Q2 2022 Arlo Technologies Inc Earnings Call
Several non-GAAP financial measures will be discussed 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.
Yeah.
Thank you Eric and thank you everyone for joining us today on <unk> second quarter 2022 earnings call.
Our services first strategy and excellent execution produced another quarter of record breaking results in Q2.
Total revenue reached $119 million up 21% year over year, and well above the top end of our guidance.
We are currently seeing healthy demand and resilience and the arlo customer base, which contributed to the stellar results and our ability to raise guidance for the full year.
Our annualized recurring revenue or <unk> continued to grow at a rapid pace.
Existing Q2 at $117 million up 67% year over year.
As a reminder, our <unk> is the fastest growing and highest margin portion of our service revenue and represents the annualized recurring subscription revenue we derived from our paid accounts.
Total paid accounts were up 113% year over year with Arlo, adding 206000 paid accounts in Q2, an increase of 41% year over year and flat sequentially as our migration to the new business model is complete and additions take on the normal seasonality of our sell through.
A 90 day lag for the three month free trial period.
In addition, I am delighted to announce that on July 15th we achieved another significant landmark in our services business as we surpassed $1 5 million total paid accounts.
As we shared on our Investor day presentation in March this year. The accounts, we capture through our domestic retail channel have an <unk> of $9 35 per month, and when combined with our low world class churn metrics translates to an LTV of $550 per user based on Q4 'twenty one data.
<unk>.
With continued strong <unk> growth service revenue reached $32 8 million of.
Up 30% year over year and marked a record for the 12th consecutive quarter.
Despite the additional complexities and expense driven by the pandemic supply chain disruptions, we posted our highest ever non-GAAP gross profit of $35 1 million and our third consecutive quarter of non-GAAP operating profit outperforming the high end of our guidance for non-GAAP EPS.
Which came in at a profit of <unk> <unk> per share.
To maximize the opportunities presented by our successful services first business model Arlo is executing our long range plan that focuses on three primary areas of the business to drive revenue growth margin expansion and through that shareholder value.
First while our products and services regular garner best in class accolades. The number one reason people don't buy arlo products is because they have not heard of arlo.
This month, we are excited to commence the rollout of our brand awareness campaign, which we will conduct in a targeted manner that focuses on new household formation to drive incremental subscription revenue.
While we are kicking off the targeted marketing in Q3, we expect the bulk of the increase in Pos to materialize in 2023.
More information, including examples of our campaign creative can be found at <unk> Dot com slash protect.
Second we are expanding our product portfolio to address new segments, and new markets, an innovative new app called ARVO safe will provide personal protection for an individual or entire family by offering one touch emergency health family location and safety features and auto crash response.
And our new innovative security system will bring full sensor based security functionality to our ecosystem of smart cameras.
Both of these provide significant opportunities to drive new subscriptions and we expect these to be available before the end of the year.
And third although we will continue to broaden our routes to market are most prominent example of this to date has been our <unk> relationship, which has been very successful driving outsized growth in Europe , and an impressive 46% of our Q2 revenue.
We also formed a partnership with Calix last year in which calix integrated Arlo services into their platform to broadband service providers around the country.
And most recently our launch of Arlo go to with partners like Verizon and T. Mobile is providing cellular based smart security to numerous market segments and often comes with unique financing offers are subsidized hardware pricing lowering the initial acquisition cost for consumers.
Are those long range plan is built to realize our three to five year targets of 5 million paid accounts $300 million.
<unk> and double digit operating margin.
Outstanding results this quarter show that our focused execution is on track to achieve these ambitious metrics.
We are tracking the macroeconomic trends closely and while they may portend to softness in consumer demand and higher execution risk in the second half of this year, our confidence in reaching our long range plan targets remains unchanged.
And with that I would like to hand, the call over to Gordon, who will provide more insight into our financial performance operational.
Operational details and outlook for the third quarter and full year.
Thank you Matt.
Thank you everybody for joining us today.
We delivered strong Q2 2020 financial results.
We exceeded our guidance.
