Latch, Inc. (LTCH) on Q3 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by, and welcome to the Latch Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and answer-session. As a reminder, this conference is being recorded. I would now like to hand the conference over to Sean Henin with Investor Relations. Please go ahead.
Unidentified Company Representative: Thank you, operator. Good afternoon, and thank you for joining us today to review Latch’s third quarter 2021 financial results. With me on the call today are Luke Schoenfelder, Chief Executive Officer, Co-Founder, and Chairman of the Board of Directors; and Garth Mitchell, Chief Financial Officer. After prepared remarks, we will open up the call for a 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 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 undertake no obligation to publicly update or revise them. For a discussion of 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 today’s 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 reconciliation of these measures to the most directly comparable GAAP financial measure. With that, I’d like to turn the call over to Chief Executive Officer, Luke Schoenfelder. Luke?
Luke Schoenfelder: Thanks, Sean. And I’d like to start by thanking all of you for joining us today for our third quarter earnings call. We are very excited to share our results for the quarter. Despite unprecedented supply chain constraints and construction delays due to labor and material shortages, we continue delivering for our customers. Growing our revenue 120% year-over-year to $11.2 million above the top end of the revenue guidance we gave for the quarter. We had another record bookings quarter for Latch as well, and we saw a substantial acceleration in bookings growth up 181% to $96 million. And we also saw growth in booked ARR up 126% to $59.8 million. Garth, our CFO will talk in a few moments to Q3 results in detail. As this is our third earnings call as a public company, we’d also like to take a moment to remind everyone about who we are, what we do, our value proposition, market opportunity and business model. I’m one of the Co-Founders of Latch and beginning in 2014, we embarked on our journey to make buildings better spaces to live, work, and visit, creating a product company focused on the biggest challenges we saw in the space. From the beginning, we recognized a powerful opportunity to transform the world’s oldest subscription product, renting a space and the world’s largest asset class, real estate. Our flagship product LatchOS provides real estate operators, residents, and service providers, the capabilities they need to solve the problems they face every day in their spaces. And we provide tailored solutions through our LatchOS modules, smart access, delivery and guest management, smart home, connectivity and personalization and services. I’d like to turn now to the current quarter and the new and exciting product and marketing updates from Q3 that we believe demonstrate our commitment to serving our customers with an ever evolving set of product features and experiences while enhancing our product portfolio and driving long-term growth. In Q3, we announced the new Latch M, which is our latest mortise lock built for retrofits and new construction. The product is designed to be easy to install without any added infrastructure and brings all of the benefits of the new Latch Lens to the mortise format. This further broadens Latch’s ability to provide more buildings of all shapes and sizes with the experience of LatchOS, our full-building operating system of software, products, and services. Also in Q3, we hired Lee Odess as General Manager of New Market Development to help strengthen our focus on new markets. Lee is a proven leader in the industry with nearly 20 years of experience driving sales growth, product innovation and geographic expansion for leading companies in the smart device and security space, including Lutron, Brivo, and Allegion. Immediately prior to joining Latch, he was the Founder and CEO of Group337, a consulting and content firm specializing in the security, access control, and IoT space. Lee’s team of industry experts has also joined Latch, and their combined expertise will be invaluable as we continue to innovate and provide scalable technology products to our customers’ operating problems. Reflecting on our third quarter results, we’re excited to share two key themes. The first theme is that our revenue growth continues to be on an impressive trajectory with 120% growth year-over-year to $11.2 million in the third quarter. We are particularly proud of delivering these revenue results, despite the widespread supply chain and unprecedented constructive industry challenges. The most powerful driver of our business remains the secular shift towards more technology in the real estate industry, which has been woefully underserved by technology companies. A lack of focus product innovation for real estate has led to exceptionally