Q3 2021 Arlo Technologies Inc Earnings Call
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 at that time. If you have a question you will need to press star one on your push button phone I would now like to turn the conference over to Eric Bilin. Please go ahead.
[noise] Sir.
Thank you operator, good afternoon, and welcome to Arlo technologies third quarter of 2021 financial results Conference call.
Joining us with our company or Mister Matthew Mcrae C E O Mr. Gordon Mattingly CFO.
Before him 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 third quarter, along with guidance provided by Gordon.
Then have time for any questions.
If you have not received a copy of today's press release. Please visit our lives Investor Relations website had investor Arlo Dot com.
Before we begin the formal remarks, we advise you that today's conference call contains forward looking statements.
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 expenses cash outlook guidance for the fourth quarter and full year 2021 transition to a services first business model, the commercial lunch and momentum of new products and services strategic objective.
And initiatives.
Market expansion in future growth.
Our partnership with very sure.
Continued new product and service differentiation.
Supply chain challenges and the impact of COVID-19, pandemic on our business operating results and financial condition.
Actual results or trans could differ materially from those contemplated by these forward looking statements.
For more information please refer to the risk factors discussing are those periodic filings with the SEC, including the most recent 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 a result of new information or a future events.
In addition, several non-GAAP financial measures will be discussed on this call a reconciliation of the gap to non-GAAP measures can be found in today's press release on our Investor Relations website.
At this time now like to turn the call over to Mac.
Thank you Eric and thank you everyone for joining us today on <unk> third quarter 2021 earnings call.
Once again, the arlo team outperformed expectations across all metrics as we continue to navigate the unprecedented supply chain challenges. So many companies are facing around the world.
Total revenue was up 1% year over year service revenue was up 42% year over year and total paid accounts were up 146% year over year and despite the additional costs driven by the pandemic supply chain disruptions non-GAAP gross profit dollars.
We're up over 10% year over year comfortably over indexing top line growth more than tenfold.
Digging a little deeper into our services business to provide some additional clarity we reported our annualized recurring revenue or a R. R as $80 million in Q3 growing 103% year over year.
Driven by our new business model or a R. R is the fastest growing and highest margin portion of our total services revenue and represents the annualized recurring service revenue, we derived from our paid accounts.
A R. R excludes prepaid service revenue such as legacy carbon revenue from our old business model and <unk> service revenue from strategic partners.
Looking ahead to queue for ICR teams, great execution, continuing in the face of what may be the peak of supply chain headwinds.
Though is raising guidance for queue for raising guidance for full year and raising guidance for our year end cash balance.
In addition, our annualized recurring revenue is expected to grow by more than 100% again in queue for and we plan to provide a more fulsome report on this topic on our fourth quarter earnings call.
Returning to Q3 results.
Revenue came in above the top end of our guidance at $111 $1 million in Q3, Mark the ninth consecutive quarter.
Of record service revenue at $27 million.
We added 182000 paid accounts a record high which represents an increase of 25% sequentially.
And 214% year over year to put that account growth in the context.
Under our legacy business model it took us more than two years to add the same number of paid accounts. We just added in the third quarter alone.
This continued acceleration of our services business, which accounted for 64% of our non-GAAP gross profit dollars in the quarter helped more than offset over $3 million of incremental air freight expenditure compared to a year ago, pushing total non-GAAP gross profit up by $2.4 million.
And up more than 10% year over year.
Arlo outperformed the high end of our guidance for non-GAAP net loss per share, which came in at a loss of eight and we have lowered our non-GAAP operating loss by an impressive 76% year over year in the first three quarters down to $14 and $7 million in 2021.
Our cash cash equivalents and short term investments landed at a healthy balance of $166.1 million.
And with our current cash position and financial trajectory, we anticipate reaching profitability without the need to raise additional capital.
Our transformation to a services company powered these impressive Q3 results, but is also propelling us towards our long range targets.
On October 18th we reached more than 900000 paid accounts.
And believe we are positioned to achieve our 1 million paid account goal significantly ahead of our year end earnings call.
And as previously mentioned service revenue in Q3 was $27 million, giving us a clear path to exceed our projection of $100 million of service revenue for the year.
Our new Arlo secure service plans are at the core of this incredible performance Arliss secure features computer vision based object detection AI based audio detection.
Interactive notifications animated event preview.
Secured cloud storage a video of up to two K resolution and 24 seven premium support.
