Arlo Technologies, Inc.

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 the star 1 on your push-button phone. I would 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 of 2020 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO, and Ms. Christine Gourgeon, 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 provided by Christine. We'll then have time for any questions. If you have not received a copy of today's press release, please visit Arlo's Investor Relations website at www.arlo.com. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross margins, operating margins, tax rates, expenses, future cash outlook, our partnership with Verisure, continued new product and service differentiation, future business outlook, and the impact of the COVID-19 pandemic on our business and operations. Actual results or trends could differ materially from those contemplated by these forward-looking statements. 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 mentioned on this call. A reconciliation of the non-GAAP to 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.

Thank you, Eric, and thank you, everyone, for joining us today on Arlo's first quarter 2020 earnings call. Before I discuss the quarter, I want to take a moment to address the ongoing impact of the pandemic. On behalf of the entire Arlo team, I offer my sincere gratitude to the frontline healthcare workers and first responders that have met this virus head on. To support them, Arlo donated thousands of N95 masks and is working with caregivers to use Arlo cameras for remote patient check-ins and to reduce the risk of transmission and reduce the PPE consumption at those facilities. And as the second order effects of the pandemic impacted people's ability to feed their families, we entered a partnership with Second Harvest in Silicon Valley in Orange County to provide meals with each purchase of an UltraSystem, Pro3 system, or video doorbell. And this has resulted in over 30,000 meals donated to feed those in need. I would like to thank Arlo employees for their compassion and their commitment to our business as we delivered a solid quarter. Our transition to work from home went smoothly and the team is operating at nearly 100% capacity. We have worked through the supply chain disruptions brought on by COVID-19 in the first quarter and feel our ability to deliver to demand is now largely intact. However, there remains considerable disruption and uncertainty across the channels that we sell through. Retail store closures, operational changes, and a focus on essential items have made it difficult for us to serve the Arlo customer. Considering the uncertain duration of this disruption, we have decided to withdraw our guidance for the full year. Given our near-term visibility and considering a range of retail channel trajectories, we are providing guidance for the second quarter. Point of sale data shows demand for Arlo products in the quarter at our previously expected levels. And if it were not for the many of our retail partners moving to a much leaner inventory model, our Q2 revenue would be materially higher. As channels return to a more normal operational footprint and inventory model, we expect this destocking to reverse in future quarters and Arlo's shipments to improve. Our Q2 quarter-to-date visibility is also showing a strong performance on subscriptions. Christine will discuss our outlook in more detail after she reviews the quarter's financials. I will now discuss our results and accomplishments from a recent quarter. Christine and I will walk you through the major elements, including financial results for the quarter, paid subscriber growth, new products, and a partner announcement. A couple of highlights from the quarter. In Q1, we reported $65.5 million in revenue, just above the midpoint of our guidance for the quarter, and up 13% year over year. As I mentioned, the team did an outstanding job delivering a solid quarter, given the unprecedented disruption across the business. While we continue to invest strategically, we remain extremely dedicated to refining our spend in the business, and I'm pleased to share that we again lowered operating expenses in Q1, down $3.8 million sequentially, and down more than $6.4 million year over year. We will continue this focus and discipline as we move forward. We have exciting news in regard to our subscription business and the success of our new business model. which is the free trial of Arlo Smart that comes with a new camera, video doorbell, or floodlight purchase. Arlo continues to attract new customers to our platform with about 230,000 added in Q1 to reach a total of 4.25 million registered accounts, up 36% year over year. We ended the quarter with approximately 255,000 paid accounts, which is up more than 57% year over year. The in-quarter growth of 25,000 new paid accounts was the most in our history and up 32% sequentially. As a result, services revenue was $14.7 million in Q1 for a year-over-year growth of 31% and a record for Arlo for the third consecutive quarter. And for the first time ever, our revenue for paid accounts surpassed our prepaid service revenue, an important inflection point for the business. The driving factor behind the success is our new business model, which features a limited 90-day trial of Arlo Smart, our industry-leading cloud storage and computer vision service. The first quarter of 2020 was the first time we had a material number of trials expire, and our subscription growth provides an early view into our future. Given the POS trends I mentioned earlier, we can expect to see momentum strengthen in Q2. While subscription conversion rates on our legacy business model hovered around 5%, early data indicates that the estimated subscription conversion rates for the new business model is around 50%, 5-0, and we're expecting a substantially lower churn rate. This order of magnitude increase in subscription attach rates will transform the business as Arlo continues to end-of-life legacy products that include free storage and introduces new products that incorporate the new business model. Upcoming product launches will complete our phase-out of the legacy products and channel sell-through should be nearly complete by year's end. Let's move on to those products. Arlo's new Pro3 floodlight camera is the first wire-free integrated floodlight camera on the market and is now on sale across our channels. It combines all of the award-winning features of our wire-free 2K Pro3 camera and a powerful 3,000-lumen floodlight housed in a modern, compact design that gives you the freedom to install it anywhere. Floodlight cameras represent up to 20% of the overall connected camera category and are growing faster than the general market. Our new offering represents a significant growth opportunity for Arlo. Within 90 days, Arlo also plans to begin production of a new camera that completes the refresh cycle of our Good, Better, Best core lineup and will address the fast-growing $100 price segment. Both this upcoming camera and the Arlo Pro 3 Floodlight include our new business model to further accelerate subscriptions. They join our existing Ultra, Pro 3, and Video Doorbell, which continue to win Best of and Editor's Choice Awards, among other accolades. Our business-to-business channel and software as a service, Arlo's Smart Cloud offering, continue to make progress as we diversify our business beyond retail and e-commerce. The partnership with Verisher is proceeding on schedule as we develop and integrate the solutions ahead of a wide rollout and growth targeted for 2021, as we discussed last quarter. And we're excited to share a new partnership with Karchner Homes, which will integrate Arlo's video doorbell into homes built over the next 12 months. providing home buyers with a premier solution in smart entry technology. Focused on building quality homes for families while offering convenience and value, Karstner Homes chose the Arlo Video Doorbell for its design, quality, features, and compatibility with both Google Assistant and Amazon Alexa Voice Assistant, providing homeowners with the connected home ecosystem of their choice, a benefit unique to Arlo's products. Homeowners will also get a free three-month trial of Arlo Smart. Before I turn the call over, I would like to thank Christine for her contributions to Arlo over the past two years in her role as CFO. As we recently announced, Christie will retire on June 15, 2020, and I wish her well. She was instrumental in the creation of Arlo as a separate entity and building strong teams inside the company. As a testament to Christine's team-building acumen, I am pleased to welcome Gordon Mattingly, the current SVP of Finance, who will take over as Arlo's new CFO upon Christine's retirement. Gordon is well-suited to succeed her, having previously served in various senior leadership roles in finance and operations at Arlo and Netgear over the past two decades. I'm excited to work with Gordon as Arlo hits this inflection point, and I'm confident he will be an excellent leader as we drive towards growth and profitability. Now I'll turn the call over to Christine for her commentary.