Q2 2021 Arlo Technologies Inc Earnings Call
Ladies and gentlemen, thank you for staying by at this time all participants are in listen only mode. Later, we will conduct and answer a question and answer session at that time. If you have a question you will need to press star 1 on your push button and phone.
I'd now like to turn the conference over to Eric violin.
Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Arlo technologies second quarter of 2021 financial results Conference call.
Joining us for the company are Mr. Matthew Mcrae CEO and.
Mr. Gordon Mattingly CFO.
Format of the call will start with and introduction and commentary on the business provided by Matt.
Followed by a review of the financials from the second quarter, along with guidance provided by Gordon.
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, although dot com.
Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
And we're looking statements include statements regarding our potential future business results of operations and financial condition.
Including descriptions of our revenue gross margins operating margins tax rates.
<unk> cash.
Cash outlook.
Guidance for the second half and full year 2021.
Transition to a services first business model.
The commercial launch and momentum of all of the secure and always secure plus.
Strategic objectives and initiatives.
Market expansion and future growth.
Our partnership with <unk>.
Continued new product and service differentiation.
Supply chain challenges and the impact of the COVID-19 pandemic on our business operating results and financial condition.
Actual results or trends could differ materially from those contemplated by these forward looking statements.
For more information please refer to the risk factors discussed and Carlos periodic filings with the SEC.
Including the most recent quarterly report on form 10-Q.
Any forward looking statements and we make on this call are based on assumptions as of today.
And Arlo undertakes no obligation to update these statements as a result on new information or future events.
In addition, several non-GAAP financial measures will be mentioned on this call.
A reconciliation of the GAAP to non-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 on Arlo second quarter 2021 earnings call.
Our team again outperformed our expectations, while navigating the considerable supply chain challenges that so many companies are currently facing and with the excellent second quarter performance, we continue to see acceleration across key metrics.
<unk> revenue service revenue and total revenue for the quarter were all up 48% year over year.
Total paid accounts were up 133% year over year.
And non-GAAP gross profit dollars were up and incredible 328% year over year.
Our strategic shift towards services and the success of our new business model.
And the resulting transformative improvement and our profitability are undeniable and while we expect the supply chain challenges to continue in the near term. We see continued strong demand and are reconfirming, our expectations for the full year.
And now I will dive a bit deeper into our Q2 results.
Revenue came and comfortably above the top end of our guidance at $98.6 million.
Q2 marked the eighth consecutive quarter of record service revenue at $25.3 million.
The strength and our services business, coupled with double digit year over year revenue growth and Americas, and Asia Pacific and Triple digit year over year revenue growth and EMEA drove non-GAAP gross margin up over 18% year over year.
This strong performance 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 <unk>.
And our cash cash equivalents and short term investments balance increased by $1.6 million during the quarter landing at a healthy $178.7 million.
We have lowered our non-GAAP operating loss by an impressive 86% year over year and the first half of 2021 from a $52.3 million loss in 2022 of $7.4 million loss in 2021 and with our current cash position we anticipate.
Reaching profitability without the need to raise additional capital.
Our current performance and these results underline the profound impact of Arlo successful transition to a services first company in.
In Q2, we added 146000 paid accounts a record high which represents an increase of 28% sequentially.
And 240% year over year.
To put that paid account growth in the context under our legacy business model. It took us more than 1 and a half years to add the same number of paid accounts. We just added in the second quarter alone.
On July 4th we reached more than 700000 paid accounts and believe we are well positioned to achieve our 1 million paid account goal by our year end earnings call.
And as previously mentioned service revenue in Q2 was over $25 million.
Giving us a clear path to hit our projection of $100 million of service revenue for the year.
As we experienced this tremendous growth and services Arlo is also driving innovation to further enhance the value provided to our users in July we announced a major update to our service plans, which have replaced Arlo smart.
<unk> secure features computer vision based object detection AI based audio detection interactive notifications animated event preview secure cloud storage of video up to 2 K resolution $24, 7 premium support and 10% off Arlo Dot com purchases Arlo secure.
