Q2 2020 Arlo Technologies Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing.
At this time all participants.
Later, we will conduct a question answer session.
Tom If you had a question do you need to press star one when you push buttons on.
I'd now like to turn the Congress everything every Alan Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Arlo technologies.
One quarter of 2020, <unk> financial results Conference call.
Joining us from the company on Mr. Mackie Mccrea CEO.
Mr. Gordon Mattingly CFO.
Format of the call, we'll start with an introduction and commentary in the business provided by Matt.
Followed by a review of the financials for the second quarter Wong with guidance provided by Gordon.
Well that have time for any questions.
If you have not received a copy of today's press release.
Please visit our lives Investor Relations web site at Investor Day, Carload Dot com.
Before we begin the formal remarks, we advise you that today's conference call contains forward looking statements.
Forward looking statements include statements regarding expected revenue gross margin operating margins tax rates expenses future cash outlook, our partnership with Perisher continued product and service differentiation future business outlook and the impact of the co bid 19 pandemic business and operations.
Actual results or trends could differ materially from those contemplated by these forward looking statements.
For more information please refer to the risk factors disgusting harlows periodic filings with the FTC.
Including the most recent data reports on form 10-K, and quarterly report on form 10-Q.
Any forward looking statements that we make on this call are based on assumptions as of today and Arlo undertakes no obligation to update these statements as result of new information or future events.
In addition, several non-GAAP financial measures will be mentioned on this call 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 to Matt.
Thank you Eric and thank you everyone for joining us today Arlo second quarter 2020 earnings call.
Today's call Gordon and I will walk you through the major elements, including financial results for the quarter paid account growth new products and a partner announcement.
For the second quarter, we reported $66.6 million in revenue well above the upper end of our guidance. Our non-GAAP operating expenses came in at $31.3 million down $900000 sequentially and down more than $6.6 million year over year.
This is substantially better than our goal of $33 million to $34 million an operating expenses.
That we said when we restructured last year.
Importantly through diligence spend and working capital management, we maintained our substantial cash cash equivalents and short term investments balance above $200 million.
Our little again set records this quarter for both registered accounts and paid account growth. Our low ended the quarter with approximately 298000 paid accounts, which is up more than 59% year over year.
The in quarter growth of 43000, New paid accounts was also a record an up an impressive 72% sequentially.
This performance resulted in our fourth consecutive quarter of record services revenue at $17 million, which was up 53% year over year.
At the heart of the success is the transition to our new business model, which features a 90 day trial of Arlo smart our industry, leading cloud storage and a high powered computer vision service.
Once the free trial of Arlo Smarts expires, we are seeing a 50% subscription attach rate, which is 10 times higher than the attach rate of our old business model.
This transition to our new business model I have clearly created an inflection point for our low we expect further subscription momentum as our legacy products phase out of the channel and retail sales shift to new business model lineup between now and the ended the year.
In our final step to phase out products with our old business model Arlo recently launched the essential spotlight security camera, which completes our lineup of new products and addresses the fast growing $100 price segment.
This latest addition to our award winning Smart home security ecosystem offers a wide array of features including high definition video two way audio integrated spotlight color night vision and six months battery life.
Essential can also connect directly to a Wi Fi network without the optional smartub, providing users greater flexibility.
The essential spotlight camera is now available for sale on our low dot com and at our major retail partners with very positive early user and press reviews.
Last quarter, we announced the full channel availability of the Arlo Pro three floodlight camera.
The first wire free battery operated integrated floodlight camera in the market.
With floodlight cameras, comprising up to 20% of the overall connected camera category. This product represents a significant opportunity for our low to capture share in a rapidly growing market.
Garnering a 4.8 rating at best buy the pro three floodlights has been very well received with many positive reviews, including three Editor's Choice Award from digital trends PC magazine, and seen at which called it the best Bud light the I've ever tested.
Now turning to our business to business channel and software as a service Arlo Smart cloud offering our partnership with very sure is proceeding as planned with all in quarter milestones achieved and as mentioned last quarter, we are targeting a wide rollout and accelerating growth in 2021.
