Q1 2021 Arlo Technologies Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. Later, we will conduct a question and answer session and at that time. If you have a question you will need to press star one on your push button phones I would now like to turn the conference over to Eric Byland. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Arlo technologies first quarter of 2021 financial results conference call.
Turning us from the company are Mr. Matthew Mcrae, CEO and Mr. Gordon Bradley CFO for.
I'm out of the call will start with an introduction and commentary on the business provided by Matt followed by a review of the financials for the first quarter along with guidance provided by God. Well then have time for any questions. If you have not received a copy of today's press release. Please visit <unk> Investor Relations website at Investor Day, Arlo Dot com.
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 tax rates expenses future cash outlook, our partnership with Berkshire continued new product and service differentiation future business outlook and the.
Impact of the COVID-19, pandemic on our business and operations.
Actual results or trends could differ materially from those contemplated by these forward looking statements for.
For more information please refer to the risk factors discussed in Arlo is periodic filings with the SEC, including the most recent annual report on form 10-K.
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 a result of new information or future events. In addition, several non-GAAP financial measures will be mentioned on this call reconciliation of the GAAP to non-GAAP measures can be found on today's press release on our Investor Relations website.
And 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 on Arlo as first quarter 2021 earnings call in my past commentary I mentioned that Arlo is not the same company. It was a year ago and clearly our Q1 results put an exclamation point on that statement.
Revenue is up 26% year over year service revenue is up 55% year over year paid accounts are up 115% year over year and non-GAAP gross margin is up on incredible 336% year over year, reaching an all time high for <unk>.
Arlo die.
Diving a bit deeper into our Q1 results revenue came in above the top end of our guidance at $82 6 million and our strong operational discipline lowered non-GAAP operating expenses by nearly $2 $5 million year over year.
Q1 marked the seventh consecutive quarter of record services revenue at $22 $8 million.
This drove non-GAAP gross margin up nearly 10% sequentially again to reach an all time record for the company.
This performance coupled with our commitment to maintaining leverage led to a soundly outperforming the high end of our guidance for non-GAAP net loss per share which came in at a loss of just three cents.
And our cash cash equivalents and short term investments balance remained solidly healthy at $177 $1 million.
Our strategic shift towards services the success of our new business model and the resulting momentum are undeniable as we look forward to reaching $100 million on service revenue. This year and 1 million paid subscribers by our year end earnings call. After just passing through 500000 subscribers on March one.
We anticipate our trajectory will have us reach breakeven on a non-GAAP basis in the second half of this year and with this we will not need to raise additional capital.
Our current performance and these near term milestones demonstrate the profound impact of Arlo successful transition to a services first company in Q1, we had 114000 paid account additions, which represents an increase of 44% sequentially and 356%.
Year over year.
As a reminder, last year Arlo carried out a refresh of our product portfolio phasing out legacy offerings under the old business model in favor of an entirely new suite of products that feature a free 90 day trial of Arlo Smart, our unique and unmatched AI powered motion identification and security service.
Through features like advanced computer vision based object identification audio analytics customizable notification activity zones and cloud video storage, we are honored to provide home and business owners with total peace of mind.
Arlo Smart is truly a value add for our customers, leading us to maintain a consistent 50% subscription conversion rate upon expiration of the initial trial period and as we follow cohorts over a six month period, we see the attach rate to our subscription services grow towards 65%.
<unk> newest product the essential indoor camera, which includes an automatic privacy shutter represents the final product transition to our new business model and its available now at a suggested retail price of $99 99.
It has already been named a winner of the Tech radar Pro twice and residential systems picks award honoring the best and most influential customer technology at CES.
Over the last quarter, our loose engine of innovation also turned to our user experience. We launched version three point O of our application for Apple iOS and Google Android devices with a wide collection of new features and improvements.
App and livestream performance, our increased up to two times deep linking from notifications allows faster access to past events smarter and Richard notifications are now available for Google home.
On Alexa, Samsung Smart things and IFTTT ecosystems and.
In video events can be viewed directly on Google nest hubs.
In addition, arlo three point O enables on an industry first animated clip inside of the notification window on iOS and Android, providing a clear indication to the user what kind of motion triggered the event and a much better context of determined threat level.
