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 would like to ask 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 Biling. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to ARLER Technology's 2022 Third Quarter Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO, and Mr. Kurt Binder, recently appointed 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 for the fourth quarter and full year provided by Kurt. We'll then have time for any questions. If you've 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, operating results, and financial condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, tax rates, expenses, cash outlook, guidance for the fourth quarter and full year of 2022, 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, the effect of our brand awareness campaign on future growth, partnerships with various market leaders, continued new product and service differentiation, supply chain challenges, transportation costs, 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 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 at 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 2022 Third Quarter Earnings Call. Amid the rapidly shifting economic environment, the team executed well to produce a solid quarter of financial results in Q3. Total revenue was within guidance at $128 million, up 7.7% sequentially, and up more than 15% year over year. And non-GAAP gross profit reached a record $38 million, up over $13 million from a year ago. This resulted in a non-GAAP gross margin of nearly 30% in the quarter. Our growing consumer SaaS business continues to be a key driver of our results. Total paid accounts were up 91% year over year as we added 195,000 paid accounts in Q3. Service revenue reached $35.4 million, which is up 31% year over year, and our non-GAAP service gross margin rose to 66.7%. While we were pleased with our execution against a challenging supply picture, near the end of Q3, we started to see a shift in consumer behavior where broad-based inflationary pressures coupled with the threat of recession are dampening consumer demand industry-wide. With a weaker demand outlook, our retail partners are moving to increase promotions and lower inventory. In consideration of this, we took immediate action to adjust our strategy and match our operational footprint to this new outlook for Q4 in 2023. First, we decided to pause our branding campaign. As we discussed, the initial awareness spend was a test implemented to measure the paid account uplift over our baseline subscriber run rate. However, despite creating nearly 1 billion impressions and a promising lift in consideration in the first six weeks, the volatility of the baseline in this market makes it difficult to effectively measure and evaluate the efficacy and ROI of the spend. So this spend is paused indefinitely until we see the market return to a more positive and stable trajectory. Second, we initiated a review of expenditures across the company to identify areas of further optimization of our business. We have well-defined plans to lower run rate expenses in various areas of OPEX to ensure we are structured to maintain our most important levers of top-line growth and achieve our long-range plan in the most efficient and disciplined manner. As these industry headwinds form, we also expect overall component supply will increase, giving us more leverage over supply chain pricing and allowing us to further utilize fee freight in the coming year to lower costs of goods sold. Our goal is to proactively attack these opportunities to ensure they positively impact our business as soon as possible. We are acting prudently and decisively to preserve capital during these headwinds and will continue to adjust our operations as we deem necessary in the face of shifting data and consumer sentiment. Despite the softening in consumer demand and the pause of our awareness campaign test, Arlo remains on track to achieve the long-range plan targets we shared in March of this year. In fact, the recent shift in the economic environment proves out how important it is for Arlo to continue diversifying our routes to market with enterprise partnerships to reach incremental households as we shared in our long-range plan. Verisure has installed Arlo services in more than 320,000 households through their direct channel in the last 12 months. Calix continues to ramp through their broadband service provider partners, and we continue to see success with Arlo Go 2 with partners such as T-Mobile, Verizon, U.S. Cellular, Cellcom, and Bell Canada. We will continue to pursue these strategic partnerships as we make progress in diversifying our routes to market and creating predictable revenue streams. Arlo's focus on innovation and new product introduction rounds out the last focus area of our long-range plan. In October, we launched Arlo Safe, our new mobile application and service that provides individuals and families safety and security on the go. This represents a major expansion of our addressable market as Arlo has moved from protecting a specific location with hardware devices and services to protecting people no matter where they are with a cloud-connected app. Arlo Safe has numerous innovations, including a check-in mode for family members and direct dispatch of first responders to you or your remote family member. Arlo Safe is available for download now in the Apple and Google App Stores, and a two-button service bundle is available now at Best Buy. Individual subscriptions are $4.99 per month. A family subscription is $9.99 per month. And we rolled out a new safe and secure plan, which combines the features of our Arlo Secure service for home security with the Arlo Safe family service for $19.99 per month. In addition to Arlo Safe, I am pleased to announce two major product launches for our core Arlo Secure platform. The first is our innovative security system with the world's first multi-sensor and utilizing SecureLink, our new two-way encrypted long-range wireless protocol. This brings full sensor-based security and professional monitoring to the Arlo ecosystem. The modular hub includes battery backup, cellular backup, direct dispatch buttons, an integrated motion sensor, a microphone for smoke and carbon monoxide alarm listening, and an NFC reader. And our incredible multi-sensor combines a door sensor, window sensor, tilt sensor, motion sensor, water leak sensor, ambient light sensor, temperature sensor, tamper sensor, and a smoke and carbon monoxide listener into one small form factor. This brings significant advantages throughout our supply chain to our channel partners and to the end user experience. Coupled with these groundbreaking hardware components, we launched our new 1999 safe and secure plan, as mentioned, which includes 24-7 professional monitoring and cellular backup service. The second product announcement is the new Arlo Pro 5S smart security camera. The Pro 5S marks a major advancement in the industry and integrates with our new security system to provide professional-level features. It is the world's first tri-band camera with dual-band Wi-Fi for maximum performance and Arlo's SecureLink, which provides new power modes for extended battery life, increased robustness in challenging RF environments, and continuous operation during power and Internet outages by leveraging the battery and cellular backup functionality of our security hub. This groundbreaking functionality creates what we believe is the world's most advanced and reliable security system. Both the security system and Pro 5S are available for pre-order and will be shipping through channels in early December. Our new channels and new products expand our addressable market and provide significant new avenues to expand our subscriber base and ARPU. I am delighted to announce that Arlo now has more than 1.7 million total paid accounts, well on our way to our 5 million target. and our annualized recurring revenue, or ARR, continue to grow at a rapid pace, exiting Q3 at $125 million, up 56% year over year, and marching towards our $300 million target. And now, I would like to introduce Kurt Binder, who recently took over as Chief Financial Officer for Arlo, and also welcome him to his first call. Kurt will provide more insight into our financial performance operational details and outlook for the fourth quarter and full year.