<unk> is $9.99 per month and now supports on unlimited number of devices.
Arlo secure plus includes all of the features from Arlo secure increases the resolution of cloud video storage to 4 K and includes are those new $24.7 emergency response, which provides a new level of assistance. When every second counts are single tap allows the user to request specific emergency <unk>.
To be immediately dispatch and with a choice of fire police or medical.
In addition, users can rapidly share critical information and saved to their arlo app with emergency personnel to better prepare first responders and route.
Information can include addresses gate access codes medical and conditions are family members and pet details and more.
Live trained emergency response agents will assist by providing continuous updates to users and first responders via the preferred method of communication whether that be through the arlo app SMS messaging or voice call.
Wireless secure plus is $14.99 per month, and also supports and unlimited number of devices.
The new Arlo secure service plans extend further <unk> technology leadership.
And while providing significant value to our users and the industry first emergency response functionality provides a compelling case for users to step up to Arlo secure plus.
As a reminder, under our new business model, where we included a free 90 day trial of Arlo Smart and we see a consistent and 50% subscription conversion rate upon expiration of the initial trial period.
And as we follow cohorts over a 6 month period, we see the attach rate to our subscription services growth towards 65%.
Going forward, our new business model products will contain a free 90 day trial of Arlo secure plus so users can experience the full breadth of capabilities provided by the Arlo platform.
Our industry, leading technology continues to outclass the competition on the hardware side as well since our last earnings call on May <unk> Pro Force series won the Editor's Choice Award from Tech Hive. The essential spotlight camera won acclaim from T..3 digital trends awarded our essential indoor camera are recommended by the.
Ultra 2.1 Tom's guide highly recommended award and numerous Arlo solutions are featured and best of 2021 lists across the industry.
The glowing reception our technology continues to garner is a testament to <unk> commitment to innovation and bringing peace of mind to our customers.
Finally, I would like to update you on our strategic partnership with <unk>.
To date are those existing suite of products and services are being sold by fair share not only through its retail channel, but also through its direct security channel, where it has more than $3.6 million customers across Europe, and Latin America.
We're excited to share that and new camera system designed specifically to meet the needs of their security channel was successfully moved into production in Q2, and we expect initial field Rollouts in Europe, and the second half of this year and full volume deployments in 2022.
That success led to current quarter revenue in Europe, growing 123% year over year, and we expect Europe to deliver more than $100 million and 2021 for a growth rate of more than 60%.
As a reminder, our strategic engagement with <unk> includes a guaranteed minimum of $500 million of product purchases alone over the 5 year term from the start of 2020 and significant service subscription acceleration.
Our programs and initial rollout.
It remains on track for 2021 and.
And we look forward to realizing the full benefit of the relationship and 2022 and beyond.
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 third quarter.
Thank you Matt and.
Thank you everyone for joining us today.
We delivered strong Q2.2021 financial results.
Seeded our expectation.
Growing on non-GAAP gross profit dollars by 328% year over year.
While revenue was above the high end of profit guidance.
And up more than 47% over Q2, 2020.
Our financial performance for the quarter was underpinned by the successful execution of our new business model.
Moving to record levels of paid accounts.
The Arlo team navigated continuing tough supply challenges.
<unk> expectations on revenue, while significantly improving our profitability.
Most notably we decreased on non-GAAP operating loss by $25 million year.
Year over year.
And now moving on to the Q2 financial detail.
Revenue came in at $98.6 million.
Up 47, 9% year over year.
And 19, 4% sequentially and was driven by meaningful growth in both product and service revenue.
Product revenue for Q2, 2021 with $73.3 million.
Which was up 47, 8% compared to last year and up 20.
2.7% sequentially.
On a year over year corporate revenue growth was driven by strong performance in all geographical territories.
And Europe, we benefited from continued strength from all virtual relationship.
