Q1 2024 Arlo Technologies Inc Earnings Call
Operator: 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 this time, if you have a question, you will need to press... star 1 on your push button phone. I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.
Ladies and gentlemen, thank you for standing by at this time, all participants are in a listen only mode.
Tahmin Clarke: We will conduct a question and answer session.
Tahmin Clarke: This time, if you have a question you will be press star one on your push waterfall.
Tahmin Clarke: I'd now like to turn the conference over to Tommy Clark. Please go ahead Sir.
Tahmin Clarke: Thank you, operator. Good afternoon, and welcome to Arlo Technologies' first quarter 2024 financial results conference call. Joining us from the company are Mr. Matthew McRae, CEO, and Mr. Kurt Binder, 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 provided by Kurt. We will then take questions. If you have not received a copy of today's webinar, please do so now. Thank you, Operator.
Tahmin Clarke: Thank you operator, good afternoon, and welcome to Arlo technologies first quarter 2024 financial results conference call joining us from the company are Mr. Matthew Mcrae, CEO and Mr. Kurt Binder CFO.
Kurt Binder: 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 provided banker.
Tahmin Clarke: We will then take questions.
Tahmin Clarke: If you've not received a copy of today's.
Tahmin Clarke: Good afternoon, and welcome to Arlo Technologies' first quarter 2024 financial results conference call. Joining us from the company are Mr. Matthew McRae, CEO, and Mr. Kurt Binder, 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 provided by Kurt. We will then take questions. If you have not received a copy of today's release, please visit Arlo's investor relations website at Investor.arlo.com.
Tahmin Clarke: Thank you operator, good afternoon, and welcome to Arlo technologies first quarter 2024 financial results Conference call.
Tahmin Clarke: US from the company are Mr. Matthew Mcrae, CEO and Mr. Kurt Binder CFO.
Tahmin Clarke: 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 provided banker.
Tahmin Clarke: We will then take questions.
Tahmin Clarke: If you have not received a copy of todays release, please visit <unk> Investor Relations website at Investor <unk> Dot com.
Tahmin Clarke: Before we begin the formal remarks, we advise you that today's conference call contains four looking states. Forward-looking statements include statements regarding our potential future business. Operating results and financial conditions, 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 of 2024, the long-range plan targets, the rate and timing of paid subscriber growth, the transition to a services-first business model, the commercial launch and momentum of new products and services, and Strategic Objectives and Initiatives.
Tahmin Clarke: Before we begin the formal remarks, we advise you that todays conference call contains forward looking statements.
Tahmin Clarke: Forward looking statements include statements regarding our potential future business.
Tahmin Clarke: Operating results and financial condition, including descriptions of our revenue gross margin operating margin earnings per share expenses cash outlook free cash flow and free cash flow margin.
Tahmin Clarke: <unk> for the second quarter of 2024 at the long range plan targets the rate and timing of paid subscriber growth the transition to a services first business model, the commercial launch and momentum of new products and services strategic.
Tahmin Clarke: Objectives and initiatives market expansion and future growth.
Tahmin Clarke: Market Expansion and Future Growth. Partnerships with various market leaders and strategic collaborators. Continued new product and service differentiation, and the impact of general macroeconomic conditions on our business, operating results, and financial conditions. Actual results or trends could differ materially from those contemplated by these four looking states.
Tahmin Clarke: Partnerships with various market leaders and strategic collaborators.
Tahmin Clarke: New product and service differentiation and the impact of general macroeconomic conditions on our business operating results and financial condition.
Tahmin Clarke: Actual results.
Tahmin Clarke: Results were trends could differ materially from those contemplated by these forward looking statements.
Tahmin Clarke: For more information, please refer to the risk factors discussed in Arlo's 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. In addition, 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.
Tahmin Clarke: For more information please refer to the risk factors discussed in <unk> periodic filings with the SEC, including the most recent annual report on Form 10-K, and quarterly report on Form 10-Q.
Matt: 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.
Matt: In addition, several non-GAAP financial measures will be discussed on this call.
Matt: A reconciliation of the GAAP to non-GAAP measures can be found in today's press release on our Investor Relations website.
Tahmin Clarke: At this time I would now like to turn the call over to Matt.
Matthew Blake McRae: Thank you, Tahmin, and thank you, everyone, for joining us today for Arlo's first quarter 2024 earnings. Before we jump into the details of our Q1 results, I would like to take a moment to review our long-range plan and strategy. You will recall from our last earnings report that Arlo set forth new and more ambitious long-range targets based on the stellar execution by the team across the business. At or before 2030, our goal is to achieve 10 million paid accounts.
Matt: Thank you Tom and thank you everyone for joining us today on <unk> first quarter 2024 earnings call.
Matthew Blake McRae: Before we jump into the details of our Q1 results I would like to take a moment to review our long range plan and strategy you.
Matthew Blake McRae: You will recall from our last earnings report Arlo set forth, new and more ambitious long range targets based on a stellar execution by the team across the business.
Matthew Blake McRae: Before 2030, our goal is to achieve 10 million paid accounts.
Matthew Blake McRae: $700 million in annual recurring revenue and over 25% non-GAAP operating margin. Our strategy to accomplish these goals focuses on several areas. First, is our retail and direct business, where we sell devices and service subscriptions to consumers. Last year, we rebalanced our pricing strategy by reducing hardware margins and increasing our service fees, which lowered the barrier of entry into a slower consumer market, driving share gains and faster household formation for Arlo. And in the 2023 holiday period, our Essential 2 product line performed well, especially at big box retailers, providing a clear indication that the DIY home security segment is entering the mass market.
Matthew Blake McRae: $700 million in annual recurring revenue and over 25% non-GAAP operating margin.
Matthew Blake McRae: Our strategy to accomplish these goals focuses on several areas.
Matthew Blake McRae: First is our retail and direct business, where we sell devices and service subscriptions to consumers.
Matthew Blake McRae: Last year, we rebalanced, our pricing strategy by reducing hardware margins and increasing our service fees, which lowered the barrier of entry in a slower consumer market driving share gains and faster household formation for airlift.
Matthew Blake McRae: And in the 2023 holiday period are central to product line performed well, especially at big box retailers, providing a clear indication that the DIY home security segment is entering the mass market.
Matthew Blake McRae: Along with helping us navigate a slower consumer climate in the near term, this shift in pricing opened a broader addressable market for Arlo and is a key dimension in our plans to continue our strong paid subscription growth, leading to expansion of both our service revenue and profitability. Looking ahead, we believe the macroeconomic environment will remain muted in 2024.
Matthew Blake McRae: Along with helping us navigate a slower consumer climate in the near term this shift in pricing opened up broader addressable market for <unk>.
Matthew Blake McRae: And as a key dimension in our plans to continue our strong paid subscription growth leading to expansion of both our service revenue and profitability.
Matthew Blake McRae: Looking ahead, we believe the macroeconomic environment will remain muted in 2024.
Matthew Blake McRae: Thus, we plan to leverage the same strategy we executed last year as we plan for the important back half of the year. While lower ASPs may bring down hardware revenue, we expect to benefit again from incremental growth in households and service revenue going into 2025. I'm excited to report that the strategy has already begun to bear fruit, as we have, similar to last year, a confirmed robust promotional calendar with some of the largest retailers in the world for this coming holiday season. Second, strategic accounts, or our B2B relationships.
Matthew Blake McRae: We plan to leverage the same strategy, we executed last year as we plan for the important back half of the year.
