Q3 2020 Arlo Technologies Inc Earnings Call

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Our ownership of their Usher continued new product and service differentiation future business outlook and the impact of Coca 19 pandemic on the business and operations.

Which is up over 65% sequentially well above the upper end of our guidance and a return to year over year growth. Our non-GAAP gross margin improved by 11 percentage points sequentially as our product gross margin recovered and our service gross margin continued its upward trajectory.

Both exclusively from Walmart this holiday season for $99 99.

And finally, we announced the essentials to wire free doorbell, which brings all of the award winning features from our Wired video doorbell to a new battery operated design, that's substantially expand our addressable market.

Long term prospects and trajectory of the business and.

And now I would like to hand, the call over to Gordon, who will provide more insight into our financial performance operational details and outlook for Q4.

Thank you Matt.

I am pleased to share the <unk> delivered outstanding results good quarter, we've revenue coming comfortably above expectations.

I am showing year over year growth with strong revenue performance improving gross margin.

<unk> types management of our operating.

Hi, Alison.

Our service revenue for Q3, 2025th $19 million.

Which is up 66% over last year and 11, 4% sequentially.

The main driver of our excellent service revenue growth is all paid account growth under a new business model.

Services.

Non-GAAP product gross margin with came in at 14.8%.

Up from six 8% a year ago.

Benefited from scale across the product supply chain.

Lower promotional spending.

And progress and the transition to products under our new business model.

Non-GAAP service gross margin.

Which came in at 48, 7%.

Our marketing efforts to drive online awareness.

In line with prevailing buying patterns.

Income and was approximately zero point $9 million.

During Q3.

Quarter.

We were able to keep our working capital relatively flat sequentially. Despite.

Despite revenue being up 65.4%.

Net loss per diluted share to come in between 36 cents and 26 cents a share.

And our non-GAAP loss per diluted share to come in between 26 cents and 16 cents per share.

Regarding our cash position.

We continue to believe that considering a range of outcome for the COVID-19 pandemic.

And its effect on our supply chain and retail and distribution channels.

We will end this year with more than $150 million in cash cash equivalents and short term investments.

Without tapping into our credit facility.

We will continue to monitor our performance during the remainder of the year.

And more than the last part of next year. So.

That's really the characterization of virtual but yeah, we're really pleased with it and we do expect momentum to continue.

Okay, Great and then just a follow up you talked about promotional activity increasing for Q4, obviously, that's normal in sales and marketing spend to increase but I was hoping you could touch on your expectations from a gross margin standpoint, do you think products gross margin can remain positive and then just any color on on what you're.

<unk> from the competitive environment and discounting for this holiday season.

Yeah I'll take the first part of the question and I'll, let Matt take the second half so just.

Gross margins.

<unk> free we benefited from a couple of things certainly scale.

Health and then secondly, we philosophy completed the transition from the legacy product for the new business model products.

Any help product gross margin in Q3, I expect that will continue and keep for you Rocky pointed out it's an extended promotional period in queue for particularly this year with prime day in queue for so that'd be a slight headwind in Q4 and then the other thing in queue for that right. We think the air freight rates are going to go up a little bit in queue for.

Do naturally anyway with normal peak.

Which is again low we think not only healthy for the quarter and the new operational footprint, but obviously historically very low so we're watching that obviously very carefully as we go through we want to make sure we're balanced.

But given where we are in the quarter, you know you're going to see us.

Not only have we shipped and stuff for.

Q4 holiday, especially with very poor in Europe, but also some here in the United States There will be additional ship ins for some of the promotions towards the back half of the quarter and a little bit of replenishment, but it will I think it will be very similar to a normal quarter from a shipment perspective, it's more how the pls is happening at the retailer.

Thats different with a lot more being done online instead of a physical store.

This does it matter for you. The if you end up selling more essential then the pro through your portfolio or are you just looking just to pick up the incremental paid user.

Well, yes. So there is a couple of things there one is what we've seen so far with essential is a couple of data points. One it seems to be it's being sold to a different customer so.

So we look at as essential as playing in a new price band and allowing us to actually capture a new customer. So so thats one two we're seeing relatively consistent subscriber signup. So when you when you talk about our long term business model around subscription essentially going to play an important component of that.