And Americas from a return to growth and retail and momentum from on loan stool Ali Dot com.
And in Asia Pacific from growth and retail.
Our service revenue for Q2, 2021, with a record $25.3 million.
Up 48, 3% over last year and up 10, 8% sequentially with on the business model fueling our growth.
Our service revenue also increased $2 million and our research and we are providing for commercial along with the associated call as can.
Pad with $1.5 million.
And the first quarter of 2021.
During the second quarter, we shipped approximately 808000 devices.
Approximately 805000 with campus.
And 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 from the second quarter of 2021 was up $21 million year over year to $27.5 million.
Which resulted in a non-GAAP gross margin of 27, 9% down from 32, 3% and Q1.2021 and up more than 18 percentage points from 9.6% and Q2.2020.
The year over year improvement was driven by strong progress on both product and service gross margin over the last year the.
The $21 million year over year improvement and non-GAAP gross profit included improvements $13.2 million from products and $7.8 million from services.
Non-GAAP product gross margin was 17, 2%.
Slightly down from $22.
6% in Q1, and 2021 due to higher promotional spending and and rates.
And up over 18 percentage points from negative 1.3% a year ago.
As you recall and 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 58, 9% slightly higher and 57, 9% in Q1, and 2021 and significantly higher than 41, 5% in Q2.2020.
The year over year growth was driven by onshore paid account growth under our new business model, coupled with cost management over the last year.
Total non-GAAP operating expenses were $31.8 million.
Up $2 million or 6.9% sequentially and on <unk>.
Zero point $5 million or 1.6% year over year.
We believe on non-GAAP operating expenses will be in the 34% to $35 million range per quarter in the second half of the year as we invest in R&D and digital advertising and and legal defense costs.
Total non-GAAP R&D expense for the second quarter was up slightly sequentially at $12.4 million.
Our head count at the end of Q2 was 349 employees compared to 355 in the prior quarter.
As a reminder, during the early stages and the virtual relationship we agreed to provide them with transition services, which include training with all employees as well as system cost and some outside service costs.
We have included these costs and our normal operating expenses.
The reimbursement from <unk> is included in other income and was approximately $0.9 million.
And Q2.
Our non-GAAP tax expense for the second quarter of 2021 with $164000.
And Q2, we posted a non-GAAP net loss per diluted share for 4.
March, especially the non guidance and a significant improvement year over year.
During the quarter and we concluded an agreement to sublease, our entire San Jose Office, which.
Stock in February 2022, and.
And runs to the and that's all committed term in 2029.
We expect the sublease, we'll say $3 million to $4 million per annum across the business from next year.
But due to the nature of the transaction it did generate a noncash impairment charge of $9.1 million.
Which is included within our GAAP operating expenses in Q2.
We ended the quarter with $178.7 million and.
And cash cash equivalents and short term investments up $1.6 million sequentially and down $26.8 million year over year.
We continue to make progress on our working capital management during Q2.
Our DSO came in at 48 days down significantly from 63 days, a year ago and down from 54 day sequentially.
Q2 inventory closed at $43.2 million a decrease of $12.8 million Q1, and 2021 with 10 at 5.7.
<unk> to $3.4 last quarter and $3, 1 a year ago.
Now turning to our outlook.
We expect third quarter revenue to be and the range of $100 million to $110 million.
Our team did an excellent job navigating COVID-19 related supply chain challenges and the first half of the year.
While we expect these challenges to impact our revenue and cost to a greater extent and the second half of the year.
We believe we can still make incremental top line progress of the first half.
Given that we expect our 2021 full year revenue to come in between 410 and $420 million.
So the third quarter of 2021, we expect GAAP net loss per diluted share to come in between 30 <unk>.
And 23 cents per share.
And on non-GAAP net loss per diluted share to come in between 19.
And <unk> <unk> per share.
In line with previous guidance.
And yeah, it was approximately $130 million and 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.
