Samsara ($IOT), Operating Leverage, and the Potential EV Problem: An Investor Day Update
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Last month, Samsara hosted its second investor day as a public company. It’s a rare example of an unprofitable tech business that went public in late ’21 but isn’t down 70-80% since then. It also hired rather than fired last year, and raised rather than lowered its estimates on every 2022 earnings call. I wrote an initial overview of Samsara a few months ago here, and so the focus of this piece will be on takeaways from the investor day rather than an introduction to the business.
On the product front, Samsara unveiled Mobile Experience Management and Connected Forms. MEM enables companies to have greater control over its employees’ devices, and includes the ability to:
Monitor a device’s location
Assign in-motion safety settings to devices, which is particularly relevant when your employees are constantly on the road!
Remotely view and control devices, which is again particularly useful when your employees tend to experience technical issues while on the interstate, rather than in an office.
Connected Forms digitizes processes such as safety checks that are currently done with pen and paper. In theory, Connected Forms will save companies large amounts of time and improve employee retention. Similar to Toast, the customers Samsara typically serves experience a lot of staff turnover; eliminating excessively tedious tasks should be a way to ameliorate this challenge.
Both MEM and Connected Forms are very much in early days. This is especially true with MEM, as evidenced by requirements that devices be Android, factory reset before provisioning, and that organizations sign up using an email ending in @gmail.com. That being said, over time MEM/Connected Forms will alter Samsara’s business in a few different ways. Firstly, these products look more like typical SaaS than the company’s current dominant revenue drivers. Products like video-based safety and equipment monitoring require sensors and sending data from those sensors to the cloud. The upshot of this is that Samsara has both lower free cash flow and margins than the standard software company; lower free cash flow because sensors are classified as CapEx, and lower margins because collecting data from edge devices isn’t cheap. MEM/Connected Forms exhibit neither of these characteristics, and so over time Samsara’s gross margins should trend upwards. Pricing info hasn’t been released yet, but it seems fair to assume that these will be priced per seat rather than per asset, another departure from Samsara’s leading revenue lines. It’s worth noting that this changes the investor pitch somewhat, which has so far been that the per-asset pricing model insulates the company from layoffs its customers make. This change isn’t necessarily a bad thing, anymore than Shopify adding a low-margin payments product on top of a high-margin SaaS business was a bad thing, but it’s worth keeping in mind when thinking about how the company might perform when customers experience hardship.
Management also discussed the opportunity for sales and marketing operating leverage over time. Currently there are three factors weighing down S&M expenses, all of which are good for the business but temporarily bad for the income statement. The first is that Samsara hired heavily for its sales team in 2022 and it takes about a year for these reps to ramp. In other words, there’s been an increased headcount cost to the business without a corresponding increase in productivity. This hiring investment should begin to payoff as the company enters 2024. The second and third points go hand in hand: customer contracts are typically 3-5 years and sales reps are compensated based on net new ACV. One of Samsara’s strengths has been its ability to upsell existing customers additional products, which last quarter was evidenced through 60% of ACV growth coming from expansion rather than new logos. The downside of this, purely from an operating leverage perspective, is that upselling new products is similarly expensive to signing a new customer. Samsara’s sales compensation philosophy, combined with the multi-year contract length, means the vast majority of existing ARR involved heavy S&M spending. Multi-year contracts mean very predictable revenue, and expansion with existing customers indicates Samsara is increasingly embedded into these organizations’ workflows. Both of these things are advantages, but also present temporary roadblocks to increased operating leverage. Fortunately, these are roadblocks that should lessen as portions of the customer base come up for contract renewal rather than purely contract expansion. At the risk of pointing out the obvious, it’s a good thing that Samsara is becoming a multi-product organization and a good thing that sales reps are incentivized to sell those products. Just as in the 2020/21 craze there was a temptation for companies to focus on revenue at the expense of all else, today there can be a temptation for companies to slash costs and modify their businesses even if it’s to their detriment longer term. Samsara could cut S&M expenses or even cut initial contract lengths to boost short term profits and demonstrate operating leverage now, but the long-term result would be a more anemic multi-product expansion, a less motivated sales team, and reduced customer LTV.
The Investor Day wasn’t all copacetic, and concerns came to mind about the potential transition to EVs over the next decade. In response to a question about the electrification of customers’ fleets and how that would impact the value Samsara products provide, management responded saying,
“For EVs, customers don't necessarily care about engine idling, but they care a lot about when are the vehicles charged, right? Are they charging all of their vehicles at the same time, putting more load on the grid and paying higher prices? Or can they optimize that charging, spread it out and be able to complete their jobs on time but also be able to lower their costs, right?”
Lowering customers’ cost to charge their EV fleets is a valuable service, but it’s not quite clear how valuable. Fuel is an enormous cost for a lot of Samsara’s customers, and skyrocketing gas prices in 2022 were cited as a significant factor in the company beating estimates every quarter. Saving businesses millions of dollars on their largest non-personnel expense is a compelling offering! It’s also a key reason customers see a return on Samsara products so quickly; paying hundreds of thousands of dollars a year for vehicle telematics makes sense if it means saving multiples of that amount on fuel costs.1 It may be harder to deliver the same kind of impact for EVs. Anecdotally, those I know who own Teslas spend far less money charging them than they would have on gas for an ICE vehicle. Again, that’s not to say that Samsara helping its customers optimize EV costs isn’t useful, but only that it’s not solving the same pain point that its fuel usage diagnostics do. The transition to EVs is worth keeping in mind, especially when the stock trades at 14x next year’s revenue.