low technology penetration rates in what is the world’s largest asset class. This is a long-term driver of our business and we remain steadfast in our focus on delivering the products and experiences our customers and their residents deserve. Let me take a moment to illustrate our momentum with a couple of customer stories that reflects how we go-to-market and how customers find value working with Latch versus other providers. We are excited to continue our relationship with Middleburg communities, a leading Southeastern multifamily owner and developer. We booked our first apartment community with Middleburg in Q2, where we delivered hardware within a month of booking. Since the first project, Middleburg has been so impressed with our comprehensive solution in particular, our ability to enable unattended touring and leasing through Tour24 Latch Lens Partner who referred us to Middleburg. Middleburg has now signed a large additional agreement to further solidify Latch as their preferred smart access partner. This deal demonstrates how our open platform and API access can create differentiated experiences for our customers, our partners, as well as our partners customers. This shared value creation is a core focus for Latch as we’ve grow our partner ecosystem using our flexible API strategy. We were also very excited to expand our relationship with the related group after deploying Latch in one of its buildings and its Florida portfolio, they signed up the rest of their upcoming multifamily portfolio with Latch. The related group was previously working with a variety of point solution hardware and middleware providers. But after seeing the benefits of the comprehensive LatchOS platform, they’ve decided to lean on Latch’s full stack of hardware, software, and services as the basis for their smart building design. Another new customer that joined us this quarter was META Real Estate Partners, a Southeast real estate developer. The company was highly impressed with our offering and was originally planning to install a competitor before being introduced to the Latch suite of products. META decided to make the swap to Latch, because they’re particularly impressed with our unique ability to serve as the single solution for every stakeholder at the building. The second theme is the state of the global electronic supply chain. We are really pleased by the flexibility, focus, and commitment of our supply chain team in prioritizing meeting our customers demand. And we are proud of our team’s ability to driven 120% year-over-year revenue growth in light of very challenging supply chain dynamics and the difficulties we’re seeing much larger companies facing in this space. We’re also very grateful to our engineering teams for being able to quickly and effectively execute engineering changes that allow us to rapidly incorporate alternative components in our products without compromising functionality. These dynamics and our continued prioritization of meeting customer demand led to a sequential step back in the third quarter in hardware margins due to spot buying and elevated shipping costs, which Garth will discuss shortly. The constraint supply for several electronics components in Latch and partner products has also persisted and are sourcing challenges have increased. However, we remain cautiously optimistic about our ability to continue to remain agile to meet demand. And we are excited to leverage our unique supply chain and engineering core competencies to gain market share while keeping an eye towards unit economics and the bottom line. In closing, we are very pleased with our Q3 performance. We are a product oriented company with a unique perspective and vision for this space. And we’ve been pleasantly surprised by the number and quality of M&A opportunities that have emerged since formalizing our corporate development efforts earlier this year. Point solutions and features being sold into our end markets today could immediately be more valuable leveraging our deep industry relationships and scaling go-to-market organization. The expansiveness of our vision makes long-term customer and resident lifestyle value on the Latch platform worth much more than if those same users were unlimited point solutions. We look forward to discussing these growth opportunities more as they develop and we continue to look at inorganic opportunities as a very real and very tangible driver of long-term growth and value creation for Latch shareholders. As always, we’ll continue to focus on our long-term strategy while executing day in and day out to deliver the long-term value that our customers and shareholders expect. Finally, I’d like to thank our global team for their unwavering focus and commitment on delivering the best product and experiences to our customers and residents. To our shareholders, the workers team is doing is incredible, and I’ve never been more excited for what’s to come. With that, let me turn the call over to Garth Mitchell, Latch’s CFO. Garth?