Arlo secure plus includes all of the features from Arlo secure increases the resolution of cloud video stores to four K and includes Arliss, New 24, seven emergency response, which provides the ability to directly request a fire police or medical responder and speak with a security expert in the event of a emerge.
C.
Arlo secure plus is $14 99 per month and further extends are those technological leadership, while providing significant value to our users.
As a reminder, under our new business model, where we include a free 90 day trial of Arlo secure plus we see a consistent 50% subscription conversion rate upon expiration of the initial trial period.
As we follow cohorts over a six month period, we see the attach right to our subscription services grow towards 65%.
Our industry, leading technology continues to outclass the competition and garner critical acclaim from expert publications since our last earnings call in August our products have been recognized with three Editor's Choice Awards multiple design awards and features and best of 2021 lists across the industry.
<unk> commented on Arlo pro for quote unquote in a point comparison resolution performance battery life and so on it just consistently outshines the competition.
This glowing reception is a testament to our commitment to innovation, which continues with the most recent product announcements.
We just launched the new Arlo go to smart security camera exclusively with Verizon.
Our local too is Ah LTE Wi Fi and GPS enabled device that leverages are deep intellectual property and RF and low power designed to deliver a camera that provides uninterrupted security in.
In environments with no power or internet connectivity, such as construction sites vacation homes, both rv's vehicle fleets or large properties.
Our logo too is now available nationwide through Verizon with additional carrier partners coming next year.
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 fourth quarter.
Thank you Matt.
And thank you everyone for joining us today.
We delivered strong Q3, 2021 financial results that exceeded our expectations.
Growing on non-GAAP gross profit by 10, 70% year over year, while revenue was above the high end of guidance and.
0.8% of the key three 2020.
Our financial performance for the quarter was again underpinned by the successful execution of a new business model, leading to record levels of paid accounts.
We all know team navigated continuing tough supply conditions to exceed our expectations on revenue.
While again, improving all year over year profitability decreasing non.
Non-GAAP operating loss by $1.2 million year over year.
And now moving onto the Q3 financial detail.
Revenue came in at $111.1 million up 0.8% year over year and 12.8% sequentially.
Our service revenue to Q3, 2021, with a record $27 million up six 9% sequentially and up 42, 4% over last year with our new business model fueling our growth.
While service revenue accounted for 24.3% of all Q3 2021 revenue it delivered 63.9% non.
Non-GAAP gross profits.
Our service revenue also includes $1.3 million.
In our research we are providing for perishable along with associated costs.
Compared with $2 million in the second quarter of 2021.
Product revenue for Q3, 2021 was $84.2 million, which was up 14.8% sequentially and down seven 8% compared to last year.
Ah sequential product revenue growth was driven by continued strength from all parish, who a relationship in Europe, coupled with growth in retail in America, as we head into the seasonally stronger fourth quarter.
Year over year and sequential product revenue growth, we're both impacted by supply chain challenges.
Which would most pronounced.
Early stages of the quarter.
While our cell through was dampened by the shortages.
Supply chain team did a fantastic job securing additional supply in the last call into the quarter and replenishing channeled inventory ahead of the seasonal uptick we expect in the fourth quarter.
During the third quarter, we shipped approximately 1.012 million devices, all of which with cameras.
From that point on my discussion points will focus on non-GAAP numbers the.
The reconciliation from gaps non-GAAP is detailed in our earnings release distributed earlier today.
A non-GAAP gross profit for the third quarter of 2021 was up to $4 million a year over year to $25 $1 million.
Which resulted in a non-GAAP gross margin of 22.6% down from 27.9% in Q2, 2021 and up more than two percentage points from 26% in Q3 2020.
The year out of the year improvement was driven by strong progress on service gross margin, while product gross margin with impacted by COVID-19 related supply chain challenges, which drove a significant increase in anchorage expense year or the year.
The 2.4 million.
Year over year improvements in non-GAAP gross profit, including the improvement of six $8 million from services.
Offset by a reduction of full $4 million from products.
Non-GAAP service gross margin came in at 59, 5%.
Slightly higher than 58, 9% in Q2, 2021 and significantly higher than 48, 8% in Q3 2020.
The year over year growth was driven by substantial paid account growth under a new business model, coupled with cost management over the last year.
Non-GAAP product gross margin with 10.8%.
I am from 17.2% in Q2 2021, mainly due to a sequential increase of $2.7 million in anchorage expense and down from 14.8% a year ago again, mainly impacted by an incremental $3.6 million in athletics.
Spence.
While short term product gross margin will continue to be adversely impacted by incremental earthquake expense G.