In July we announced an agreement with Securitas security services USA, our first us smart cloud SaaS customer.
Securitas will integrate our will smart cloud and our award winning cameras into their platform for centralized remote monitoring of their commercial assets. In addition, our smart cloud AI enabled security cameras, including the Arlo Pro three and Arlo go will be used to make secured houses remote guarding services, even more efficient for there.
Commercial clients.
At a time when numerous buildings and assets are being left on monitor due to cobot 19, smart cloud enables securitas to monitor and take action on any potential incident.
We're excited to continue expanding our routes to market and to assist securitas in delivering peace of mind to their customers.
In summary, Arlo delivered strong results in Q2.
Launched a competitively priced camera into the fastest growing price segment announced a new SaaS partner and achieve the inflection point in our subscription business that will continue to accelerate through the balance of the year.
These results were achieved despite the pandemic, creating challenges on both the supply chain side and go to market side of the business.
Our employee showed an exemplary commitment to arlo that helped us overcome these challenges and outperformed our expectations for the quarter.
Hi, I'm extraordinarily proud of our execution the results for the quarter and the foundation that our team has built for future success.
And now I would like to introduce Gordon Mattingly, who recently took over as Chief Financial Officer for Arlo and also welcome him to his first call Gordon will provide more insight into our financial performance operational details and outlook for Q3.
Thank you Matt.
Let me start by segment I'm extremely excited to the company in my new role.
Foods working with you in the future.
I'm pleased to share the all new team delivered an excellent quarter.
With revenue coming in $6.6 million above the high end guidance.
While significantly reducing Americas retail channel inventory.
From 14.5 weeks at the end of Q1.
Seven weeks since the end of Q2.
We're also very pleased with the acceleration in our paid account growth.
And what not can do for the business over time.
In addition, our restructuring activities and expense management continued to deliver results.
We came in well below our previously communicated targets.
$33 million to $34 million.
Non-GAAP operating expenses in Q2.
These achievements demonstrates our teams continued strength of execution across all business.
Now onto the financials.
I was not highlighted.
We achieved $66.6 million the rents.
Above the upper end because all guidance.
Up 1.8% sequentially.
Down 20.3% year over year.
We're not revenue for Q2 20 was $49.6 million.
Which is down 31.5%.
The last year.
And down 2.2%.
Financially.
The year over year performance was mainly driven by coded 19 effects from our sales channel operation.
The sequential performance reflected an uptick in sell through which was offset by de stocking.
Major retail channels.
Our service revenue for Q2, 20 with $17 million.
Which is up 52.7 cents over last year and up 15.6% sequentially.
The main driver of our excellent service revenue growth.
These are paid account growth.
The on new business model.
Well, we continue to see very strong conversion to a paid subscription as although smocks after the free trial and.
Well service revenue.
So includes $2.3 million does in a hurry services, we are providing because they're ashore.
Along with associated costs.
As compared with zero point $9 million in the third quarter Twentytwenty and zero.
A year ago.
During the second quarter, we shipped approximately 516000 devices.
Which.
The 511000, where Cameron.
From this point on my discussion points, you focus on non-GAAP numbers.
The reconciliation from GAAP to non-GAAP.
Detailed in our earnings release, which was distributed.
Earlier today.
Our non-GAAP gross profit the second quarter of Twentytwenty was $6.2 million.
Which resulted in a non-GAAP gross margin.
9.6%.
An improvement of 2.2 percentage points sequentially.
This compares to $10.5 million in a year ago comparable period.
And $4.8 million.
In the park water.
Product gross margin has been challenges in the first half of the year.
Due to incremental costs in kind of ethanol transitions from products under the legacy business model.
Products under the new business model.
As we increasingly move to shipping products under the new business model.
We expect product gross margins for the remainder of Twentytwenty to return to roughly what they have reached in 2019.
I'll service gross margin was 41.5%.
From 36.8 positions in the first quarter Twentytwenty.
As previously mentioned I'll service gross margin in third and by the cost the free all the smart trials under the new business model.
What is the cost of servicing.