This is the beginning of an innovation cycle from Arlo that will span across our experiences surfaces and new segments.
Our current solutions continue to win a claim across the industry U S News and World report awarded the Pro series, the best security camera or 2021 in multiple categories.
Pocket lint recognize the essential indoor camera as the best Indoor security camera.
Our pro for series won Editors' Choice Awards from both PC magazine and digital trends.
The essential wire free doorbell won acclaim from Android central the ambient and beat Google's nest doorbell and a head to head review posted by review Dot Com and finally Arlo what's recognized for excellence in design by winning three coveted Red Dot design awards for our pro three floodlight essential spotlight camera and the <unk>.
Central wire free video doorbell.
I would like to take a moment to thank all the teams that arlo for their outstanding work to deliver the world's best and most recognized smart security ecosystem, we have launched more than 10 products under our new business model and our innovation has clearly spread across our hardware as well as our services all designed to continue to enhance the entire arlo experience.
And our teams have successfully completed a major program with our partner <unk>.
New camera designed specifically to their needs that will move into production in Q2 for initial rollouts. This year in full volume deployments in 2022.
This is a significant milestone in our relationship and will drive future growth and product and service revenue.
As a reminder, our strategic engagement with very for includes a guaranteed minimum of $500 million of product purchases alone over the five year term from the start of 2020 and service acceleration through the direct sales channel you can see in our quarter results. The traction we are seeing in Europe, as bearish or invest across.
On the channels and continues our rollout of the Arlo solution.
Our programs and Rollouts remain on track in 2021, and we look forward to the full benefit of the relationship in 2022.
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 the second quarter and full year.
Thank you, Matt and thank you everyone for joining us today.
We delivered strong Q1, 2000, twenty's on financial results that exceeded our expectations.
Recording an all time high for non-GAAP gross margin on.
Revenue was above the high end of guidance and up more than 20% over Q1 2020.
Our financial performance for the quarter was driven primarily by the successful execution of our new business model.
Leading to record levels of paid accounts.
The arlo team navigated supply challenges to exceed our expectations on revenue, while significantly improving our profitability through prudent spend management.
Most notably we decreased on non-GAAP operating loss by $24 $3 million year over year, and $3 $4 million sequentially. Despite the normal seasonal revenue downtick.
And now moving on to the Q1 financial detail.
Revenue came in at $82 $6 million.
Up 26, 1% year over year.
28, 1% sequentially due to normal revenue seasonality.
Current revenue for Q1, 2021, with $59 $8 million, which was up 17, 8% compared to last year and down 35, 9% sequentially.
Our year over year product revenue growth.
Primarily driven by strength in Europe from a bearish on relationship.
Service revenue for Q1, 2021 was a record $22 $8 million up 54, 8% over last year and up five 7% sequentially.
With our new business model fueling our growth.
Our service revenue also includes $1 5 million.
And all these services, we are providing for Paris Shaw along with associated call.
As compared with $2 4 million.
In the fourth quarter of 2020.
During the third quarter, we shipped approximately 597000 devices.
Which approximately 595000 with cameras.
From this point so on my discussion points will focus on non-GAAP numbers.
A reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
Our non-GAAP gross profit for the third quarter of 2021 was up 21 $8 million year over year to $26 $7 million.
Which resulted in a non-GAAP gross margin.
32, 3%.
Up from 22, 4% in Q4 2020.
Not more than 20 percentage points from seven 4% in Q1 2020.
This represents a record gross margin and was driven by strong progress on both product and service gross margin.
Last year.
The $21 8 million year.
Year over year improvement in non-GAAP gross profit includes an improvement to $14 1 million from product and $7 8 million from services.
Non-GAAP product gross margin was 22, 6% Cigna.
Significantly higher than 14% in Q4, 2020, due to lower promotional spending and accurate on October 23 percentage points from negative one 2% a year ago.
As you recall in the first half of last year gross margins were adversely affected by the transition from legacy products, coupled with demand uncertainty due to COVID-19.
Non-GAAP service gross margin came in at 57, 9% slightly lower than 58, 9% in key for 2020 and significantly higher than 36, 8% in Q1 2020.
