Q1 2020 Earnings Call
At this time all participants are in listen only mode. Later, we will conduct a question and answer session.
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I would now turn the conference over to Eric's Island. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to our technologies first quarter of 2020 financial results Conference call.
Joining us from the company are Mr., Matthew Macquarie CEO, Ms., Christine Gorjanc CFO.
The format of the call. It starts with the introduction of any commentary on the because provide a buyback.
Followed by reviews, the financials for the first quarter on guidance provided by Christine.
Little bit hopped on for any questions.
If you've not received a copy of today's press release.
Please visit our lives Investor Relations website at Www Dot although dotcom.
Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
Forward looking statements include statements regarding expected revenue gross margins operating margins talks wage expenses future cash outlook, a partnership with Berkshire continued Newpark service differentiation future business outlook and the impact of the cobot 19 pandemic on our business and operations.
Actual results or trends could differ materially from those pumps, but by these forward looking statements.
For more information please refer to the risk factors discussed in all those periodic filings with the FCC, including the most recent annual reports on form 10-K in quarterly report on form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today and although undertakes no obligation to update these statements as a result of new information.
For future events.
In addition, several non-GAAP financial measures will be much in on this call.
A reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our Investor Relations website.
At this time I would now like to turn the call over them.
Thank you Eric and thank you everyone for joining us today on Harlows first quarter 2020 earnings call before I discuss the quarter I want to take a moment to address the ongoing impact of the pandemic on behalf of the entire Arlo team I offer my sincere gratitude to the frontline healthcare workers and first responders.
Met this virus head on.
Support them Arlo donated thousands of and 95 math and it's working with caregivers to use arlo cameras for remote patient checking and to reduce the risk of transmission and reduce the p. consumption at those facilities.
And as the second order effects of that pandemic impacted people's ability to feed their families. We entered a partnership with second harvest in Silicon Valley in Orange County.
To provide meals with purchase of an ultra system pro three system or video doorbell and this has resulted in over 30000 meals donated to feed those immediately.
I would like to think arlo employees for their compassion and their commitment to our business as we delivered a solid quarter our transition to work from home went smoothly and the team is operating at nearly 100% capacity.
We have worked through the supply chain disruptions brought on by Coven 19 in the first quarter and feel our ability to deliver to demand is now largely intact.
However, there remains considerable disruption and uncertainty across the channels that we sell through retail store closures operational changes and a focus on a central items have made it difficult for us to serve the arlo customer considering the uncertain duration of this disruption we have decided to withdraw our guidance for the full year.
Given our near term visibility in considering a range of retail channel trajectory, we are providing guidance for the second quarter point of sale data shows demand for our the products in the quarter at our previously expected levels and if it were not for the many of our retail partners moving to a much leaner inventory model arc.
Q2 revenue would be materially higher as channels returned to a more normal operational footprint and inventory model. We expect this de stocking to reverse in future quarters, and harlows shipments to improve.
Our Q2 quarter to date visibility is also showing a strong performance on subscriptions Christine will discuss our outlook in more detail after she reviews the quarters financials.
I will now discuss our results and accomplishments from recent quarter, Christine and I will walk you through the major elements, including financial results for the quarter paid subscriber growth new products and a partner announcement.
A couple of highlights from the quarter.
In Q1, we reported $65.5 million in revenue just above the midpoint of our guidance for the quarter and up 13% year over year as I mentioned the team did an outstanding job delivering a solid quarter given the unprecedented disruption across the business.
While we continue to invest strategically we remain extremely dedicated to refining our spend in the business and I'm pleased to share that we again lowered operating expenses in Q1 down $3.8 million sequentially and down more than $6.4 million year over year. We will continue this focus and discipline.
As we move forward.
We have exciting news in regard to our subscription business and the success of our new business model, which is the free trial of Arlo Smart that comes with a new camera video doorbell or floodlight purchase.
Arlo continues to attract new customers to our platform with about 230000 added in Q1 to reach a total of 4.25 million registered accounts up 36% year over year.
We ended the quarter with approximately 255000 paid accounts, which is up more than 57% year over year. The in quarter growth of 25000, New paid accounts was the most in our history and up 32% sequentially. As a result services revenue was 14.7.
A million dollars in Q1 for a year over year growth of 31% and a record for arlo for the third consecutive quarter and for the first time ever our revenue for paid accounts surpassed our prepaid service revenue on an important inflection point for the business.
The driving factor behind the success is our new business model, which features a limited 90 day trial of Arlo Smart our industry, leading cloud storage and computer vision service.
