Cloudastructure, Inc. Class A Common Stock 2026 Q2 Earnings Call

Rob, you may begin. Good afternoon, everyone.

Thank you all for participating in today's conference call. On the line with us today are James McCormick, Chief Executive Officer of Cloudastructure, and Greg Smitherman, Chief Financial Officer. Earlier today, the company issued a press release announcing its operating results for the second quarter ended June 30, 2026. The release is available on our website at cloudastructure.com. Also earlier today, the company filed a Form 12b-25 with the SEC, notifying the commission that it requires additional time to complete the review of its financial results for the quarter. Cloudastructure expects to file its Form 10-Q within the five calendar day extension period provided under that rule, and the report will be available on our website and at www.sec.gov once filed. Because the review is ongoing, the results discussed on today's call are preliminary and potentially subject to change.

Please also note that on July 31, 2026, the company affected a one for 30 reverse stock split of all classes of its issued and outstanding common stock. Unless otherwise noted, per share figures discussed on today's call reflect that adjustment. Before Mr. McCormick reviews the company's operating results for the second quarter ended June 30, 2026, and provides a business update, I want to remind everyone that today's call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding our expected business performance, strategy, market opportunities, customer demand, deployment activity, recurring revenue, operating results, liquidity, and growth plans. Forward-looking statements are based on the current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these statements.

Important factors that could cause actual results to differ materially are described in today's earnings release and Cloudastructure's filings with the SEC, including the risk factors discussed in our most recent annual report on Form 10-K and subsequent filings. Forward-looking statements made on this call speak only as of today, and Cloudastructure undertakes no obligation to update them except as required by law. We may also discuss non-GAAP financial measures on today's call. Reconciliations to the most direct comparable GAAP measures, where applicable, are included in today's earnings release and related materials available on our investor relations website. I would now like to turn the call over to James McCormick, Chief Executive Officer of Cloudastructure.

James? Thank you, Rob, and thank you all for joining us today.

We spoke with many of you just four weeks ago on our first quarter call, so I'll keep the background brief and focus our time on what changed during the second quarter. Turning to the second quarter, the most important development was the continued growth of the recurring portion of our business and the impact that is beginning to have on our revenue mix and margins. Our annualized recurring revenue run rate increased to approximately $3.1 million exiting the second quarter, compared with approximately $2.6 million exiting the first quarter. Revenue for the quarter was approximately $1.2 million, representing a 13% year-over-year growth rate. Recurring subscription revenue increased 164% year over year to approximately $764,000, while hardware revenue declined 49% and installation revenue declined 32%.

Recurring revenue now represents approximately 62% of total revenue, compared with 27% a year ago. That growing mix of recurring revenue is translating directly into improved economics. Gross profit increased 51% year over year, while gross margin expanded approximately 13 percentage points to nearly 50%. The decline in hardware and installation revenue is a direct result of the kind of business we are winning, and it reflects a deliberate choice about how we compete. In 2025, 57% of the cameras we signed in new contracts were taking over from a previous vendor. Through the first six months of 2026, that figure is 77%. We do not require a customer to rip out equipment that still works in order to adopt our platform. That is central to how we win competitive displacements, and it is why that percentage is climbing. Excuse me. The trade is straightforward. A takeover generates Apologies. I just had a blip in my communication line.

A takeover generates materially less hardware and installation revenue up front, and it gets us to the recurring subscription faster and at a higher margin. We are not walking away from installation work, though. Where a customer needs infrastructure built, as in Southern California and Baltimore, we build it, and we capture that revenue as well. But we would rather win the recurring seat on a customer's existing camera system than lose the account defending a hardware sale. It's also worth putting that growth in context. Our customer retention rate is approximately 99%. That means substantially every dollar we add is a net new dollar rather than a dollar replacing something we lost. Many companies at our stage have to rebuild a meaningful portion of their revenue base each year before they grow at all. We do not. Combined with expansion inside existing accounts, that is what allows growth that looks modest in any single quarter to compound into a durable recurring base.

Our objective for the second half is straightforward: convert more of the pipeline we have already built into deployed customers and recurring revenue. More on this shortly. Multifamily remains our largest and most established vertical, and we continue to see meaningful opportunity within the customer relationships we have already built. Earlier this month, we announced our third deployment with a luxury multifamily operator in Houston, bringing Cloudastructure into approximately 38% of that customer's Texas portfolio. That progress is important. We started with an individual property, demonstrated the platform's value in production, and earned subsequent deployments across the portfolio.

That is the land and expand model we have discussed in the past, and we are pleased to continue to see tangible evidence of it within our customer base. Because our retention is high, expansion inside an existing account adds to the base rather than replacing something that left it. We also continue to serve eight of the 10 largest NMHC-ranked multifamily property managers in the United States. We are also beginning to see our platform gain traction beyond multifamily, particularly in commercial real estate. Earlier this month, we announced a five-building Southern California office portfolio managed by one of the world's largest commercial real estate services and investment firms. What makes this deployment particularly important is that we are not replacing another technology provider. We are replacing the property's dedicated on-site security guards with AI-powered surveillance and live remote guarding.

This represents our first commercial office portfolio where remote guarding is replacing an on-site guard program outright across multiple buildings. We will also design and install the camera infrastructure across all five properties from the ground up, creating both installation revenue and a larger recurring subscription footprint. The opportunity came through a referral from a sister property within the same institutional portfolio, providing another example of how successful deployments can create additional opportunities within an existing customer ecosystem. More broadly, we believe rising labor costs, staffing challenges, and demand for consistent 24x7 coverage are creating a meaningful opportunity for technology-enabled remote guarding to replace portions of the traditional on-site guard model. One of the advantages of our cloud-native architecture is that it allows us to engage customers at multiple points in the life cycle of a property.

In Southern California, we are designing and installing an entirely new surveillance infrastructure across a five-building office portfolio where no lobby camera coverage previously existed. Last week, we also announced another example of that flexibility with a new multifamily development in Baltimore, where we were selected during the construction phase based on the performance of our platform across the developer's existing portfolio. Because the property is still under construction, the initial phase consists of the surveillance installation, with AI surveillance and remote guarding expected to be added as the building nears completion. Being specified into a project before a building is completed changes how early we can establish a customer relationship. Rather than competing to replace an incumbent system after the fact, we are becoming part of the property's security infrastructure from the beginning.

More broadly, these engagements demonstrate that customers can adopt Cloudastructure at multiple stages of a property's life cycle, from new construction to existing portfolios that expand over time as customers gain confidence in the platform. While the Southern California deployment is expected to begin contributing this year, the Baltimore installation aligns with the property's construction schedule and is expected to begin in the first half of 2027. That timing difference is important, but both engagements reflect the same underlying trend. Customers are bringing Cloudastructure into their portfolios earlier and expanding the relationship over time. As we scale our business, we are also strengthening the team responsible for converting this opportunity into revenue. Separately this morning, we were pleased to announce the appointment of Nile Coates as chief revenue officer.