Growing our revenue by 27% year over year, while growing non-GAAP gross profit sequentially and year over year to a record for the company of $35 1 million.
Our financial performance for the quarter was once again underpinned by the successful shift to a service business model.
This helped drive our non-GAAP gross profit up by 27, 7% year over year comfortably over indexing revenue growth.
The team was able to bring channel inventory entering with Colgate and at the same time navigate supply chain challenges to exceed our expectations on the revenue.
At the same time, even after investing $1 2 million.
<unk> content.
<unk> awareness campaign.
We were able to grow on a year over year non-GAAP operating profit by $5 3 million.
And Christophe third consecutive quarter of non-GAAP operating profit.
I would like to point out that foreign exchange did not have a material impact on our financials in Q2, and we do not expect it to have an impact moving forward.
And now moving on to the Q2 financial detail.
Revenue came in at a second fiscal quarter record of $119 million.
Up 27% year over year and down four 6% sequentially.
The strong revenue result, clearly demonstrates how our terminal diversification.
Our growth benefiting the business.
Service revenue for Q2, 2022 was a record $32 8 million.
Nine 6% sequentially and 29, 8% year over year.
Britain vials.
This model and the addition of 206000 paid accounts in the quarter.
While service revenue accounted for 27, 6% of our Q2 2022 revenue.
It delivered 61, 5% of our non-GAAP gross profit.
Our service revenue will shrink to 0.2 million.
In our research.
We are providing very sure along with associated cost outcome.
As compared with zero point $1 million.
In the first quarter of 2022.
Product revenue for Q2, 2022 with $86 2 million.
Which was up 17, 6% year over year and down nine 1% sequentially.
Our year over year product revenue growth was driven by continued strength from our bearish relationship in Europe .
While the sequential results reflect the destocking in both our Americas and.
Asia Pacific sales channels.
We were pleased to end the quarter.
Normal channel inventory levels, as we head into the seasonally stronger second homes.
During the second quarter, we shipped one 1 million devices, all of which were cameras.
From this point on my discussion points will focus on non-GAAP numbers.
The reconciliation from GAAP to non-GAAP is detailed.
Earnings release distributed earlier today.
Our non-GAAP gross profit for the second quarter of 2022 was up seven $6 million year over year.
Zero 6 million sequentially to $35 1 million.
Which resulted in a non-GAAP gross margin of 29, 5% up from both 27, 9% in Q2 2021 and from 27, 6% in Q1 2022.
The $7 $6 million year over year improvement in non-GAAP gross profit included an improvement of <unk>.
$6 7 million from services.
And zero $9 million from products.
The improvement in non-GAAP service 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.
non-GAAP service gross margin came in at a record 65, 8% significantly up.
From 58, 9% in Q2, 2021, and an improvement of 65, 4% in Q1 2022.
non-GAAP product gross margin was 15, 7% down from 17, 2% in Q2, 2021, mainly driven by product mix.
Flat with Q1 2020 to 15, 7%.
Turning to our non-GAAP operating expenses were $34 $1 million.
Zero, $8 6 million or one 9% sequentially.
And up to $3 million.
It was seven 2% year over year.
We invest in R&D and ahead of our new product and service introductions and lay the groundwork for our upcoming awareness campaign.
In which we invested a total of $1 2 million.
During the second quarter.
Our total non-GAAP R&D expense for the second quarter was down zero point $3 million sequentially.
$13 8 million.
Our head count at the end of Q2 with 354 employees compared to 358 in the prior quarter.
The second quarter was an excellent example of how the team is driving leverage in the business.
While revenue was up 21% year over year.
Gross margin expanded by more drawing at 28% increase in gross profit.
While our operating expenses only grew 7%.
After investing more than $1 million.
In our wins campaign.
This resulted in a year over year improvement with more than $5 million.
non-GAAP operating income.
As a reminder, during the early stages of the virtual 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've included these costs in our normal operating expenses.
The reimbursement from various Shaw is included in other income and was approximately zero point $1 million.
During Q2.
Our non-GAAP tax expense for the second quarter of 2022 with zero $2 million.