Matthew Blake McRae: While lower Asps may bring down hardware revenue, we expect to benefit again from incremental growth in households, and service revenue going into 2025 I'm excited to report that this strategy has already begun to bear fruit as we have similar to last year are confirmed robust promotional calendar with some of the largest retailers in the <unk>.
Matthew Blake McRae: World for this coming holiday season.
Matthew Blake McRae: Second is strategic accounts or our beta be relationships, Curt and I mentioned on our previous call that we believe more than half of the growth in our long range targets could come from our partnerships.
Matthew Blake McRae: Kurt and I mentioned on our previous call that we believe more than half of the growth in our long-range targets could come from our partnership. Arlo is experiencing a resurgence of interest and engagement across several verticals, and we are more confident than ever that these strategic accounts will play an important role in our future success. Reinforcing that notion, today we announced the renewal of our agreement with Ferrishire, one of our oldest and most important strategic partners.
Matthew Blake McRae: <unk> is experiencing a resurgence in interest and engagement across several verticals and we are more confident than ever that the strategic accounts will play an important role in our future success.
Matthew Blake McRae: Reinforcing that notion today, we announced the renewal of our agreement with fair shared one of our oldest and most important strategic partners are there. We'll continue to provide devices custom development AI powered services and our cloud platform technologies to fair share for another five years as they continue to grow their business across Europe.
Matthew Blake McRae: Arlo will continue to provide devices, custom development, AI-powered services, and our cloud platform technologies to VeriShirt for another five years as they continue to grow their business across Europe and Latin America. I want to congratulate Ferrisher on their success, and we look forward to working together as we support their next wave of growth. The last area of focus is our capital allocation plan, which is being built to maximize shareholder value through the careful and disciplined deployment of our resources.
Matthew Blake McRae: And Latin America.
Matthew Blake McRae: I want to congratulate bearish or on their success and we look forward to working together as we support their next wave of growth.
Matthew Blake McRae: The last area of focus is our capital allocation plan, which is being built to maximize shareholder value through careful and disciplined deployment of our resources.
Matthew Blake McRae: Our internal investment in Arlo's innovation pipeline continues to enhance our market position, from the successful Essential 2 portfolio rollout to the anticipated launch of our Arlo Secure platform later this year with its groundbreaking AI-powered capability. And while the smart security category is maturing,
Matthew Blake McRae: Our internal investment in <unk> innovation pipeline continues to enhance our market position from the successful essential to portfolio rollout to the anticipated launch of our Arlo secured platform later this year with its groundbreaking AI powered capabilities.
Matthew Blake McRae: While the smart security category is maturing.
Matthew Blake McRae: I see a new wave of innovation over the next 24 to 36 months, and Arlo could not be better positioned to strengthen our leadership in this phase. As evidence of our current leadership position, this quarter, Arlo won an American Business Award for Innovation of the Year. Adding to our previous accolades, including the Smart Security Camera Company of the Year Award from IoT Breakthroughs and our recognition for innovation and excellence from Newsweek. Other aspects of our capital allocation plan are under development, and we plan on providing additional insight and detail over the coming month.
Matthew Blake McRae: I see a new wave of innovation over the next 24 to 36 months and arlo could not be better positioned to strengthen our leadership in the space.
Matthew Blake McRae: As evidence of our current leadership position. This quarter are little won an American business award for innovation of the year.
Matthew Blake McRae: Adding to our previous accolades, including the Smart security camera company of the year Award from Iot breakthroughs.
Matthew Blake McRae: And our recognition for innovation and excellence from Newsweek.
Matthew Blake McRae: Other aspects of our capital allocation plan, our underdevelopment and we plan on providing additional insight and detail over the coming months.
Matthew Blake McRae: With that overview of context, you can see why we are so pleased with our operating results in the first quarter. Arlo ended with 3.2 million paid accounts in Q1, growing our base by 58% year over year. Our annual recurring revenue grew by over 24% year-over-year to reach $227 million, driven by retail and direct subscriptions from our successful holiday sales. And total revenue was $124 million, up 12% year-over-year and driven by the anticipated recovery of very short orders after their de-stocking event at the end of 2023.
Matthew Blake McRae: With that overview of context, you can see why we're so pleased with our operating results in the first quarter.
Matthew Blake McRae: <unk> ended with $3 2 million paid accounts in Q1 growing our base by 58% year over year.
Matthew Blake McRae: Our annual recurring revenue grew over 24% year over year to reach $227 million driven by retail and direct subscriptions from our successful holiday sales.
Matthew Blake McRae: And total revenue was $124 million.
Matthew Blake McRae: Up 12% year over year, and driven by the anticipated recovery of various for orders after their destocking event at the end of 2023.
Matthew Blake McRae: This outstanding performance resulted in a non-GAAP earnings per share of $0.09, and the business generated an incredible $19.5 million of free cash flow at a free cash flow margin of 15.7%, a record for the company and a result that truly demonstrates the success of our services-first business model. I would like to congratulate and extend my appreciation to the entire Arlo team. Our Q3 results represent a great first step towards successfully achieving our new long-range target. And now, I'll turn it over to Kurt for a more in-depth review of these Q1 results.
Matthew Blake McRae: This outstanding performance resulted in a non-GAAP earnings per share up nine cents and the business generated unencrypted or $19 $5 million of free cash flow at a free cash flow margin of 15, 7%.
Kurt: Our records for the company and a result that truly demonstrates the success of our services first business model.
Kurt: I would like to give my congratulations and extend my appreciation to the entire arlo team.
Kurt: Our Q results represent a great first step towards successfully achieving our new long range targets.
Matthew Blake McRae: And now I will turn it over to Kurt for a more in depth review of these Q1 results.
Kurt Binder: 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 of 2024. Total revenue for the first quarter of 2024 came in at $124.2 million, up 12% over the prior year period. In the quarter, service revenue represented about 46% of total revenue, up from 40% in the same period last year. This shift in revenue composition reflects the continued momentum that we have gained in our transformation to a services-first business.
Kurt: Thank you, Matt and thank you everyone for joining us today I'll start by sharing some financial details and an overview of the business for Q1 of 2024.
Kurt Binder: Total revenue for the first quarter of 2024 came in at $124 $2 million.
Kurt Binder: Up 12% over the prior year period.
Kurt Binder: In the quarter service revenue represented about 46% of total revenue up.
Kurt Binder: Up from 40% in the same period last year.
Kurt Binder: This shift in revenue composition reflects the continued momentum that we have gained in our transformation to a services <unk> business.
Kurt Binder: Our installed base of subscribers continued its strong growth trajectory as we reached over 3.2 million paid accounts by the end of Q1, an increase of approximately 422,000 paid accounts in the quarter. This number does include a significant catch-up of VeriShore accounts that we have discussed on previous calls. We expect the catch-up to continue for one or two more quarters.
Kurt Binder: Our installed base of subscribers continued its strong growth trajectory as we reached over three 2 million paid accounts by the end of Q1, an increase of approximately 422000 paid accounts in the quarter.
Kurt Binder: This number does include a significant catch up a bearish or account that we have discussed on previous calls.
Kurt Binder: We expect to catch up to continue for one or two more quarters.
Kurt Binder: Service revenue for Q1 was another record at $56.7 million, or a 29% increase over last year. The strong service revenue performance was driven by our increase in pricing across our paid accounts last year, as well as the growth in our overall paid account base. Our annual recurring revenue at March 31st was $227 million, up 24% over the same period last year. I want to highlight the strength of our services revenue and ARR, which helped deliver solid revenue performance and contributed to Arlo generating a non-GAAP operating profit of $8.6 million in the quarter.
