CFO Greg Smitherman have both joined us before, and we have two executives making their first appearance with us, Chief Revenue Officer Nile Coates and Chief Security and Operations Officer Ed Burnett. Welcome everyone, and thank you for joining us.
Thanks for having us.
Thanks, James.
Thank you.
Appreciate it.
Before we dive in, I must note that Cloudastructure's safe harbor statements are available in the investor presentation on their website. This fireside chat is not to be reproduced, nor may a transcript be distributed without prior written consent from Water Tower Research. As always, investor questions are encouraged. Please enter them in the chat box. Those wishing to request a meeting with Cloudastructure can do so through the conference portal. With these items addressed, let's move forward, gentlemen. All right. I'm going to start with you, James.
Just again, for investors who are new to the story, just give us a quick refresher on what Cloudastructure does today, and then perhaps paint the bigger picture. What kind of company are you building over the next three to five years, and how will it differ from the Cloudastructure of today?
Yeah, sure. As a refresher, what we do, we are a video surveillance company using artificial intelligence and, where appropriate, human-in-the-loop to provide proactive security coverage for our enterprise customers, right? In regards to where we're at today and where we see ourselves going in the future, our first beachhead, if you will, into revenue was multifamily housing. We do work with eight of the top 10 multifamily property management companies in the U.S., so that is a huge revenue source and vertical for us. We think over the next, frankly, two to five years, you're going to see that shift.
Not that multifamily won't be an important revenue stream for us, but there's additional verticals that we have current installations in that we see expanding at a more rapid clip, including active construction sites, commercial buildings, transportation and logistics, those sorts of things.
That's a great overview. Thank you. Let's talk about Q2 for a second. High mix of recurring revenue in Q2, and subscription services were 62% of total revenue. Just setting any one quarter aside, just how are you thinking about the mix of the business over the long run between-
Mm-hmm. Yeah.
Subscription services, hardware, installation? What does the revenue model look like at scale?
Mm-hmm. Yeah. Interesting question. Many ways to answer it, but historically what we saw is that the components of revenue were split sort of evenly, I guess you would say, right? Hardware, installation, subscription revenue. One-third, one-third, one-third. Q2, first half of the year, recurring revenue, there was a shift.
There are very specific reasons for that. Greg can talk about that in a little bit. But we think over time a couple things are going to happen. We actually like installation revenue because that means we have a new customer, right? Or we have a further deployment inside the portfolio of an existing customer. We actually like that. When we sell hardware, we actually make decent margins on hardware, right?
The real gem, the thing that we are starting to get more and more excited about because we are seeing demonstrable proof points, is the increase in the SaaS or recurring revenue piece, and we expect that to continue to grow as a percentage of revenue over time. So we will see, but that one-third, one-third, one-third will probably be weighted more towards the recurring revenue piece.
Again, not to give too much away, but we have a very high customer retention rate, so once we get a customer and prove the efficacy of our solution, they do not go away. So that would imply that we should continue to see that SaaS component increase.
Yeah. There's obviously a lot of opportunity out there for a greenfield opportunity for installation.
Yep
Yeah, it will be very interesting to see how that mix changes over time. You talked about multifamily in your overview.
Yeah.
Obviously, that's kind of your initial key vertical.
Yeah.
You're eight of the 10 largest multifamily property managers in the country. You're still, I think, a relatively small share of the portfolios, but you've had some wins in Houston, Baltimore, and in Southern California that kind of show the platform landing at very different kinds of properties.
Yeah
Over the medium to long term, how do you think about the balance of going deeper into multifamily versus building out new verticals
Yeah
like commercial real estate, logistics, retail, and construction?
Sure. So, let's start with multifamily first. My previous answer, it was not to imply that multifamily will be a throwaway for us in the future. As I mentioned, we work with eight of the top 10 largest property management firms in the U.S. And let's just use rough numbers, right? Right now in that portfolio, we're approaching, let's just say 200 properties, but those eight manage 10,000 properties, so the expansion potential is just massive.
We could have just a wonderful business if we only focused on multifamily, but economics change, economic environments change. We think a diversification strategy for additional verticals or approaching different verticals is a smart thing for us to do, and that is indeed how we're approaching things right now, right? Think of it this way.
The solution that we're providing is the same regardless of what the vertical and who the customer is, right? It's video surveillance tied in with artificial intelligence and, where appropriate, human-in-the-loop. It's the same. We're just addressing it with different solutions, different hardware products, those sorts of things. So I think what you'll see is that we will continue to expand in multifamily while we continue to penetrate additional verticals.
Yeah, makes sense. Security is a problem everywhere, whether it's a shopping mall.
Indeed
Or a multifamily or a construction site.
Yep.
Let's turn to Greg.