In Q2, we posted a non-GAAP net profit per diluted share one.
Much better.
Guidance and a slight improvement year over year.
The written by a combination of revenue growth and gross margin expansion.
We ended the quarter with $135 3 million.
Cash cash equivalents and short term investments.
Down $10 $2 million sequentially.
Down $43 4 million a year over year.
The sequential reduction was driven by a reduction in working capital the $7 million.
Primarily from lower deferred revenue and accrued liability balances.
Coupled with taxes paid.
Q2 inventory flow.
$39 2 million.
An increase of $2 2 million.
Q1 2022.
With tons at seven five.
<unk> to $8 seven last quarter and $5 seven a year ago.
Our DSO came in at 57 days.
Up from 48 days, a year ago with the increase driven by customer mix and down from 58 days sequentially.
No.
Turning to our outlook.
We expect third quarter revenue.
Be in the range.
$125 million to $135 million.
We expect our GAAP net loss per diluted share to come in between 28.
And 21 per share.
And our non-GAAP net loss per diluted share to come in between 2017.
And 10 cents per share.
Our guidance includes approximately $8 8 million.
Awareness spending as we kickoff of our campaign in the third quarter.
In line with the plans, we communicated in our analyst day back in March.
For the full year and up from previous guidance, we expect total revenue to be in the range of $500 million to $520 million.
While we expect our non-GAAP operating loss will be in the range of $15 million to $25 million.
Equivalent to breakeven non-GAAP operating profit for the year.
Mine us our planned awareness spending.
The team also continued to work tightly with our retail partners.
While we recognize many retailers may be rethinking their inventory strategy.
Coming quarters.
We believe we have taken potential adjustments into account.
In considering our updated full year revenue guidance.
In line with previous guidance.
To end the year with $110 million to $120 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.
I'll open it up for questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We will pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Jacob Stephan with Lake Street capital markets.
Hey, guys congrats on the quarter.
Maybe just to help me understand the inventory levels. So.
Is working through some lower margin inventory yet.
Or has kind of been worked through.
Jacob EU, it's Gordon here.
Are you talking about channel inventory.
Yes.
Yes, Tom inventories in reasonably good shape actually if you look back to where it was at the end of last quarter U S. Retail channel inventory was up near 16 weeks. Our goal is for 10 to 14 weeks, we brought that down in Q2, and we ended the quarter within our target.
Range at 11 eight weeks. So it is right now the thing to bear in mind.
We're heading into a seasonally stronger sales Prime day was around the beginning of Q3. So I think the stock position channel inventory position in Americas retail is pretty nicely balance to be honest outside of that we also made some really good progress in Asia Pacific in Q2, if you look back to Q1, we told you.
At the end of Q1 that we were looking to take action to bring APAC inventory more in line ended May 20 weeks at the end of Q1, we cut that in half in Q2, and we're now back to pretty normal run rates levels of inventory in APAC.
It's $9 eight weeks.
The channel inventory situation that we're looking at.
We want it to be.
Got it and maybe just.
I'm very sure contract obviously, they're huge.
<unk> of the revenue.
But talking about calix can you give us an update.
Their revenue edge segment was up 129% maybe.
Maybe if you could just kind of give us a progress update on how things are going with calix and that would be.
Helpful.
Yes, I'd be happy to.
You called out <unk> as well and you can see what a strong quarter. We've had as we as we continue to rollout with them on calix.
We're really still in the rollout phase.
And so we're adding bsp's or their customers broadband service providers every quarter.
And look to continue to ramp that through the end of this year and habits haven't become more material to our strategic accounts as we get into 2023, we started with them.
Half of last year, and I think at the time, we had like 12 or 13.
Broadband service providers, we're now around 40 broadband service providers.
We look to see that to continue to ramp.
Like I said through the through this year, where we get to some critical mass as we enter 2023.
Okay.
And maybe just on 2023 guidance.
You're still expecting to double the growth rate from 22.
Yes.
That's still where we see it obviously the macro environment.
<unk> changed and we gave you guidance that is a part of this year.