Garth Mitchell: Thanks, Luke. It’s great to connect with both our existing and prospective shareholders in our third quarter 2021 earnings call. Q3 was a record quarter for the company once again on many fronts. And I’m excited to share these results in addition to providing an update to our fiscal year and Q4 2021 guidance. Before diving into our third quarter results, I thought it might be helpful to provide a reminder of our sales process and give some additional color on bookings and revenue recognition. Bookings represent signed customer LOIs to purchase Latch hardware and software services, not reflecting term or promotional discounts with a target delivery date, no later than 24 months following signature. Bookings are the sum of the total gross hardware revenue commitment and the total gross software revenue commitment over the total life of the software agreement. Each booking is associated with a specific building, including pricing for the specific software and hardware products for each unit, and includes explicit target delivery dates, upon which the customer expects delivery and deployment. We adjust our cumulative and in period bookings metrics for bookings that do not ship within a 36-month timeframe. This standard allows for a 12-month period following the 24-month booking window to account for construction industry delays, which have become much more common in this macro environment while ensuring our cumulative metrics correlate most closely to the timing of our deployments. Although, we expect some of the 36-month and older bookings to eventually convert, we make these adjustments as a good hygiene measure for our reporting. The total hardware revenue commitment is recognized net of promotional discounts as Gap hardware revenue at the time of shipment. Software revenue is recognized net of promotional discounts over the course of the contract, starting from software contract signature through contract end. And thus, there is a greater lag between software bookings and the recognition of Gap software revenue than with hardware bookings to Gap hardware revenue. There’s been some confusion regarding our term discounting policy and its impact on our revenue recognition. Though, we have detailed this in our public filings, I thought it would be helpful to add more color in these remarks. We benefit greatly from our customers willingness to pay upfront for upwards of 10-year software agreements. The large upfront cash collection has helped finance our growth. And therefore, we incentivize customers to do this by offering tiered discounts based off of our estimated annual cost of capital. The upfront discount increases accordingly based on the term length for which the customer is prepay. Because the purpose of the discounting is to incentivize customers to prepay, to finance our growth in accordance with ASC 606, we determined the discount to be a form of customer financing. Because of this, we recognize our revenue net of promotional discounts only and expense the term discount as interest expense. The term discount represents substantially all of Q3 reported interest expense and we provide further detail about this in our public filings. Pricing is an always evolving topic for our business and we are exploring ways to better align our pricing strategy with the company’s present cost of capital and liquidity position. Some pricing changes will lead to differences in the relationship between our reported revenues and interest expense. We do not anticipate any near term policy changes, but we also do not expect the term discount to make up the same percentage of software revenue as shorter term length LatchOS module revenues grow as a percentage of total revenue. And we evolve our pricing strategy to reflect changes in our cost of capital. We will be sure to detail any material changes to this going forward. Now let me turn to our third quarter results. 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 early earlier today. For the third quarter, bookings were $96 million, up 181% year-over-year, growth and cumulative booked home units also accelerated to a total of 531,000 units, up 101% year-over-year. Finally, booked ARR grew to $59.8 million, up 126% year-over-year. Both home units represent the total number of apartment units or similar dwellings installed cumulatively as well as committed to be installed with Latch products. Both ARR is defined as the cumulative value of annual recurring revenue from Latch Software subscriptions that are under assigned to LOI. The acceleration in growth across all bookings metrics is reflective of increased adoption of Latch’s product offering. In the third quarter, we saw attach rates of non-access LatchOS modules of 83% versus 90% in Q2. This attach rate demonstrates robust customer demand for our incremental LatchOS modules, as they become available and support increased investments in R&D, which will accelerate the time to market of several new modules. As we have discussed, the attach rate metric is becoming less meaningful since it only accounts for the percentage of in period booked units with the LatchOS module other than access attached. Since we are seeing an increasing number of deals, including more than two LatchOS modules, we are working to provide a better metric to capture per unit module attach rates and will no longer provide this metric going forward. This dynamic is a good one for the business. As we expect these modules to drive higher customer ROIs and accelerate customer LTV expansion. Now turning to revenue. We’re pleased to announce revenues of $11.2 million in the quarter, up 120% year-over-year. We’re proud of this result as this again, demonstrates the strong customer demand for our products, but also our team’s rigorous execution, given the challenging macro and supply chain environment. Revenues were just above the high end of our third quarter guidance range, despite the impacts of labor and building material shortages through the quarter. Our priority remains meeting our customer needs