Samsara, IoT, and Pricing Power
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Samsara ($IOT) enables businesses that rely on physical operations to collect and make sense of their data. Physical operations is a broad term, and intentionally so. Samsara describes its entire product suite as the ‘Connected Operations Cloud’, which reflects its ambition to become customers’ system of record over time. Products are currently divided into a few different areas:
Video-based safety: Monitors both the road and fleet drivers. Captures important incidents, provides AI-powered safety alerts and enables driver coaching to improve safety.
Vehicle telematics: provides location tracking and advanced fuel/vehicle diagnostics.
Equipment monitoring: provides location tracking, utilization data, and maintenance diagnostics for equipment fleets (fork lifts, generators, water tanks, containers, etc).
Site visibility: video-based safety but for worksites. Monitors for onsite threats, site inactivity, incidents, and enables improved worker coaching, among other things.
Apps/Driver Workflows: Intuitive driver workflows to save company drivers time and shift them from pen and paper to online.
A key part of Samsara’s value prop is making data accessible that previously wasn’t. This involves giving customers sensors/cameras for data collection, as well as sending that collected data from the sensor/camera to the cloud. Consequently, it’s not a pure software business, with gross margins currently at around 70%. This is significantly better than the mid-50s margins from three years ago, but management has said they’re unlikely to improve too much more in the short-term. There are two paths to these sensors costs trending lower over time: the first is that as Samsara matures it’ll have a higher ratio of existing to new customers. The second is that OEMs such as John Deere are beginning to have pre-installed sensors in their equipment, which Samsara can then access via APIs, although this transition is very much in its infancy.1 It’s also worth emphasizing that while the sensor piece hurts gross margins, it strengthens the company’s competitive advantage. Aside from its app/driver workflows, Samsara’s products are only as good as the recommendations and alerts they provide. The more sensors they have installed, the more data the company collects, the more accurate its recommendations are. This leads to a powerful data network effect; a startup that wanted to compete with Samsara would also need to analyze over a trillion data points, which is challenging if you don’t already have sensors installed with a large number of customers!2
Pricing is a little different from the SaaS standard, as it’s neither per seat nor usage based. Instead, Samsara prices per application per asset, so if a transportation business has 50 vehicles, and wants both vehicle telematics and video-based safety, it’d purchase 100 subscriptions. The company’s focus is currently on serving the enterprise, and contracts are typically 3-5 years, although unfortunately for Samsara’s cash flow dynamics not all that money is received upfront. Recent performance has also been a little different from other SaaS players, to put it mildly. The company’s beat earnings and revenue estimates for each of the past four quarters, grown headcount 40% YoY as of Q4, and also recently hit an all-time ARR per employee high of 350k. The stock price has behaved accordingly, with 1-year performance very modestly positive:
Year in Review
“So from an ROI perspective, it's absolutely a strong case. We have multiple opportunities to provide value to our customers on the safety side when it comes to helping exonerate drivers from accidents or even reduced risk to avoid accidents in the first place. That's really compelling. And for these large-scale, complex physical operations customers, it can save them millions of dollars on a yearly basis. Similarly, for fuel, it's the same story. Coaching drivers to operate a little more fuel efficiently, and then optimizing the assets and the workloads and the routes to be fuel efficient, can save these customers millions of dollars a year.” - Q42023 earnings call.
