Q1 2023 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 phones.
I'd now like to turn the conference over to Eric Byland. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to Arlo technologies first quarter 2023 financial results Conference call.
Joining us from the company are Mr. Matthew Mcrae, CEO and Mr. Kurt vendor CFO .
The format of the call will start with an introduction and commentary on the business provided by Matt.
Followed by a review of the financials for the first quarter, along with guidance for the second quarter and full year provided by Kurt.
Then have time for any questions if.
If you've not received a copy of todays release, please visit <unk> Investor Relations website at Investor <unk> Dot com.
Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
Forward looking statements include statements regarding our potential future business operating results and financial condition, including descriptions of our revenue gross margin operating margins earnings per share expenses cash outlook free cash flow and free cash flow margin.
Guidance for the second quarter and full year of 2023.
The rate and timing of subscriber growth.
The transition to a services first business model, the commercial watch and momentum of new products and services.
Strategic objectives and initiatives market expansion and future growth.
Of our brand awareness campaign on future growth partnerships with various market leaders and strategic collaborators.
<unk>, new product and service differentiation.
And the impact of general macro economic conditions 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 factor discussion are those periodic filings with the SEC, including the most recent annual report on Form 10-K, and 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 future events.
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 <unk> first quarter 2023 earnings call.
As I mentioned on our last call Arlo had crossed an inflection point in our results in Q1 provide a glimpse of the bright future ahead.
And while we remain cautious with regards to the overall macroeconomic outlook. The decisive operational actions. We took at the end of Q3 combined with our recent product launches and new pricing strategy drove outstanding results and is positioned to arlo to outperform the market.
We reached non-GAAP profitability ahead of expectation in Q1, we are guiding to a substantial increase in non-GAAP profitability for Q2, we are raising full year guidance for 2023, and we expect our profitability and cash position to improve throughout the rest of the year.
This underlines the continuing valuation dislocation for Arlo, we are redoubling, our efforts to generate awareness with investors as we execute the business and strategy that is creating our successful trajectory.
Looking at Q1 in more detail.
Revenue came in at $111 million, which was above the high end of our guidance and we saw strong demand throughout the quarter, thereby driving our inventory lower.
Arlo added 182000 paid accounts and crossed the 2 million paid accounts subscriber milestone in Q1.
Earlier this year, we adjusted the pricing on our hardware and subscriptions to optimize our ability to drive shareholder value.
<unk> hardware prices to sell more units, while increasing subscription pricing to accelerate service revenue.
The price increases have had an immaterial impact on churn to date and we have seen an upward mix shift across our subscription plans.
These factors drove service revenue up 47% year over year to $44 million for the quarter and non-GAAP service gross margin grew 380 basis points sequentially to reach a record 74%.
Exiting the quarter <unk> annual recurring revenue grew an incredible 80% year over year and reached $183 million.
The observed price Inelasticity and successful Upselling is a testament to the value proposition <unk> services bring to our users as well as to the lifetime value of each subscriber.
Yes.
<unk> remains on track to continue our strong pace of subscriber additions and achieved $200 million of service revenue in 2023 at close to 75% non-GAAP gross margin and growing nearly 50% year over year.
The performance of our service this business not only delivered non-GAAP profitability.
$9 million of free cash flow in Q1.
And we expect <unk> to generate free cash flow and non-GAAP profitability throughout the year, leading to our target of 5% non-GAAP operating margin for full year 2023.
Underpinning. This achievement is what continues to be heralded by many reviewers as the best cameras and doorbell available on the market.
Our innovative technologically advanced portfolio of products propelled arlo to the top of numerous best of 2023 less in the quarter and awards from publications, including diverge consumer reports and Gadget wire cutter Android police digital camera World New York post in the no.
Pocket now flash gear, good design digital trends popular mechanics and tech chunky.
We have also expanded our product portfolio to include a full security system with an advanced multi sensor at its core that provides numerous advantages over the competition.
<unk> extensive award winning product ecosystem is a powerful subscriber acquisition lever that continues to drive new paid accounts.
And our Atlas safe, our new personal and family safety service opens new doors for users to enter our ecosystem.
Simple download from the Apple or Google App store begins our users' engagement with Arlo.
I am pleased to share that today, we announced a partnership with <unk>.