Basic service under the whole business model.
As we've seen in the past two courses.
Continued improvement in you paid subscription attach rate.
Well expand service gross margin.
Also as mentioned.
Service revenue includes $2.3 million and already services, we are providing superior show.
In Q2 operating expenses benefited from our restructuring late last year.
Now continued expense management asset.
Total non-GAAP operating expenses.
With $31.3 million.
Down 17.3% year over year.
And down 2.9% sequentially.
In the third quarter, though we expect to shift our marketing efforts to drive online awareness.
Bringing the more in line with the prevailing buying pattern.
And reflecting the growth we're seeing in online store.
On the Dot com.
Given that we expect sales and marketing expenses to rise in Q3.
Well the balance of our Opex component should remain flat.
We expect that this will result in operating expenses ending up in the original target range in Q3.
I'll touch with non-GAAP R&D expense for the second quarter was $12.5 million.
Down $1.1 million compared to the current quarter.
The sequential reduction in R&D expense.
Both from lower spending and an increase in the time spend while R&D team on the very show and already.
Which is classified under cost of service.
Hi headcount at the end of Q2 were 355 employees.
Had to 356 in the prior quarter.
As a reminder, during the early stages very sure operating the European commercial business.
We agreed to provide them with transition services.
Which includes training time with all new employees.
It was costs.
Well, it's some outside service costs.
We've included the cost you know a normal operating expenses.
The reimbursement from very show is included in other income and was approximately $1 million during Q2.
Our non-GAAP tax expense so the second quarter, two twentytwenty is $191000.
For the second quarter Twentytwenty.
We posted a non-GAAP net loss per diluted share.
31 cents.
Back to the high end device guidance.
We ended the quarter with $205.5 million in cash cash equivalents in short term investments.
Down $1.1 million sequentially.
With working capital improvements more or less offsetting the operating loss.
We were pleased with the results of our working capital management during Q2.
It was helped by the growth in paid subscriptions and online store.
In particular, we significantly improved our dsos.
Came in at 63 days.
Down from 83 days sequentially.
We expect Dsos to increase in subsequent quarters in Twentytwenty.
Based on business and customer mix.
While continuing to show year on year improvements.
Now turning to our outlook.
As previously mentioned.
Given the uncertainty presented by coated 19.
We have with Google and our guidance for the full year.
But we will provide guidance for the third quarter.
Based on what we know today.
Oh Jeez, we guidance takes into consideration, what we know about end user demand.
Our retail channels and our supply chain.
As well as the inherent uncertainty presented by 'cause it 19.
We expect third quarter revenue beat in the range of 80 $595 million.
We expect our GAAP net loss per diluted share.
I mean between 32 cents.
51 cents per share.
And our non-GAAP loss per diluted share to come in between 24 cents.
33 cents per share.
We'd also like to what they tell commentary on our cash position.
We believe that considering a range of outcomes for the coated 19 pandemic and its effect on our supply chain and.
And retail and distribution channels.
We will still ends this year with between 125 on $150 million in cash cash equivalents in short term investments.
Without tapping into our credit facility.
Who will more likely lands at the upper end of this range.
We will continue to monitor all performance hearing twentytwenty.
I'm closely manage our operations to preserve our cash.
And we can now open the call two questions.
[noise] certainly at this time I would like to remind everyone.
And in order to ask a question. Please press star one and you touched on.
Your first question.
Your first question comes from Jeffrey.
Please go ahead Sir.
Hi, congratulations on the nice quarter in their growth in the services business can you talk a little bit about the traction so far the arlo essential Cameron do you think these customers roll eventually have a lower AMR tax subscription attach rate as they may be more cost sensitive than someone buying a more expensive camera.
Yes, so the essential camera as you know as just entered the market. We've got a few weeks of Oh sales under our belt and I think we're very happy with what we're seeing so far.
It's early to comment on what the subscription attach rate.
May be on this product versus others, but I, but I can tell you we have not seen any significant variability I'm on the attach rate by price point on all the products, we've had a in the market today, including when we promo them down to lower price points.