The first quarter of 2020 was the first time, we had a material number of trials expire and our subscription growth provides an early view into our future.
Given the Pos trends I mentioned earlier, we can expect to see momentum strengthen in Q2.
While subscription conversion rates on our legacy business model hovered around 5%.
Early data indicates that the estimated subscription conversion rates for the new business model is around 50% five zero and we're expecting a substantially lower churn rate.
This order of magnitude increase in subscription attach rates will transform the business as Arlo continues to end of life legacy products that include free storage and introduces new products that incorporate the new business model upcoming product launches will complete our phase out of the legacy product and channel Sellthrough should.
Be nearly complete by years end.
Let's move onto those products.
Our lives New pro three floodlight camera is the first wire free integrated floodlight camera on the market and is now on sale across our channels.
It combines all of the award winning features of our wire free to K Pro three camera and a powerful 3000 lumens floodlight housed in a modern compact design that gives you the freedom to install it anywhere.
Floodlight cameras represent up to 20% of the overall connected camera category and our growing faster than the general market.
Our new offerings represents a significant growth opportunity for arlo.
Within 90 days Arlo also plans to begin production of a new camera that completes the refresh cycle of our good better best core lineup and will address the fast growing 100 dollar price segment.
Both this upcoming camera and the Arlo Pro three floodlight include our new business model to further accelerate subscriptions. They join our existing ultra pro three and video doorbell, which continue to win best of and Editor's Choice Award among other accolades.
Our business to business channel and software as a service Arlo Smart cloud offerings continue to make progress as we diversify our business beyond retail and E commerce.
The partnership with Varistor is proceeding on schedule as we develop and integrate the solutions ahead of a wide rollout and growth targeted for 2021, as we discussed last quarter.
And we're excited to share a new partnership with Kartchner homes, which will integrate our lives video doorbell into homes built over the next 12 months, providing homebuyers with premier solution in smart entry technology.
Focused on building quality homes for families, while offering convenience and value harsher homes chose the our live video doorbell for design quality features and compatibility with both Google Assistant and Amazon Alexa voice assistant providing homeowners with the connected home ecosystem of their choice a benefit unique to our those products.
Homeowners will also get a free three month trial of Arlo smart.
Before I turn the call over I would like to thanks, Christine for her contributions to our though over the past two years in her role as CFO as we recently announced Christie will retire on June 15th 2020, and I wish her well she was instrumental in the creation of Arlo as a separate entity and building strong teams inside the company as a testament to that.
Christine's team building actually meant I am pleased to welcome Gordon Mattingly. The current SVP of finance, who will take over as our those new CFO. Upon christine's retirement Gordon is well suited to succeed her having previously served in various senior leadership roles in finance and operations at Arlo and next year over the past.
Two decades.
I'm excited to work with Gordon as Arlo hits, this inflection point and I'm confident he will be an excellent leader as we drive towards growth and profitability.
Now I'll turn the call over to Christine for her commentary.
Thank you Matt.
In the face of the unprecedented challenges the arlo team delivered a solid quarter with revenue just above the midpoint of guidance as can be seen in our sequential decline in operating expenses are restructuring activities continue to go well and in Q1, we weren't materially below our target of 33 to 34.
Million dollars per quarter of non-GAAP opex.
Now onto the financial.
Not highlighted we achieved $65.5 million of revenue just above the midpoint of our guidance and down 46.5% sequentially and up 13.1% year over year. During the first quarter, we shipped a total of approximately 642000 devices.
Which approximately 636000 our cameras.
As a reminder, beginning in Q4 2019, we changed our metric definition to registered accounts and paid account from registered users and paid subscribers. We believe this more accurately describes our metric given the very sure transaction, where we are now paid by their share for our EMEA account.
As opposed to individuals or businesses.
We added approximately 230000 registered users to the Arlo platform in Q1 as of the ended the quarter. We had about 4.25 million registered accounts, an increase of 35.8% from a year ago.
At the ended the first quarter, we had approximately 255000 paid account an increase of 25000 in the quarter end up more than 57% year over year.
We're very pleased with the growth in our paid account base and believe our new business model for paid services will be a substantial driver of recurring revenue growth in the near future.
Our services revenue for Q1, 2020 with $14.7 million, which is up 30.7% over last year. Our service revenue includes $1.2 million and Ari services were providing for very sure along with associated costs as compared with 279000.
In Q4 19.