The year over year growth was driven by substantial paid account growth on on new business model, coupled with cost management over the last year.
Total non-GAAP operating expenses were two.
$29 8 million.
Down $2 $5 million or seven 7% both year over year and sequentially.
This was the result of continued prudent cost management and lower marketing expenses quarter over quarter.
We believe our non-GAAP operating expenses will be approximately $33 million.
In the second quarter and in the $33 million to $34 million range per quarter in the second half for the year.
Our total non-GAAP R&D expense for the third quarter was slightly down sequentially at $12 $2 million.
Our head count at the end of Q1 with 355 employees.
That's a 359 in the prior quarter.
As a reminder, during the early stages of the virtual relationship we agreed to provide them with transition services.
Each include training with all of employee.
Well its systems costs and some outside service costs.
We've included these costs in our normal operating expenses.
The reimbursement from Bearish rule is included in other income and was approximately zero point $9 million during Q1.
On non-GAAP tax expense for the third quarter of 2021 was $180000.
In Q1, we posted a non-GAAP net loss per diluted share of <unk> <unk>.
Much better than on our guidance on.
On our best results as a public company.
We ended the quarter with $177 1 million in cash cash equivalents and short term investments.
On 2000 $9 million sequentially.
And then on $29 $5 million a year over year.
We continue to make progress on our working capital management during Q1.
DSO came in at 54 day down significantly from 83 days, a year ago and down from 64 days sequentially.
Q1 inventory closed at $56 million, a decrease of $8 $7 million over key for 2020 with tonnes at $3 for compared to five last quarter and $3 for a year ago.
Now turning to our outlook.
We expect second quarter revenue to be in the range of $80 million to $90 million.
Our team did an excellent job navigating supply chain challenges in the third quarter from component shortages to sea freight lead time on.
While we expect similar headwinds in the second quarter, we believe we can make incremental progress over the first quarter.
For the second quarter of 2021.
Our GAAP net loss per diluted share to come in between 33.
And 26 per share.
And on non-GAAP net loss per diluted share to come in between 20.
And 13 cents per share.
Slightly up from previous guidance, we expect 'twenty year with approximately $130 million in.
Cash cash equivalents and short term investments.
And we will continue to monitor our performance and prudently manage our operations to preserve our cash position.
And now I'll open it up for questions.
As a reminder to ask a question. It is star then the number one on your telephone keypad. Your first question is from the line of Adam Tindle with Raymond James.
Hi, This is Katherine Huntley on for Adam We were wondering what you're learning about characteristics from your subscriber base, specifically our lifetime value.
And on the same token.
How do you believe that your partnerships will drive upside in the future and when you spoke about very sure. You had previously mentioned that there's a one to one attach rate and how do you believe that this will impact the services I know you gave a little bit of color on product already thank you.
Yeah. Thank you for the question.
We're talking about service and service growth as we're going forward. So as you can see we're still accelerating as far as net.
Net adds on a quarter basis, and we've mentioned before that the churn rate on the new business model is also lower so theres actually a double benefit of not only accelerating and seeing a higher attach rate that approaches 65% over a six month cohort, but the business model also is showing a lower churn rate. So we are learning a lot about the cut.
<unk> for different segments, and nothing we can share publicly but we use those to drive not only.
Our visibility into the customer base, but driving some other promotional activities that we're seeing actually have a better effect on each quarter as we're going forward, we're getting smarter about how to address customers from a subscription perspective.
Sure in particular as is and will be adding subscriptions really in three buckets. So the first bucket is our partnership and deploying arlo branded product in the retail channel retail and E Commerce channel there and we're seeing strong performance there much like we're seeing here in the United States Bearish or is investing heavily in the Arlo brand.
Throughout the channels.
And as far as personnel.
Pull up marketing dollars, even running TV ads in Europe to drive drive demand for arlo through through those traditional channel. So we're seeing strong growth in subscribers just just like we're seeing here.
The United States also the second bucket is arlo branded products through their direct channels.
And thats them Upselling Arlo branded cameras and security cameras to traditional install traditional channel that they sell security systems through and we're starting to see that get added into the mix and those are to your point a one to one attach.