Kurt Binder: Service revenue for Q1 was another record at 56 $7 million or a 29% increase over last year.
Kurt Binder: The strong service revenue performance was driven by our increase in pricing across our paid accounts last year as well as the growth in our overall paid account base.
Kurt Binder: Our annual recurring revenue at March 31 was $227 million up 24% over the same period last year.
Kurt Binder: I want to highlight the strength of our services revenue.
Kurt Binder: Our which helped deliver solid revenue performance and contributed to our low generating non-GAAP operating profit of $8 $6 million in the quarter.
Kurt Binder: This represents a six-fold increase in operating profit over the same period last year. Product revenue for Q1 was $67 million, which was down sequentially from our seasonally strong holiday quarter but in line with the revenue generated in the same period last year. During the quarter, we shipped a total of 1.1 million devices worldwide, compared to 960,000 in the prior year period. Product revenue at these levels was driven by higher unit volume, offset by the continuing decline in ASPs in most product categories. Our lower-cost Essential 2 camera lineup has positioned us to gain a greater share of households as we enter the mass market phase of home security.
Kurt Binder: This represents a six fold increase in operating profit over the same period last year.
Kurt Binder: Product revenues for Q1 was $67 million, which was down sequentially from our seasonally strong holiday quarter, but in line with the revenue generated in the same period last year.
Kurt Binder: During the quarter, we shipped a total of 1.1 million devices worldwide compared to 960000 in the prior year period.
Kurt Binder: Product revenue at these levels was driven by the higher unit volume offset by the continuing decline in Asps in most product categories.
Kurt Binder: Our lower cost essential to camera lineup has positioned us to gain a greater share of household as we enter into the mass market phase of home security.
Kurt Binder: We believe that customers of these products that come to Arlo through channels like Walmart represent an incremental subscriber opportunity for our services business. And given the strong commitment to the smart security segment by some of our largest retail partners, we will use product pricing as a lever to go after additional market share, even if it results in product gross margins being below the mid-single-digit range to drive additional service revenue growth in 2025.
Kurt Binder: We believe that customers of these products that come to arlo through channels like Walmart represent an incremental subscriber opportunity for our services.
Kurt Binder: And given the strong commitments to the smart security segment by some of our largest retail partners, we will use product pricing as a lever to go after additional market share even if it results in product gross margins being below the mid single digit range to drive additional service revenue grow.
Kurt Binder: In 2025.
Kurt Binder: In the quarter, approximately $70 million, or 56% of our total revenue, was generated from our international customers. Specifically, our sequential results for the EMEA region improved significantly as we experienced a material uptick in orders from our largest partner, which resulted in them surpassing the $500 million minimum purchase commitment threshold on our contract during the period. As Matt mentioned, we remain extremely pleased with our very short relationship.
Kurt Binder: In the quarter, approximately $70 million or 56% of our total revenue was generated from our international customers.
Kurt Binder: Specifically, our sequential results for the EMEA region improved significantly as we experienced a material uptick in orders from our largest partner, which resulted in net of surpassing the $500 million minimum purchase commitment threshold on our contract during the period.
Kurt Binder: As Matt mentioned, we remain extremely pleased with our virtual relationship.
Kurt Binder: And we are excited to share the recent news that the existing contract was renewed through 2029. From this point on, my discussion 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 for the first quarter was $49 million, up 35% year-over-year. This resulted in a non-GAAP gross margin of 39%, up over 600 basis points from 33% in Q1 of 2023.
Kurt Binder: And we are excited to share the recent news that the existing contract was renewed through 2029.
Kurt Binder: From this point on my discussion will focus on non-GAAP numbers directly.
Kurt Binder: The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release distributed earlier today.
Kurt Binder: Our non-GAAP gross profit for the first quarter was $49 million up 35% year over year.
Kurt Binder: This resulted in a non-GAAP gross margin of 39%.
Kurt Binder: Over 600 basis points from 33% in Q1 of 2023.
Kurt Binder: The year-over-year increase in non-GAAP gross profit was primarily attributable to the continued expansion of our services business and associated gross margins. Non-gas service gross margin for the quarter was 76.7%, up from approximately 73.5% in the same period last year. The improvement in non-GAAP service gross profit was driven by growth in our total paid subscriptions and the pricing increase implemented in February of last year. Non-GAAP product gross margin for the quarter was 8%, consistent with the previous quarter but up 200 basis points from the same period last year.
Kurt Binder: The year over year increase in non-GAAP gross profit was primarily attributable to the continued expansion of our services business and associated gross margin.
Kurt Binder: non-GAAP service gross margin for the quarter was 76, 7% up from approximately 73, 5% in the same period last year the.
Kurt Binder: The improvement in non-GAAP service gross profit was driven by growth in our total paid subscriptions and the price increase implemented in February of last year.
Kurt Binder: non-GAAP product gross margin for the quarter was 8% consistent with the previous quarter, but up 200 basis points from the same period last year.
Kurt Binder: Product margin of 8% is slightly high, but still in line with the mid-single-digit guidance that we provided when we gave our full year 2024 outlook. Total non-GAAP operating expenses for the first quarter were $40 million, up both on a sequential and year-over-year basis and in line with the expectations we shared last quarter. The year-over-year increase is partially attributable to the increase in R&D expenses as we invest in the development of Arlo Secure 5.0.
Kurt Binder: Product margin of 8% is slightly high but still in line with the mid single digit guidance that we provided when we gave our full year 2020 for outlook.
Kurt Binder: Total non-GAAP operating expenses for the first quarter were $40 million.
Kurt Binder: Both on a sequential and year over year basis.
Kurt Binder: And in line with the expectations, we shared last quarter.
Kurt Binder: The year over year increase is partially attributable to the increase in R&D expenses.
Kurt Binder: We are investing in the development of Arlo secure five downhill.
Kurt Binder: We are keeping our operating expenses in check while delivering higher levels of service revenue as a percentage of total revenue. We will continue to exercise a disciplined approach to our cost structure as we scale the services business. In Q1, we posted non-GAAP net income of $9.5 million. This translates into income per dilutive share of $0.09.
Kurt Binder: We are keeping our operating expenses in check while delivering higher levels of service revenue as a percentage of total revenue.
Kurt Binder: We will continue to exercise a disciplined approach to our cost structure as we scale the services business.
Kurt Binder: In Q1, we posted non-GAAP net income of nine $5 million.
Kurt Binder: Our non-GAAP net income translates into income per diluted share of nine cents.
Kurt Binder: Regarding our balance sheet and liquidity position, we ended the quarter with $142.9 million in available cash, cash equivalents, and short-term investments. This balance was up more than $24 million year-over-year and underscores the strength of Arlo's capital position right now. We generated a record $19.5 million in free cash flow in Cuba, which represents a free cash flow margin of 16%, an improvement driven by both our increased profitability and solid working capital. For instance, our Q1 accounts receivable balance was $56.5 million at quarter end, with Q1 DSOs at 41 days, down from 44 days in the same period last year.
Kurt Binder: Regarding our balance sheet and liquidity position, we ended the quarter with $142 $9 million in available cash cash equivalents and short term investments.
Kurt Binder: This balance was up more than $24 million year over year and underscores the strength of <unk> capital position right now.
Kurt Binder: We generated a record $19 5 million in free cash flow in Q1, which represents free cash flow margin of 16% and improvement driven by both our increased profitability and solid working capital management.
Kurt Binder: For instance, our Q1 accounts receivable balance was $56 5 million at quarter end with Q1 Dsos at 41 days.
Kurt Binder: <unk> from 44 days in the same period last year.