In terms of growth rates year over year, yes, we still believe that is reasonable we just literally kicked off the awareness campaign that is obviously pretty pretty central to achieving that growth rate and we're looking forward to seeing how that goes and reporting back on progress when we see more data on that.
Okay, great. Thanks for the color I'll hop back in the queue. Congrats again. Thank you. Thank you very much.
Your next question comes from Hamid Corson with Dws financial.
Could you just talk about the.
The rate of paid subscribers, if youre doing anything different than what you've talked about to investors.
Given it's been rising at a steady.
Increase and just wanted to see what what's causing that.
Is it.
Stable to assume that that will continue.
Yes, that's a great question, Amit I think some of the growth in the past has been a phasing in the new business model. So if you. If you go back over the last 12 to 18 months, especially if you go back a couple of quarters.
And look past from there.
Some of that quarter over quarter growth was being driven by us.
Rolling out old product or legacy product and rolling in to the channels and through Pos.
The new business model product that is basically complete and so when you look at our baseline.
It kind of adds from a retail direct perspective.
Kind of follow seasonality across our channels I think in a lot of ways. So youll see <unk>.
Q2.
Paid account adds are going to be related to Q1, Pos because we have a 90 day free trial and so we will see them.
Typically turn into a paid account 90 days later.
There are some exceptions to that one of the paid account I'm sorry.
The campaign that we're doing around awareness.
<unk> drive incremental paid accounts above normal seasonality and we're seeing strength from some of our strategic partners again I mentioned furniture.
In the last question and those are actually added on top of what we would see as kind of normal seasonality from the retail and direct paid so that's that's kind of what's driving the growth.
On a quarterly basis and so some of it is going to be driven by retail Pos seasonality and some of it is done through great execution for some of our partners like <unk>.
And could you just talk about.
Inventory situation with.
And the channel with retailers in the current environment.
<unk> are you looking to sell more directly to the consumer going into Q4.
How comfortable are you that the consumer is not going to retract on their spending habits.
Yes from an inventory perspective, I think Gordon gave a great overview on where we sit from a channel inventory across our across our regions.
The commentary in the in the script was really around we're seeing we're seeing specific retailers trying to optimize.
Their positions and their balance sheets and things on inventory. So some of them are are looking far less inventory. Some of them are looking for a little bit more and we're making those adjustments that was built into the guidance that we gave for.
For Q3 as we go forward.
We have not seen.
A pullback from a consumer perspective as.
As far as purchases in kind of consumer confidence as it relates to them executing with arlo across our channels.
We just finished prime day as an example in Prime day was actually very strong for us it actually exceeded expectations.
As we just got into this this quarter. So we are watching very carefully.
What kind of the back half of Q3, and as we get into Q4 and continuing to monitoring.
What the consumer behavior it looks like we review.
Data from our retailers every single week and actually do it twice a week inside of inside of <unk>. So we're going to stay very much on top of this as we as we get through the quarter I would expect to see maybe some additional competitive offers if things do slow down a little bit in the channel, but what we're seeing right now as we got through Q2.
And even in the Prime days is some resiliency and some strength from the consumers that are buying are low.
Okay. Thank you youre.
Youre welcome.
Your next question comes from Mark cash with Raymond James.
Hi, Thanks for taking the questions.
So you guys are already asking you confirmed that the plans to double growth in fiscal year 'twenty three but I was also wondering if you hit on operating profit and if that the gold becoming Ralph operating profitable is still intact.
And if there is a chance would you lean into growth over margins if the opportunity presents itself.
Okay.
Just to reiterate what we said previously around 2023 that will still be in investment mode. In the first half of the year.
Still looking at non.
non-GAAP operating loss in the first half.
<unk> over back into profitability for the second half 'twenty three.
And for the full year we're.
Expecting to be at breakeven for 2023, so the outlook for the same amount as we shed.
Earlier this year when we when we gave you those projections.
Ill.
With that over to Matt just to talk about the balance between.
Taking margin versus profit and what his thoughts on that might be but certainly I think the awareness campaign that we just embarked on is a pretty good start to saying that.
As we said.