and our team should be proud of our differentiated ability to simultaneously deliver 120% year-over-year third quarter revenue growth and greater than 21 percentage points of year-over-year hardware margin improvement. During these unprecedented global supply chain and electronic shortages, which have impacted almost every company that distributes physical products. Our global supply chain team is tactically sourcing components to meet our customer demand, enabling us to continue to drive greater than 100% year-over-year revenue growth. The annual hardware margin improvement was largely driven by scale efficiencies, improved distributor cuts and more cost effective next generation access products. We did experience a sequential quarter-over-quarter decline in hardware margin from negative 12% to negative 21% largely due to spot buying and elevated shipping costs as mentioned earlier by Luke. Though, this macro environment may continue to challenge our margin performance for the remainder of the year. We have high confidence that this temporary market dynamic will not impede long-term hardware margin improvements. Our software margin was 91% for the third quarter, a marginal difference compared to 93% in the third quarter of 2020. We believe the software margins continue to demonstrate the strength of Latch’s business model and highlight our scalable and modular software stack, which enables all of LatchOS functionality, including integrating first 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 long-term gross margin expansion. Operating expenses were $34.4 million in the third quarter, up 135% year-over-year, primarily due to higher people costs as a result of successful hiring efforts primarily in sales and engineering. In particular, third quarter sales and marketing expenses grew 210% year-over-year as we continue to invest in sales capacity to meet accelerating growth and customer demand and take advantage of our huge untapped market. Since joining this year, our CRO, Chris Lee has been focused on growing infrastructure, training, operations and sales capacity. We are excited to continue to invest in our sales and go to market functions to support accelerating growth and customer demand. Adjusted EBITDA in the third quarter was a loss of $26.2 million as compared to a loss of $14.6 million in the third quarter of 2020. Turning now to our balance sheet. As of September 30, we have cash and cash equivalence of $240.3 million compared to $60.5 million as of December 31, 2020. The increase in cash and cash equivalents was primarily due to proceeds received in connection with the closing of the business combination with TS Innovation. At the end of the third quarter, we had no debt. Now let me turn to guidance. Because of the accelerating growth and demand for our products and our strong year-to-date execution, we are excited to raise our annual total bookings guide to $355 million to $365 million from our previous guide of $325 million to $340 million, which reflects a 115% to 121% year-over-year increase in total bookings. Thus, in the fourth quarter, we expect total bookings to be in the right range of $91.5 million to $101.5 million, a 102% to 124% year-over-year increase. Despite seeing accelerating customer demand, post pandemic macro normalization has been choppy and we’ve experienced impacts from the global supply chain and labor shortages that have been widely reported and referenced earlier by Luke. I am sure this has been a consistent theme throughout earnings of the season. The latest NMHC construction survey found that 93% of multifamily construction projects up from 83% the prior quarter are now experiencing delays, only 2% of canceled upcoming projects down from 3% in the prior quarter. This is a situation that we will continue to monitor closely as the challenges persist. Despite the challenging environment, we’ve never experienced more robust customer demand and are confident in our differentiated ability to deliver despite the challenging global supply chain environment. Because of this, we are reiterating our full year revenue guidance of $38 million to $42 million, a 111% to 133% year-over-year increase. This guidance assumes no meaningful improvement to the current global macro and supply chain environment and implies a fourth quarter revenue guidance range of $11.2 million to $15.2 million. Despite these supply chain shortages, we will continue to prioritize meeting customer demand for our products, and we’ll continue to tactically source supply to maximize the delivery of our long-term high margin software agreements. We assume this macro disruption will persist for the remainder of the year, impacting hardware margins, though the long-term drivers of our hardware margin expansion discussed earlier remain in place, despite the short term macro disruption. We are also excited about our continued work with Latch Lens partners. With this program, Latch partners will be making latch certified products that support LatchOS via their own differentiate supply chains. These partnerships act as a force multiplier for Latch’s supply and engineering core competencies. That said, we are seeing some efficiencies elsewhere in the business. And as a result, we are decreasing our expected adjusted EBITDA losses guidance for the year to $105 million to $90 million from $115 million to $95 million. This implies guidance for the fourth quarter of $47.5 million to $32.5 million. In summary, we’re very pleased with our performance in the third quarter and look forward to continuing to deliver long-term sustainable growth. 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 sustained accelerating growth in customer demand, which is reflected in our accelerating revenue growth. With a massive and growing market opportunity ahead of us, category defining products and market and in development and a strong market leader ship position. We believe we are uniquely positioned for sustained long term success. With that, we will now open the call up for questions. Operator?