While supply constraints on limiting our top line and impacting our cost and the team also remains extremely focused on getting to breakeven on a non-GAAP basis later in the year.
And now I'll open it up for questions.
As a reminder to ask a question press star 1 on your telephone to withdraw your question press the pound key.
And our first question comes from the line of Jeffrey Ram from Deutsche Bank.
Hi, Thanks for taking the question and congrats on a nice quarter, you continue to see nice growth and your subscription business. How do you think about the opportunity of your current installed base, who could potentially become subscribers and what is your strategy for converting these users who have already bought the product and not signed up debt after the free trial.
Yes, great question.
And are seeing subscribers come from a couple of areas. So 1 is obviously the partnership with <unk> and some of the strong growth, we're seeing and Europe 2 as all the new registered users that were capturing every every quarter through our through our normal channels, but 3 to your point is we are very active.
And tapping into our legacy what we call our legacy installed base and.
And we do that a couple of ways..1 is we're running specific promotions for sign up to Arlo Smart and now called Arlo secure and our new service plans that we announced this quarter.
But also.
Pushing different hardware or new hardware as we launch new products on the market and what we see is when and household that had legacy hardware and a new camera.
That ecosystem at home the propensity for them to actually sign up for service to cover all of that ecosystem actually goes a lot higher so we're having I would say quarter over quarter more success every quarter as we learn how to market to them. We test all of the promotions to that legacy installed base and we're continuing to refine that going forward, but it.
It is an area that.
We're actively.
Mining, but also getting better at as we go over time.
Great. Thank you and I'll just I'll follow up you are forecasting revenue to grow modestly sequentially and <unk>, but your non-GAAP EPS outlook is for a larger loss and <unk>. It looks like some of this is from higher operating expenses, but it also looks like Youll see some gross margin pressure sequentially can you just talk about what is driving this gross margin pressure.
Sure Hi, Jeff it's going on here.
I mean really in Q3, we're balancing revenue against profit.
The supply constraints and really the story there to be honest and what we're doing and Q3 spending a bit more on <unk> right.
And in order to get the product to our customers. That's probably the biggest reason for the slight decrease in product gross margins, it's not service gross margin to gross margin.
And it is just really a result of the supply challenges. We face is that also a little bit of cost component increases built into that as well.
Great. Thank you.
The next question comes from the line of Adam Tindle from Raymond James.
Hi, This is Katherine on for Adam Thanks for taking our questions.
Can you talk about the early feedback that you've seen from your new subscription plan are less secure and arlo secure plus.
Many people do you plan on having it by this time next year.
Yes, we're not going to forecast going forward, because I think it.
It was yet to be seen how many people actually move from Arlo smart to Arlo secure plus.
Depending on which plan works better for them and that's something we'll learn over the next couple of quarters, obviously, all new subscriptions.
That come on and we'll be arlo secure because we no longer sell arlo smart.
Giving you a forecast on that would actually give you a forecast going out a little bit further on on subscriptions, but as far as the reaction early on reaction is positive.
And would tell you that there is 2 major changes.
Inside the plans 1 as we move to unlimited device support and that.
Something customers have been asking for and in fact actually channel partners have been asking for that because it makes it simpler to educate users on what plan they need depending on how many devices. They have now it's an extraordinarily simple message no matter. How many devices you have here is a plan that covers everything so.
So we think that will take some of the friction out of some of the sign up process for some of the complexity initial on but the other real innovation that we've rolled out is something we call emergency response, and I touched upon it a little bit on my earlier remarks, but it is the world's first live agent professional monitoring 1 tap capable.
<unk> for a user to actually tap the exact emergency response that they need.
Through and applications. So the user can actually has an icon for fire police or medical and if they tap medical for instance.
Medical first responders are actually dispatched.
Mediately, so they already know kudos and and at the same time, a live agent actually reaches out to the end user and coordinates that responses and if theres any other help that needs to be done. So again <unk>. We think it adds a lot of peace of mind to our customers.
