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spk_0: 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 one on your push button some i would now like term the conference over to eric pilot please go ahead sir
spk_1: regular you operator good afternoon and welcome to our own technologies for quarter and four year twenty twenty two financial rewards conference call during a from the company or mr mackey mcrae ceo mr kurt bender of the format of the call will start with an introduction in a your in the business provided by matt followed by review of the financials for the fourth quarter and four year belonged guidance for the first quarter employer provided by kurt will don't have time for any questions but you're not receive a copy of today's really please visit our with investor relations website at investor to arlo doctrine he boy begin the forty mark read by you but today's carpet call change for looking statements for looking statements include statements regarding our potential future business operating results and financial condition including descriptions of our revenue gross margin operating margin
spk_2: earnings per share tax rates expensive cash outlook guidance for the first quarter and for your twenty twenty three transition to a service first business model the commercial launch and momentum of new products and services
spk_1: strategic objectives and initiative market expansion and future growth the effect of our brand awareness campaign on future growth partnerships with various market leaders continue new product and service differentiation the by june challenges transportation costs and the impact of the coven eighteen pandemic on our business operating results and financial condition actual results or terms could differ materially from note contemplated by the for looking statements more information please refer to the risk factors disgusting hours periodic problems with the fcc including the most recent and report on formed nk and quarterly report on for junkie
spk_2: and he for looking statements remake on it's call are based on assumptions as of today and arlo undertake no obligation to update the statement as a result of new information or future events in addition several nanya financial measures will be discussed on this call
spk_1: a reconciliation of the gap to non got measures can be found in today's press sleeps on our investigations website at this time i would now like in turn the color but the map
spk_2: thank you eric a thank you everyone for joining us today on our lives fourth quarter and four year twenty twenty two earnings call
spk_3: the fight softening consumer demand and titan retail inventory levels are low delivered a solid fourth quarter with both revenue and non gaap net loss per share above the high end of our guide and revenue was one hundred and eighteen point five million dollars which was down year over year but non gaap gross profit rose two percent year over year or strong case of subscriber growth continued with arlo adding over one hundred and eighty nine thousand paid accounts in the quarter the field our annual recurring revenue growth which was up fifty three percent year over year to one hundred and thirty eight million dollars and non gas service gross margin reached seventy percent both records for arlo looking across twenty twenty two you see the results of a cohesive team delivering stellar execution i will produce total revenue for the full year of four hundred ninety point four million dollars or growth of thirteen percent year over year and within the range of the guidance we provided at our analysts day a year ago our service revenue was up more than thirty percent to one hundred thirty six point five million dollars while our service costs were up less than ten percent a living the leverage that drove a seven percentage point increase in service gross margin to sixty seven percent and if you remove are discretionary marketing stand are delivered for orders of non gaap operating profit in twenty twenty two and i'm thrilled to announce that are little surpass two million paid accounts next week more than doubling are subscriber base over the last five quarters this is another massive milestone for the company and proved that disciplined him even when facing external headwinds can produce impactful result the fight that impact of full value of our services business is not widely understood to be clear when looking at total service revenue and art annual recurring revenue arlo service business is growing at roughly fifty percent year over year has seventy percent of gross margins
spk_2: and we expect the next twelve months of service revenue to be nearly two hundred million dollars let me repeat that arlo service business is growing at roughly fifty percent year over year have seventy percent gross margins and should grow forty five percent plus to reach nearly two hundred million
spk_1: dollars and twenty twenty three
