Q1 2022 Arlo Technologies Inc Earnings Call
Exhibit the same discipline that we've demonstrated as we transformed our business.
And with that 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.
Thank you, Matt and thank you everyone for joining US today, we delivered strong Q1 2022 financial results.
Our expectations.
Growing our revenue by 51, 1% year over year.
And above the high end of our guidance.
While growing non-GAAP growth profit sequentially and year over year to a record for the company.
$34 5 million.
Our financial performance for the quarter was again underpinned by the successful execution of our services business model, leading to record levels of paid accounts.
The team navigated continuing tough supply conditions.
Our expectations on revenue.
While improving on a year over year non-GAAP operating profitability by $4 1 million and posting a second consecutive quarter of non-GAAP operating profit.
And now moving on to the Q1 financial detail.
Revenue came in at a first fiscal quarter record of $124 8 million.
51, 1% year over year and down only 12, 7% sequentially. The strong sequential revenue results clearly demonstrate how our channel diversification and.
Growth benefiting the business.
Our service revenue for Q1 2022.
A record $29 9 million.
Up five 1% sequentially and 31, 3% year over year.
Our services for business model fueling our growth.
While service revenue accounted for 24% of our Q1 2022 revenue delivered 56, 8% of our non-GAAP gross profit.
Our service revenue also include $0 $1 million with annual Reis services, we are providing for very short along with associated costs.
As compared with $1 1 million.
In the fourth quarter of 2021.
Product revenue for Q1, 2022 with $94 8 million.
Which was up 58, 7% year over year and down 17, 1% sequentially.
Our year over year product revenue growth was driven by continued strength from our parish or relationship in Europe .
Coupled with growth in retail in Americas.
We were pleased to bring retail channel inventory back up to more normal levels.
During the third quarter, we shipped approximately 1 million devices.
All of which were cameras.
From this point 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 first quarter of 2022 was up seven $8 million year over year and up $1 $8 million sequentially.
<unk> $34 5 million, which resulted in a non-GAAP gross margin of 27, 6% down from 32, 3% in Q1 2021.
Four seven percentage points from 22, 9% in Q4 2021, the $7 $8 million year over year improvement in non-GAAP gross profit included an improvement of $6 4 million from services.
$1 4 million from products.
The improvement in non-GAAP services gross profit was driven by growth in our <unk>.
Coupled with cost optimizations.
The improvement in non-GAAP product gross profit was driven by higher revenue.
More than offsetting an incremental $3 3 million.
As air freight expense due to COVID-19 related supply chain challenges.
non-GAAP service gross margin came in at a record.
65, 4%.
Significantly up from 57, 9% in Q1, 2021, and an improvement of 63, 2% in Q4 2021.
non-GAAP product gross margin was 15, 7%.
Down from 22, 6% in Q1 2021, mainly due to year over year increase of $3 $3 million in <unk> expense.
Up from 12, 9% sequentially helped by a $3 $1 million reduction in air freight expense.
Total non-GAAP operating expenses were $33 4 million.
Up $4 3 million or 14, 7% sequentially and up $3 7 million or 12, 4% year over year as we invest in R&D ahead of our new product and service introductions and lay the groundwork for our upcoming awareness campaign.
Our total non-GAAP R&D expense for the third quarter was up $2 $8 million sequentially at $14 1 million.
Our head count we ended Q1 with 358 employees compared to 353 in the prior quarter.
As a reminder, during the early stages of a personal relationship we agreed to provide them with transition services, which include training with all of our employees as well as systems costs and some outside service costs.
We have included these costs in our normal operating expenses.
The reimbursement from various Shaw is included in other income and was approximately zero point $4 million.
During Q1.
Our non-GAAP tax expense for the first quarter of 2022.
$0 2 million.
In Q1, we posted a non-GAAP net profit per diluted share of <unk>.
Much better than our guidance and a 4% improvement year over year.
We ended the quarter with $145 5 million.
Cash cash equivalents and short term investments.
Down $32 million sequentially.
And down $31 $6 million year over year, the sequential reduction was driven by reductions in accounts payable.
In line with sequentially lower product prices.
And deferred revenue.
In line with bearish or prepaid product purchases.
Q1 in Belgium flow.
$37 million.
A decrease of $1 $4 million over Q4 2021.
With tons of $8 seven as compared to $10 five last quarter and $3 four a year ago.
Our DSO came in at 58 days.
Up from 54 days, a year ago and up from 60 days sequentially with the increase driven by customer mix.