So we're seeing 100% attach rate on services to those cameras that or do you mean deployed through their direct channel and then finally, the third ramp of subscribers that will fee on top of on top of the product is what we mentioned in the call that we've reached a milestone in our development of a custom product.
For sure that will be deployed in high volume.
Next year, and we'll see that start to phase in in the second half of this year and full volume deployments like I said next year and those will also be a one to one attach on.
On service so very shares actually there's three buckets that are that are contributing to the to the service mix and we expect that to accelerate and help us hit our 1 million subscribers by our year end call next year.
Great. Thank you so much for the color and also can you talk about the shift to services to your point on what you were mentioning in the previous answer and how you believe that's going to impact margins. What do you plan on seeing as your businesses shift is complete and also especially since you.
Plan on breaking even so soon.
Thanks, that's a great question.
You can actually see already some of the benefit of the services business is having on on our gross margin even in Q1.
Services in Q1 were actually a record percentage of our total mix just under 28%.
You can see we are pretty pleased with the service gross margin itself, which we kept just on the 58% in Q1, but the benefits of that great gross margin and the high mix that we saw on Q1, you can see on the gross margin was up 32% on non-GAAP basis.
Record for Us as a company and we are very pleased with that so certainly as the service revenue continues to growth we would expect it to account for.
An increasingly large proportion of on mix and we would expect that to reflect itself in the gross margin, but keep in mind the seasonality in our business Q1 from a product revenue perspective is the lowest seasonal point for us and obviously Q for the strongest point, so youll see from mixed variation, but I think Q1 result exemplifies the benefits of.
So for this business and what it does for our margin.
Thank you and congrats on the quarter.
Thank you. Thank you.
Your next question is from the line of Jeffrey Rand with Deutsche Bank.
Hi, Congrats on a on a great quarter can you talk about your supply chain, if you're seeing any areas of tightness and do you have any could you have good visibility into securing enough components to meet your full year revenue outlook and how much upside in demand could your supplier support.
Yes, it's a great question. So we are obviously still in a world where COVID-19 is.
It is having some impact on the business and I'll lay out a couple of a couple of components of that so one we still see elevated freight cost for both sea freight and and airfreight.
And sea freight, we're seeing a little bit of congestion so a little bit longer lead time, just from a freight perspective, I think we're managing very well you can see in the quarter, we're managing very well those expenses those could go up again as we go through the year a bit but we're managing that through.
The ops team and everything else I think the.
The area that has a little bit more of a of an impact will be component and component shortages.
We have been forecasting out quite quite much farther than we would normally forecast out to make sure that we're securing the supply we need.
And at this point, we feel comfortable with our year guidance of having those components. Although again, we may see that pressure intensify as we get into the second half the biggest impact for component shortage are having out there is our ability to actually respond to upside.
So we just published a great Q1, and I can tell you there was more demand in Q1 than we could actually service.
And again not not because.
There's a big shortage in components, but because of the lead times are higher our reaction time to actually bringing in upside finished goods is a little bit slower than normal. So I think we will see that were potential upsides are being attenuated, but we're seeing strong demand at the same time that we're seeing some other component shortage, but we are managing that out we are taking our forecast out.
A lot farther we're managing this I think very well with our with not only our suppliers, but our manufacturers and so while we're relatively comfortable now I think what we're trying to adjust for US is how do we address potential upsides through the year as they come up and how much of that can we actually execute.
Great.
My follow up maybe a little more high level question, but the pandemic has changed a lot about how people work go to school and interact with people in some of these change behaviors are likely to continue after the pandemic can you talk on how you think changing behavior during the pandemic will impact longer term demand for your products.
It's generated a tremendous amount of awareness.
And I think theres been several.
What I would call vertical areas of awareness and uses for the product that I think will be.
Still with us for for quite a bit some of it will be a permanent change.
The most obvious is the amount of deliveries.
On interactions that happen at the front door and some of that is the shift to E. Commerce, just in general where people are buying things on there and they are being delivered.
But even even meals being delivered instead of going out for restaurants, and some of that has caused a lot higher.
Traffic at your front door and one of the things we noticed that people not only do they want to know when something's left at the front door. They also want to make sure that it is not being taken and lipids from a debt perspective, but even in our mill meal delivery scenario people want to see the meal delivered and then actually see the delivery person leaves so they don't come face to face.
