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 Bilen. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies' third quarter of 2021 financial results conference call. Joining us for the company are Mr. Matthew McCrae, 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 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 our potential future business, results of operations and financial condition, including descriptions of our revenue, gross margins, operating margins, tax rates, expenses, cash outlook, guidance for the fourth quarter and full year 2021, transition to a services-first business model, the commercial launch and momentum of new products and services, strategic objectives and initiatives, market expansion and future growth, our partnership with Verisure, continued new product and service differentiation, supply chain challenges, and the impact of COVID-19 pandemic on our business, operating results, and financial condition. Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC. including the most recent 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.

Thank you, Eric. And thank you, everyone, for joining us today on Arlo's third quarter 2021 earnings call. Once again, the Arlo team outperformed expectations across all metrics as we continue to navigate the unprecedented supply chain challenges so many companies are facing around the world. Total revenue was up 1% year over year. Service revenue was up 42% year over year. and total paid accounts were up 146% year-over-year. And despite the additional costs driven by the pandemic supply chain disruptions, non-GAAP gross profit dollars were up over 10% year-over-year, comfortably over-indexing top line growth more than tenfold. Digging a little deeper into our services business to provide some additional clarity, we reported our annualized recurring revenue, or ARR, as $80 million in Q3, growing 103% year over year. Driven by our new business model, our ARR is the fastest growing and highest margin portion of our total services revenue, and represents the annualized recurring service revenue we derive from our paid accounts. ARR excludes prepaid service revenue, such as legacy carbon revenue from our old business model, and NRE service revenue from strategic partners. Looking ahead to Q4, I see our team's great execution continuing in the face of what may be the peak of supply chain headwinds. Arlo is raising guidance for Q4, raising guidance for full year, and raising guidance for our year-end cash balance. In addition, our annualized recurring revenue is expected to grow by more than 100% again in Q4, and we plan to provide a more fulsome report on this topic on our fourth quarter earnings call. Returning to Q3 results, revenue came in above the top end of our guidance at $111.1 million, and Q3 marked the ninth consecutive quarter of record service revenue at $27 million. We added 182,000 paid accounts a record high, which represents an increase of 25% sequentially and 214% year over year. To put that account growth into context, under our legacy business model, it took us more than two years to add the same number of paid accounts we just added in the third quarter alone. This continued acceleration of our services business, which accounted for 64% of our non-GAAP gross profit dollars in the quarter, helped more than offset over $3 million of incremental air freight expenditure compared to a year ago, pushing total non-GAAP gross profit up by $2.4 million and up more than 10% year over year. Arlo outperformed the high end of our guidance for non-GAAP net loss per share, which came in at a loss of 8 cents, And we have lowered our non-GAAP operating loss by an impressive 76% year over year in the first three quarters, down to $14.7 million in 2021. Our cash, cash equivalents, and short-term investments landed at a healthy balance of $166.1 million. And with our current cash position and financial trajectory, we anticipate reaching profitability without the need to raise additional capital. Our transformation to a services company powered these impressive Q3 results, but is also propelling us towards our long range targets. On October 18th, we reached more than 900,000 paid accounts and believe we are positioned to achieve our one million paid account goal significantly ahead of our year end earnings call. And as previously mentioned, service revenue in Q3 was $27 million giving us a clear path to exceed our projection of $100 million of service revenue for the year. Our new Arlo Secure service plans are at the core of this incredible performance. Arlo Secure features computer vision-based object detection, AI-based audio detection, interactive notifications, animated event preview, secure cloud storage of video up to 2K resolution, and 24-7 premium support. Arlo Secure Plus includes all of the features from Arlo Secure, increases the resolution of cloud video storage to 4K, and includes Arlo's new 24-7 emergency response, which provides the ability to directly request a fire, police, or medical responder and speak with a security expert in the event of an emergency. Arlo Secure Plus is $14.99 per month and further extends Arlo's technological leadership while providing significant value to our users. As a reminder, under our new business model, where we include a free 90-day trial of Arlo Secure+, we see a consistent 50% subscription conversion rate upon expiration of the initial trial period. As we follow cohorts over a six-month period, we see the attach rate to our subscription services grow towards 65%. Our industry-leading technology continues to outclass the competition and garner critical acclaim from expert publications. Since our last earnings call in August, our products have been recognized with three Editor's Choice Awards, multiple Design Awards, and features in Best of 2021 lists across the industry. CNET commented on Arlo Pro 4, quote-unquote, in a point-to-point comparison, resolution, performance, battery life, and so on. It just consistently outshines the competition. This glowing reception is a testament to our commitment to innovation, which continues with the most recent product announcement. We just launched the new Arlo Go 2 smart security camera exclusively with Verizon. Arlo Go 2 is a LTE Wi-Fi and GPS-enabled device that leverages our deep intellectual property in RF, and low-power design to deliver a camera that provides uninterrupted security in environments with no power or internet connectivity, such as construction sites, vacation homes, boats, RVs, vehicle fleets, or large properties. Arlo Go 2 is now available nationwide through Verizon, with additional carrier partners coming next year. 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 the fourth quarter.