Over the past several quarters, the two sides of Latch's (LTCH 3.30%) business, hardware, and software have been performing quite differently. In this clip from "The Rank" on Motley Fool Live, recorded on March 28, Fool.com contributors Matt Frankel, Travis Hoium, and Jamie Louko take a look at recent earnings and discuss how the company needs to focus on software for future success.

Matt Frankel: So, Latch makes proprietary hardware for buildings, smart home hardware. They also have a software-as-a-service business, which is the core of the business. They provide a building operating system. It integrates with things like smart locks, cameras, other devices like smart thermostats, things like that. They make their own smart locks, which is where their name comes from. They went public last year through SPAC. I bought a lot of these SPAC IPOs, the ones that I believed in a lot.

This was backed by Tishman Speyer, which as a real estate investor, I have tremendous respect for that, a huge portfolio of properties around the world, Rockefeller Center, for example, is one of their properties in Manhattan. Chamath Palihapitiya, whether you like him or not, called Latch the best software-as-a-service business he's ever invested in. So very high praise coming there.

They've secured partnerships with some of the biggest companies in the business. AvalonBay Communities (AVB 2.50%), the biggest apartment real estate investment trust is a partner of theirs to fit their new constructions with their operating system. The Empire State Building is a client of Latch. They recently expanded into offices, and that's a pretty impressive get for their first one.

The concern is, right now, Latch is losing money. Not just a little bit. Currently, let me share this real quick if I could find it. There it is. No, that's not it. Found it. This is from Latch's most recent earnings. The column to pay attention to is the one all the way on the right. You see, hardware revenue, made up about 80% of the total. About $12 million of their $14.5 million came from hardware. Software to date is a very small part of revenue.

The cost of hardware was $18.2 million. That means hardware has a negative gross margin, a negative 54% gross margin. The software, the cost of revenue is very low. Their gross margin on software is 91%, but right now, it's a very small part of revenue.

The idea is that over time, as more hardware is installed and more people are brought into the software ecosystem because Latch's hardware doesn't work with other software, is that over time the software revenue will take over. That 91% gross margin will become the dominant force and it will become a profitable business. It's not yet, not even close.

Travis Hoium: Is there an argument that they'll be able to lower hardware costs over time? I'm just trying to think about, can they even get that to break even because that's really concerning that it's such a negative number.

Frankel: At scale, yes, the idea is that they can. They haven't proven that yet obviously. Hardware has operated at a loss at least the last five quarters as I'm seeing right there. It's operated at a gross loss, not just net a loss, but the idea is they're booking out revenue. Their bookings are the number to pay attention to. That's revenue that they've booked for future dates.

Currently, software bookings are 63% of the total, which is a very promising figure. Software revenue for future reference is growing faster than hardware. Their bookings grew 113% year-over-year in the fourth quarter. So it's definitely trending in the right direction. As Travis mentioned, that hardware loss is very concerning, especially if software revenue doesn't really start to quickly gain ground on the hardware. But that's Latch. Any other thoughts on that?

Jamie Louko: I also want to make it known that I am a Latch shareholder. I like the business a lot. I really do, but the company's loss, net loss, and free cash flow burn and I think it was over a $100 million last year. Very, very concerning, especially considering the company's not extremely large cash position.

They noted in the fourth quarter that they're going to shift to more of a software focus instead of a hardware focus. I even think they noted that they were going to outsource some of the hardware production to second and third-party manufacturers, so they can focus more on the software, which I do like, but it has the potential to be a boom or bust company.

I think if they can really nail this and nail the software aspect of the business, and leave that very bad gross margin for the hardware by the wayside and continue to grow with software, I have very, very high hopes for this business, but it's a risky one, albeit.