Kurt Binder: Our continuing improvement in DSOs reflects our focus on improving our working capital position. We are pleased with our strong liquidity position, which provides us with options to leverage our cash for strategic initiatives to help accelerate our growth in the smart security market. And finally, our Q1 inventory balance ended at $44.7 million, up $6.3 million from Q4 2023 levels. Inventory turns were 5.7 times, down from 7.6 times in 2.4, but in line with our expectations, as we look to optimize our inventory levels in an effort to reduce spend on inbound freight, especially air freight.
Kurt Binder: Our continuing improvement in Dsos reflects our focus on improving our working capital position.
Kurt Binder: We are pleased with our strong liquidity position, which provides us with options to leverage our cash for strategic initiatives to help accelerate our growth in the smart security market.
Kurt Binder: And finally, our Q1 inventory balance ended at $44 $7 million up $6 $3 million from Q4 2023 levels here.
Kurt Binder: Inventory turns were five seven times down from seven six times in Q4, but in line with our expectations as we look to optimize our inventory levels in an effort to reduce spend on inbound freight, especially air freight.
Kurt Binder: Now turning to our, we expect the second quarter revenue for 2024 to be in the range of 120 to 130 million dollars, and our non-GAAP net income per dilutive share to be between 6 cents and 12 cents per share. We are positioned well with the new low-cost Essential 2 camera portfolio in this more cautious consumer market. Consumers are continuing to make purchase decisions based on promotional activity, and our ability to deliver a great product at an entry-level price point allows us to expand our strong market position as the security segment enters the mass market phase of adoption.
Kurt Binder: Now turning to our outlook, we expect the second quarter revenue for 2024 to be in the range of $120 million to $130 million and our non-GAAP net income per diluted share to be between six.
Kurt Binder: And 12 cents per share.
Kurt Binder: We are positioned well with the new low cost essential to camera portfolio in this more cautious consumer market.
Kurt Binder: <unk> are continuing to make purchase decisions based on promotional activity and our ability to deliver a great product and an entry level price point allows us to expand our strong market position as the security segment enters the mass market phase of adoption.
Kurt Binder: Service revenue is still forecasted to grow at approximately 20% over last year, thereby becoming a much larger portion of our overall revenue and profitability. We continue to expect non-gas service gross margin to be in the 75% range for 2024. Now, I'll open it up for questions.
Kurt Binder: Service revenue is still forecasted to grow at approximately 28% over last year, thereby becoming a much larger portion of our overall revenue and profitability mix.
Kurt Binder: We continue to expect non-GAAP service gross margin to be in the 75% range for 2024.
Speaker Change: And now ill open it up for questions.
Operator: At this time, I would like to remind everyone, in order to ask a question, press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from the line of Mark Cash with Raywood Gene. Their line is now open.
Speaker Change: At this time I would like to remind everyone in order to ask a question, Chris the number one and your telephone keypad.
Operator: We'll pause for just a moment to compile the Q&A roster.
Operator: Okay.
Mark Cash: Our first question comes from the line of Mark <unk> with Raymond James.
Mark Cash: Line is now open.
Mark Cash: Yeah, thanks. This is Mark going for Adam.
Mark Cash: Yeah, Thanks, Tavis spark on for Adam.
Kurt Binder: If I could start with you. First time with EMEA being the largest portion of the business, and I appreciate your pair of remarks talking about material uptake coming from Beresher, but I just wanted to ask, would any of this be one-time in nature? Do the new five-year extension? And then maybe alongside that, reading in the queue, the new agreement extension does not contain any minimum purchase obligation. So can you just talk about kind of what you're expecting and if there's any risk with that?
Mark Cash: Hey, Brian if I could if I could start with you.
Kurt Binder: First time with EMEA being the largest portion of the business and I. Appreciate your prepared remarks talking about material uptick coming from bearish here, but I just wanted to ask with any of this be onetime in nature do you the new five year extension and then maybe alongside that reading in the Q.
Kurt Binder: The new agreement extension does not contain any minimum purchase obligations. So can you just talk about kind of what you're expecting and if there is any risk with that.
Matthew Blake McRae: Yeah, thank you for the question. Yes, so we're really happy that we renewed with Verisure. I mean, it puts a great solid foundation on the strategic account portion of our business, so we're really excited to continue that relationship with Verisure. It was extended another five years, and you're right, the minimum guarantee that we had put in the original agreement was really for the initial ramp term. Now that we're just extending the existing contract for another five years, there's no incremental or additional minimum guarantee there.
Speaker Change: Yes. Thank you for the question, yes, So we were really happy that we renewed.
Matthew Blake McRae: With very short.
Matthew Blake McRae: Just a great solid foundation on the strategic account portion of our business. So we're really excited to continue that relationship with <unk>.
Matthew Blake McRae: It extended another five years and you're right the minimum guarantee that we've put in the original agreement was really for the initial ramp.
Matthew Blake McRae: Term.
Matthew Blake McRae: Now that we're just extending the existing contract for another five years, there is no incremental or additional minimum guarantee there.
Matthew Blake McRae: What you see from Verisure is very strong ordering, and Kurt mentioned in his part of the script that they have already met in the quarter their $500 million hardware purchase guarantee, and we see through forecasting that that's going to continue. Now, when you look at Q1 being strong, like we mentioned, a little bit of that is seasonality and kind of normal seasonality between Q4 and Q1. But it's accentuated by Verisher's destocking over the back half of last year and, I think, running a little bit dry on inventory and then doing a bit of catch-up in Q1.
Matthew Blake McRae: You see from <unk> is very strong ordering.
Matthew Blake McRae: And Curt mentioned in his part of the script that they've already met in the quarter. There are 500 minimum guarantee the 500 million dollar hardware purchase guarantee and.
Matthew Blake McRae: And we see through forecasting that that's going to continue over time now when you look at Q1 being strong.
Matthew Blake McRae: Like we mentioned a little bit of that is seasonality and kind of normal seasonality between Q4 and Q1, but it is accentuated by <unk> destocking over the back half of last year, and I think running a little bit dry on inventory.
Matthew Blake McRae: And then doing a bit of a catch up in Q1, we might see a little bit of that in Q2 as well from a from a hardware purchase perspective. So some of that is normal seasonality. Some of that is because of the destocking in Q4, and then various or doing some strong buying in Q1 to bring their inventory back to an operational level.
Matthew Blake McRae: We might see a little bit of that in Q2 as well from a hardware purchase perspective. So some of that is normal seasonality. Some of that is because of the destocking in Q4, and then Verisher did some strong buying in Q1 to bring their inventory back to an operational level. Okay, great.
Matthew Blake McRae: And just kind of, if I could follow up on that, just what kind of geography mix are you expecting? Is this atypical just because of what you're talking about with the bearish, or kind of catching up there? Yeah, I think it's definitely atypical, or at least the mix is stronger on the European side because of that catch-up in ordering after their de-stocking. So I think, you know, we again are seeing placing orders in Q1 that were stronger than a normal Q1, and might happen a little bit in Q2. And then it may start to normalize as their inventory position is kind of, you know, more normalized with their operations and some of the new paid accounts that they're signing up across.
Matthew Blake McRae: Okay great.
Speaker Change: And just kind of if I could follow up on that just what kind of geography mix are you expecting is it just a typical just because of what you just talked about with with the bearish or kind of catching up there.
Matthew Blake McRae: Yes, I think it's definitely atypical or at least the mix is stronger.
Matthew Blake McRae: To the European side, because of that catch up and ordering after their destocking.