A company known for World Class authentication and corporate security solutions, <unk> will be providing <unk> safe as an employee benefit across their company.
This reflects an exciting new channel for Arlo to drive paid accounts.
All of these services run on Arlo Smart cloud platform that provides an unparalleled level of security and performance for our users and partners. The smart cloud architecture is flexible and scalable, allowing us to quickly bring new features services and solutions to market as we look to expand our capabilities and offerings over the next 20.
Four months of our long range plan.
And with that I'll turn it over to Kurt.
Thank you, Matt and thank you everyone for joining us today I will start by sharing some financial details and an overview of the business for Q1 2023.
Revenue for the first quarter came in above the high end of our guidance at $111 million down, 6% sequentially and 11% year over year.
The decline in revenue was attributed to lower product revenue a trend which commenced in the second half of 2022 in the face of a softening consumer demand environment.
This trend was partially offset by our approach to reducing product prices as a catalyst to household acquisition and subscriber growth.
To date. This approach has been effective and has enabled us to maintain strong subscriber additions and deliver strong growth of our highly profitable service revenue.
We are extremely pleased with our services revenue.
Our growth, which helped deliver revenue above our guidance range and strongly contributed to our low delivering non-GAAP net operating profit in Q1.
Our service revenue for Q1 was another record at $44 million, an increase of $14 million or 47% year over year.
And an increase of $5 6 million or 15% quarter over quarter.
The increase driven by the addition of a 182000 paid accounts in the quarter, coupled with certain in App enhanced functionality and features.
Tabled us to increase our subscription plan prices in the quarter.
Additionally, our installed base reached a major milestone of 2 million paid accounts subscribers during Q1, which represents an inflection point in our operating model.
Service revenue accounted for 40% of our Q1 2023 revenue and importantly represented 91% of our total gross profit. Additionally, our quarter end was $183 million up 80% year over year.
And thereby providing greater predictability and visibility into our ability to deliver on near term revenue and profitability targets.
Product revenue for Q1.
Was $67 million down, 16% sequentially and 29% year over year.
During the quarter, we shipped a total of 964000 cameras worldwide with 50% of our revenue coming from our international customers.
In fact, we again experienced consistent results in the quarter with our strategic partner <unk> in EMEA with product revenue up 27% sequentially.
Slightly down 8% year over year.
Our strong and collaborative relationship with bare sure continues to be a very important one for us.
And a great intangible as we explore future growth opportunities together.
From this point on my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release distributed earlier today.
Our non-GAAP gross profit in the first quarter was $36 million up 5% year over year.
This resulted in a non-GAAP gross margin of 33% up 500 basis points from 28% in Q4 of 2022.
The year over year increase in non-GAAP gross profit in Q1 was attributable to growth in our service business.
As we have brought down product gross margins as part of our overall pricing strategy.
The improvement in non-GAAP service gross profit was driven by growth in our IRR or subscription plan pricing and the monetization of our install base of paid subscribers coupled with cost optimization.
non-GAAP service gross margin for the quarter was 74% significantly up from 70% in Q4 of 2022 and 65% in Q1 of 2022.
non-GAAP product gross margin for the quarter was 6% and consistent with our guidance provided in March of this year.
Total non-GAAP operating expenses for the first quarter were $35 million down sequentially and up $2 million or 5% year over year.
The year over year increase is attributable to continued investment in sales and marketing expenses to help drive household acquisition and subscriber growth.
The non-GAAP operating expenses for the first quarter were slightly better than our expectation and reflect the cost savings initiatives implemented in Q4.
Our headcount at the end of Q1 was 334 employees, which represents a decrease from 343 team members at the end of Q4 and 358 team members in the same period last year.
In Q1, we posted non-GAAP net income of $1 $1 million.
Our non-GAAP net income translates to earnings per diluted share of <unk> much better than our guidance provided last quarter.
The significant improvement in non-GAAP operating margin was driven by a combination of service revenue growth and gross margin expansion, coupled with a disciplined approach to cost management.
You can expect us to be deliberate and disciplined in managing operating expenses in line with revenue growth and our customer centric operating model.
In Q4, we execute on various initiatives to reduce operating expenses all of which have proven to be prudent considering the uncertain economic climate, but more so in aligning our organizational structure with the services for our strategy.
Regarding our balance sheet and liquidity position, we ended the quarter with $118 $7 million in available cash cash equivalents and short term investments.
