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 turn the conference over to Eric Bailin. Please go ahead, sir.

Thank you. Good afternoon and welcome to Arlo Technologies' third quarter of 2020. Financial Results Conference Call. Joining us from the company are Mr. Matthew McCray, 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 third 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 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, post 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 COVID-19 pandemic on the 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 today 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 the call. 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.

Thank you, Eric, and thank you, everyone, for joining us today on Arlo's third 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, and new product announcements. Arlo's strong third quarter results serve as further evidence of the improvement we have made in the business. Accelerating paid service accounts, gross margin expansion across both products and services, a strong contribution from Beresher, and our continued operating discipline combine to produce a significant improvement in profitability and further demonstrate the transformational impact of our business model transition. We delivered $110.2 million in revenue, which is up over 65% sequentially, well above the upper end of our guidance and a return to year-over-year growth. Our non-GAAP gross margin improved by 11 percentage points sequentially as our product gross margin recovered and our service gross margin continued its upward trajectory. Non-GAAP operating expenses came in at $31.2 million, down almost $5 million year-over-year, and reflected our sustained focus on operational efficiency. These results demonstrate the leverage we can generate in the business as we shrank our non-GAAP operating loss by more than $16 million year-over-year, and that, in turn, helped us close the quarter with a very healthy cash, cash equivalents, and short-term investments balance of more than $193 million. Arlo once again set a record by adding 58,000 paid accounts in Q3 and ended the quarter with approximately 356,000 paid accounts, an increase of 69% year over year. This resulted in our fifth consecutive quarter of record services revenue at $19 million, which is up 61% year over year. The driving force behind the success is our new business model, which features a 90-day free trial of Arlo Smart, our best-in-class AI-powered motion identification and security service. Once the free trial of Arlo Smart expires, we have consistently seen a 50% subscription conversion rate to the paid service, which is 10 times higher than the conversion rate of our old business model. Last quarter, we launched the Essential Spotlight Camera, which completed our phase out of old business model products. So beginning in 2021, virtually all of our retail product sales will be under the new business model. Now we'd like to walk you through our recent product announcements that substantially expanded our new essential product family. The first is Essential XL Spotlight, which shares all of the features from our recently announced Essential Spotlight, but lengthens battery life to an incredible 12 months. The second is Essential, a simplified version of the product for those who do not need the spotlight or color night vision functionality. And this product will be available exclusively from Walmart this holiday season for $99.99. And finally, we announced the Essential Wire-Free Doorbell, which brings all of the award-winning features from our wired video doorbell to a new battery-operated design that substantially expands our addressable market. The new wire-free doorbell is available for pre-order and will ship out across our channels later this year. Arlo also announced upgraded versions of our Pro and Ultra product families in the quarter. The Ultra 2 and Pro 4 wire-free spotlight cameras carry all of the great features of our award-winning Ultra and Pro 3 with improved performance. The Ultra 2 is available for pre-order at Amazon, Arlo.com, and Best Buy, and is available for purchase now at Costco. The Pro 4 camera has already won the Editor's Choice Award from Review.com and is available now at Arlo.com and Best Buy. All of these newly announced products feature our new business model with a three-month free trial joining our award-winning lineup, including the Pro 3 Floodlight, which continues to garner critical acclaim from industry reviewers. In Q3, Android Central named our floodlight among the best outdoor security cameras of 2020, and Tech Ares called it the best wireless floodlight camera they've used yet. In summary, Arlo's Q3 results provide a window for where the business is heading as we continue our transition to the new business model. The team continued to execute at a high level as we answered the challenges from the pandemic and drove innovation while still managing costs. This performance has provided a compelling set of data points that speak volumes about the long-term prospects and trajectory of the business. And now I would like to hand the call over to Gordon who will provide more insight into our financial performance, operational details, and outlook for Q4.