You too the current COVID-19 related supply chain challenges the.
The incremental long term customer lifetime value, we derive from the associated credit account is compelling.
And more than justifies the investments.
Postal non-GAAP operating expenses with $32.5 million up zero point $7 million or $2, 1% sequentially and at $1.2 million, 4% year over year.
Our total non-GAAP R&D expense of the third quarter was down slightly sequentially at $12.3 million.
A head count and at the end of Q3 with 346 employees compared to 349 in the prior quarter.
As a reminder, during the early stages of the virtual relationship we agreed to provide them with transition soon too which include training with all of the employees as well as systems cough and some outside service costs.
We have included these costs in all normal operating expenses.
The reimbursement from Barry Shaw is included in other income and was approximately zero point $5 million during Q3.
Our non-GAAP tax expense for the third quarter of 2021 with zero point $2 million.
In Q3, we posted a non-GAAP net loss per diluted share of eight.
Much passive an olive garden.
And the two cent improvement yeah, Oh the year.
We ended the quarter with $166.1 million in cash cash equivalent and short term investments down $12.6 million sequentially and down 27 $6 million a year or the year.
Keith we eventually closed.
$298 million, a decrease of $3 $4 million of the Q2 2021 with tons at seven six as compared to five seven last quarter and four six a year ago.
DSO came in at 62 days up from 47 days, a year ago and up from 48 days sequentially with the increased driven by the time you shipments in the latter part of the quarter.
Now turning to our outlook.
We expect fourth quarter revenue to be in the range of 132 $140 million and accordingly are full year revenue to come in at between 422 and $432 million.
<unk> $12 million on previous guidance at the midpoint of the current range.
Our team has done an incredible job navigating unprecedented COVID-19 related supply chain challenges in 2021, enabling us to exceed the top nine guidance, we provided back in February.
For the fourth quarter of 2021, we expect our GAAP net loss per diluted share to come in between 16 cents and nine cents per share.
And our non-GAAP net loss per diluted share to come in between seven and.
And zero cents per share.
Our guidance includes at great expense of approximately eight cents per diluted Chet compared with <unk>, but the new chair in Q4 2020.
This additional French expenditure is a direct result of the current COVID-19 related supply chain challenges.
We expect at Great expense will normalize when the global supply chain situation stabilizes.
Up from previous guidance, we expect to end the year with more than $140 million in cash cash equivalents and short term investments.
And we will continue to monitor all performance and prudently manage our operations to preserve our cash position.
And now I'll open it up for questions.
At this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
Yeah first question comes from the line of item $10 with Raymond James Your line is now open.
Hi, This is Alexander Adam Thanks for taking our questions. So I'm just curious looking into this year's holiday season can also looking into next year given the current inventory levels in the supply chain set up how do you think about promotional activity an inch sort of how will that play out.
Yeah. That's a great question, we're making those decisions almost in real time as you've heard on the call. We had both in Q3 and we're expecting even in queue for more demand.
Then we have from a supply perspective so.
In those areas, where where we think we might be a little bit light on supply. We are pulling back on some of those promotions because there's no reason to do that.
As we get into next year that'll dependence as the supply chain disruption start to unwind as we expected to do throughout the year and will continue to make those make those decisions based on the balance of what's happening in the channel would supply we have coming in.
What we need to do for the quarter, but it gives you an idea of what happened in Q3, what we see probably continuing in queue for the good news is the demand is absolutely there for the product and in several areas. We have stopped out and we're making sure we're reacting on that to maximize profitability.
Perfect. Thanks, and then May and things are seeing a nice mix shift towards devices other than IP cameras I was.
Just curious do these devices typically carry a different subscription attach ray and are there any significant gross margin discounts to speak of as as we move towards smart door bells, and some lights yeah.
Yes, it's a great comment we are seeing that diversification and we think it's important it's one of the long term goals, we set out as as we spun was too not only diversify on the go to market side, but also in the area that you're calling out diversifying across different product categories.
We look at those products, both from subscription attach right and from a gross margin. They are very consistent with what we see on the cameras. So there's a couple of percentage points either way given the on a given quarter, but I would look at them as <unk>.
Totally consistent with what we are seeing from IP cameras.
Fantastic. Thank you.
Your next question comes from the line is definitely ran with Deutsche Bank. Your line is now open.
Hi, Thanks for taking my question and congrats on a good quarter and your continued progress with your services business Uhm. My first question I wanted to dig deeper inches annual recurring revenue number that you gave based on how you describe it excluding your legacy business and our he's eventually would you expect all your services revenue to be included in your air or.