From this point on my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
Our non-GAAP gross profit for the first quarter 2020 was $4.8 million, which resulted in a non-GAAP gross margin of 7.4% slightly below the low end of our guidance range. This compares to $2.7 million in a year ago comparable period and $14.9 million.
In the prior quarter.
Our service gross margin was 36.8% for the first quarter 2020, as previously mentioned our service gross margin is burdened by the cost of the free out of smart trials under the new business model as well as the accounting carve out where the free basic service, but we do expect as we increase the.
Subscription attach rate, we will see the service gross margin continue to expand in addition, our service revenue includes $1.2 million at NRT services that we are providing to very sure and the gross margin on those services is less than what we see in the subscription business.
In Q1 operating expenses came in under our 33 to 34 million dollar target.
Total non-GAAP operating expenses were $32.2 million down, 16.6% year over year and down 10.5% sequentially.
In the second quarter, we expect to release, two new products and shift our marketing efforts to drive online awareness, bringing them more in line with the prevailing buying patterns given that we expect sales and marketing expenses to rising Q2, while the balance of our Opex components should decline we expect that this will.
The result in operating expenses ending up in the original target range.
Our total non-GAAP R&D expense for the first quarter was $13.6 million and down $700000 compared to the prior quarter.
Our head count at the end of Q1, 20 was 356 employees compared to 349 in the prior quarter.
We agreed provide very sure we transition services as they start to operate the European commercial business. These transition services include training time, with our employees systems cost as well as some outside service costs.
We have included these costs in our normal operating expenses and the reimbursement from bearish are included in other income and was approximately $1.1 million during Q1 20.
Our non-GAAP tax expense for the first quarter of 2020 is $116000.
The first quarter of 2020, we posted a non-GAAP net loss per diluted share of 34 cents.
We ended the quarter with $206.6 million in cash cash equivalents and short term investments.
Down $5.1 million sequentially.
Roughly equally the operating loss and the use of working capital. We were pleased with our inventory management during Q1 and improved Dsos of 83 days for Q1.
Now turning to our outlook as Matt mentioned, given the uncertainty presented by our distribution channels, we have decided to withdraw our guidance for the full year, but we will provide guidance for the second quarter based on what we know today.
Our Q2 guidance takes into consideration the current state of our retail channels, which is creating a headwind to revenue.
We expect second quarter revenue to be in the range $50 million to $60 million given our revenue outlook, we have high confidence in our supply chain ability to deliver.
We expect our GAAP net loss per diluted share to come in between 53 cents and 46 cents per share and our non-GAAP loss per diluted share to come in between 46 cents and 39 cents per share.
We would also like to give some commentary on our cash position.
We believe that considering a range of outcomes for the cobot 19 pandemic and its effect on our retail and distribution channels. We will end this year with between $125 million and a $150 million in cash without tapping into our credit facility. We will continue to monitor our.
Performance during 2020 and take prudent action to preserve our cash.
Before I turn it over for questions.
I'd like to give a heartfelt thanks to all of the Arlo Nextyear employees vendors customers investors and analysts I have worked with over the last 15 years Ive greatly enjoyed working with you and you have made the last 15 years truly memorable as we traverse good times and bad together it will certainly be.
Range three months from now when I'm not prepping for an earnings call, but I know I have left the company in good hands with Gordon who most of you already know.
Thank you.
Stacey.
We can now turn the call over for questions.
Certainly at this time.
I'd like to remind everyone in order to ask a question. Please press star one on your Touchtone telephone. The first question comes from the line up Jeffrey Rand.
Please go ahead your line is open.
Hi, Thank you I'm just looking at gross margin. It appears gross margins are gonna have to come down sequentially every model revenue and EPS of the midpoint whatever incremental pressures you're seeing in Q2 and how are you thinking about gross margins as we go into the back half of the year.
Yeah, when we look at the gross margins for Q2, there's a couple of things one its scale as we as we look on our operations and secondly, what we see is that freight airfreight, specifically is extremely high right now and although we're using that prudently that that's the majority of what you see and there is really to scale.
And the airfreight as we look to the back half of the year, we're not giving guidance that we would like to believe that as everything comes up so does the gross margin.
Great. Thank you and.
Thinking about seasonality with your channel de stocking do you think there could be a sharper seasonality in the back half the year because of the restocking versus a normal period.
Yeah, I think that's fair I mean, if you look at the way we're looking at the second half.
It's really on a year over year basis. So if you know for level setting. If you look at Q2 year over year, it's our guidance that we're providing today is roughly 35% down year over year at the midpoint, obviously to the chronic virus and some of the channel implications, we do see some recovery coming into the second half which would accentuate.