Matthew Blake McRae: So I think again, we're seeing them, placing orders in Q1 that was stronger than a normal Q1 might happen a little bit in Q2 and that it may start to normalize their inventory position.
Matthew Blake McRae: It's kind of more normalized with our operations in some of the new paid accounts that they're signing up across Europe.
Kurt Binder: Okay, and if I could pass one to Kurt, just kind of maybe maybe kind of the bigger picture, I guess just what are you seeing now in terms of consumer behavior today versus three or six months ago, and how do you tie that into your, you know, the planned promotional activity that was discussed?
Speaker Change: Okay, and if I can just ask one pick Kurt.
Kurt Binder: Just kind of maybe maybe kind of bigger picture I guess, just what are you seeing now in terms of the consumer behavior today versus three or six months ago, and how do you tie that into your.
Kurt Binder: Planned promotional activity that was discussed.
Kurt Binder: Yeah, thanks, Mark. So the consumer environment is in line with what we were expecting. If you recall, over the last couple quarters, we've indicated that, from the standpoint of consumer sentiment in the overall environment, 2024 is expected to be quite similar to 2023. And that's exactly what we're seeing here for Q1.
Kurt Binder: Yeah, Thanks, Mark so the.
Mark Cash: Yeah, the consumer environment.
Kurt Binder: Your line with what we were expecting if you recall over the last couple.
Mark Cash: Sure as we've indicated that we anticipated 2024 from the standpoint of considerable consumer sentiment in the overall environment to be quite similar to 2023, and that's exactly what we're seeing here for Q1, the great thing is and as we've communicated in the past we.
Kurt Binder: The great thing is, and as we've communicated in the past, we anticipated that, and that was really the basis for us moving aggressively to the Essential 2 platform that we rolled out in October and November of this past year. That platform does allow us, because of the cost downs that we included within that BOM, the ability to be very promotional. You'll see in Q1, we did, on a product gross margin standpoint, come in at about 8%.
Kurt Binder: Did that and that was really the basis for us moving aggressively to the essential to platform that we rolled out in October and November of this past year that platform does allow us because of the cost downs that we included within that bomb the ability to be very promotional youll see in Q1, we did on <unk>.
Kurt Binder: We have the flexibility, because of that BOM cost, as well as what we're doing around air freight and some of the other supply chain costs, to be a lot more aggressive. And I would say to you, you could expect us to do that throughout the year, in the event that the consumer market remains relatively soft as it is right now.
Kurt Binder: Our product gross margin standpoint come in at about 8%, we have flexibility because of that Bom cost as well as what we're doing around air frame. Some of the other supply chain cost to be a lot more aggressive and I would say to you you could expect us to do that throughout the year in the event that the consumer market remains.
Kurt Binder: Relatively soft as it is right now.
Kurt Binder: Yes.
Kurt Binder: Great. Thanks, guys, for the questions. I really appreciate it. You're welcome. Our next question comes from the line of Hamed Khorsand with BWS Financial.
Speaker Change: Great. Thanks, Thanks, guys for the questions really appreciate it.
Hamed Khorsand: Youre welcome.
Hamed Khorsand: Our next question comes from the line of Amit <unk> Shannon.
Hamed Khorsand: Dws financials.
Hamed Khorsand: Your line is now open.
Hamed Khorsand: Hi. So the first question I want to ask is, in your comments, you said about Verisure expanding in Latin America. Does that cover Arlo's agreement with Verisure at all?
Kurt Binder: Hi.
Hamed Khorsand: The first question I want to ask was in your comments you said about there sure.
Hamed Khorsand: Expanding in Latin America does that cover a <unk> agreement with very short at all with this extension.
Matthew Blake McRae: Yeah, it does. So in our relationship with Verisure, and this was true of the first term and will continue to be true on the renewal, is that we have an ability to partner with them on a global basis. A lot of the initial term obviously was focused on the European footprint, bringing that up across channels, but as Verisure expands into new regions over time, and one of the ones that they've actually talked about publicly and is starting to ramp up a bit is Latin America or South America, we will be one of their key partners obviously from a supply chain perspective on both devices and cloud technologies and AI technologies. So we do see them starting to move beyond Europe from a footprint perspective, and we are looking forward to actually helping them do that.
Hamed Khorsand: Yes. It does so so in our relationship with <unk> and this is true of the first term and continuing to be true.
Matthew Blake McRae: On the renewal.
Matthew Blake McRae: We have an ability to partner with them on a global basis a lot of the initial term obviously was focused on the European footprint, bringing that up across channels, but as very sure expands into new regions over time, and one of the ones that they've actually talked about publicly and it's starting to ramp a bit as Latin America or South America, we will be one of their key.
Matthew Blake McRae: Partners, obviously from a supply chain perspective in both devices and the cloud technologies and AI technology. So we do see them starting to move beyond Europe from a footprint perspective.
Matthew Blake McRae: Looking forward to actually helping them do that.
Matthew Blake McRae: Okay, and then why has this new subscriber ad number continued to just, you know, climb, and you can't provide what is actually Arlo's? incremental gain for the core. Well, as always, I know it's still a little bit murky because of the catch-up in the Verisure South numbers, and as you know, we've been trying to get that cleaned up as quick as possible. I think, you know, Kurt mentioned we may probably have another quarter or so, maybe a little bit longer of that.
Matthew Blake McRae: Okay, and then why has this.
Matthew Blake McRae: New subscriber adds number has continued to just.
Matthew Blake McRae: Climb.
Matthew Blake McRae: Can't provided what is actually rose.
Matthew Blake McRae: Incremental gain for the quarter.
Matthew Blake McRae: Well, we always I know, it's still a little bit murky because of the catch up in the <unk> south numbers.
Matthew Blake McRae: And as you know we've been trying to get that cleaned up as quick as possible I think Kurt mentioned, we may probably have another quarter or so maybe a little bit longer.
Matthew Blake McRae: That's Verisure rolling out new firmware and bringing on devices, you know, from a pay-to-service account perspective, accurately reporting those into the back end. So every quarter, like we usually do, we kind of tell you that there's a catch-up and that the normal run rate for Arlo minus that catch-up is somewhere between 170,000 and 190,000 net paid accounts. And then, on top of that, is the catch-up rollout that Verisure is doing so that the cameras that are actually deployed are being counted correctly.
Matthew Blake McRae: That's fair sure Rolling out me firmware and bringing on <unk>.
Matthew Blake McRae: Devices from our paid a service account.
Matthew Blake McRae: Account.
Matthew Blake McRae: Perspective accurately reporting those into the backend so every quarter.
Matthew Blake McRae: Like we usually do we kind of tell you that there is a catch up and Thats a normal run rate for arlo minus that catch up is somewhere between 170 190000 net paid accounts and then what youre seeing on top of that is the catch up rollout their furniture is doing so.
Matthew Blake McRae: Cameras that are actually deployed are being counted correctly again, I think we will see probably a quarter of that at least we're seeing some catch up now in the quarter that we're currently in and it may spill a little bit into Q3, but we're hoping to have it mostly finished by the end of summer.
Matthew Blake McRae: Again, I think we'll see probably a quarter of that at least. We're seeing some catch-up now in the quarter that we're currently in, and it may spill a little bit into Q3, but we're hoping to have it mostly finished by the end of...
Matthew Blake McRae: And my last question was, do you have any data that you could share as far as if there's a change in the attach rate with the Essentials 2 introduction versus the rest of the Arlo product line? Yeah, we have some preliminary data. It's a great question.
Matthew Blake McRae: And my last question was.