Now.
Turning to our outlook.
We expect second quarter revenue to be in the range of $105 million to $115 million.
We expect our GAAP net loss per diluted share to come in between 19 and 14 cents per share.
non-GAAP net loss per diluted share come in between <unk> and threep per share.
Our guidance includes approximately $1 $2 million of awareness spending as we develop content and messaging.
Ahead of starting a campaign in earnest in the third quarter.
In line with what we communicated in our analyst day in March.
In line with previous guidance, we expect to end the year with 110 $120 million.
And cash cash equivalents and short term investments.
And we will continue to monitor our performance.
We 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. If you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Your first question comes from the line of Katherine Hunt link with Raymond James Your line is open.
Hey, guys. Congratulations on a great quarter. This is Jonathan on for Adam.
Great. Thank you.
Good to talk to you.
Can you talk about a weeks of channel inventory and how they're elevated globally and could you maybe speak to why we're seeing channel inventory increase while supply is still very tight and how can we think about the financial impact of this normalizing.
Yes sure.
Looking at the channel inventory typically lets break it out into the relevant part so looking at Americas retail and data.
15 weeks, we would typically target, 10% to 14 weeks of stock in the channel.
On one level for retail so we're just a little bit above the target range, but not by much and quite frankly, we're actually happy for it to be there. We did get start towards the end of the quarter and the denominator in that calculation is in last six weeks and sell through how youre looking at a situation where inventory was filled through the end of the quarter.
And the sell through before that was slightly depressed due to shortage of inventory.
I think thats the context, you need for the Americas retail inventory, we think it's actually a pretty normal level and quite frankly, we're quite pleased to have it at that level compared to where it has been and then if we look at APAC.
APAC distribution is a little bit on the high side, but you need to appreciate APAC distribution is a very relatively immaterial part of our business. So from a dollar perspective. It is not very meaningful we're making a small destock in APAC in Q2, and that's already reflected in the guide, but it's certainly not material.
Overall, I think we're pretty well positioned from a channel inventory perspective, I don't see anything concerning there too.
Perfect. Thanks, so much for that color and you've previously laid out your discretionary plan for brand awareness. So much you'll be spending about $10 million per quarter and you spoke about this on the tail end of the call what are the learnings so far that you've had as you approach this investment given that its coming up.
And how can we think about the timing and magnitude what has changed since the last call.
Yes, great question, yes.
Still committed to doing the same that we talked about at the analyst day, and just as a reminder.
It's a relatively small defined spend from an amount perspective, but also from a time perspective. So the last six months of the year.
We're doing that $20 million plan like you've architected.
Articulated to frame just in your question and then look at those results at the end of the year going into next year to determine where.
Where we want to adjust that going forward the ultimate metric from the spend will be incremental.
Incremental Pip counts, Brian that's driving the LTV and the shareholder value in the company. So we're committed to this well defined and disciplined spend in the second half as we've been.
Planning it there hasnt been a lot of changes we are looking for changes in the media landscape and we are looking for some of that is we will get into.
Closer to the spend which is which is going to be in Q3 as Gordon articulated.
But right now there hasnt been any changes since the analyst day, and we're looking forward to not only executing that spend but sharing the results of that at the end of the year.
Great, it's always a pleasure and keep up the great work.
Thank you very much thank you.
Your next question comes from the line of Amit <unk> with BWXT financial your line is open.
Hi, I just wanted to know about the paid users.
The amount of the growth you saw this quarter does that include anything from your partners very sure the 29 broadband.
Broadband service providers.
Yes. So it is it is across a lot of those gains are obviously from the.
The retail holiday season.
A 90 day free trial and so.
A lot of the paid our Pos that we see.
That comes from the holiday period, those accounts tend to become paid accounts in Q1, so youre seeing some of that obviously growth is coming from retail coming on the 90 day post trial after.
Purchases in the holiday period, and we've seen a growth in <unk> and we've mentioned that.
The custom camera is starting to ramp and you're seeing that in some of the results from it from a revenue mix perspective, and as you know some of the direct.
Business that we do with fair share is a one to one on paid accounts.
Those are the two primary areas of growth in paid accounts, we are starting to see calix ramp, but I think that will take longer before its really material in the paid accounts. We did share on the call that we now have 2009 Bsp's a broadband service providers that are now active at least from an onboarding perspective through calyx, we expect that.
Number to continue to ramp so I think the contribution from calix will be later in the year going into the following year.
It's a lot of these strategic accounts kind of take a while to ramp.