It's a capability nobody else has we think it can reduce response time now that emergency response functionality is actually in the $14.99 plan. So 1 of the things we'll be focused on going forward is pitching that functionality and looking at getting some of our users to step up to the larger plan.
I agree that simplicity stands out could you.
Describe your ideal inventory position coming out of the pandemic. Your turns are up to 5.
5.7 times, and possibly and all time high are you planning on rolling out any promotional activity later this year.
That's a great point.
The inventory levels in Q2 for Q2, which is actually seasonally the.
And the weaker half of the year for us.
That number is pretty high.
And we did tap into you can see the inventory shrunk by about $13 million.
And on hand inventory quarter over quarter and that was part of the reason why and the team were able to over deliver against our original expectations for Q2.
We will do what we can to get inventory to a.
A slightly high level, but it's not a million miles of where we need it to be and certainly as we look forward to the second half of the year, we've got a lot more visibility into the supply thats coming and we've worked very closely with.
Manufacturing partners without chipset providers, we have extended our demand outlook and we've got a good degree of confidence and Thats why we reiterated for the year, the $400 million to $420 million and revenue.
Thanks for the time.
Thank you. Thank you.
Your next question comes from the line of Hamid Corson from B Dws finance.
First question on this.
Given your annual revenue guidance.
Or it sounds like you are going to be expecting a lot more revenue out of Europe.
Does it matter on year, and if it's coming from Europe, and North America as far as revenue is concerned as far as gross profit dollars.
And how.
And how likely is it those European.
Consumers would actually.
Topped.
Carlos secure when they're already very sure customer.
Hey, Amit Great question to answer to answer it doesn't matter, whether it's coming from Europe or the U S. I think just take a look at our results we have a ratio as being quite a large proportion of volume mix and.
And the current quarter year, with 25% and Q1, it was more than that and Q3 last year was pretty high to you.
You can see our product gross margins and all of those costs have been pretty healthy. So my answer to that and it doesn't matter and then the second answer to the question with respect to subscription attached in the virtual security channel, which we're starting to sell and T. Now just a reminder, we have a wonderful on attach for services. So we.
Should see some nice growth and paid accounts from the virtual security channel and as that begins to pick up steam.
Latter part of this year, but more so at 2022 play.
And then my other question was.
How comfortable are you with the supply chain and being able to secure the necessary components.
Components to get to Q4, just given that the inventory did decline sequentially.
Yeah, we focus on that probably every minute of every day right now and we have been working very very closely and supply chain team done an amazing job you saw the results for Q2, we were able to eke out supply that we didn't have visibility into when we guided Q2 and supply chain team and doing.
And so we've elongated.
Window and with our suppliers and we're working very very closely with our OEM partners and with our chipset providers and right now and yes, we have good visibility into supply from the latter part of this year and we've got a good degree of confidence in reiterating the guidance for the year of $400 million to $420 million revenue.
And lastly could you just sorry.
Clarify when youre talking about breakeven for the.
Is that for the quarter or for a specific month and the year.
Yes, with respect to breakeven and just wanted to clarify the team remain highly focused on getting there and we'd be talking about a lot more confidently if it wasn't for the supply chain challenges that we're facing that being said, we believe we have a shoulder and Q4 and the entire team and United.
And we're pulling out and where the stock to make sure we get as close to that as we can.
Okay. Thank you.
Thank you.
And on and your last question comes from the line of Tom Voice with Cowen and company.
Hi, Thank you for taking the questions. The first 1 here and obviously, it's great to see the various partnership going so well I was just wondering how you thought about replicating that and other geographic regions.
And in Asia.
Yes, we think the <unk> channel or the partnership channel is an important area of.
Growth for us, obviously bearish or <unk>.
Great example of that.
We've signed a deal with Calix, if you remember here and the United States to do some distribution through them to Csp's.
And especially rural Csp's across United States.
And we've done other deals on Kartchner homes for.