Matthew Blake McRae: Is there any data that you could share as far as if there's a change in the attach rate with essentials to thanks for the option versus the rest of the Arlo product line.
Matthew Blake McRae: Yeah, we have some preliminary data. It's a great question, and it's something we're watching very carefully.
Matthew Blake McRae: Yes, we have some preliminary data it's a great question and it's something we're watching very carefully as you know we have our conversion rates and then attach rates conversion rates are the metric of service being acquired by a customer within 30 days of a free trial, ending and then attach rates as we look at that cohort six months out so we're not really at.
Matthew Blake McRae: As you know, we have conversion rates and then attach rates. Conversion rates are the metric of service being acquired by a customer within 30 days of a free trial ending, and then attach rates are how we look at that cohort six months out. So we're not really at a point six months out where we can really see what the long-term attach rates are, but what I can tell you is that the general mix of our platform is still within that 60% attach rate plus or minus, even though we haven't had all the Essential 2 live on for six months or more in the current stall base.
Matthew Blake McRae: 0.6 months out where we can really see what the long term attach rates are but what I can tell you is both the general mix of our platform is still within that 60% attach rate plus or minus even though we havent had all essential to live on for six months or more and the current installed base.
Matthew Blake McRae: And the initial conversion rates that we're seeing actually across the board look slightly better than the original Essential 1. So we think we're in a similar position as where we would have been prior to the Essential 2 launch, potentially with a little bit of upside as we get through the full life of the Essential 2 customer and we get to judge their attach rates in the next, call it, three to four months.
Matthew Blake McRae: And the initial conversion rates that we're seeing actually across the board look slightly better than the original essential essential one. So we think we're in a similar position as where we would have been prior to the <unk> central to launch potentially for a little bit of upside as we get through the full life of the essential to customer and when we get to judge their attach rates in the next.
Matthew Blake McRae: All at three to four months.
Speaker Change: Alright, thank you.
Speaker Change: Youre welcome.
Scott Wallace Searle: Our next question comes from the line of Scott Searle with Rock N KM. Your line is now open.
Matthew Blake McRae: Our next question comes from the line of Scott Searle with Roth <unk>. Your line is now.
Matthew Blake McRae: Hey, good afternoon. Thanks for taking my questions. Hey, Matt, maybe to start, you know, could you give us an update in terms of what you're seeing with the customer channel right now in terms of responsiveness to driving further penetration of you versus what I'll call them, Amazon-linked devices, and kind of couple that then with the product gross margin expectations as we're looking out over the course of 2024? You know, I know 8% is at the higher end of the range, but how are Over the next couple of quarters, how aggressive do you plan to be?
Scott Wallace Searle: Hey, good afternoon, thanks for taking my questions.
Matt: Matt maybe just start.
Matthew Blake McRae: Could you give us an update in terms of what youre seeing with the customer channel right now in terms of responsiveness to driving further penetration of you versus other I'll call them. The Amazon linked devices and kind of couple that then with the product gross margin expectations as we're looking out over the course of 2024.
Matthew Blake McRae: I know a percentage at the higher end of the range, but how are you thinking about that over the next couple of quarters, how aggressive do you plan to be.
Matthew Blake McRae: Yeah, great, great question. So, a couple of the channel dynamics that we're seeing to provide a little bit of color. Towards the end of last year, obviously, we had a very successful Q4 and engagement across several retailers, including some of the biggest big box retailers, and I think you'll see that continue, meaning the investment that we've placed into that relationship is being reciprocated in an investment in Arlo, not only from a shelf perspective, but also from a promotional calendar perspective.
Matt: Yes, great Great question, So a couple of the channel dynamics.
Matthew Blake McRae: But we're seeing that provide a little bit of color.
Matthew Blake McRae: Towards the end of last year, obviously, we had a very successful Q4 and engagement across <unk>.
Matthew Blake McRae: Several retailers, including some of the biggest big box retailers and I think youll see that continue meaning the investment that we placed into that relationship is seeing reciprocated in an investment in arlo not only from a from a shelf perspective, but also from a promotional calendar perspective, so that's exciting as we get in to the <unk>.
Matthew Blake McRae: So, that's exciting as we get in, you know, to the second half and look at driving, obviously, future service revenue from device sales. I would say that, also from a color and competition perspective, we are seeing some consolidation in the space. I think that's a benefit for us, you know; that's an opportunity for us to capture share as some of the smaller brands that start to struggle, especially brands that do not have a healthy service component so that they can dig a little deeper on hardware.
Matthew Blake McRae: Second half and look at driving obviously future service revenue from from device sales.
Matthew Blake McRae: I would say that also from a color on competition perspective, we are seeing some consolidation in the space I think that's a benefit for us that's an opportunity for us to capture share as some of the smaller brands start to struggle with specialty brands that do not have a healthy service component. So that they can dig a little deeper on hardware.
Matthew Blake McRae: So, and then to your point, and I think you were hinting at this in the question a little bit, there are several retailers, you know, one in particular and one that's in the middle of kind of strategizing their assortment, are weary about some of the larger competitors in the space and what they mean from a long-term perspective, but also from a customer, you know, customer ownership perspective, and I think, again, that plays So, I would say Arlo, I think we're in a really strong position.
Matthew Blake McRae: So and then to your point and I think you were hinting at this in the question a little bit there are several retailers one in particular in one.
Matthew Blake McRae: In the middle of kind of strategizing there their assortment are wary about some of the larger competitors in the space and what they mean from a long term perspective, but also from a customer.
Matthew Blake McRae: Customer ownership perspective, and I think again that plays into our favor. So I would say are low I think we're in a really strong position.
Matthew Blake McRae: We feel like the strategy that we played last year around the rebalancing of our pricing to lean in and lower the barrier of entry for our products really did pay dividends in the service business, our service gross margin, and our overall profitability as a company. So to the second part of your question, we're looking out now at a year that we believe, and to Kurt's answer to a previous question, looks a lot like 2023. You know, maybe the holiday period gets a little bit deeper, depending on what happens. Maybe it's a little bit better than that.
Matthew Blake McRae: We feel like the strategy that we played last year around the rebalancing of our pricing to lean in and lower the barrier of entry for our products really did pay dividend in the service business our service gross margin and our overall profitability of the company.
Matthew Blake McRae: So to the second part of your question. We're looking out now at a year that we believe into Curt answer on a previous question. It looks a lot like 2023.
Matthew Blake McRae: Maybe the holiday period gets a little bit deeper depending on what happens maybe it's a little bit better but on a whole were seeing this year start to play out very similar to last year and the good news is our strategy worked extraordinarily well last year.
Matthew Blake McRae: But on the whole, we're seeing this year start to play out very similarly to last year. And the good news is that our strategy worked extraordinarily well last year, and so we're going to replicate it this year.
Matthew Blake McRae: And so we're going to replicate this year Youre right. Our gross margin on hardware in Q1 was roughly 8% to a bit higher than the mid single digits that we had laid out I would tell you as we're looking for Q4 and given the benefit the clear benefit and demonstrable benefit we already had last year in both service revenue and overall.
Matthew Blake McRae: You're right; our gross margin on hardware in Q1 was roughly 8%. It's a bit higher than the mid-single digits that we had laid out. I would tell you, you know, as we're looking for Q4 and given the benefit, the clear benefit and demonstrable benefit we already had last year in both service revenue and overall profitability of the company, when you look at how service revenue actually, you know, applies to our overall financials, I think you could see us potentially go lower, right?
Matthew Blake McRae: Profitability of the company when you look at how service revenue actually applies to our overall financials I think you could see us potentially go lower right and that's something we're kind of planning through and trying to talk about on the call is maybe it's still single mid single digits maybe.