Operator: Thank you. And our first question comes from Stephen Sheldon with William Blair. Your line is now open.
Matt Filek: Hi everyone. This is actually Matt Filek on for Stephen Sheldon. Thank you for taking my questions. In the prepared remarks, you talked about reporting bookings on a gross basis. And was wondering if you could talk through the reasoning for that and if you have considered reporting the bookings, not of promotional discounts.
Luke Schoenfelder: Absolutely. Garth, do you want to take that one?
Garth Mitchell: Yes, sure. Thanks, Luke. And thanks for the question, Matt. I think that we know about Latch is that we don’t sell into just one type of customer, for example, a handful of large owner operators. We serve a very broad customer base and our discounts vary based on the size of the customer. How many projects they have with us, the mix of products, building pipes and region, among several other important factors. Because of this, we believe that it wouldn’t service well to publish an average discount. That said, the range of promotional discounts range from 15% to 20% and term discounts are all of the interest expense in our third quarter results, which should give you a pretty clear sense of what the net amounts are. Importantly, nothing has changed to our discounting practices since we first discussed this back in our 2021 Analyst Day. And if we expect any material changes, we’ll be sure to let you know.
Matt Filek: Thanks for that commentary. That’s helpful. And then consider the elongated construction timelines. Are you seeing any changing dynamics in the current backlog of book business?
Garth Mitchell: Yes. Look, I’ll jump in on that one. So just as we mentioned, the macro environment has led to delays on all projects, include new construction and retrofit projects. And we have seen instances in which delays have been over a year. We’re really pleased, however, about our ability to deliver 120% year-over-year revenue growth and reiterate our full year revenue guidance. Despite those delays that are a result of this challenging macro environment. Most importantly, it’s really early days for customer adoption of our products and market penetration for Latch. We’ve never been more confident about our positioning and market opportunity, and again, have high confidence that once we get through these lingering COVID driven macro disruption, our delivery timeline will timelines will really quickly revert back to what we’ve seen previously.
Matt Filek: Thank you for that. I’ll jump back into queue.
Operator: Thank you. And our next question comes from Ben Sherlund with Cantor Fitzgerald. Your line is open.
Ben Sherlund: Hey, guys, thanks for taking my question. So looking at the fourth quarter guidance, the top line range is much larger than in prior quarters. You may help provide a low context, you know, around the volatility of expected revenue versus prior quarters. I mean, it just related to a large project that might fall in 4Q or 1Q. Any color there would be helpful. And then – and I have a follow up too, thanks.
Luke Schoenfelder: Garth, do you want to take the first part there?
Garth Mitchell: Sure. Yes. Ben, we are – like Luke mentioned, we’re prioritizing meeting our customer demand and we’re really pleased about our ability to source supply and deliver for our customers given some of the supply and labor shortages that we talked about previously. In the fourth quarter, we’ve seen some opportunities to deliver products for our customers, who’ve been waiting for them in certain instances for over a couple of quarters. Because of that, we look directly in our pipeline, and that gives us high confidence in our ability to deliver those high growth rates. Despite the macro disruption we’re currently experiencing. So it’s no individual deal. It’s really our ability, largely because of our supply chains flexibility to deliver for our customers on some deals that they expect, on some projects they expect to deliver in the fourth quarter.
Ben Sherlund: Okay. Great. And then looking at the ARPU of the bookings in the quarter, it looks like you guys had some pretty nice sequential growth there. Maybe provide some color on, how the average discounts have trended throughout the year or maybe relative to 2Q.