So from a from an essential perspective, thats, where we see it kind of playing across different channels and it will be.

Not only attaching a new customer to the arlo ecosystem, but actually driving.

Tick up again.

Well actually Gordons point and he can comment more detail I mean, we're seeing service gross margins pickup over the last three quarters.

To a record level this quarter and we expect that to continue.

Based both on mix, but also just the performance of the business and the leverage that we're getting on the subscription business.

Yes, just to add some color to that.

Say three consecutive quarters, an increase up from 34%.

Mean key for year ago up to 48 cents in Q3 pretty pleased with that we do expect the sequential improvement to continue certainly for the next few quarters.

And as Matt said the mix it paid subscriptions is definitely helping Matt and the team has done a fantastic job Hong Kong.

Migration as well, which really helps so yes, we expect the improvements continue to comment.

Okay. Thank you.

You're welcome.

Hi, Dan would you like to ask a question press star and the number one on your telephone keypad.

And your next question comes from Thomas Boyes with Cowen Your line is open.

My questions just a couple quick ones for me I was just wanted to get a sense, if youre seeing any new trends developing a following Amazon prime stays loads come the sales promotions that were going at best buy and our lives on store. So the preference among customers for less number of cameras and they are picking up more doors.

Little while but it will transition to the ultra to with.

Consistent business model to the rest of our products on a 90 day trial.

Okay.

Thank you.

I don't think its just the name on services, obviously, something that was very differentiated for arlo and it never has been around for a couple of years. I mean have you started to see any of your competitors did this feature.

Wherever you are and I was wondering if the habit like why do you think about it.

No yes, we haven't challenge, yes, it's so it's a good question.

We're still.

Definitely on the forefront when it comes to.

Cloud based service was four for cameras and for security systems, and you're pointing out one Great example, which is the 911, allowing somebody to allowing US intelligence intelligently routes and emergency call to the right 911 center for where the cameras are located I have not seen anybody else do this in a scaled way, it's actually relatively difficult to do.

And we've done it as part of one of the original launches of wireless smart.

In addition, we're also one of the only companies doing multiple simultaneous object detection with computer vision, that's something we can do better than anyone else, including person package vehicle animal and do that in a very low latency manner and a bunch of other features inside that pack. So we talk a lot about on the call our innovation on a hardware device level.

But you're pointing out a great area, where our innovation and our lead from an innovation perspective on the service is still substantial over the competitors in the marketplace and of course, we're not standing still and will continue to innovate on that on that service level.

Great I guess just to get a get a COVID-19 question. There I just wanted to to just double check given the resurgence globally. I mean, there's been some talk of potential lockdowns in Europe I, just wanted to get a better sense of maybe some extending exposure to the supply chain or manufacturing capabilities more broadly just as you.

Look out heading to the end of the year.

Yes, I mean, it's something we're looking at.

Literally on a daily basis when it both on the supply chain side and also talking with our channel.

Cobot is.

Resurging a bit in Europe, you rightly point that out it's just searching a little bit here in the United States as well I.

I think I think the major difference is.

This isn't a surprise just time and a lot of operational changes have already been put in place by our partners both forward and backward in our in our supply chain. So I think everybody is in a much better position to deal with different lockdowns or things that are happening consumers are very used to buying product online a lot of our physical retailers.

I've gotten a lot better at selling online and have been able to.

Kind of start to mix their business a little bit different. So I think there's obviously risk of Gordon pointed out in Q4 and kind of as we look into next year and how thats going to go, but but I'd say everybody has gotten a lot better about.

How to deal with it from an operational perspective.

We kind of know what to look for so I think it's I think the risk of a lot more muted than it was before.

Understood.

That was all for me thanks for the time guys. Additionally on the quarter.

Thank you. Thank you.

And there are no further questions at this time Mr. Mack Mccrea ill turn the call back over to you.

Thank you. So that concludes concludes our call for the Q3 I want to wish everybody, a happy and safe holiday and we'll talk to you soon thank you everyone.

This concludes today's conference call you may now disconnect.