Matthew Blake McRae: And that's something we're kind of planning through and trying to talk about on the call is, you know, maybe it's still single, mid-single digits. Maybe it's somewhere between zero and mid-single digits if we think it would generate substantially more household formation, which turns into service revenue, and then, obviously, turns into shareholder value creation.
Matthew Blake McRae: Maybe it's somewhere between zero and mid single digits. If we think it would generate substantially more household formation, which turns into service revenue and then obviously turns into shareholder value creation. So it gives you hopefully some color we're going through some of that stuff right now, but the promotional calendar we have for the holiday is very strong.
Matthew Blake McRae: So that hopefully gives you some color. You know, we're going through some of that stuff right now. But the promotional calendar we have for the holiday is very strong, and if we think there's an opportunity to dig a little bit deeper and do the exact same trade we did last year for similar results, it's something we would do again.
Matthew Blake McRae: And if we think theres an opportunity to dig a little bit deeper and do the exact same trade. We did last year for similar result, it's something we would do again.
Matthew Blake McRae: Okay, great, very helpful. And Matt, if I could follow up, you know, Arlo Secure AI, looking at those currently unpaid accounts getting close to six million dollars, I wonder if you could update us on your thoughts in terms of modernization opportunities there and some of the adjacencies, be it with F&B, InsurTech, telehealth, and maybe as well how you're thinking about things from an inorganic perspective. The company is now starting to get into a regular position of generating positive free cash flow. Are your thoughts changing at all on that front?
Speaker Change: Okay, great very helpful and Matt if I could follow up.
Matthew Blake McRae: Arlo secure AI looking at those currently unpaid accounts getting close to $6 million I'm wondering if you could update us on your thoughts in terms of monetization opportunities there into some of the adjacencies be with F&B insure Tech telehealth and maybe.
Matthew Blake McRae: As well.
Matthew Blake McRae: How youre thinking about things from an inorganic perspective of the company now is starting to get into a regular position of generating positive free cash flow or your thoughts changing at all on that front. Thanks.
Matthew Blake McRae: Yeah, yeah, great questions again. So on the what we'll call active unsubscribed customer base, that continues to grow as well, which is great. Obviously, we look to them with promotional activity, and sometimes that's maybe upgrading somebody's device, maybe that's a promotion on the service itself, to bring them into the paid service tier over time, and that's something we're constantly looking at. I would tell you some of the roadmap items, including several of the features that are in Arlo Secure 5, which will launch towards the end of this year, are specifically geared towards some of the features that users are asking for to become a paid subscriber.
Matthew Blake McRae: Thanks. Yeah, yeah. Great questions again.
Matt: Yes, great questions again.
Matthew Blake McRae: So on the on the what we'll call active unsubscribed customer base that continues to grow as well, which is great. Obviously, we looked at them with promotional activity, sometimes that maybe upgrading somebody's device, maybe thats a promotion on service itself to bring them into the paid service tier overtime.
Matthew Blake McRae: Over time, and that's something we're constantly looking at I would tell you some of the roadmap items, including several of the features that are in Arlo secure five that will launch towards the end of this year are specifically geared towards some of the features that users are asking for it to become a paid subscribers. So we gear our roadmap based on survey data and listening to what.
Matthew Blake McRae: So we're focusing our roadmap based on survey data and listening to what unsubscribed active customers are actually telling us. I would also tell you that, and we talked about this on the previous call, we're going to test in-app advertising on the free tier as well. And that may open up an additional monetization opportunity where an unsubscribed active customer could still generate service revenue for the company.
Matthew Blake McRae: Unsubscribed active customers are actually telling us I would also tell you that and we've talked about this on the previous call.
Matthew Blake McRae: We're going to test.
Matthew Blake McRae: <unk> advertising on the free tier as well and that May open up an additional monetization opportunity, where an unsubscribe active customer could still generate.
Matthew Blake McRae: Service revenue for the company and Thats something were going to test as we get towards the end of this year and see how that applies to our 2025 strategy. So I think I think both of those are areas that we're excited about and you'll see more activity in the second half of this year.
Matthew Blake McRae: And that's something we're going to test as we get towards the end of this year and see how that applies to our 2025 strategy. So I think, I think both of those are areas that we're excited about. And you'll see more activity in the second half of this year. As we get into the capital allocation plan, which is the second question, you're right. Obviously, we're having some great success.
Matthew Blake McRae: As we get into the capital allocation plan, which is the second question.
Matthew Blake McRae: Youre right, obviously, we're having some great success, we're throwing off some cash.
Matthew Blake McRae: We're throwing off some cash. I think the market consolidation also lends itself to us looking at things beyond just the organic investment we're doing from an R&D perspective. Now, I would say, like I said on the call, the next 24 to 36 months, even though the market segment is maturing, there are new technologies being brought to bear, some work we've been doing over the last year that I'm extraordinarily excited about, what that means just from an organic investment in new technologies that can expand our markets. But again, put that aside, and come back to your question.
Matthew Blake McRae: I think the market consolidation also lends itself to us looking at things beyond just the organic investment we are doing from an R&D perspective, I would say like I said on the call.
Matthew Blake McRae: The next 24 to 36 months, even though the market segment is maturing there are new technologies being brought to bear some work we've been doing over the last year that I'm extraordinarily excited about.
Matthew Blake McRae: What that means just from an organic investment in new technologies.
Matthew Blake McRae: I can expand our market, but again put that aside and come back to your question I don't think Thats. The only thing we'll be looking at we are starting to look at some inorganic opportunities maybe thats new technologies, maybe thats a consolidation play that leans into some of the natural market dynamics.
Matthew Blake McRae: I don't think that's the only thing we'll be looking at. We are starting to look at some inorganic opportunities. Maybe that's new technologies. Maybe that's a consolidation play that leans into some of the natural market dynamics. We're exploring other things like buybacks and other things that might be inorganic and returns. These all may play a part in the capital allocation plan. It's under development.
Matthew Blake McRae: And we're exploring other things like buybacks and other things that might be inorganic and returns. These all may play a part in the <unk>.
Matthew Blake McRae: Capital allocation plan is under development, we're in active discussion with the board. So there's nothing I can communicate yet, but I think over the next.
Matthew Blake McRae: We're in active discussion with the board, so there's nothing I can communicate yet. But I think over the next several months, we're hoping to have a bit more information that we can share with investors and start to lay out how the capital allocation plan will play a key role in getting us to our long-range targets. Those long-range targets are something that drives us every day inside this company. How do we get to 10 million paid accounts?
Matthew Blake McRae: Several months, we're hoping to have a little bit.
Matthew Blake McRae: More information that we can share with investors start to lay out how the capital allocation plan will play a key role in getting us to our long range targets right and those long range targets are something that drive us everyday inside this company, how do we get to $10 million paid accounts, how do we get to $700 million in IRR and how do we drive.
Matthew Blake McRae: How do we get to $700 million in ARR? How do we drive profitability above 25% operating margin? That's something that we're all focused on, everybody in the company is bonused on, and we're all targeting. The capital allocation plan may play a key role in that as we go forward. That's something we'll talk more about, I think, in the coming months or quarters.
Matthew Blake McRae: Profitability above 25% operating margin. So that's something that we're all focused on everybody in the company as bonus Dawn and we're all targeting and so the capital allocation plan may play a key role in that as we go forward and it's something we'll talk more about I think in the coming months or quarters.
Speaker Change: Great. Thanks, so much.
Speaker Change: Yes Youre welcome.