Okay.
The normal seasonality and so the way we look at the second half is really year over year basis take the entire second half and maybe it's 20% down on a year over year base is showing some recovery.
As we accelerate into that into that second half so that would provide a little bit of additional.
Boost on the seasonality you would normally see as we think the year over year would be lower moving from 35% Q2 to kind of a 20% in the second half a year over year basis.
Great. Thank you.
Your next question comes from Adam.
Raymond James. Please go ahead your line is open.
Okay. Thanks, good afternoon, and congrats to concede on retirement and Gordon on the new role.
Matt I just wanted to start on the services I'm just double cooking there.
I guess, what would you attribute the record ads in the quarter too is there a way to maybe parse out how much is incremental from the bearish or partnership versus converting the existing core base of subscribers, just kind of a little bit more granularity on the record ads in the corner and also the sub.
The inability of that cadence you talked about strong performance on subs quarter to date or we ought to kind of a new normal where we're going to add 25000 a quarter.
Yes, so through some really good question were what I would say is especially when you look at the current quarter and and the quarter. We just announced the biggest portion of that boost in subscribers is coming from the new business model.
And I know, it's something we've been talking about probably for the last two or three quarters on the calls that it's coming.
And it's great to actually report real numbers underlying that and so that 50% conversion rate compared to last conversion rate on the legacy which was hovering just about 5% I mean, that's an order of magnitude change and so as we see Pos start to transition from old legacy products to new like a new business model products.
Which is just starting to happen in the in the quarter. We just reported you're going to see that Boo. So I think it isn't the normal we are commenting a bit on the current quarter that we're seeing this strength continue.
And so I would I would see that going forward, we have done a good job it actually.
Mining that legacy base, we're seeing good subscriptions from Perisher as well, but the bulk of this transformational kind of change in subscribers coming in on a quarterly basis was coming from the new business model.
Got it Okay. That's helpful and maybe just double click on the question on gross margin for Q2 at the current quarter is still strong on services I'd imagine that should be a boost we already thinking for the color on revenue and we know.
Yes number you get a lot of color on Opex I know, it's a slight headwind, but the only I guess.
Piece of that that's missing that would be an incremental headwind would I guess product gross margin.
I mean any more color I know a Christian you mentioned airfreight just to we already negative product gross margin in Q1, or we like double digit negative in Q2 is that kind of what we're implying here just give me a sense of kind of the the bridge.
I wouldn't I wouldn't say that but what I would say isn't in the services and we mentioned that while we're still going into all the trials on all of these products and really in Q2, we'll see more of all the with our floodlights, it's just coming out and that will have more products that go into the automatic 90 day trial that kind of burdens the service gross margin too.
So what you will see as as your as we're fully into the new products, which we really expect to be into that more and more every quarter, then you're going to start to see that service gross margin rise.
Okay.
I just wanted to ask the U.S. distribution channel inventories, obviously very elevated I'd imagine that somewhat related to retail closures, but maybe just a little bit color because it's just such an order of magnitude of elevated and how quickly that comes out.
Sure on two things are on that one is you know it is based on the last six weeks of the quarter is the way we give our our numbers and those were the slowest on the distribution channel, but I'd say secondly, we had some inventory in there that was going to go out for a broadcast deal in Q2, So we should see that number come down.
Got it and last one for me. Thank you for the color on the full year.
Cash guidance without the credit facility I guess more near term.
Any reversals that are going to hit in Q2, I'm, just thinking that the losses going to slightly white and I know Q twos, typically a week or cash flow quarter. As it stands should we be thinking about kind of a greater use of cash in Q2 than Q1, and if not went up.
You know I think at what you'll see is from we when you look at Q4 to Q1, you saw the accounts payable from giving how Q4 is coming down quite a bit I don't think you'll see that big drop like that in Q2 and that should lessen same with accounts receivable to be honest on the other side that should make that not not as big of a magnitude.
Okay. So the loss should improve sequentially than.
The use of cash it improved sequentially I'm sorry, the use of cash won't be the same given the drop from Q4 to Q1 from a seasonality standpoint.
Got it. Thank you that's helpful. Congrats again.
Thank you.
Your next question comes from Hammad course on.
Financial Please go ahead.
Hi.
First off just want to ask it would do you have enough components as your supply chain, Okay, and give the inventory to sell into the channel once they begin to restock.
Yeah.
Okay, alright, so the supply chain is basically.
Very close to fully operational we are we're seeing a couple of weeks delay here and there on certain components.
