What happened
Shares of property-technology company Latch (LTCH -10.57%) were down 33.1% in May, according to data provided by S&P Global Market Intelligence. The company reported financial results for the first quarter of 2022 on May 5, highlighting ongoing concerns. Then on May 20, Latch's management made a drastic move to preserve cash, further underscoring the bear case with the stock right now and leading to its underperformance for the month.
So what
Latch is a small property-technology company. The business consists of a smart-lock hardware device (with a low profit margin) and its operating-system software (with high margins). The company had guided for first-quarter revenue of $12.7 million to $14.8 million, and it made good on this guidance by reporting quarterly revenue of $13.7 million. Moreover, software revenue of $3 million exceeded guidance and motivated management to raise full-year software revenue guidance.
Because its software revenue will be the driver of its future free cash flow, you might have expected the market to celebrate this development from Latch. But its business is simply behind schedule and has a deteriorating financial situation as a result.
Image source: Getty Images.
For context, when Latch went public, it had projected $35 million in software revenue in 2022. In the first quarter, it raised full-year software revenue guidance from a range of $14 million to $15 million to a range of $14.3 million to $15.3 million. But even this small raise is still drastically lower than what investors had previously expected by this point. And it's why the first-quarter report left investors wanting.
Moreover, Latch ended the first quarter with cash and marketable securities of $335 million. That sounds like a lot, but the company had a $50.6 million loss from operations in the first quarter alone. In short, with software revenue significantly behind schedule, its cash burn has remained elevated. And it's why investors continued to be sellers in May.
Now what
Latch is making a bold move to address its cash burn problem. Subsequent to its first-quarter report, management announced it was laying off 28% of its full-time workforce. This move will cost the company $4 million to $6 million in one-time restructuring charges but will save it around $40 million annually.
Most importantly, management believes this change gives it enough cash to make it to breakeven on a free-cash-flow basis.
In my opinion, this move was necessary; Latch's stock is down so much that it wouldn't have been able to raise additional capital on favorable terms otherwise. However, there's potential downside risk. Many of the cuts will come in the sales and marketing department, where spending had soared over 360% higher in the first quarter compared to the previous year.
Management cited ongoing construction delays as a reason for the cuts, and this is something to watch. Cutting sales employees now could be a signal of a further deceleration in the business.