spk_3: these numbers illustrate the current valuation dislocation an immense upside and arlo driven by our services business is expected to cross over to non gaap profitability into to have this year and to reach full year non gaap operating margin of nearly five percent for twenty twenty three these metrics or substantially ahead of expectation and further validate the power of our those services first transformation to generate upstanding shareholder value from a technology perspective arlo continues to win on innovation and experience arla was recognized as quote unquote the apple a smart cameras by p three and that quote unquote connected home company of the year by the i owed he breakthrough awards are cameras won numerous awards and twenty two on a to including a mention in time magazine's quote unquote best inventions of twenty twenty two and have already one that's the twenty twenty three awards from men's health pack tech high review dot com digital trends and mobo awards from seen it in a smart camera and doorbell categories i'll also expanded are offering to include a powerful security system with twenty four seven professional monitoring petering a truly innovative all in one censored that provide significant advantages for users and channel partners this allows arlo to directly address the broader global home security market which is roughly fifty billion dollars and will great and nearly eighty billion dollars by the end of twenty twenty five
spk_2: there are more than twenty million households to the united states alone that a stuck on old security systems with antiquated technology from traditional providers are no now have a full security solution to directly replace that functionality significantly upgrade the capabilities and substantially improve the user experience we are rolling out the arlo security system across a retail and direct channels now and will be leveraging partnerships to drive additional awareness and distribution
spk_3: in addition to the security system launch our report we analyzed the latest market data supply chain information in consumer behavior in our existing channel we believe a more aggressive customer acquisition strategy coupled with our best and class service metrics can drive additional shareholder value as we look to accelerate paid account and twenty twenty three
spk_2: are will focus on lowering the barrier of entry into our ecosystem by bringing down and initial purchase prices and exploring new sales model at the same time are those upgrading our service peers introducing new anal service plan and raising subscription service prices
spk_3: and further drive this effort today we announced a strategic partnership with citizens bank to provide user financing for purchases of our solution
spk_1: the citizens pay platform will enable arlo to bundle hardware and service into a single low monthly price opening a path to directly address those twenty plus million traditional security household with a more innovative and cost effective solution
spk_3: the platform is used by companies such as apple and microsoft to create compelling offers with low barriers of entry across both direct and retail channels
spk_2: our looks to leverage that unique failed model and partnership to acquire incremental paid accounts in new market segments where users preferred not to pay for the system upfront
spk_3: the first offers will roll out in the second half of this year
spk_2: as you look to our twenty twenty three guidance you will see a rebalancing of our was pricing model that will accelerate growth increased service revenue and allow arlo to address a wider market segment than ever before as we trade on hardware revenue and hardware margin for incremental new paid accounts and fire service margin and due to the scale of our services business it will drive demonstrably greater profit to our little as a whole
spk_3: at this time i will him a collared shirt who provide more you'd buy into our financial performance operational details and outlook for the first quarter and full year
spk_4: thank that and thank you everyone for joining us today the madman june two thousand and twenty two was a transformer year barlow with our services first strategy leading to continually improving performance and our service been we have not only feet and system pay to tell addition but continued best in class subscriber retention and margin expansion now i would go by sharing some financial details on to four mb twenty twenty two for you revenue for the fourth quarter came in above the high end of our guidance range at one hundred and eighteen point five million dollars but down a percent sequentially and seventeen percent year over year
spk_3: as mentioned last quarter and consistent with commentary heard across the broader consumer retail market we experienced softening demand in a second half of two three which continued into the fourth quarter
spk_2: this trend coupled with certain retailers tightening their inventory level can be attributed to the revenue decline we experienced to for and we expect these pressures to continue into early two thousand and twenty three revenue for the four year twenty twenty two was four hundred and nine point or me in dollars up nearly thirteen percent year over year and within our original annual guidance rings
spk_3: we were pleased that are channel diversification and a are our growth demonstrated resilience to deliver revenue within our gardens range our strategic shift to a services first operating model was instrumental in driving our year and a are are to one hundred and thirty seven point eight million dollars up fifty three percent year over year and thereby providing greater predictability and visibility into our ability to deliver near term revenue
spk_5: and profitability target
spk_2: our service revenue for to for was another record at thirty eight point three million dollars an increase of nine point nine million dollars or thirty five percent year over year and an increase of two point nine million dollars or eight percent quarter over quarter driven by the addition of one hundred
spk_6: and eighty nine thousand paid account in the quarter
