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 star 1 on your push button phone. I would now like to turn the conference over to Eric Fallon. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies' second quarter of 2020 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO, and Mr. Gordon Mattingly, 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 second quarter, along with guidance provided by Gordon. 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 relation website at investor.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 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. 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 second quarter 2020 earnings call. In today's call, Gordon and I will walk you through the major elements, including financial results for the quarter, paid account growth, new products, and a partner announcement. For the second quarter, we reported $66.6 million in revenue, well above the upper end of our guidance. Our non-GAAP operating expenses came in at $31.3 million, down $900,000 sequentially, and down more than $6.6 million year over year. This is substantially better than our goal of $33 to $34 million in operating expenses that we set when we restructured last year. Importantly, through diligent spend and working capital management, we maintained our substantial cash, cash equivalents, and short-term investments balance above $200 million. Arlo again set records this quarter for both registered accounts and paid account growth. Arlo ended the quarter with approximately 298,000 paid accounts, which is up more than 59% year over year. The in-quarter growth of 43,000 new paid accounts was also a record and up an impressive 72% sequentially. This performance resulted in our fourth consecutive quarter of record services revenue at $17 million, which was up 53% year over year. At the heart of this success is the transition to our new business model, which features a 90 day trial of Arlo Smart, our industry leading cloud storage and AI powered computer vision service. Once the free trial of Arlo Smart expires, we are seeing a 50% subscription attach rate, which is 10 times higher than the attach rate of our old business model. This transition to our new business model has clearly created an inflection point for Arlo. We expect further subscription momentum as our legacy products phase out of the channel and retail sales shift to new business model lineup between now and the end of the year. In our final step to phase out products with our old business model, Arlo recently launched the Essential Spotlight Security Camera, which completes our lineup of new products and addresses the fast-growing $100 price segment. This latest addition to our award-winning smart home security ecosystem offers a wide array of features, including high-definition video, two-way audio, integrated spotlight, color night vision, and six months of battery life. Essential can also connect directly to a Wi-Fi network without the optional smart hub, providing users greater flexibility. The Essential Spotlight Camera is now available for sale on Arlo.com and at our major retail partners with very positive early user and press reviews. Last quarter, we announced the full channel availability of the Arlo Pro3 floodlight camera, the first wire-free, battery-operated, integrated floodlight camera in the market. With floodlight cameras comprising up to 20% of the overall connected camera category, this product represents a significant opportunity for Arlo to capture share in a rapidly growing market. Garnering a 4.8 rating at Best Buy, the Pro3 Floodlight has been very well received with many positive reviews, including three Editor's Choice Awards from Digital Trends, PC Magazine, and CNET, which called it the best floodlight they have ever tested. Now turning to our business-to-business channel and software-as-a-service Arlo Smart Cloud offering. Our partnership with Verisure is proceeding as planned, with all in-quarter milestones achieved, And as mentioned last quarter, we are targeting wide rollout and accelerating growth in 2021. In July, we announced an agreement with Securitas Security Services USA, our first US Smart Cloud SaaS customer. Securitas will integrate Arlo Smart Cloud and our award-winning cameras into their platform for centralized remote monitoring of their commercial assets. In addition, our Smart Cloud AI-enabled security cameras including the Arlo Pro 3 and Arlo Go, will be used to make Securitas' remote guarding services even more efficient for their commercial clients. At a time when numerous buildings and assets are being left unmonitored due to COVID-19, Smart Cloud enables Securitas to monitor and take action on any potential incidents. We are excited to continue expanding our routes to market and to assist Securitas in delivering peace of mind to their customers. In summary, Arlo delivered strong results in Q2 launched a competitively priced camera into the fastest growing price segment, announced a new SaaS partner, and achieved the inflection point in our subscription business that will continue to accelerate through the balance of the year. These results were achieved despite the pandemic, creating challenges on both the supply chain side and go-to-market side of the business. Our employees showed an exemplary commitment to Arlo that helped us overcome these challenges and outperform our expectations for the quarter. I am extraordinarily proud of our execution, the results for the quarter, and the foundation that our team has built for future success. And now I would like to introduce Gordon Mattingly, who recently took over as Chief Financial Officer for Arlo, and also welcome him to his first call. Gordon will provide more insight into our financial performance, operational details, and outlook for Q3.