I alluded to this earlier on the mix towards recurring revenue, but gross margin has been trending higher as a result of that mix and touching 49% last quarter. Just looking at over the next several years, just where do you think gross margin can go as that SaaS component compounds? What are the biggest drivers and potential swing factors along the way?
Yeah. It's really interesting and as James alluded to it, the first half of this year compared to what we have done in the past, there was a big shift in the mix where historically about 57% of the cameras that we added were takeovers. Someone already had a system up there. They realized we have a much better solution. They dropped their old vendor, they moved to us. Fantastic.
But almost 40%, a little over 40% was new build. Significant installation revenue in hardware sales. But in the first half of this year, again, not through the design, it's just the way the deal flow happened to pull out, that 57% became 77% takeovers. Part of that is also our continuing land and expand, right? We are going after people we know have systems, because they like us and we're getting further penetration in there.
But that meant the installation and hardware components were only 23% instead of 43%, and that has an impact on margin, and revenues, because the installation, while it's decent revenue, it's not very big margin. When you kind of drop out that from a margin perspective, a little bit of a drag, yeah, margins went up.
Would I expect margins to come back down as I don't expect that trend to be so high takeovers. I think it will come down in the short term, but long term, yeah, the SaaS component's going to become a bigger and bigger part as that recurring base and the stickiness of our solution stays, and margins will increase and they'll be, we think, significantly north of 50% on a long-term basis.
Great. It is a good overview. You have shown expense discipline with G&A down year-over-year, even as you invest in sales and operations. Just over the medium term, how do you think about the path to cash flow breakeven, and how do you balance getting there against investing ahead of the growth that you see coming?
Always a challenge for an early-stage company, right? Because you would love to throw 1,000 salespeople out there and really just get everyone pushing revenue. But that doesn't control the costs well. I think we have got a team here of people that have been operating companies for decades and really understand how to manage that tricky balance. It is not something that you can just say, "Oh, well, I am going to do it this way." It is, "What are we doing this month, this quarter, this week?" Right?
You have always got to have your hand on the dials, moving around, reacting to the market, and we continue to do that. We continue to be very focused on controlling our costs, making sure that every dollar we spend is driving to grow and expand the business, meet our customer needs. So it is just something we have to continue to manage. We do continue to manage, and we have got decades of experience doing it at various companies. Fortunately, Cloudastructure is benefiting from those decades of experience.
All right. Just on a sort of related topic, just kind of wrap up the CFO section here. Can you talk about your funding strategy and how you are going to capitalize on the company for the growth ahead, just what the planning sources are available to you and what the balance sheet looks like as you approach breakeven.
Yeah. We ended the last quarter with a little over $3.5 million in the bank. We still are cash flow negative at the moment, but we are charting a path to get to cash flow breakeven in the certainly plannable future. We're hoping by kind of end of next year we are there. We'll need a little bit of cash going forward. We have certainly several facilities.
We continue to talk to investors. We continue to talk to strategic partners. There, we think we have a host of opportunities to get that funding. We're also trying to make sure that it is minimally dilutive as possible. I'm not worried about cash. Again, it's something that, like everything else, you got to play with the dials.
You got to react to the market and we are out talking to investors, making sure that we're getting the right deals, that we're going to have the financing available. But we've already got plenty of facilities that we can draw down. It's can we do better? And that's something James and I spend a lot of time saying, "Yep, we can do better and we will do better.
Thanks, Greg. That was a good financial overview. Let's turn to our couple of first-time guests from Cloudastructure that we're excited to engage with. We'll start with Nile. Nile Coates was appointed Chief Revenue Officer in August. Is that correct?
That is correct.
Nile, welcome. Please give us a little bit about your background and what convinced you to join Cloudastructure.
Yeah. First of all, thank you very much for having the time for me to be here. I would tell you, quite frankly, I've spent 35 years in sales now, right? As a salesperson, at a core, you're looking for an opportunity to have a really, really strong product that you're going to be putting in front of customers, have a really strong company behind it, and then a pricing point that makes sense to the market in general, right?
As I started looking at this and especially from the lens of a sales leader, which I've done for about 20 years now, there was nobody that had as much opportunity as Cloudastructure has right now for us. It really comes down to two things.
For me, the multifamily environment that James talked about, I was familiar with Cloudastructure before because I lost deals to them quite a bit, right? There is an environment of this retention that James talked about that's unheard of in the industry as a whole. So that's something that excited me just at the foundation. Then I looked at what are the other things that we have as an organization?
You look at the sales leadership, or the leadership as a whole, and we have a great message from the finance piece. You just heard from Greg. We have a great leader in the CEO component in terms of how are we going out and trying to expand our marketplace. You'll hear from Ed in terms of what we're doing from an operations standpoint. I haven't seen an organization that's had this type of unity at any level. For that's the main reason I decided to come here.