This balance was up nearly $5 million sequentially and is well above the high end of our guidance range provided last quarter.
We are pleased to report that we generated approximately nine $4 million in free cash flow in Q1, which represents a free cash flow margin of eight 5% driven by our increased profitability and working capital management.
Additionally, our Q1 inventory balance ended at $39 $9 million.
Representing a decrease of $6 6 million or 14% from Q4 of 2022 with inventory turns at six four times and consistent with last quarter.
And finally, our accounts receivable balance was $52 8 million as of April 2nd with Q1, Dsos at 44 days down from 50 days sequentially and 58 days from the same period last year, we will continue to monitor our working capital balances.
In line with our revenue levels with a focus on maintaining a solid balance sheet and liquidity position in the future.
Now turning to our outlook.
Considering that arlo surpassed the 2 million paid accounts subscriber milestone this past quarter, let me emphasize that the company is upon an inflection point in 2023.
The forecasted revenue growth in our service business will drive <unk> to be materially profitable in 2023.
Given the current consumer environment, we still remain cautious about our product revenue outlook for the year.
With that said, we expect the second quarter revenue for 2023 to be in the range of $105 million to $115 million.
We expect our GAAP net loss per diluted share to be between 15.
And <unk>.
And our non-GAAP net income per diluted share to be between <unk> and <unk> per.
Per share for Q2 of 2023.
For the full year, we reiterate that service revenue is forecasted to grow at roughly 45% year over year to approximately $200 million.
Thereby becoming a much larger portion of our overall revenue and profitability mix.
We estimate non-GAAP product gross margin will be in the mid single digits as we pursue promotional activities and sales models that prioritize the acquisition of new households, and subscribers. However, we expect non-GAAP service gross margin to be at or above 75%.
In 2023.
Additionally, we are adjusting upwards, our 2023 full year revenue range to be between $470 million to $500 million.
And now I'll open it up for questions.
Thank you ladies and gentlemen, if you have a question today. Please press star one on your telephone keypad, we'll pause for just a moment to give everyone an opportunity to signal.
We will go first to.
Jacob Steven Lake Street.
Hey, guys. Congrats on the solid quarter, certainly nice to see the free cash flow positive.
Maybe just starting off could we talk about.
On the 20% sequential monthly RP will increase I just want to see if you could provide any more color. How we can kind of think about.
How much of the.
<unk> increases related to oil price.
Subscriptions increase and how we can kind of.
Okay that moving forward.
Sure Jacob Great to talk to you today just.
Just a couple of thoughts about the <unk> expansion. So obviously you know that ARPA expansion is driven by a whole host of factors. Obviously the increase in subscribers has played a big part of that the mix of those subscribers and then more recently the price increase that we put in place and in the quarter we were real.
Pleased to see that.
Given the in App functionality that we've added over the last several quarters, we were able to enact about a 20% to 30% increase in the actual <unk>.
Within our subscription plans with that we saw very little impact on churn and as a result, a read through to our growth and our overall services revenue and the profitability that we experienced in the quarter. So pretty excited about the results for Q.
Q1, and we will expense will expect that the profitability.
The services revenue to be in that gross margin range of about 75% for the remainder of the year.
Okay got it.
Have you guys kind of talked about how we can think about.
The percentage of paid subs, who pay monthly versus annually I know theres, a slight price different zones.
Those two.
Yes, so we haven't broken that out yet and that changed with the addition of the annual plan happened mid quarter. So it's a little bit earlier, it's something that we could probably provide later in the year as we see things settle out.
A couple of comments on that one as we made the price increase.
On the monthly plans as we talked about obviously that had an impact on the quarter, even though it happened mid quarter. So we expect the first quarter of the full impact of that price release price increases to happen in Q2, what's interesting is on the annual plan, even though they're abbvie.
The discounted price, which is equals the old price on the monthly plans.
Those are also more profitable for us because we only do one transaction from a billing credit card and clearance perspective, instead of 12 throughout the year. So both the annual plan and obviously the new pricing on the monthly plans are both accretive to profitability for us, but we haven't broken that.
Out yet.
We'll probably do later later commentary as it settles out and we get a full quarter under our belt.
Okay got it.
Maybe just talk about the <unk> announcement.
Is that bundled.
In terms of subscription revenue.