spk_4: our service revenue for the four year twenty twenty two was one hundred and thirty six point five million dollars an increase of thirty three million dollars or thirty two percent year over year driven by the addition of seven hundred and ninety five thousand paid accounts in the year and a robust install base of one point nine million subscribers at the year end
spk_3: lol services revenue accounted for only twenty percent of our twenty twenty two revenue it represented sixty seven percent of our total gross profit product revenue for to for would eighty point two million dollars which would down fourteen percent sequentially and thirty percent year over year
spk_4: our product revenue for the four year twenty twenty two was three hundred and fifty three point nine million dollars an increase of twenty two point three million dollars or seven percent year by year our twenty twenty two year over year product revenue growth was driven by the total four point five million cameras shipped worldwide with forty five percent of our revenue coming from our international customers
spk_3: within our globally diverse customer base we experience solid group for the full year from our strategic relationship with very short and a meal
spk_4: with revenue up forty six percent year over year
spk_3: our ability to develop such a strong and collaborative relationship with their sure has proven to be a great intangible for arlo
spk_4: from this point on my discussion points will focus on non job numbers the reconciliation from gap to non get figures is detailed and our earnings release distributor earlier today our non gaap gross profit for the fourth quarter was thirty three point two million dollars up slightly year over year
spk_2: this resulted in non gap gross margin of twenty eight percent of five hundred basis points from twenty three percent in two for twenty twenty one
spk_4: are non gap gross profit for the four year twenty points two was one hundred and forty point nine million dollars up twenty eight point nine million dollars or twenty six percent year over year
spk_3: this resulted in a non gaap gross margin of twenty nine percent up three hundred basis points from twenty six percent in two thousand and twenty one the twenty eight point nine million dollar year over year increase and non gaap gross profit was attributable to the growth and our services business the improvement in non gaap service gross profit was driven by growth in our a are our and the modernization of our install base of paid subscribers coupled with cost optimization non gaap service gross margin for the full year was sixty seven percent significantly up from sixty percent in twenty twenty one nine gap product gross margin for the four year was fourteen percent and consistent with fifteen percent product gross margin and twenty twenty one we are proud to say that dorian twenty twenty two we delivered four consecutive quarters of margie growth in our services didn't total non gaap operating expenses for the fourth quarter were thirty seven point one million dollars down five point two million dollars or twelve percent sequentially and up seven point nine million dollars or twenty seven percent year over year
spk_6: the non gaap operating expenses for the fourth quarter were in line with expectations and reflect the coffee read initiative implemented into for
spk_4: total non gaap operating expenses or the four year twenty twenty two were one hundred and forty six point nine million dollars up twenty three point eight million dollars or nineteen percent year over year the increase in total non gaap operating expenses year of year which princely driven by marking expand as we executed on the initial phase of our brand awareness campaign and which we invested a total of fifteen point six million dollars during the year as indicated last quarter we are causing the campaign until visibility into the current economic environment is clear our total non gaap operating expenses excluding me marketing about that were relatively consistent with the prior year period
spk_3: our headcount at the end of two for was approximately three hundred and forty employees which represents a decrease from about three hundred and sixty team members at the end of two three and three hundred and fifty ti members in the prior year end
spk_4: in shoot for we posted a non gaap net loss of three point six million dollars with would have been non gaap net income of one point six million dollars when excluding the brand awareness ben
spk_2: are non gaap net loss trend wait to a net loss per diluted share of for said much better than our to for guidance of a net loss per diluted share of ninth them
spk_4: for the four year twenty twenty two we recorded a non gaap net worth of five point nine million dollars which would have been non gaap net income of nine point eight million dollars when excluding the brand awareness then additionally we would have been profitable on a non gap basis
spk_3: each quarter of twenty twenty two if we exclude the brand awareness to spend
spk_2: our non gaap net loss friendly to a network per diluted share of seven said much better than our for you're gonna have a net loss per diluted share of twelve them and a remarkable improvement year over year
spk_3: the improvement in our non gaap net loss were driven by a combination of revenue growth and gross margin expansion coupled with a different approach to cost management you can expect up to be delivered and disciplined with managing operating expenses in line with revenue growth and our customer centric are pretty model