Yeah. That's pretty compelling. You're coming in with fresh eyes. What are your early observations of the go-to-market and where do you see the biggest opportunities to accelerate revenue growth?
Yeah. When I talked about the opportunity as a salesperson, it really comes down to I could name a variety of verticals. I think James talked a little bit about it earlier. For me, if we look at the fact that we are at this precipice of change that the market is demanding, they want an organization from a security environment that's going to adapt to what their needs are, and we are at that phase right now.
Whether we're looking at construction, we're looking at the T&L portion, we're looking at data centers, we're looking at all of that, but even if I come back to the very beginning of all of this and say from a multifamily environment, we want to be engaged earlier.
If we can get engaged during the build phase and then transition into the protection of tenant phase, that gives us a much greater input on helping those facilities control costs and make it much more acceptable for everybody to be part of. I would tell you from the go-to-market piece, I've been here roughly a month.
What I've seen is we have a very, very strong foundation in multifamily. We have some very good salespeople that have the acumen to take on some additional challenges in other markets, and now it's up to me and the team to really help them hone those skills, and fine-tune what they need to do to go into these other markets themselves and the verticals.
That's a good segue into my next question, which is related to verticals. As we've discussed earlier in this discussion, Cloudastructure is touching multifamily, commercial real estate, logistics, retail, and construction. Just as CRO, how do you prioritize across those verticals? How do you keep the sales organization focused while the opportunity set widens?
Yeah. There's a couple ways that we can handle that. I can do this with finding subject matter experts in those verticals, so as we start to expand, we expand intelligently. We don't hire quickly. We're going through and making sure who are the right candidates that are actually going to drive that market. Ideally, you're like any other sales leader.
We'd love somebody to come in with a giant book of business that says, "Okay, I've got this. Let's just go into these verticals." The reality is that we have to look and fine-tune and figure out where does our solution fit best. One of the things that James talked about in those core foundations of what we do, it's all super important to do the video monitoring, the protecting, all of that.
But in addition, there are some organizations that are going to benefit from an operational improvement standpoint by taking advantage of the camera feeds that they have within those organizations. For me, what I do is I look to figure out where it is that crime is really starting to intensify, operational challenges have intensified, and the demand for video confirmation has intensified. Once we have those three things, then we can look out and figure out, okay, who actually will benefit the most from our solution? And that's who we're going to go after first.
Great. Maybe a quick one here. The Southern California office win came through a customer referral, I think. So, Master Service Agreements are turning single-site customers into portfolio relationships. How do you think about referrals, partnerships, and MSAs as leverage for scaling revenue efficiently?
Yeah. Quite frankly, James, that's the force multiplier in anything, right? The idea of landing a customer, the reason James talked about the importance of retention, it's not just that we don't lose customers, but the expansion of those customers. How we're truly impacting their overall business, that's a huge deal. As much work as we can do to land and expand those opportunities, great. In addition to that, though, most every organization has preferred vendors that they're working with, and some of those are maybe outside of our industry of security.
However, they do have needs, sometimes in RFPs and other things, that have requirements for security components to come in. That's where we have to really improve our partnership capability in talking about some of the major players from an implementation standpoint, or at least a recommendation standpoint for becoming a preferred vendor for those folks too. So force multiplier all the time. Anytime we can find additional areas for folks to sell for us on our behalf, as long as they understand what our product value is to the end customer, I'm in.
Right. No, I think that's a great review of the sales effort. Let's turn to Ed Burnett, who joined as Chief Security and Operations Officer earlier this year. Welcome, Ed, and thanks for joining us.
Thanks, James. It's great to be here.
All right. So Ed, you spent more than 30 years in enterprise security, including over two decades at UPS. That's quite a long time, leading large-scale security and fraud investigations. Sort of the same question I asked Nile. What drew you to Cloudastructure, and from your vantage point, where is physical security headed?
Yeah. I had the chance encounter to get involved with Cloudastructure through a consulting agreement. The more that I recognized what Cloudastructure had to bring to the table, the uniqueness of the AI platform, and their human-in-the-loop structure, it became very quickly apparent to me of the different solutions that Cloudastructure could have provided me in my previous career, and the concerns that I was forced to deal with and didn't have solutions for.
Not only did Cloudastructure either have the solution currently, or they had the ability to develop those. James and I had some great conversations. I had some great conversations with Greg and the other executives and the board, and understood the strategy. I was excited about that and wanted to be a part of it. That's why I'm here.
Great. We talked about the Southern California announcement with Nile a little bit, but you're replacing around-the-clock guard posts. You said that the replacing around-the-clock guard posts isn't just a cost decision, it's a reliability decision. I have the vision of a guard asleep at his desk in the middle of the night. Just walk us through the guard replacement thesis and how significant you think that shift could become across the industry, and perhaps touch on any barriers to that shift.