Our each as each person who's getting the saves gluttony pain.
Pain with $25, a month and it's reimbursed by.
The company or tell me, how that kind of contract yes, yes, thank you deciding announced pipeline.
Yes, I'm glad you brought it up it's exciting for us because.
It's a first of its kind <unk>.
<unk> deal for us and what I mean by that is it's actually being provided as an employee benefit. So <unk> idea as a company is purchasing the subscriptions for their employees and delivering them to their employees employee base as an added benefit of being an employee of <unk>. So all of the features including personal safety.
Family Safety crash protection everything that Arlo safe provides will be part of the benefits of working at <unk> IV and so it's exciting for us number one because ping ideas such as.
A household name in the business community at least around safety and security and it's a huge.
Think vote around Arlo safe being something that provides tremendous value to an individual and their family.
But it's also exciting for us because this is us seeing a new opportunity in new potential go to market, specifically for all of us safe, but potentially arliss secure as well over time and that is some of our services being seen as an employee benefit.
Which obviously could have future growth on paid accounts. So it's being bought by the company and being distributed for free to the employee as a benefit of being an employee at <unk>.
Okay, Great maybe just one last one here. So you guys reported you had $98 million in backlog to very sure that I believe is a new metric at the time.
When you ship north of $40 million in product in Q1 here.
That should leave roughly $50 million.
And shipments kind of remaining in that backlog obligation.
How can we think about that.
Bearish or contract moving forward. It seems like you guys have been progressing.
Certainly nicely on that on that contract and maybe what does that look like going forward.
Yes, so I'll just reiterate some of the commentary we've provided in the past the relationship with that.
With <unk> is a good one for US one that's very healthy and collaborative so we're excited about its potential as we've indicated we're in.
I would say that last third of a five year contract whereby they hadn't purchase commitments in the range of $500 million and so what we've done in the past is we've given backlog insight into the upcoming year.
So that backlog actually gets adjusted periodically throughout the year as demand fluctuates and as we service that demand through supply. So in terms of the exact number I don't know that we actually posted that in our quarter, but I would say that we're proceeding well against that $500 million commitment and we expect that by the end of the five.
We will have exceeded that that target.
It remains to be seen ultimately what the backlog will be for this year I don't have that information available to share with you right now.
Yes.
Okay got it no that's helpful.
Great quarter, guys best of luck going forward here.
Thank you.
And next we'll hear from Adam Tindle Raymond James.
Okay. Thanks, Good afternoon, maybe wanted to start with you we've heard kind of a variety of different results from consumer companies, whether it's Wi Fi arena the home Speaker Arena.
A lot of them have been disappointing.
And there has been some citations is channel inventory issues, particularly in e-commerce, or even retail where they're willing to hold less inventory I guess when you look around the consumer electronics space relative to year results. What do you think are the things that are maybe insulating you from.
The trends that are being experienced by others or do you think this is something that may ultimately impact our low at some point just on a lagged effect.
Yes, great question, Adam So a couple of things I would say one.
We are operating in a market segment that is just more naturally resilient.
To some of the headwinds that you would see in a macroeconomic slowdown and what I mean by that is being in the segment of safety and security often is a lot stickier and the demand is more resilient because it's around being safe keeping your family safe keeping your assets like a home or.
Small business safe and if not one of the first things that consumers cut back when when Theyre spending and when there is a need for safety or security solution. There is a need for safety and security solution at that time, So I think from a general market perspective, and market segmentation perspective safety.
Safety and security is an area that's going to be more resilient as we go through this macroeconomic chaos that we're having a little bit of as we go forward.
Two I would say we identified.
The turnaround in the market I think earlier than most so in Q3, we took actions across many areas, including cutting costs really working with our supply chain to bring down product costs changing our pricing. So we're bringing down the upfront costs, even though we're increasing the monthly cost consumers are much more sensitive to the.
Out of box experience and the cost of getting into a solution. So we I think our pricing strategy has changed in a way to react to the market as the market was becoming a little softer that has worked so we said on the last call that we expect this year to behave a lot like Q4 did as far as how.
Consumers are looking for deals that are looking for a lower upfront cost, but once they are into a solution and they're subscribed as a subscriber is a very very sticky service. So those are the two I would say I think we're in a unique market segment compared to things that are lot more discretionary.