spk_2: a for we execute on various initiatives to reduce operating expenses and areas such as headcount office leases and outside services
spk_3: these initiative have proven to be prudent and affected considering the uncertain economic climate but more so in a line in our organizational structure with the services first strategy as we drive revenue and profitability through paid subscribers decision and supplemental revenue service opportunities we're going or balance sheet and liquidity position we ended a quarter with one hundred and thirteen point seven million dollars and available cash cash equivalent and short term investment this talent with down eleven point five million dollars sequentially and sixty two million dollars year year what is well above the high end of our got his range providing last quarter
spk_6: the overall reduction in available cassie the triple a to the funding of our ongoing operation as well as customers fluctuations in working capital
spk_2: at the end of two three have bolstered our inventory bound to seventy three point two million dollars in order to meet anticipated consumer demand in the fourth quarter and beyond while also taken advantage of reduce supply chain and free call
spk_3: we are pleased that are to for him and toward ballots ended at forty six point six million dollars representing a decrease of twenty six point seven million dollars or thirty six percent from two three two thousand and twenty two with him and tory turn at six point four times as compared to four point three times last quarter the decrease in inventory is attributable to an exceptional focus on supply chain efficiency and working capital management couple with other factors including our internal objective to maintain more appropriate inventory levels to support consumer demand throughout two thousand and two three our objective is to maintain a healthy inventory level so we are respond to the consumer buying patterns but in a capital and cost efficient manner and finally our accounts receivable valens was sixty six million dollars as of december thirty first with to for a third at fifty day down from fifty nine days sequentially and consistent with the prior year period and
spk_7: we will continue to monitor are working capital balances in line with our revenue level with a focus on maintaining a solid balance sheet and liquidity position in the future
spk_4: now turning to our outlook
spk_2: considering that arlo will surpass the two million subscriber milestone next week we believe the company is upon and inflection point and twenty twenty three the forecasted revenue growth and our services business will drive arlo to be materially profitable this upcoming year specifically we expect our gross profit from services alone to exceed our operating expenses thereby thereby making not profitable at the operating income line by the end of two two given the kurds consumer environment we remain cautious about our product revenue outlook for the year
spk_3: and not alluded to we are going to adjust our hardware or product sales levers as necessary to drive new household formation and fuel further from scarborough
spk_4: we will remain responsive to sudden market ships and practised the revenue growth and profitability of our services business
spk_3: with that said weeks that the first quarter revenue for twenty twenty three to be in the range of one hundred to one hundred and ten million dollars we expect our gap net loss per diluted share to be between twenty three thousand and seventeen cents and are non
spk_4: gaap net loss per diluted share to be between seven cents and one cents per share our to one twenty twenty three gonna take into account approximately six hundred thousand dollars of reschedule brand awareness been committed before we pause the overall campaign
spk_2: for the twenty twenty three four year we expect revenue to be a new range of four hundred and sixty two four hundred ninety million dollars factoring in our cautious outlook for products sale potential headwind and the european region and heightening level of
spk_3: optimism and visible the for growth and our service business third revenue is forecasted to grow at roughly forty five percent year over year thereby becoming a much larger portion of our overall revenue and profitability mix
spk_4: in terms of seasonality we expect approximately forty percent of our twenty twenty three revenue will be in the first half of year
spk_3: we estimate non gap product gross margin will be in the mid single digits as we pursue promotional activities and sales models that prioritize the acquisition of new household and subscribers however we expect non gaap service gross margin to be at or above seventy five percent as we exit twenty twenty three
spk_2: non gaap operating expenses are expected to come in at approximately one hundred and fifty million dollars for the year
spk_3: further we expect to maintain are available cass cass equivalent and short term investment at or above one hundred million dollars throughout the year we believe this represents an acceptable level of to operate been as we drive closer to sustainable non gaap operating income and increasing free cash flow generation additionally we expect our cost level to be on an upward trajectory as we exit twenty twenty three
spk_0: and now i'll open it up for question at this time i would like to remind everyone in order to ask a question press star and the number one on your telephone keypad your posture just a moment to compile the q and a roster
