach and product capabilities.
Risks and Challenges
Latch's journey has been marked by several significant challenges, many of which are ongoing. The company's restatement of its financial statements has raised concerns about the reliability of its past financial reporting and the strength of its internal controls. While Latch has taken steps to address these issues, the long-term impact on stakeholder trust and the company's reputation remains a concern.
Furthermore, Latch operates in a highly competitive market, where it must continually innovate and adapt to changing customer preferences and technological advancements. The company's ability to maintain its competitive edge and drive profitability will be crucial to its long-term success.
Supply chain disruptions and construction delays have also posed significant challenges for Latch, as these factors have affected the timing and recognition of its hardware and software revenue. The company's efforts to mitigate these issues and improve its operational efficiency will be critical in the coming years.
Lastly, Latch's growth and expansion plans, including its recent acquisitions, come with inherent integration and execution risks. The company's ability to successfully onboard and integrate new businesses, as well as effectively manage its expanding product portfolio and customer base, will be key to its continued success.
The company is currently involved in pending stockholder class action and derivative complaints relating to the investigation and restatement of its financial statements. Additionally, the SEC is conducting an investigation into the company. These legal and regulatory challenges could potentially have significant financial and reputational implications for Latch.
In January 2023, Latch experienced a significant leadership change with the resignation of its Chief Executive Officer, Luke Schoenfelder, and Interim Chief Financial Officer, Barry Schaeffer. Such high-level departures can create uncertainty and potentially impact the company's strategic direction and operational execution.
Conclusion
Latch, Inc. has emerged as a disruptive force in the smart building and access control market, leveraging its innovative hardware and software solutions to transform the multifamily real estate industry. Despite facing significant challenges in recent years, the company has demonstrated resilience and a commitment to addressing its operational and financial shortcomings.
As Latch navigates the path to smart building dominance, its success will hinge on its ability to execute on its growth strategy, maintain its competitive edge, and regain the trust of its stakeholders. With a renewed focus on efficiency, profitability, and customer-centric innovation, Latch is poised to capitalize on the growing demand for connected living experiences in the years to come.
The company's performance in the coming quarters will be crucial in determining its ability to overcome recent challenges and establish itself as a leader in the smart access and apartment technologies market. Investors and industry observers will be closely watching Latch's progress in improving its financial position, resolving ongoing investigations, and successfully executing its growth initiatives in the competitive smart building landscape.