And then two I think we have done an excellent job at reading, where the market is going adjusting our strategy across our operations, our supply chain and our pricing to match, where the consumer is and we're seeing that resilience continue even outside of Q1 as we are starting to go into Q2. So.
That's one of the reasons why you see us upping not only our future profitability, but actually up.
The full year guidance on revenue is that we expect this to continue and our success to continue throughout the rest of the year.
Yes, certainly very prescient moves it makes sense to me I guess, maybe as a follow up the secure product is such an interesting potential.
Growth driver moving forward and I'm curious.
Kind of what you're learning as you venture down that journey.
In particular.
The potential partnerships that it might ultimately open up or go to markets.
I mentioned that because theres just been a number of moves whether it's insurance providers like state farm investing heavily and ADT.
For technology companies like Google and ADT rate that are interested in those that have this sort of technology, so sort of these outside.
Partnerships that might end up being open up to you from the secure.
On a piece of the business just wondering if you could talk about early observations and the opportunities for those sorts of partnerships moving forward and any timeline or visibility into that would be helpful. Thanks.
Yes, another great question I'll tell you I'm very bullish on what we call strategic accounts or partnerships going forward I think there is a overall recognition about the market segment that we're in and we just discussed.
Together the value it provides an end user.
The revenue it can provide on a recurring basis theres only a certain number of segments that consumers will pay on a on a monthly or a recurring basis for value that is provided through a subscription when you look at the smart home, it's really around security. So I think there is many avenues of which you've touched on whether it's service providers are.
Insurance and other insurance companies or other <unk> partners, where <unk> is potentially a great fit as a partner when we talked about our long range plan last year and last March when we rolled it out one of our key pillars was continuing to invest in and expanding our <unk> strategic.
Account base, it's a focus for us we don't have anything to announce at the moment, but I will tell you I do believe there is some very strong potential on bullish over the call. It. The 12 to 18 month time horizon that it'll continue to drive results for our LOE continued to drive paid accounts and becoming even a bigger portion of our <unk>.
As we head forward.
Great looking forward to it thanks and congrats.
Thank you very much John .
Next up we'll hear from Hamid courtesan Dws financial.
Hi could you first.
The address.
Price changes you undertook in the quarter and how much of your subscriber.
Subscriber base saw that price increase in Q1, and how much how many will see it in Q2.
Yes, so the price changes happened.
Over the course of February and the reason it didn't happen on a single day as it depends on when the natural.
Renew date happens. So if you were on the fifth of a month that renewed on the fifth of February . If you were on the 14th of a month would be the 14th of February so throughout the month of February 100% of our subscriber base rolled into the new pricing so.
It basically happened throughout February so on an average you'd say half the quarter was was benefiting from that price increase of course next quarter will be 100%, but as we exited February meeting going into March 100% of the subscriber base was moved over to the new pricing.
Okay and then in your prepared remarks, you had said.
Something about mix shift in service plans are you seeing more.
Movement towards the higher end or the lower end of your service plans now with the higher price points.
Yeah. Great question. So we are seeing an increase meaning an upward shift so as I think the security system.
It started to rollout as arlo safe is rolled out in a bundle we have our arlo safe and secure bundle and some of the feature changes that we made putting more value more capabilities into our arlo secure plus we are seeing a mix up.
Where people are signing up for more and more.
Higher price plans compared to historical so I think at current kind of alluded to that in his quest his answer to a question around.
Both price increases and the mix shift upwards in price selection or.
Our plan selection has impacted ARPA.
Okay. My last question was just given the seasonality of first quarter, how do you feel about the point of sale transactions now.
Our focus being on price do you feel like you're winning market share.
Yes, I do think we're winning market share.
It's Ben.
Obviously, a strong quarter and as I mentioned, we're seeing that that resilience in the consumer continue as we go forward. So we think we are absolutely on the right strategy, we think it's going to drive not only some market share gain but obviously.
Paid accounts as we get through the year. So we're really happy with where we're sitting we think the pricing strategy was exactly the right move, especially as we are a services business at the forefront and the hardware sale is really how we instantiate that relationship with the end user and this is really leaning into that and is providing great results for the company.
Okay. Thank you.
Thank you Amit.
That does conclude our question and answer session and also concludes today's conference we would like to thank you all for your participation you may now disconnect.
Okay.
Okay.