Garth Mitchell: Luke, I’ll jump in on that one as well. Then there’s been no material change in our – in sort of the promotional discount range we’ve talked about previously at 15% to 20%. I think what you’ll see in the ARPU number is that we had a several deals that actually included a lot of common area doors. And our R Series software is meaningfully more expensive than our unit entry software, because of that that drove a sequential change in the ARPU in the quarter. And it is a reflection, however, of the really high attach rates of incremental LatchOS modules as well, which we consider to be a long-term driver of ARPU expansion for the business.
Ben Sherlund: Okay, great. Thanks guys.
Operator: Thank you. Our next question comes from Jason Celino with KeyBanc Capital Markets. Your line is open.
Jason Celino: Great, thanks guys for taking my questions. Maybe the first one, rent growth and occupancy, it’s been in the news that it continues to climb occupancy all time back to kind of pre-pandemic highs, how do you view this as a positive trend for your owner and property manager, customers. What is their kind of confidence level in looking at smart building solutions from last?
Luke Schoenfelder: Hey, Jason. Thanks so much for the question. Yes. I mean, I think what we’re seeing is that there’s a real excitement on the part of users and residents to return to cities and get back to the environment that they were in pre-pandemic. I think you’re also seeing just continued and historic growth in the multifamily segment. And you and I have spoken about this before and I think what we’re most excited about is that these macro trends really played a Latch’s of favor, but I think the important part is that we are still such a small percent of the overall market. And it’s such an under penetrated technology end market that we’re very excited to see whatever sort of tailwinds that these sorts of shifts bring about. But we’re very confident in our ability to grow in a wide variety of different macro environments, because of the under penetration. And so are excited to continue to provide better and better experiences for building operators, helping them be more efficient, drive more value at their properties. And then also just make life better for residents, which we think will have the effect of Latch buildings – and buildings where Latch products are installed, being more desirable. So we’re super excited about we’re seeing out there, Jason.
Jason Celino: Okay, perfect. And then maybe one more M&A strategy, I think Luke, at the beginning, you talked about some of the opportunities down the line. Maybe remind us on how you think about the make first buy decision when it comes to adding different functionalities to either internal.
Luke Schoenfelder: Absolutely. Yes, absolutely, Jason. I think for us, we have a very clear sort of product vision that we’re executing against. And for us, it’s about doing whatever we can to bring those products and those fantastic experiences to our users as quickly as we can and as efficiently as we can. And we are always looking at ways to improve the speed with which we can deliver new products to market. And we see M&A as a really important strategy to bringing new products to market and serving new markets. And so we’re continuing to prioritize that we formalized our corporate development efforts earlier this spring and are excited to continue to make announcements as things come to pass. But we’re seeing a lot out there. I think there’s a lot of interest in Proptech. And so you’ve seen a lot of venture funding going into the space. But it’s a really hard end market. It’s very difficult to build the right product. It’s very difficult to build the right distribution. And we think we have a very unique advantage to offer to companies who are making point solutions to join a platform that already has an audience and an install base with the largest owners in the world. And we’re very excited about how corporate development can be used to accelerate our product vision and our product roadmap and from us on that in the future for sure. Thanks, Jason.
Operator: Thank you. Our next question comes from Rod Hall with Goldman Sachs. Your line is open.
Rod Hall: Yes. Hey guys, thanks for the question. My – I guess my starting point question would be Garth, you talked about this 36-month adjustment of the booking. Could you – is there any way you could elaborate on how much of the booking then adjusted that way and then any color you could give us on how you’re adjusting it? It sounds like you’re impairing it a little bit, but I wasn’t clear on exactly how you’re adjusting that. And then I have a follow-up.
Garth Mitchell: Thanks for the question, Rod. This is something that we’ve done as good hygiene measure in order to give investors the best tools to understand our business. I think we’re really pleased to be able to deliver 181% year-over-year growth rates and bookings after making the adjustments to both the cumulative and in period bookings metrics. The 36 months policy gives us 12 months after our – after the 24-month booking window to account for construction industry delays, like we’ve talked about it become more common in this macro environment, but we are really pleased by our ability again to grow at bookings at such high growth rates, despite making those types of adjustments and despite a lot of the macro disruption that we’re seeing, which is really just a reflection of the customer adoption of this product category, which we expect to continue for many years to come, because of the relative under penetration of technology in our customer’s portfolios.