So that's the data we have going in but so far as I think we're happy with how essential is actually executed in channel.
Great and can you talk a little more about the security business opportunities how this to support growth in both your product and services business going forward.
Yeah, absolutely you know we're excited about the secured hot deal for several reasons. One obviously, it's the first.
Substantial smart cloud SaaS scale, we have here in the United States. So thats.
Yeah, that's exciting from a channel diversification perspective.
Two you know obviously the product and service are going to go together with securitize, just like we've done with our various or deal. So we expect the attach rate up a service.
To be basically one to one on that deal as they deployed they're deploying it as part of a.
Service that they called remote guarding go.
And it's going to be deployed out to target customers like.
Mindset or industrial it's always a small medium enterprises. So it in itself even their customers are a diversification channel and opportunity for us.
For our logo for Harlow Smart then as I was just said we're excited because this SaaS deal actually involved not only our traditional life products.
But it's also going to be deploying our logo product. So for those who are not familiar with that product that that is a product that uses cellular connectivity, where you can place the product where there is no power because its battery operated but also when there is no networking or broadband capabilities.
So they're going to be using our full platform of products attached to service going into a diversified channel mix. So we're excited to see what this does overtime.
Great. Thank you so much.
Welcome.
And your next question comes from Adam Tindle go ahead Sir.
Okay. Thanks, Good afternoon, Matt I, just wanted to maybe start on an update on the state of the industry and competitive environment. We had noticed a that asps for the category were trending up you think that's.
A function of pricing getting more rational is it consumers moving up to more premium product versus commodity after.
Maybe you know experimenting with it and getting more serious about the purchase just you know what you're seeing a in that and how that should correlate to product gross margin.
Yeah. If so you know we have seen definitely especially if you look historically as you know if people are coming down quite aggressively if you look back, especially couple of years.
That has definitely stabilized and I think a part of that as we've hit some natural price points, both as an industry, but also our low.
In the essential launch as an example of designing a product for a price point, which will help gross margin overtime one of the things Thats dragged down our gross margin and we discussed on previous calls was having to promote old product. So now that we've designed product and we completed the refresh of our core product lines at those trigger price.
Points.
We expect as Gordon mentioned in his commentary to see that go up overtime.
But I think also you know as as people are looking at this product category. It is a product category of peace of mind safety.
And people generally want quality not only of the hardware itself, but but a trustworthy service.
Thats actually backing up that hardware to provide the peace of mind. If people are asking for so I think those are all coming into play of why we're not seeing the ASP declines we have seen historically.
Over the last couple of quarters.
Got it okay. That's helpful.
And then secondly, just on a subscriptions I'm just talking about a 50% attach rate when expiring.
We think moving forward is there a way for us to perhaps quantify that opportunity as the year progresses, I think you're guiding to some pretty healthy overall total revenue sequential growth I mean, how should how should we judges judges inflection point, you're now adding over 40000 subs a quarter and does it just kind of stabilize at that level does it hit another step.
Function increase just any way to corral our expectations on that thanks.
Yes, I think the best guidance if somebody information we included in the Investor deck and the reason I say that is we're at this very complex moment in this transition where we have legacy business model products in the field selling through we have new business model product selling through we have the original ultra.
12 months trials, we got products with 90 day trials. So there's a risk the transition that we think will be substantially through as we exit this year, it's going to be relatively complex for the next couple of quarters. I think one of the biggest drivers of that from a modeling perspective will be the sales meeting the point of sale Pos sales through at the channel.
Mix of legacy two new products right and we've included a charge in our investor deck that shows the forecast the actual for Q1 in Q2 and a forecast for Q3 in Q4 going forward that should help provide some guidance we want to provide additional information, especially in this in this kind of complex.
State that we're in and then obviously as we get into next year you would see.
Oh predominantly almost completely on the new business model, obviously and the modeling will get a lot easier as you look at Pos and how that trickles down 90 days later.
To sign ups and conversion.
Yes, I'm certainly looking forward to that point, thanks, and congrats on the results.
Thank you very much.
Next question.
Todd.