Well, I think as a security executive, you're always looking for ways to improve your security performance and your platform. At the same time, how can you improve cost, right? At the end of the day, you want to be able to deliver return on investment to the company that you're working for.
I found that physical security guards, they had a tendency to become tired over a period of time, complacent in your process and your procedures. Whether or not they were missing criminal activity, compliance activity, and putting the company at risk. How could you overcome that? Obviously, to me and in my experience, technology and AI came into play there.
When you talk about it's not necessarily reducing a cost, but it's improving reliability, you've really got to take into account what technology you can use to improve that reliability and protect your organization better, and return on that investment is critical to be able to go to your C-suite and ask for funding for AI technology and other enhancements.
Barriers, where you talk about that is, really it comes down to an education. If my processes and procedures are working, I become complacent in allowing those to continue. You really have to understand what the AI can bring to the table for you to be able to enhance your processes, reduce cost, and make sure that you're protecting the company, the employees, and your customers that you're dealing with. That's really the main barrier, is just that education and that awareness.
Because I will tell you, James and I both touched on this, about our multifamily segment that's been the bread and butter for Cloudastructure. But the opportunity that we have in other verticals is tremendous, and it's a matter of educating and becoming a forefront of the awareness in those other verticals for companies to understand who Cloudastructure is. We're getting there.
Great. That's helpful. You oversee remote guarding deployments and hardware development in productions. Just at a high level, how are you scaling these operations to stay ahead of demand?
Oh, that's a great question. I think you really have to understand what the strategy is first. You understand the strategy, then you're able to look at your product offerings and where you need to develop other hardware to provide solutions. Then at that point, really that sales engagement, understanding what the customer needs and what we can provide for them.
Now you become into that scaling of process, right? Looking at your process, is it efficient? Does it have a cost containment, and is it a repeatable process? Right? Now your process is solid, you've developed that, then the next step is looking at your people. Do you have highly qualified technical people? Are they trained and educated in the process to scale? Once they become trained and they understand it, then you're able to execute.
Once you start executing, then it starts repeating itself, right? You have to continue to look at your process. You have to continue to define the process, and you have to continue to educate your employees. Once you do that, then you're able to scale at whatever the strategy dictates that you scale at.
Got it. Just turn to your background again for a second. Given that, you have a pretty strong logistics background, you must know firsthand what operators like UPS care about. How does Cloudastructure's platform map the problems you saw on the inside of a major logistics operator, and how big could transportation and logistics become for the company?
Cloudastructure and the AI platform that the company provides and the human-in-the-loop operating structure is significant in the various concerns that you see, not only from a theft perspective or a security, physical security, perimeter security perspective, but it also has play in transportation logistics, construction, other verticals in reducing safety violations, protecting employees, looking at compliance areas where it puts companies at risk, right?
The AI and that physical remote guarding platform can improve the compliance and reduce the risk. Example is at airports, right? There is security processes that are involved in entering properties from carriers. You violate that, you have the risk of shutting that operation down. Millions and millions of dollars involved in that. Cloudastructure can play a key role in preventing that from happening. Now, I would answer the last question that you asked about the potential impact for transportation and logistics for Cloudastructure. I will answer that with one word: huge.
That is a great way to end the answer. Let us wrap up. I will talk about you, James, just kind of put a bow on it for us. What should investors be looking for in terms of milestones, and what are your top priorities as we head towards the end of 2026 and into 2027?
Sure. So look, we are at an inflection point as a company, right? Decent revenue last year, more this year, but we really want to get into that, I don't want to call it hypergrowth, but we want to get into the extended growth phase from a revenue standpoint, right?
Part of the way you do that is you have a strategy, you tie it in with development features, and you tie the engineering organization, right, into what the salespeople are hearing and what can be delivered from the operational side of things. One of the key components that I think we have addressed is the strength of the management team. You've heard it in these conversations, right? Greg and I have been doing this a long time. Nile and Ed, same thing in their respective disciplines.
It is a pleasure to work with leaders like this that can take an organization from where we're at today to much, much larger in the future. What should you look for? Increased revenue, and then all the attendant things that we just talked about over the last 20, 25 minutes, which include expansion in multifamily, traction in additional verticals, partnerships with key partners, I guess you would say, and additional products that we can add to our sales portfolio as well. I think that's what you can look for, James.
Great. All right. Well, thank you, James, Greg, Nile, and Ed. On behalf of Water Tower Research, thank you, and thanks also to our participating audience. We look forward to having you back soon. Additional materials related to Cloudastructure can be found at www.watertowerresearch.com. Investors with remaining questions or those wishing to request a meeting with management are encouraged to communicate their interest via the conference portal.
Thank you, James.