Samsara’s resiliency over the past year is due its customer base, which is meaningfully different from the customers that most tech companies serve. It’s challenging for Netflix to report resilient growth after a pandemic, when everyone was stuck inside and wanted a subscription to anything that would alleviate boredom. Resilient growth is also currently challenging for software businesses that primarily have other software businesses as customers, because to some degree their growth is indexed to the growth of the startup/software industry as a whole.3 Samsara’s fortunate to not be affected by either of these dynamics, as seen by their customer base:4
Samsara’s also fortunate to have customers that (1) are sensitive to high fuel prices and (2) pay a lot in insurance premiums. While tech companies have been cost cutting by laying off employees, the companies above cost cut by saving on gas and insurance. Both of these were tailwinds to the business in 2022. Identifying opportunities to reduce fuel waste matters a lot if fuel costs are 60% of customers’ non-personnel operating budget. Samsara’s Video-Based Safety product records any incidents that occur on the road, which makes lawsuits and accidents both straightforward and cheaper for companies to handle. Importantly, insurance providers can also access customers’ driving data through APIs and then offer lower insurance premiums to these customers, leading to significant cost savings. In other words, using Samsara has a pretty immediate effect on a company’s OpEx, which can make even a $500,000 price tag seem reasonable.5
Expansion Opportunities and Pricing Power:
Samsara’s first two products, Vehicle Telematics and Video-Based Safety, were built for companies’ vehicle fleets, and comprise the vast majority of the business’s current revenue. The push into non-vehicle applications, whether that be equipment monitoring or site visibility, is more recent, and along with app and driver workflows contributes a little over 10% to the company’s top line performance. The selling process for equipment monitoring is likely more challenging than for the company’s first products. While extending the useful life of equipment and reducing maintenance costs matter, it’s not the same pain point that fuel was in 2022, nor has Samsara indicated it saves money to the same degree as lower insurance premiums. Having said that, customer adoption so far seems strong, if still in early stages. Two-thirds of multi-product large customers are subscribed to non-fleet products, but the limited revenue contribution, and management commentary, suggests that these products have been rolled out over only a fraction of these customers’ assets.6 Assuming these non-fleet applications perform well, there’s a natural revenue expansion opportunity as customers add the rest of their non-fleet assets. Non-fleet applications also bring Samsara closer to being a true platform, rather than just a point solution for companies’ vehicle fleets.
The other obvious opportunity to increase revenue, asides from just adding logos, is through price increases, which sell-side analysts have asked about many times. Speaking at the 2022 Investor Day, Samsara’s CEO said:
“I think we've been very focused on more assets on the platform. And over time, we need to also think about our monetization strategy.”
In other words, Samsara is following a similar strategy to Netflix: keep prices low to grow faster, and then increase prices over time. This model worked well with Netflix subscribers, but it potentially works even better when your product is embedded into enterprises and delivering obvious cost savings. Assuming this strategy works it has meaningful consequences for the how the company should currently be valued, and partially explains its high revenue multiple of 14.5x 2022 sales: It’s a business that looks poised to continue reporting impressive NRR numbers, and underpricing its product suite means both revenue and gross margins are currently understated.
There’s some worry that OEMs pre-installing their own sensors will lead to them offering their own telematics products, as Ford recently has. Samsara’s CEO has said this in the past: “What we see today is that our customers have heterogeneous fleets. They don't just drive one make or one model of vehicle and so they want to see data across all their operations and often not just trucks. They want to see their warehouses, their factories, their equipment, all in one place. And so, our OEM partnerships are really kind of playing into that where we can connect the data to our cloud directly. It's a better customer experience in terms of it being seamless and software-driven. But it does provide that full visibility and that's our differentiation and that's something that OEMs alone cannot offer.”
Of course this assumes recommendations get meaningfully better with more data. It’s always possible that that doesn’t end up being the case.
Byrne Hobart at The Diff has talked about this in the past, but unfortunately I can’t quite remember the name of the article.
Image is from Samsara’s Q12023 shareholder letter.
One customer case study from Samsara’s Q32023 shareholder letter reads: “They estimate that these exonerations (of drivers involved in accidents) alone saved them $500,000 in annual insurance premiums, representing a five-month payback period for their entire investment in Samsara products.”
Again from the Q32023 shareholder letter: “Almost half of our multi-product core customers and two-thirds of multi-product large customers subscribe to non-fleet products, resulting in future non-fleet monetization opportunities as existing customers bring additional assets onto the Samsara platform”