Is the contribution from very sure.
Something like a step up every quarter or is it going to be lumpy.
It's a little bit more steady if what we see from bearish because.
While the retail paid accounts will at some point follow some seasonality like we were talking about right a lot of hardware sold in Q4 will drive paid accounts in Q1 and Youll see some seasonality in at least the growth on paid accounts from a normal retail business <unk> direct business, which is beginning to ramp with especially with the custom camera, we launched last year.
<unk> will be a little bit more steady quarter over quarter, because it doesn't really adhere to the normal promotional periods you would see in a traditional consumer channel I don't think we've seen a huge impact of that yet, but that's an effect I think we will see as we continue to ramp the direct business with fair share over time.
Okay and I didn't hear you say this in the script, but are you still at 50.
<unk>, 50% conversion rate for hardware.
Yes, so those numbers really haven't changed so.
We have two metrics that I think we've shared in the past one is that initial conversion rates, which is what you are talking about which is right about 50% and thats really a measure of how many people have signed up in the free trial and the 30 days post of that free trial expiring. So that first 120 days from the hardware activation that's 50.
<unk> and then we've shared what we call it a six month cohort and we count that as an attach rate. So what we've done is we follow the different populations across our different products and channels and everything and those are all consistent as well roughly around what we shared in the script roughly that 65% almost two thirds of hardware purchasers six months later and a cohort.
Analysis are attached to service at that time. So we do have still have rises from 50% to that 65% over some additional time. If some people are signing up after that initial conversion period.
Okay, great. Thank you Youre welcome.
Your next question comes from the line of Jeff, Jeff Osborne with Cowen <unk> Co. Your line is open.
Hey, good afternoon, guys. A couple of questions. I was wondering if you could sort of postmortem diagnosed where the upside came from in the quarter relative to your initial expectations I heard two rationale on the call one was the supply chain management.
Also U S retail channel I wasn't sure.
Are those where the source of upside or one versus the other.
Yes, it's a combination I think you know that pretty well that we were able to get a little bit more supply than what were expecting at the time of the guide.
That definitely helps.
We talked about earlier, we were able to get some additional inventory very welcome inventory into the U S retail channel.
<unk>.
So not something we have visibility into at the time, we got it. So it's really those two things, but largely tied to supply availability.
Got it and then Gordon how does.
<unk> changed in the last four to five weeks with the Lockdown in China. Some other components that go back and forth from China to southeast Asia to be made at packages just curious.
The COVID-19 shutdown in China does too.
Ever.
Ever aging battle of supply chain management for you folks.
Broadly yes.
Yes, well it certainly doesn't make it easier.
For sure.
Obviously manufacturers.
In Vietnam, and that time, and we do have component obviously being manufactured.
Limited components manufacturing in Shanghai, I'd say, we've seen a little bit of impact there.
Not another large amounts impact you've seen it's been reflected in the guide anyway. The one interesting one that we do see is congestion actually crossing the border.
From China into Vietnam, Stephanie desktop in light Lockdowns.
Additional challenge that we face and we just looking at alternative routes to get those components into Vietnam, but other than that we haven't seen most of the downside so far I'd say, so far but on the bright side, we are seeing some some nice reductions in air freight rates, we've seen some nice reductions in sea freight.
We're actually seeing those transit time.
From Vietnam for example to the U S over come down from.
Kind of pandemic Heights, a 70 day transit times down to something more like 50 days, which is welcome news that that part of it heading in the right direction and yes, you rightly said.
Lockdowns in China.
That's slightly slightly.
Negative effect.
Got it and the last question I had was just you had a helpful chart showing the DIY market share growth over the past three years in the deck I was wondering within DIY.
Camera market.
Sure.
Got it.
The security market, what you felt your share has been over the past three years.
So yes. It reports some helpful metrics there yes.
It's changing it's hard to do an apples to apples comparison, because some of the key.
Market study to actually present that is from a third party perspective, like MPV actually changed the way that they calculate it.
And they started bringing in first part of your first party dot com and some other.
Things that are reported by some but not by others.
In general we've been holding share I would say for quite a while over the last two years or so and it really goes up and down based on promotional timing, both our promotional timing, but also the promotional timing of of our competitors haven't seen a lot of real big movements recently, when we moved any.
Italy too.
The subscriber first is the kind of services first strategy inside the company, we did see a decline in market share back in that time period, and that was expected and kind of built in we decided to focus on the customers market segments price segments and channels that we're going to deliver subscribers and start to deemphasize some of the price segments and the channels.
