Smart home company SmartRent (NYSE:SMRT) fell short of analysts' expectations in Q2 CY2024, with revenue down 9.1% year on year to $48.52 million. It made a GAAP loss of $0.02 per share, improving from its loss of $0.05 per share in the same quarter last year.
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SmartRent (SMRT) Q2 CY2024 Highlights:
- Revenue: $48.52 million vs analyst estimates of $51.6 million (6% miss)
- EPS: -$0.02 vs analyst expectations of -$0.02 (20% miss)
- Gross Margin (GAAP): 35.7%, up from 18.5% in the same quarter last year
- EBITDA Margin: 1.9%, up from -12.1% in the same quarter last year
- Free Cash Flow was -$14.12 million compared to -$3.37 million in the previous quarter
- Annual Recurring Revenue: $51.2 million at quarter end, up 32% year on year
- Market Capitalization: $333 million
"Our team is taking comprehensive steps to address the increasing market headwinds and enhance both our financial stability and overall execution discipline," stated Daryl Stemm, CFO and interim Principal Executive Officer.
Founded by an employee at a real estate rental company, SmartRent (NYSE:SMRT) provides smart home devices and software for multifamily residential properties, single-family rental homes, and student housing communities.
Internet of Things
Industrial Internet of Things (IoT) companies are buoyed by the secular trend of a more connected world. They often specialize in nascent areas such as hardware and services for factory automation, fleet tracking, or smart home technologies. Those who play their cards right can generate recurring subscription revenues by providing cloud-based software services, boosting their margins. On the other hand, if the technologies these companies have invested in don’t pan out, they may have to make costly pivots.
Sales Growth
A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Thankfully, SmartRent's 45.1% annualized revenue growth over the last four years was incredible. This is a great starting point for our analysis because it shows SmartRent's offerings resonate with customers. 
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. SmartRent's annualized revenue growth of 20.6% over the last two years is below its four-year trend, but we still think the results were good and suggest demand was strong.
SmartRent also reports its annual recurring revenue (ARR), or the revenue it expects to generate from its existing customer base in the next 12 months. SmartRent's ARR reached $51.2 million in the latest quarter and averaged 95.2% year-on-year growth over the last two years. Because this performance is better than its normal revenue growth, we can see the company generated more revenue from its existing customers than new customers. Holding everything else constant, this is a positive sign as it should lead to lower sales and marketing expenses. 
This quarter, SmartRent missed Wall Street's estimates and reported a rather uninspiring 9.1% year-on-year revenue decline, generating $48.52 million of revenue. Looking ahead, Wall Street expects sales to grow 44.7% over the next 12 months, an acceleration from this quarter.
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Operating Margin
Unprofitable industrials companies require extra attention because they could get caught swimming naked if the tide goes out. It's hard to trust that SmartRent can endure a full cycle as its high expenses have contributed to an average operating margin of negative 40.8% over the last five years. This result isn't too surprising given its low gross margin as a starting point.
On the bright side, SmartRent's annual operating margin rose by 57.6 percentage points over the last five years, as its sales growth gave it immense operating leverage. Still, it will take much more for the company to reach long-term profitability.
This quarter, SmartRent generated an operating profit margin of negative 14.3%, up 8.4 percentage points year on year. This increase was driven by stronger leverage on its cost of sales (not higher efficiency with its operating expenses), as indicated by the company's larger rise in gross margin.
EPS
We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Although SmartRent's full-year earnings are still negative, it reduced its losses and improved its EPS by 74.1% annually over the last four years. The next few quarters will be critical for assessing its long-term profitability. We hope to see an inflection point soon.
In Q2, SmartRent reported EPS at negative $0.02, up from negative $0.05 in the same quarter last year. Despite growing year on year, this print missed analysts' estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street is optimistic. Analysts are projecting SmartRent's EPS of negative $0.11 in the last year to reach break even.
Key Takeaways from SmartRent's Q2 Results
We struggled to find many strong positives in these results. Its revenue unfortunately missed and its EPS fell short of Wall Street's estimates. Overall, this was a mediocre quarter for SmartRent. The stock remained flat at $1.65 immediately following the results.
SmartRent may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.