The number one reason people don't file is.
I haven't heard of all I want to go and invest and acquire households.
That's what we're doing in Q3 Q4, and then as Dave mentioned in Q1 Q2 next year.
I'll turn it over to Matt He has any other comments to make on that subject.
I think the question around balancing growth and profitability is something we talk about quite a bit internally.
Not only in the short term, but the long term and so Youll know if you look back at our March.
Our March presentation, you can see what were pegging as far as our long range plan and how to how to drive that growth. The marketing spend you see in the second half of this year and to Gordon's commentary next year, where the first half we think will continue to spend given our expected results from from the campaign is is where we are right now on that balance where we think.
Over the next 12 months will.
We will be driving growth in spending into that growth, but as the results start to pull through we think we will return to profitability in the second half of next year that is where we are in our current balance obviously any <unk>.
Economic headwinds or changes to that may make us adjust as we get into next year, where we may turn up growth. If we see a great reaction to the campaign or pull back potentially are continuing to spend at the current level, depending on what we see in the second half of this year, but that balance is where we spend a lot of time and spent a lot.
Time in our long range plan really focusing on maximizing shareholder value creation over the next three to five years and not giving up when you're one of the things you can look at is when you. When you look and model out where are those headed over the next three to five years growth in that first one to one and a half year call. It 12 to 18.
Month period of the long range plan.
Actually has a compounding effect on where where shareholder value actually gets created so I think the balance that we struck and communicated for the next 18 months still holds with the idea that as we exit this year, we may make adjustments based on actual results.
Alright, Thank you for all that.
If I could just ask one more regarding the awareness campaign, just getting kicked off. So you guys have any early feedback and then if there's any metrics you guys are tracking to see how it's going and if you guys have a plan if youre trying to lean more towards growing direct to consumer versus retail with this campaign that'd be great good to hear that.
Yes, great question, so on the on the call.
Channel you will see us through.
Through the various media.
Not only leverage Arlo dot com significantly and when you do a brand awareness campaign, that's where a lot of the traffic just kind of naturally flows.
Because the next step of awareness is a bit of education, and we think we do that best.
At Arlo Dot com, but you could see us do some partnerships with some of our channel partners, where we actually do some tagging and drive traffic to them as well so it'll be a bit mixed I would say overall emphasis a significant portion of the emphasis will be to arlo dot com both for that educational component, but also for.
Potential transactions for both products and services on.
On the efficacy. We are we are I think slightly more than a week and so we have very very little data as you go through an initial data is usually.
Wrong, you usually need at least 30 to 60 days, even get an initial idea of where the spend is being effective and like we said in the past.
We think the actual effect through our waterfall will be more towards the end of this year going into 2023 because of the lag that typically is.
Associated with the branded campaign transferring into actual Pos in consumer spending.
No.
We're really looking for data as we exit the year and we'll be able to report the first part of next year. The way we are looking at it going back to kind of the original part of your question. We have a very well characterized waterfall at customer journey at <unk>. So we know if we sell X number of cameras, how many of them activate how many of those that activate <unk>.
The free trial, how many of those are complete the free trial and on what date do they actually convert to a paid account how many of those actually churn over what time period, a lot of that we shared on the analyst day. So we have a very well characterized funnel. This is just adding to the top of that funnel.
If we could sell more products through an awareness campaign.
Then we will watch all of those various metrics I just talked about fee. If they go off if they go down as we as we execute the campaign and actually drive incremental households, and paid accounts. So that's what we'll be tracking.
And that's what we're excited to share more about as we kind of exit this year and get into the first part of next year.
Great. Thank you so much.
Yes.
There are no further questions at this time.
I will now turn the call over to Matthew Mcrae for any closing remarks.
Thank you operator, I would like to take a moment to thank all the teams at Arlo for the hard work to deliver such outstanding results in the face of continuous pandemic and macroeconomic headwinds the excellent execution confirms our trajectory at this early stage of our long range plan and we look forward to continuing from here.
Thank you again for joining the call today.
This concludes today's conference call you may now disconnect.
Okay.
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Okay.
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