Deploying door bells into into new home builds across the country. So that is an area, where we focused quite a bit.
1 of the areas, you'll see us continue to focus on also.
Isps are service providers.
And Thats and Thats something.
We'll talk more about as we get through the rest of the year, but that idea of a beta be non consumer channels is something that is part and 2 we're constantly looking for additional partners there.
And as we as we sign up or have more news in some of those other areas. We'll definitely report on but it is a vector of strong growth for us and and some of these deals like calix like very sure. The thing. That's important is it's not just the hardware sales that goes into the partnership and the deployment into the consumer's home it as Gordon mentioned earlier the 100.
And 1 is attach rate on services.
Drive that hardware sales, but it's also driving our household that's got a 1 to 1 attach which is driving our paid account number.
Got it and that's very helpful and then.
The other 1 obviously, it's very nice to see kind of the evolution of <unk> 9112.
Emergency services response.
And it's something that competitors have had more of a difficult time, but located interest on that.
And 1 side and I was just wondering is there how do you and tight someone who was on older Arlo Smart platform that has access to their traditional and 911 to go with.
Arlo secure is a base level to go to Arlo smart you'd get that functionality or is that something that you still offered on their lineup.
Your line of demarcation between whats and emergency response level services and what's the traditional day.
Yes, it's a growth.
Great question. So you can see that Eni and 1.1 was our first foray into very low latency access and the ability to access remotely 911 from wherever you are and reduce it late and fee for that emergency response.
We are the first rolled out we're still 1 of the only ones that ever rolled out E 911, and we know how important that is.
To our users and we got a lot of great feedback on how to make that better what youre seeing is all of that feedback plus some innovation and actually going into emergency response, which really picks it up.
<unk> level not only from a user experience perspective, but also from the accuracy and the speed of which and.
Emergency and first responders can be dispatched plus having a live agent almost and emergency concierge and Thats working with you to ensure that.
Net debt Youre emergency is being dealt with plus being able to actually send information in many cases right to the laptop or the computer that's inside the cab of the fire truck or and the police car things like gate access codes or if you have a family member that has a certain medical conditions. So a lot of feedback went into that we think emergency responses and most innovative way to know.
Respond to emergency situations that you see through through any kind of smart security system as far as enticing people.
If you can remain as a customer and you can remain on your Arlo Smart plan. If you want and we feel emergency response is such a big step forward that we will see people actually a lack of income transition over to the arlo secure plans. The other benefit obviously is the unlimited device count, which really simplifies the plans and the other.
The other reason we made that choice to do that is we're seeing people continuously adding on additional arlo devices.
And where they may have had a couple of pro tools and they buy a pro 3 let's say, which is a new business model product and sign up for <unk>.
Arlo Smart service and then they may want to add 2 or 3 more devices over and over over time. This.
And have any upper limit you can continue to add devices into that household plus a few step up to secure plus you get the new emergency response, so 2 big things there that I think will entice people to move over and of course like I mentioned on on the earlier remarks.
Every new every new registered accounts and.
Registered user coming on will have the choice between Arlo secure and Arlo secure plus and the Arlo Smart is no longer offered.
And that's it.
And I appreciate the insight thanks, so much.
And welcome.
And there are no more questions I'd like to turn it back over to Ms. Joan.
Macquarie.
Thank you operator.
I'd like to take a moment just to thank all of the teams at Arlo for the outstanding work to deliver the world's best and most recognized smart security system that we've talked a lot about today, we've launched more than 10 products under our new business model and continue to see and acceleration of our service revenue and paid accounts the new Arlo secure plans that we've been talking about bringing in.
Innovative industry first features to our users and will further drive our recurring revenue business higher and.
We're seeing the first results of our impactful relationship with very sure after more than a year of groundbreaking work. We're very excited about where that's headed especially as we look into the following year I could not be more proud of the achievements as we continue to focus on our mission of protecting the contact connecting what users care about most thank you everyone for joining us on the call today.
Hey.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Okay.