We're really just selling hardware and there was not a high propensity to.
Subscribed to service after the hardware purchase so we saw that initial decline and then had kind of late into a relatively consistent share over over the last couple of time periods. So.
So I haven't seen any real big movement, we haven't seen a lot of movements in the market in general from competitive behavior or anything else.
Thanks, I appreciate the thoughts that's all I had.
Your next question comes from the line of Mark Argento with Lake Street Capital. Your line is open.
Hey, good afternoon, guys, just a couple quick ones.
First on gross margin.
These are numbers nicely or estimate yes.
Given the current environment.
<unk> been able to maintain kind of that.
'twenty six 'twenty seven level going forward any thoughts around that.
Trend there.
Hey, Mark Gordon.
<unk> looked at it separately breaking it out between service revenue and <unk>.
Product revenue.
I think the guidance we've already given on both those stays in place on service revenue, we guided 60% to 65%, we still stick to that it was nice to come in slightly above that in Q1, we did benefit in Q1, a little bit from mix benefits, just with the bare assure and already being slightly lower proportion of the <unk>.
In Q1, but we stick to the guidance, we've given 60% to 65% on the service gross margin on the product side of thing.
Low to mid teens is where we see it.
From down ticking down a little bit from where we were at Q1 and Q2.
I think low to mid teens on the product side of thing is where we see it panning out so not falsely different to the actual results you saw in Q1.
The guidance, we've given for the year.
Great Thats helpful.
You had mentioned the 29 ESP as well.
Relationship.
As we launch additional products.
Yes in particular.
The full security suite.
Are those going to go through that channel as well how do you how do you.
Think about it.
Products and channel distribution.
Yes.
Great question, I mean, the calix relationship.
It's a very positive one and I think we've mentioned in the past that we feel is helping us reach households that are probably underserved from some of our.
Channels. These are tend to be more rural or smaller areas of the country that may not have a best buy or a costco nearby.
As an example, and so.
What I can say is calix and although we've done a pretty deep integration on the back is one of the reasons why the ramp takes them a while theres a lot of technical integration and the back and so we look at the products and additional.
Services as a layer on top of that and a great way to kind of leverage the work that's been done on the initial integration. So the cameras as you know we are rolling out and Thats, what were kind of talking about different DSP that are signing up.
And last quarter I think we mentioned it at the Investor Day, We did announced that Calix is also committed to rolling our security system.
And so that will be longer because there is an additional integration.
Needs to happen. So we didn't release a date, yet, but they are committed and we are committed with them to do.
Deploy the security system in.
Addition to our cameras overtime and.
And that's what's great about some of these partnerships is there.
Typically not focused on a single product they are focused on.
A longer term relationship that cuts across products, especially after you've done that.
Kind of deeper platform integration work.
Pay dividends over time, and we're going to see that with calix over the next year or so.
Great and then just one.
One in terms of supply chain of components component availability is still an issue broadly, but any any concern.
Youre not going to be able to get the security products out by the second half of this year.
So you can sort of switch.
Yes, so just on a general level I think Gordon did a great job kind of breaking down.
Where we see freight because thats part of this as well so from a freight perspective, we are seeing improvements.
And we're seeing that as Gordon mentioned, both in cost and in time for delivery by actual transit time of coming into us. So that's actually helping us because when the transit time is shorter.
That means component purchasing can happen later.
It helps on the component side with things are short and Thats why I bring that up components, you're correct absolutely components are still relatively tight it's not across the board, it's kind of hit and Miss in different areas. We've been forecasting the security system from a component level perspective for quite a while I think we've mentioned on Investor day, and one of the questions that we tend to.
Take our forecasting at a component level almost out 50 weeks to give our component suppliers a lot of visibility and we have done that on a security system as well. So at this time, we're confident that we've got the supply that we need to launch the product in Q4 and have already forecasted Q1, and Q2 into the system as well.
Great. Thanks, guys. Good luck.
Thank you.
And there are no further questions I'll turn the call back to Matthew Mcnee for closing remarks, Thank you operator.
I'd like to just take a moment to thank all of the teams at <unk> I know a lot of them listen and for the hard work to deliver such.
Raising result for Q1.
At the beginning of our new long range plan that we described last quarter and in Q1 with an absolutely outstanding start.
So thank you to the team and thank you for everyone joining the call today.
This concludes today's conference call. Thank you for joining you may now disconnect.
Okay.
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Yes.
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