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