Number and how much of your services revenue and <unk> is currently included in <unk>.
Thanks for the question yet at the moment, we didn't break that out but you can do some pretty simple math to to work out answering the second part of your question.
We disclosed the IRR is is $80 million.
Already using the last calendar months and a quarter multiplied by 12, so it's a little bit apples and oranges you tell you. The 27 million of service revenue in queue for multiplied by four and gives you $108 million annualized.
He can get an idea of comparing the <unk>. The one O eight you've got a rough idea of how much of the total service revenue that recurring paid <unk>.
Fit account for that's also in the second part of your question and the first one do we expect two shifts mainly to IRR in future I think the mix will continue to shift more in favor of that recurring paid services piece. We don't think <unk> is going to disappear.
We're certainly going to be working til you get additional opportunities with strategic accounts to continue.
Re service revenue and the the legacy PCF that will go away, but remember we do still offer free trial with all our new business model products and that that piece is part of the prepaid service revenue that is excluded from that.
Great. Thank you and as I follow up I wanted to dig deeper into the supply chain. One of the main problems. You are seeing are you able to mostly need to manage just costs. It costs you more for your components in for air freight or is there a meaningful unmet demand.
There is there's meaningful unmet demand and it depends on the product. So some products were in I would say good stock and some products, we have stopped out multiple times during the quarter.
And Gordon's script, we talked about some shipments coming later in the quarter and that's why we missed a little bit of demand in Q3 like I said also I think we'll see that continue.
In the queue for so we are seeing healthy demand for the product.
As far as the causes of it.
We are seeing some component shortages, we are seeing some component costs ups in some areas, but I wouldn't say that's the primary factor.
As components.
Darting to go short what the first thing that happened is the lead times on those components go out and as we've described on previous calls. We then took our forecasting out farther than those lead time. So yes. It slows down some of those components in certain areas, but as you can tell from our good results in the quarter in our guide up in queue for we feel we're executing on top of some of the shortage that we're seeing.
I'm a component side I would say the biggest impact is really around freight.
And that has to do with obviously the costs not only the cost of air freight that Gordon shared on the call.
Also a costa C frayed or anywhere up from three to 10 X normal.
But the lead times on the sea freight is what really disruptive right something that I would take six to eight weeks to come over is now taking multiple weeks I may be sitting 56 to eight weeks outside of the port what we've done in response to that is actually shift a lot more of our product airfreight, which is why you are seeing the costco up so.
As an example take a year ago.
Q for as we look forward or even Q3, 20%, maybe the Max would be about 20% of our product coming in would be on air freight, we're anticipating and Q Q4, 80% of our product coming in will be on air freight and that's how we're actually getting around some of the sea freight congestion some of those problems as we're using more air freight.
And that's why you're seeing that.
Called out in a script as those costs will go up again, we do believe it's transitory it's temporary as we get into next year, we should see some of that unwind, but we think the right call in queue for us to continue the air freight coming in so we can meet as much as the demand as we can in queue for which obviously generate future subscribers.
Great. Thank you.
Your next question comes from the line of Jeff Osborne was Cowen and company your lines on muted.
Jeopardy.
We will move onto the next question.
From hamlet car Sandwich Dws. Your line is now open.
Hi, So first question I had was on Europe, obviously.
Revenue there increased is is that all associated with various sure and how much of the queue for guidance involves there sure and the.
The ramp up ahead of the exclusive product released from.
Sure.
Yes in Q3 of definitely some of that is obviously from various sure we are.
Basically tracking exactly on time with the release of the custom product, we announced on the previous call. So that's great. They are deploying it region by region, we're seeing a bit of that in Q3 and to your question, we will see a bit more of that.
In queue for.
The full effect of that product being rolled down.
Won't be really felt until next year. So I would expect it to step up a bit in Q4, and then continue to step up as we get into next.
Next year. So we'll see virtual continue to grow going forward is that starts to roll out and we're seeing we're expecting to see some additional growth obviously on the retail side in Europe as well as they continue to invest in the brand and some of the go to market.
Okay is it is it too early as far as being able see what kind of conversion you have on the pizza subscriber side going from the older Arlo smarts, the arlo secure product.
Yeah, we haven't really released any different numbers and part of that is it seems to be very consistent going forward.
As far as a very early read I will tell you that in our next earnings call. We think will have enough data and maybe characterize more around not only the services business as a whole.
