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The IoT disruptor
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Sanjit Biswas and John Bicket developed wireless mesh networking technology at their last start-up, Meraki, which was acquired by Cisco Systems in 2012 for $1.2 billion. Inspired by their experience and the potential for IoT (internet of things), the duo decided to start a new venture focused on revolutionizing industrial operations.
The name "Samsara" is derived from a Sanskrit word that refers to the cycle of birth, death, and rebirth in Hinduism and Buddhism. It symbolizes the interconnectedness of life, which aligns with the company's vision of connecting devices and software to enable more efficient operations.
Samsara began by developing a platform that combines hardware, wireless connectivity, and cloud-based software. The company's initial focus was on the transportation and logistics industry, where it aimed to improve fleet management, reduce fuel consumption, and enhance driver safety. Over time, Samsara expanded its product offerings beyond fleet management to include solutions for industrial operations, construction sites, energy management, and more. The company's diverse portfolio of IoT devices includes vehicle trackers, environmental sensors, cameras, asset trackers, and gateways, all designed to collect and transmit valuable data to the cloud. On Samsara’s most recent earnings call though, 83% of net new contract value came from industries outside of transportation.
The main value prop that Samsara is trying to provide is digitizing the operation of physical assets. As mentioned, the first product-market fit was in transportation. Dash cams lowered insurance premiums and deterred large lawsuits in wrongful accusation cases. Simple GPS tags notified companies about vehicle whereabouts. Other sensors automatically notified company mechanics about an issue before serious problems occurred. Now, those same issues are being fixed in all sorts of industries. A particularly cool example is one oil company integrated real-time depreciation data into their tax planning software and saved $10 million a year.
In Q1 2024, the company reached free cash flow breakeven, ignoring stock-based comp. This is impressive considering the company is still growing at 40%+ at an $800 million run-rate. Clearly, the company’s value proposition seems to be resonating with customers looking to save money. Spending $100,000+ on a software system that can ultimately make your business run much more efficiently and save multiples of that cost is a no-brainer deal.
What also struck me about Samsara is that the company doesn’t seem to have a competitor with the same coverage of industries. There is quite a bit of competition in transportation from Verizon Connect, which bought Fleetmatics, and Geotab. However, transportation only makes up about 25% of Samsara’s revenue these days. The closest true competitor is probably Trimble, the $13 billion publicly traded company. Trimble has done over $500 million in EBIT and $3.5 billion in sales compared to Samsara’s $715 million in sales and net losses. Despite this, Samsara has a slightly higher enterprise value. Now, of course, Trimble is ex-growth and Samsara is growing 40% with a real chance to grow well over 30% again next year, but the market is clearly assuming some high, sustained growth for Samsara.
The Narrative and the Numbers
The company was founded in 2015 and it has been a rocketship since day 1. After this year, Samsara will likely pass $1 billion in sales, less than a decade after its formation. The company has about 20,000 core customers, which means that these customers pay over $5,000 in ARR. About 7% of these customers spend upwards of $100,000 and this is where Samsara would really like to focus. Crucially, the growth in enterprise customers has been very impressive, even despite the macro softness that other software companies have pointed out. What sticks out about Samsara is that they are really focusing on digitizing the industrial companies that account for 40% of GDP. These are the “sleepy” industries that we take for granted – things like trucking, distribution, agriculture, manufacturing, and oil refining. All of these industries are very capital intensive and they need a better way to account for all of their assets. Imagine a trucking company with 10,000 trucks. At that scale, it’s not easy to keep drivers accountable, and perform timely maintenance on each truck. Samsara typically bundles the hardware costs in with the subscription for access to that data, which is called the Connected Operations Cloud. The company makes 98% of its revenue from this subscription model. Customers can then use this data in any way they please – from integrating it into other applications through Samsara’s Marketplace or using it as an API in their own applications.
The competitive advantage that the company points to is the sheer amount of data it is collecting. It is true that data is the most important input for these AI models so it will be interesting to see how Samsara utilizes all of the data points in more creative ways in the future. As mentioned, the company has deemed the sale of the hardware and software as a package and thus the subscription includes the cost of the hardware. This was actually a critical matter in the company’s audit and that’s why gross margins were 57% just a few years ago. If you look at the balance sheet, at the end of FY ’23, you’ll notice that the company had $277 million in current/non-current connected devices. This was 42% of sales and is likely closer to the real amount of sales that the company brings in from hardware. However, rather than accounting for the cost of the hardware upfront, the company can amortize it over five years because it locks customers into contracts for 3-5 years.
While gross margins are now at 72% I am skeptical that they can go much higher as the amortization of the hardware must hit the cost of revenue line. It’s actually really interesting how the company pulled this off; because of the longer contract period, the hardware can be amortized over a longer period. Of the $277 million in connected devices, amortization was only $65 million. Overall cost of revenue was $182 million so the connected device costs were only about 35% of that, when you’d probably expect higher if you just thought about what the business actually does. If the contract lengths were only two years, amortization costs would be much higher, pushing gross margins down from 72% to the ~60% range. So it’s actually a little bit of financial engineering but it’s also consistent with how Samsara thinks about the business. They don’t separate out the hardware from the software because the software wouldn’t be able to function without the connected device. But the hardware is certainly something to keep in mind for Samsara. The company will likely never have 30% FCF margins as they have to spend roughly 15-25% of sales on buying inventory. The company keeps about 2 months of inventory on hand and they seem to do a really good job of managing it. The fact that the company is about cash flow breakeven is all the more impressive considering that true hardware sales could actually represent closer to 40-50% of the business. While the hardware produces some drag on the financials, an argument can certainly be made that it increases the stickiness of the business. If you have a gigantic trucking company, it would be a royal pain to change providers, especially when Samsara is doing a great job and the hardware cost is embedded in the subscription.
The company’s two founders that we talked about at the beginning still own quite a bit of stock. Each founder owns about 21% of the company and then Andressen Horowitz owns another 15%. What’s interesting is that a16z had huge conviction in Samsara; they led every round of the company’s financings, from Series A-F. It’s also interesting that the two founders kept so much of the businesses when they did six rounds of fundraising. Each one must’ve been done at a pretty high valuation so they didn’t have to give up too much equity.
Samsara has proven it can execute in a tough macro environment. It has a huge TAM, with really strong founders that are highly incentivized. Its mission to digitize the companies that run the global economy is ambitious and the company is delivering on that purpose. While the company does a good job of hiding the impact of the hardware on its business, it’s something to keep in mind. However, I can’t deny that Samsara is putting in some excellent results and I could see a long runway for this company.
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