Jacob Michael Stephan: Our next question comes from the line of Jacob Stephan with Lake Street Capital. Your line is now open.
Matthew Blake McRae: Our next question comes from the line of Jacob Stephanie with Lake Street Capital. Your line is now open.
Matthew Blake McRae: Hey guys, I appreciate you taking the time to answer the questions. I've been hopping between calls, so I'm sorry if this has already been asked, but I just want to follow up on the Arlo Secure 5 rollout and some of the monetization opportunities you talked about with your unpaid subscriber base. You know, the advertising kind of tier that you had been talking about, is that technology something that will be rolled out with Secure 5, or are you going to need to essentially kind of acquire that or develop that further before rolling that out? Yeah,
Jacob Michael Stephan: Hey, guys I appreciate you taking the questions.
Matthew Blake McRae: Between calls so I appreciate your I'm sorry, if this has already been asked but just wanted to follow up on kind of the arlo secure five rollout in some of the monetization opportunities you talked about with your your own paid subscriber base.
Matthew Blake McRae: The ads kind of tier that you had been previously talking about is that technology is something that will be rolled out with secure fiber or are you going to need to essentially kind of acquire that or develop that further before rolling that out yes.
Matthew Blake McRae: Yeah, yeah, good question. So Arlo Secure 5 is a rollout that includes all the new AI features and some of the other functionality that we discussed on the prior call. It also includes, by the way, a lot of refactoring, you know, I would say simplification of both language and user experience because we're starting to see ourselves move into the mass market, right? So some of the success you've seen at big-box retailers means our general population of users is going to broaden.
Speaker Change: Yes, yes. Good question, so artless secure five.
Matthew Blake McRae: A rollout.
Matthew Blake McRae: That includes all the new AI features and some of the other functionality that we discussed on the prior call. It also includes by the way a lot of re factoring.
Matthew Blake McRae: Simplification of both language end.
Matthew Blake McRae: User experience because we're starting to see ourselves move into the mass market right. So some of the success you've seen at big box retailers means our general population of users is going abroad, and that's exciting but it also means we need to take a fresh look at our user experience and make sure that support mechanisms are there simple plain English.
Matthew Blake McRae: And that's exciting, but it also means we need to take a fresh look at our user experience and make sure that support mechanisms are there, simple, plain English descriptions of key features are there, and the simplification and navigation are there. So it's twofold, Arlo Secure 5. One is simplification and broadening access to a wider population of users, and it's adding a lot of new technologies, including some of the, to me, some of the most exciting AI features you'll see in the security space for a long time.
Matthew Blake McRae: Descriptions of key features are there the simplification of navigation is there. So its two fold <unk> five one and simplification and broadening the access to a wider population of users and its adding.
Matthew Blake McRae: Lot of new technologies, including some of the to me that some of the most exciting AI features you'll see in the security space in a long time. So that's secure five now in parallel to that Theres. A couple of tests, we're going to be doing towards the end of the year to inform what our strategy will be based on the resulting data for what we want to do in 2025 and be able to build that into our annual operating.
Matthew Blake McRae: So that's Secure 5. Now, in parallel to that, there are a couple of tests we're going to be doing towards the end of the year to inform what our strategy will be based on the resulting data for what we want to do in 2025 and be able to build that into our annual operating plan. One of those tests is advertising. So it's related in that it'll run on top of Arlo Secure 5, but it's not technically part of that launch and rollout.
Matthew Blake McRae: Plan one of those task is advertising so it's related in that it will run on top of Arlo secure five but its not technically part of that launch and rollout. It's apparel all development that is focused on doing a test, allowing us to capture data as we go into next year's planning cycle to your question about development a lot of that has been.
Matthew Blake McRae: It's a parallel development that's focused on doing a test, allowing us to capture data as we go into next year's planning cycle. To your question about development, a lot of that is being developed in-house, but obviously there are a lot of third-party relationships with technology partners and industry partners that bring a lot of that capability from the back end to bear into the Arlo user experience, and this is an area that both Kurt and I and many of the executives here, back at Vizio and other companies we've been at, have had a lot of experience figuring out how to monetize a user experience even if it doesn't have a paid subscription attached to it.
Matthew Blake McRae: Developed in house.
Matthew Blake McRae: But obviously there are a lot of third party relationships.
Matthew Blake McRae: With technology partners and industry partners that bring a lot of that capability from the backend to bear into the Arlo user experience and this is an area that both Curt and I and many of the executives here packet vizio and other companies. We have been at have had a lot of experience figuring out how to monetize our user experience.
Matthew Blake McRae: Even if it doesn't have a paid subscription attached to it.
Matthew Blake McRae: Got it. That's really helpful. And then, just, I guess, to follow up on kind of that question with the unpaid users, maybe it would help if you could quantify kind of what the load on, I guess, your cost of goods would be or kind of what the load on, you know, running the kind of backend software for those unpaid users would be.
Speaker Change: Got it that's really helpful and then.
Matthew Blake McRae: Just I guess to follow up on kind of that question.
Matthew Blake McRae: With the unpaid users.
Matthew Blake McRae: Maybe it would help could you quantify kind of what the what the load on I.
Matthew Blake McRae: I guess.
Matthew Blake McRae: Your cost of goods would be or kind of what the load on.
Matthew Blake McRae: Running the kind of backend software for those on paid users.
Matthew Blake McRae: Yeah, we don't break it out, but I can tell you it's pretty low, and our unpaid users are really broken into two categories, right? There's what we used to call, and we still call, legacy users, and those are the users that were before we changed our business model to a much more subscription-oriented company, right? Now those users have some free storage and a couple services that are a bit more expensive. Now that user base is actually shrinking over time as more and more people, you know, subscribe as we go forward.
Speaker Change: Yes, we don't break it out but I can tell you it's pretty low.
Matthew Blake McRae: And our unpaid users are broken really into two categories right. There is what we used to call and we still call legacy users and those are the users that were before we changed our business model to a much more subscription oriented company right now those users have some free storage on a couple of services that are a bit more expensive now that use.
Matthew Blake McRae: Your base is actually shrinking over time as more and more subscribers.
Matthew Blake McRae: As we go forward and then there is the free users. After we made our business model change to really a subscription oriented business and those have a very low.
Matthew Blake McRae: And then there are the free users after we made our business model change to really a subscription-oriented business. And those have a very low, you know, cost basis from a cloud perspective and another, sorry, because there is no storage component. There's very little compute, and it's really just, you know, streaming live and doing some notifications off of raw motion events. So very, very efficient. That was part of our business model change.
Matthew Blake McRae: Cost basis from a cloud perspective, and other sorry, because there is no.
Matthew Blake McRae: Storage component there is very little compute and it's really just streaming live and doing some notifications off of raw emotion events. So very very efficient and that was part of our business model change now obviously, if we deploy additional features into that free tier in exchange for the AD monetization that could change, but it would be done in a way that's accretive to our business because of the monetization scheme that we.
Matthew Blake McRae: Now, obviously, if we deploy additional features into that free tier in exchange for ad monetization, that could change, but it would be done in a way that's accretive to our business because of the monetization scheme that we can deploy.
Matthew Blake McRae: We can deploy.
Matthew Blake McRae: Okay, I appreciate all the color here. Best of luck going forward, guys.
Speaker Change: Okay I appreciate all the color here best of luck going forward guys.
Speaker Change: Thank you.
Operator: There are no further questions at this time, so that concludes today's conference call.
Speaker Change: There are no further question at this time so that concludes today's conference call you may now disconnect.
Operator: Yes.