But anything that that we're seeing from a difference from Arlo smart Arlo secure but right now I think it's safe to assume that if at least as good as what we've been seeing for Arliss Martin historically.
And can you maintain a piece on the services side, where you're actually able to offset any kind of.
Negative contribution from the hardware side beyond just Q4.
Yeah, we're not we're not anticipating negative contribution harm it we still obviously key three.
Still double digit low double digit gross margin on the hardware side I think the guide for key for implicitly, suggesting something similar so we're not looking to move into negative territory a tool on the hardware. We expect to continue to see positive gross margins on the hardware and I'll see the service is gross margin itself you sofa.
Jeffrey 59.5%.
Self was an improvement on the prior quarter and a record for us as a standalone company. So we're continuing to see <unk>.
Slow, but steady improvement in the service is gross margin as well.
Okay. Thank you.
You're welcome.
Your next question comes from the line of Jeff Osborne was Kevin <unk> Company. Your line is now open.
Okay, sorry about that.
Font size easy to use as arlo products.
Good to hear from him yeah, Yeah, absolutely a couple of questions on my end I was wondering if we could just touch on the the channel mix in terms of online versus in store or did you see any noticeable trends.
On that front and then also if you could give us an update on how the arlo store.
Going direct is working out for Ya.
Yes, I would tell you there is no <unk>.
Big changes, we've seen from a mix now I say that.
But also know that sometimes when we get reporting from a retailer's it's in Ah it's.
And a single bucket and it's hard to differentiate what what is actually sold through the retail dot com versus a retail brick and mortar also what we've seen as we've seen some increase omnichannel activity and what I mean by that is somebody may buy a product online and actually drive to the store and pick it up and that is often counted as in <unk>.
Line order, even though they're physically going into the store and picking up and maybe buying additional things. So it's a little tough to give you a great read on that but from what we've seen on a quarter over quarter sequential perspective haven't seen any massive shifts in the in the retail side from Ah Arlo Dot Com perspective, we haven't released any details.
Obviously from that perspective, but it is a fast growing channel and it is one of our most important channels not only from a financial and profitability perspective, but it's also a direct relationship.
With our end user and so we're able to really glean a lot of data on what they are buying it as a key market for us to sell accessories.
We know that certain customers are apt to buy accessories, roughly 30 days after they buy the main camera and we can make sure that we're modeling that and of course are allowed to comp dot com is the primary way people actually subscribe to our services. So across the board that is mixing up across from calling from a revenue perspective, but it is contributing to our.
Increased profitability.
Got it that's helpful. I made my last question is just can you touch on the world semiconductor supplies scene sort of an evolution from everything from the foundry to Microcontrollers and now more of the backend.
Vietnam, and Malaysia, having more challenges can you be.
Be more precise as to where your challenges where is it related to supply chain issues. In Q3, just so we can sort of keep that in mind as we monitor the situation of the semiconductor shortage heading into 2022 yeah.
Yeah. It was.
On the component level I'll tell you, it's typically relatively low valley.
Values, so think of like power ice's or things like that that we've got a kind of chase and make sure we get enough supply in Q3. It moved our direction, which is why we were able to ship more towards the end of the quarter. So that's good the team from an operations perspective has done an absolute fabulous job on the procurement operations.
Getting our fair share if not more of some of these ice's. So we were able to secure the supply.
That we needed to deliver the results that you saw and not only that but deliver the confidence in the in the in the guide for Q4. So that's that's that from a from an icy perspective or from a component level perspective, really what's going on there and we're chasing that not only weakly but actually daily.
And then the rest of it is really the frame and and just dealing with finding the airfreight capacity figuring out how much to actually stick on a boat.
And we're starting to see a little bit of congestion even on the air freight side. That's all of this product actually landing at airports instead of ports and a lot of the airports don't have rails.
Most of those go into port So we're seeing some congestion they're nowhere near what we're seeing in the actual shipping parts. So we're keeping an eye on that and making sure that that our lead times as products actually land are being.
Accurately calculate on our site to make sure we give a proper guidance.
Makes sense I appreciate the insight. Thank you, yes, you're welcome.
There are no further questions at this time Mister amount, Okay, I turn the call back over to you.
Thank you operator.
As we close I would like to think.
All the teams that arlo for the hard work to deliver not only the outstanding Q4, but also the confidence in queue for as we continue to face the global pandemic related disruptions. The entire company is absolutely laser focused on finishing the year strong and I am looking forward to our year end earnings call. Thank you everyone for joining us today.
This concludes today's conference call you may now disconnect.
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