spk_8: your first question comes from the line of jacob stuff and with lake street capital line is now open
spk_3: he goes to read on the quarter
spk_8: maybe just starting out could you talk about the
spk_2: on
spk_3: kennedy home security market in general
spk_9: you know what kind of trends are you seen with your consumer channels you know your best buy your costello's and then maybe contrast that with canada strategic partners
spk_3: yeah absolutely and and thanks for the thanks for the derived from the courtroom we we feel really proud of what was accomplished and an eye out for the year from a for a trend perspective what i can tell you is way we thought was the end of you for that with them resilience in the in the security market from especially from the consumer marina in another consumer channels that you've mentioned in that that continues and q one you see that reflected in the guidance in i would say that's true across channel so we don't really seem to demand really drive across strategic or the retail channels for the most part we do think there might be a little bit more softness calling from europe overtime and i was reflected in some summer kurt comments just because of the macro economic situation there be the be united states but overall i would say
spk_2: we're we're seeing some resilience in in the demand for a home security but also arlo in particular and as reflected not only in a quarter results but in the guy that the you see articulating going forward can
spk_10: some maybe just focusing on of inventory levels and gross margins and you for here
spk_4: you know was was kind of the marginal decrease the resultant the sales you'd as his running the older
spk_10: yes what animals a margin pressure there
spk_6: was it on the are the product or hardware margin side we were ensuring that we recovered from our overall channel a mentor tory level you wanted to make sure that you'll as we get into two thousand and twenty three we felt good about where and me inventory levels were not just on here
spk_4: i am for ourselves but also with our our retail partners and i think that showed in the on the the product gross margin were extremely pleased with the outcome on the services gross margin
spk_10: we saw that actually exceed our expectations and there and the beauty of that is that we see that going into the first part of twenty twenty three and trending up as we mentioned in the ad in the guidance i think if you look at two thousand and twenty three in a we do believe that we can be very promotional in on the hardware side and we expect to do that
spk_8: our goal really is to continue to drive health information and subscriber growth
spk_11: super exciting news about us achieving that two million subscriber mark this upcoming week so that's that's super exciting and and course we want to remain focused on our overall operating profitability as we indicated or matt had suggested were talking about five percent operating margin are coming out of two thousand twenty three
spk_3: so although the on the hardware or product gross margin might be a bit under what was expecting to for we think that our be a key lever going to two thousand and twenty three to help us drive the new health information than incremental subscriber growth okay got it yeah than two million i pads on the certainly a natural a milestone maybe just one last one went looking at the new security system launch many early comments you guys can make on kind of what you're saying yeah it's it's sad here we've got it in a couple channels male you'll see the the role as we mentioned in the prepared remarks grow not only in additional retail locations but probably with you know strategic partner to as we go through this year and it'll feedback has been has been great if you look at some of the reviews
spk_12: know they're all four point nine five and and some of our retail accounts
spk_8: they were taking a lot of feedback in as well and making very quick integrations and so the products getting better and better by the week
spk_0: in we're looking for it actually to the distributing it all kind of a broader basis i will tell you most of our customers right now our existing are look merce and that's on purpose we're we're really mining our existing customer bit as the initial target audience and then we'll see that grow with we brought distribution through the spring and going through the
spk_13: rest of this year
spk_2: okay got it possible that you
spk_4: your next question comes from the line of jake north and with raymond james your line is now open
spk_10: he goes appreciate you taking my call i just heard on food died a little deeper on services and product mix i'm not any comments on what happened dropped the quarter and how should we think about that mix going forward
spk_3: yeah sort of i think that the when you look at mix for twenty twenty two and a imitator to for we were trembling in sort of that a twenty to thirty percent of our revenue coming from services and the sixty seventy percent coming from prada on that was in
spk_10: mine with our expectations and obviously that makes plays into our overall gross margin
spk_14: performance i think as you look at twenty twenty three and we moved around twenty twenty those going to be a considerable i've lived in the service revenue and especially as a as a portion of the overall total revenue we would expect that makes would shift from say that thirty percent to probably higher maybe exceeding forty and into the forty five