During the pandemic can pick the food up after after people have left so I think the entire activity and the traffic and the awareness around.
On the front door is something thats going to persist there are other trends as well being able to check in on loved ones are remotely make sure they're moving around because you don't get there as often.
I think some of these trends are long term and then in fact, we think we will see some increased demand is actually people get to leave the house.
And they want to make sure now that they are not in the home all the time that it's secure when when their remote. So we think some of these some of these trends will continue.
And then some of them may accelerate as actually people start to travel again and want to watch their premise as they start to leave the home again.
Great. Thank you.
Your next question is from the line of Thomas Bouygues with Cowen.
Great can you guys hear me okay.
Yes, we can't yet.
Excellent.
So really nice quarter the product.
Product gross margins were up significantly and it looks like there was a lot of them from healthy restocking into the channel I was just wondering if you could remind us how many weeks of inventory youre typically target targeting and then maybe provide us some insight into maybe the steady state margins for the product business for.
For the balance of the debt.
Yes, great great questions really Q1, the product gross margin benefited from a couple of main things, we were able to control airfreight in Q1 pretty nicely.
That was the first thing and then the second thing it was relatively quiet quarter for promotional activity.
Not a lot of events going on in Q1 from a promotional perspective and that certainly helped gross margins as well from a product perspective.
Addressing your question on the channel inventory, we actually did destock the channel in Q1 on just need to remind you that the denominator in that calculation is the final six weeks of cell free now if you look at it Q1 is our seasonally weakest quarter from a cell free perspective, and you're comparing that to Q for the last six weeks are key for actually included the Holly.
Day period, so the denominator in that calculation in Q1 is a lot lower than what it was in Q4, so on how it looks like we've.
Stopped in the channel, we actually desalt too.
And I think looking at the channel inventory level now where it's at for North America retail 12 on a half week I think it's pretty reasonable stock I think for the rest of the year, we'll see the normal seasonal pattern as stocking destocking that we would see I don't think there's going to be any tailwind or headwind from a COVID-19 perspective on channel inventory.
I think we have a relatively normalized but just to just to clarify we did actually destock from a dollar perspective in Q1 in Americas.
And sorry, what was the final question you had.
I was just on a steady state margins for the product.
Steady state margins from a product perspective, we would expect mid teens is a reasonable guideline for steady state product gross margins.
Got it and then just as my.
Follow up.
The entire product line has now happened.
Refresh everyone's offering smart bundles.
Definitely on the software side I was wondering what potential hardware refreshes you could do down the line or is it something simply is just youre going to go from four to 8-K or are there other.
Hardware technology gaps you see John Wyman.
Yes, I think there is there are several areas and we don't want to.
You don't get too much into into roadmap at this time, but I would tell you that that there is still significant opportunity.
To innovate on the core cash.
Camera lineup from a technology perspective, and in ways that consumers would care about and we're working on several of those aspects right now I would tell you the monthly service or subscription which includes all those AI components.
I do believe it's still at its early stages of providing value to customers and we're already at a very healthy conversion rate and an even more healthy attach rate and I think there's a lot. We can do over time to actually add value there.
For the last thing I would say is is our mission and vision here at Arlo is to really protect Inc.
Connect people and provide that that peace of mind.
And I think there is there are some adjacent categories that we'll be looking at overtime, so without announcing anything in particular.
We are moving some of our innovation engine like I said on the call not only are we going to continue to drive and be.
The company that is delivering the best products physical products with the highest technology in the industry <unk> and delivering the best service from a feature set and functionality perspective, but we will be starting to look at opportunities to scale beyond what we've just refreshed, which is which is our core kind of smart monitoring camera lineup.
Great appreciate the color. Thanks again.
Again, if you'd like to ask a question. Please press Star then the number one on your telephone keypad again star one to ask a question.
There are no further questions at this time I would like to turn it back over to management for closing remarks.
Yes. Thank you operator, and thank you everybody for joining us on on what was another great quarter for Arlo as we look forward to speaking to you again next quarter.
That does conclude today's conference. Thank you for participating you may now disconnect.