Rod Hall: Okay. Thanks, Garth. And then I wanted to check the interest expense as a proportion of the software revenues 36% this quarter, 38% last quarter. Are those – if we were averages, is that a pretty good guesstimate for what the term discount sort of looks like? Or are there reasons we shouldn’t use that as a rule of thumb for how to think about how these bookings translate into revenue over time?
Garth Mitchell: Yes, Rod. Just referring back to my prepared remarks, I think that that is a pretty good rule of thumb for where they sit today. But as I mentioned, as we introduce more LatchOS modules that have shorter-term lengths, it is likely that, that, that the percentage of a reported software revenues that, that, that the term discount make up goes down over time. So I’d expect to see more information about that into 2022, but for now that is a reasonable assumption.
Rod Hall: Okay, great.
Operator: Thank you. And our next question comes from Tom White with D.A. Davidson. Your line is open.
Tom White: Great guys. Thanks for taking my questions. Two if I could. I was hoping you just maybe double click on your comments around how you’re approaching pricing and I guess specifically kind of as we enter next year and if we’re faced with the possibility of kind of inflation on inputs and supply chain delays and stuff like that. How does your view of kind of pricing change? And then just secondly on the guidance commentary Garth, I think you mentioned that you called that some operating expense efficiencies that were offsetting some of the hardware gross margin pressure. Can you just give a little more color on exactly what those are,? Are those kind of like durable, permanent efficiencies or things that that might kind of re-ramp again? Thanks.
Luke Schoenfelder: And I’ll start on that. And then Garth, I’ll hand it over to you. Yes, thanks so much for the question. I think for us, what we’re focused on is continuing to deliver hardware for our customers, because that is the vehicle that we deliver our north of 90% high margin software through that initial installation and that initial distribution process. And so while we’re absolutely keep an eye towards the bottom line and trying to make sure that we minimize hardware costs wherever possible. We’re playing the long game for the to effectively deploy the software as widely as possible. So it’s an important nuance to just understand about our hardware pricing is that we look at it as an important input into acquiring the software long sale revenue stream. And so for us, it doesn’t have as big of an impact as it does for a company that makes the – or derives the majority of their profits from selling a device itself. We’re really focused on the devices enabler for the software business. So it’s just an important thing to keep in mind. And then Garth, I’ll hand it over to you for any nuance on that and then also for the second part of the question.
Garth Mitchell: Thanks, Luke. Just Tom, thanks again for the question. We are confident that the value our products delivered to our customer. Our customers meaningfully exceeds the price we charge them, which we believe gives us decent flexibility to adjust pricing if we need to. That said, our customers depend on stable and consistent pricing, which we believe to be a competitive differentiator end market, particularly in times like needs where the supply chain challenges are making it difficult for suppliers of all kinds, because of this we don’t feel the need to adjust pricing right now, which we think will help us accelerate our share gains. And we’ll be sure to keep you updated if this changes on upcoming earnings calls. Luke, I can follow your comment on the operating expenses after.
Luke Schoenfelder: Yes, go ahead, Garth. That’s fine.
Garth Mitchell: Okay. So just on the operating expenses efficiency, so some – we saw some improvements on the G&A side relative to what we expected, which we’d – which would certainly helped and we actually do expect that to continue. Also, we saw – we had some small adjustments to the product roadmap, which allowed us to deliver some upgrades without some of the planned investments. I’d again expect the G&A improvements to continue, and we’re always looking for ways to make the other parts of the organization more efficient, which gives us pretty high confidence in our ability to deliver on the improved adjusted EBITDA guidance we provided today.
Tom White: Great. Thanks, guys.
Operator: Thank you. And this concludes today’s conference call. You may now disconnect. Everyone, have a wonderful day.