Go ahead Sir.
Hi, just the first off we wanted to ask you about what's happening on the competitive front, we're seeing that obviously you got secure toss the here in the U.S. and then one of your competitors just this week.
How to another when is it going to be a disadvantage to you know if your competitors have a lot more cash and are you.
Using cash as a way to get.
Marketshare.
Well I think I think what's happening is that the the whole space is is heating up and being validated I think by some of the activity.
Seeing on a on a deal size right.
One of the trends we're seeing is.
Security is definitely becoming smart security or smart home security.
Of course, Arlo is a leader in the space, especially from a technology perspective.
Is obviously working on several deals severities are deal was obviously our flagship deal that we expect to start contributing.
More to our results in next year as they take a while to actually get integrated but I think I think you're going to see the whole area.
We continue to grow and you'll see additional partnerships, but at the base level. What most of these potential partners on the partners. We've already signed are looking for is adding video and smart video, meaning computer vision services into their mix and moving from security to actual smart security, we solve a couple.
Oh, Thanks want it creates a much better user experience for the end user but it also provides with called video verification for events to reduce false alarms and make sure that.
Emergency responders can can respond faster, especially when it's verified so I think that trends is going to continue.
As we go forward and I think you're just seeing a a lot activity in the space over the next 12 18 months.
So where does that put arlo as far as being able to get more a a market share with service providers.
Yeah, I think we have we're in a great position for that frankly, because we do have obviously the best in class hardware.
We also have the widest portfolio of hardware from both a battery operated like our floodlight, which is the first.
Well first battery operated integrated floodlight.
Now that we've launched our video doorbell, we've got that full ecosystem of product.
And obviously on the back end, we've got the best Computervision service in the marketplace, but I'll tell you from a positioning perspective I think there's a couple of other things that are important one is our position on privacy.
I will be taking a very strong stance with our privacy pledge that we don't collect data for surprising purposes to the end user we don't sell data. So we've taken a very.
Strict view on.
How we protect that data and why we do and do not collect and that's great from a partnership perspective that makes us look very different than some of the other big players in the phase.
Two were agnostic from an ecosystem perspective so.
If you if you sign up with some of these other partners out there you may be stuck with one voice solution for one interoperability capability Arlo provides obviously compatibility with Apple Syrian Homecare, Google voice, Amazon Alexa Samsung Smart things, even I ask GTT and so we have the broadest capabilities, you're not locking your customers in.
Two.
Single solution, what we found that we find that sure survey data, but also talking to our customers. Most homes are a multi voice household meaning they may have a Google home device in the kitchen and they have an iPhone in their pocket and they expect all of that to work in a seamless way analysts one the only providers in the world to do that makes us a better partner.
In the space I think I think we're well positioned.
And we'll have more information as we go forward.
Okay and my last question was that what are you guys doing as far as your web page traffic goes in converting that into sales and is that going to.
Okay cannibalize any of your Oh.
A retail partners.
Yeah, you know Arlo Dot com as you know we launched.
In roughly really launched in Q3 of last year and we are seeing.
We were already seeing nice growth quarter over quarter, but obviously the pandemic accelerated that even further.
We have seen those all of that.
Sales has been completely incremental to channel. So it's a different customer we're addressing a different customer I think it opens up the possibility for us to do different kinds of bundles.
Potential business models direct to consumer so it's a it's a very exciting growth path for us and it's been fully incremental.
You'll see us continue to invest in that it's one of the on Gordon's commentary, we believe some of our marketing dollars will drop below the line and you'll see that in opex in future quarters, and part of that as us investing in our direct channel.
A little bit more continue to drive success and Orla Dot com.
Okay. Thank you.
Well.
And your last question Jeff.
Go ahead Sir.
Yeah. Good afternoon, I must say questions were answered, but I just wanted to understand with prime day being in the fourth quarter now instead of the third quarter traditionally what the ramifications are of that.
Yeah.
Yeah, I don't know exactly to be honest. So we're looking at the modeling of Q4 from a POS perspective, what's interesting is shipments are more predictable that Pos at that point right. Because we know will ship in Q3 still still for Prime day.