spk_2: percent range of tote around services and that a forty percent forty five percent hardware product in that say sixty sixty five percent range of that gonna have a considerable impact on our overall gross margin and obviously an impact on iran operating profit as a big part of our role strategy because we mentioned before the dry
spk_15: i've in a subscriber be getting our hearts are or up and up and really targeting or cost optimization to to drive that margin
spk_3: manchin is really really important for us
spk_1: awesome and then are less one from me can you just provide any metrics or on the growth of our look safe would you sing their terms of know customers outside our local ecosystem choosing save as their entry point or little does any color there would be helpful
spk_3: yeah it's armed faith actually a very exciting a product for us and the make a product is really a service and what's interesting is it's it's the first service for arlo where you do not have to buy a piece of hardware to actually come in and sorry
spk_2: yeah simple app store download get you into our safe for that one too
spk_3: we've chosen to actually mandolin and arc in a higher priced pier and so in our now twenty five dollar pricing or month peer includes arles sure which is the professional monitoring for oliver cameras a security system and arlo safe
spk_2: and it's a little early to provide some metrics spend beyond kurt just alluded to some to increase are hoping by next quarter we could hear some actual numbers on that but as say early indications are positive on both are the safe and the bundle which is what we call are safe and secure bundle and we think it's a really important strategic asset to bring our
spk_0: arlo from protecting a location with it's hardware and secure service to actually protecting families other and individual on the go and is resonating quite well i do believe also that you'll see some some action and some verticals with a spade is cars are less safe over time as well so we think there's some be partnership opportunities don't provide some additional outside as we get through twenty twenty three
spk_16: perfect thank you so much iraq
spk_3: your next question comes from the line of him and that crush on the t w s airline is now open hey could you just talk about the customer demographics of the households year now targeting with the approach of having lower price point on the hardware a house sticky are they to just continue to pay for that subscript monthly subscription yeah it's it's something we've looked at quite a bit any you when you look at the market data a couple years ago some of the very low price points out that will hit some the price points in this range had a relatively lower tax rate on service part of the prepared remarks we talked about looking at the latest market data and as we on promotion has him some relatively low price point three queue for for holiday promotions we're seeing very consistent attach on service now these lower price points so overseeing is consumers being able to buy a lower price hardware is not reflecting in a much lower tax rate on service and that the road relative change since we originally spawn from next year and took a look at the market at college for years ago
spk_16: so what we're expecting you might be a little bit lower but of relatively consistent level of both attach rate and turn at some of the new price points will head and of course a broader market from a demographic perspective especially as we're looking at some of the recall headwinds from pricing and things that we're seeing in the market just from a just from an old overall economic perspective though some of the information we seen in queue for has led us to look at some of the rebalancing of the hardware price points versus the service price point is so what you've seen us do is lower some entry point pricing for some of our hardware and with actually increased service brazen on a monthly basis and that rebalancing is part of with leading into the big boost unprofitability that were forecasting for twenty twenty three yeah
spk_3: okay and i'm a year ago you had been talking about how the consumers is not really aware of your brand and now ford or the year you're talking about pricing capturing him
spk_2: sounds like marketshare it is is coming because of a price points is coming because of your competitor having health issues
spk_12: upper management changes pricing issues as well
spk_17: yeah outfit mostly coming from just a change and consumer behavior and of tapping into that change
spk_0: especially in to formally science you for enough some of our competitors are going through some changes in the like i'm sure that has an impact as well but a lot of it is is us that rebalancing our strategy against what we're seeing in the market what we're seeing from a consumer perspective and some of this is a natural transition the you see when a market go
spk_3: from what i'll call early adopter to becoming more of a early part of the mass market work you can bring down at the right time some of those entry price points still get them subscribed and have that long term relationship he started happened to have to a broader market and where we saw the beginning of that for and that's something we're going to continue to do and twenty twenty three okay great think if europe there are no further questions at this time not attend a call back every year
spk_0: thank you operator
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