But based on the forecast we have going forward, we don't see a lotta issues coming from from the supply chain.
Okay, and then just being able to restock to channel in time raise is are you just at the mercy of how much airfreight you could allocate too.
Well I'd say there is no when you look at retail the reset dates aren't the same is that so there's probably a little more flexibility on that side. So we're managing both sides of that but we're definitely seeing the supply side come back up to normal.
And because of what.
All that and everything that's going on from actually selling a device are you implementing any new promotions are you discounting more aggressively.
No not I mean, we're seeing different activity in the channel and so I would say, we're doing some things differently, but I wouldn't say we're moving.
To a completely different footprint and give you. An example of that obviously best buy is a predominant brick and mortar shop with with online and our sales were predominantly through the stores, obviously thats inverted analysis predominantly online and it's not in the stores. Besides the curbside pickup so you've seen promotional are shifting.
The way they are being spent.
But for the most part we're not being more aggressive it's really around costs things like airfreight. Some some other effects that we've had as as crossfire's kind of hit the supply chain going out to the to the customer.
So is the sales and marketing expense sustainable at current levels or is it will have to go back up once to covert vendetta subsides.
You know I, obviously, we'll we'll take a look with some of our new products. There's some launch expenses and then depending on black Friday and that the we'll manage that.
Depending on where it is it should come down a little bit.
Okay. Thank you.
Your next question comes from Jeff Osborne.
Please go ahead, Sir your line is open.
Hi, Good afternoon, a couple of questions on my end Kristina I was wondering if you could just share with us the qualitative recognizing you're not giving guidance for the year, but what the thought process was on the 125 million to 150 of of cash which is helpful. I think last quarter was 150 that you've talked about so obviously, a 25 million differences.
Is that all just the EBIT loss and some working capital or is there tighter measures that you've taken it looks like head count went up sequentially I'm just trying to understand.
The puts and takes as it relates to getting to that number if you can't give guidance any help and backing into would be helpful. Sure. Yes, you can see our opex went significantly down even though head count was up so sometimes you know hiring someone and not spending it on outside services is actually better for the company what I would say as we've gone through several scenarios.
As of modeling and this or the numbers that we come up with them. We feel you know very good about hitting those numbers.
And so it's really just from a high range to a low range as we go forward.
Got it and then on the Divesture shore NRT is there any help you can give us in the lower margin flow through that the 1.2 million this quarter, what the cadence of that is the next three quarters of the year.
You know, it's just pretty flat. So I mean, we don't comment on that specifically, but it's just included in the numbers and we wanted to make sure people knew that was in there. Okay. I just want to make sure it wasn't a doubling or tripling as we.
Ramped up into more of their territories and whatnot.
And train them, how is the training going and bringing onboarding.
Oh, I think Thats not you know I think that's going very nicely and I can let Matt comment on that.
Yes if.
Everything's on track. So there's there's several tracks that were actually taking with them one is.
Obviously onboarding of there.
Running up the channel and some of the operational.
Pieces as you know several actually over 2025 employees of Arlo moved over so that was relatively smooth and just needed to be adjusted from an operations perspective on the venture side.
Also there is theres a lot of technology integration being done ahead of some ramp of up some business with them in some other areas and 2021 and that is actually proceeding on schedule as well, which is why you're seeing me in our and our you payments actually flow through so we're really happy with the way. That's progressing everything is is on time and we're going to continue to focus on execution ahead of time.
21.
Got it and then maybe Matt the last question I had for you is on the subscription side as I know, it's super early but is there any noticeable trends between products skews and in particular say, 50% is impressive that was higher than I was anticipating on the subscription shot but is doorbell above that say floodlight or cash.
There are below I didn't know if theres any.
Why deviation in and around the 50% number based on the type of product.
Yes, so on a qualitative basis.
It looks like it's it's a very solid foundation to build from then of course, our focus now is refining the model, we're finding the messaging iterating around promotions and marketing messaging and positioning to actually increase it from here if we can but the floor is remarkably consistent across.
All the different cameras that are on the new business model and the video doorbell onto the example, you give.
Excellent. Thank you.
Okay.
There are no further questions at this time I will now turn the call.
For closing remarks.
Thank you for joining us today, despite the headwinds across the channel presented by the current environment. We are seeing strength from the services business driven by the new business model, even as I look at the current quarter and I'm confident our continued execution through the year will result in a more profitable predictable company in the future stay healthy unsafe and we look forward to engaging with me.
Any of you throughout the quarter.
This concludes today's conference call you may now disconnect.
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