But on the POS side, when you look at normal seasonality year over year, it's obviously going to be different we've been working really closely with the retailers.
Which includes obviously Amazon, but also the other retailers that have significant.
Promotional activity, including Black Friday, cyber Monday in that quarter.
And their reactions to where prime day, falling and everything else. So I think we have a good handle on what the planning is a lot of it off obviously depend on what the operational footprint is going to look like for the individual partners, depending on how the pandemic progressive but I think from a from us.
The shipment perspective seasonality will look a little bit more normal than maybe the seasonality on pls.
Because of because of the difference.
Because of the early October date, you mean as opposed to being later.
Yeah, well it but from a part Prime day, having prime day land in Q4 versus in Q3 will change the kind of the Pos timing got it.
First shipments of fits in early Q4, a lot of shipments will happen in Q3 anyway.
Makes sense and then how do we think about the the approach you took to the recent quarter Twoq you about.
Formulating the guidance and can you just described where the upside was.
Relative to two your initial expectations I Didnt hear the on the call. If you I apologize. If you went through it and then is there any lessons learned about the formulation of guidance.
As it relates to Q3 and potentially Q4 in the future.
Hi, Jeff Gordon the Hey, I think it's sad to say that of the degree of uncertainty that we are facing winning went out and actually chose to guide.
For Q2 is pretty significant.
In terms of the beat I would say, which is mainly sellthrough driven.
Right.
If you strip and buy and ease of on being more than what we expected that takes into account. The degree of conservatism caution that we had in on guidance just based on the level of uncertainty.
Obviously the situation as you know is still pretty uncertain and weve semi reference that with the guide for Q3.
Obviously, we're not guiding Q4. This station we continue to monitor the situation pretty closely but the beat in Q2 is really driven by end user demand exceeding our expectations.
What I was trying to get that Gordon is across all channels or was on one particular outlet that there was doing better than others.
Hi, with Gen generally across all channels generate capital channel.
Got it my last two questions. One is can you just remind us what normal weeks of inventory are you you said seven.
Improvement from Fortune and a half obviously, but.
What what where would you like that to be or maybe your content. There and then also you made reference to hitting the milestones for very sure but could you just pick the top one or two that you hit so we can get a better appreciation of what's been accomplished in the quarter.
Yes, I'll take the first one all that might be the second one so in terms of weeks to start asking what what the norm is pretty interesting in a moment and because of probably isn't really a norm. What we've seen is retail partners.
Focusing on a couple of things firstly that management around cash and inventory very tightly as they should secondly, we've seen quite it shifting the mix of that business. Obviously in prototype in 19, you're probably talking about an 80 20 in store online mix and that that relationship almost went to the inverse uncertain times in.
We probably back to roughly 50 50, now, but certainly I think we're going to see a return to kind of normal inventory levels of roughly 12 inch weeks out anything that's going to happen anytime soon.
Well I would say from a channel invention perspective for us just heading into Q3.
Of the essential channel sale will give us a small amounts of benefit in Q3, but we certainly don't expect the weeks adult to head back to what used to pay the 12 14 weeks level for retail.
And then on that to answer your various your question. The second part of your question.
Most of our milestones in quarter with them as we're doing the integration preparing for for more of that execution in next year after do with software integration hardware development.
Timelines and things that we're doing to prepare.
Both companies had to go to market with a with a more integrated solution. So we have very specific milestones on every quarter that we we mark to make sure we're making great progress and that's also how we make sure that we can account for the entry.
To close that add on on each quarter and so those are all progressing well all of our description about the deal and how we think it's going to contribute to our low, especially your 235. If you remember previous commentary is all still tracking perfectly. So we're excited about that as we continue to work with Perisher.
It's great to hear that's all I. Thank you.
Thank you.
Okay.
And there are no further questions at this time I'll now turn the call Everton Mac make right for closing comments.
Yes. Thank you operator that concludes today's call I want to thank everybody for joining our level on our Q2 2020 earnings call.
This concludes today's conference call you may now disconnect.