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 Beiland. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to Arlo Technologies' first quarter 2023 financial results conference call. Joining us from the company are Mr. Matthew McCray, CEO, and Mr. Kurt Bender, 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 first quarter, along with guidance for the second quarter and full year provided by Kurt. We'll then have time for any questions. If you have not received a copy of today's 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, expenses, cash outlook, free cash flow and free cash flow margin, guidance for the second quarter and full year of 2023, the rate and timing of subscriber growth, the 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 and strategic collaborators, continued new product and service differentiation, and the impact of general macroeconomic conditions 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 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 first quarter 2023 earnings call. As I mentioned on our last call, Arlo had crossed an inflection point and our results in Q1 provide a glimpse of the bright future ahead. And while we remain cautious with regards to the overall macroeconomic outlook, the decisive operational actions we took at the end of Q3 combined with our recent product launches and new pricing strategy drove outstanding results and has positioned Arlo to outperform the market. We reached non-GAAP profitability ahead of expectation in Q1. We are guiding to a substantial increase in non-GAAP profitability for Q2. We are raising full-year guidance for 2023, and we expect our profitability and cash position to improve throughout the rest of the year. This underlines the continuing valuation dislocation for Arlo. We are redoubling our efforts to generate awareness with investors as we execute the business and strategy that is creating our successful trajectory. Looking at Q1 in more detail, revenue came in at $111 million, which was above the high end of our guidance, and we saw strong demand throughout the quarter, thereby driving our inventory lower. Arlo added 182,000 paid accounts and crossed the 2 million paid account subscriber milestone in Q1. Earlier this year, we adjusted the pricing on our hardware and subscriptions to optimize our ability to drive shareholder value, lowering hardware prices to sell more units while increasing subscription pricing to accelerate service revenue. The price increases have had an immaterial impact on churn to date and we have seen an upward mix shift across our subscription plans. These factors drove service revenue up 47% year over year to $44 million for the quarter and non-GAAP service gross margin grew 380 basis points sequentially to reach a record 74%. Exiting the quarter, Arlo's annual recurring revenue grew an incredible 80% year over year and reached $183 million. The observed price inelasticity and successful upselling is a testament to the value proposition Arlo services bring to our users, as well as to the lifetime value of each subscriber. Arlo remains on track to continue our strong pace of subscriber additions and achieved $200 million of service revenue in 2023 at close to 75% non-GAAP gross margin and growing nearly 50% year over year. The performance of our services business not only delivered non-GAAP profitability, it drove $9 million of free cash flow in Q1. And we expect Arlo to generate free cash flow and non gap profitability throughout the year, leading to our target of 5% non gap operating margin for full year 2023. Underpinning this achievement is what continues to be heralded by many reviewers as the best cameras and doorbells available on the market. Our innovative Technologically advanced portfolio of products propelled Arlo to the top of numerous best of 2023 lists in the quarter and awards from publications including The Verge, Consumer Reports, Engadget, Wirecutter, Android Police, Digital Camera World, New York Post, In the Know, Pocketnow, Flash Gear, Good Design, Digital Trends, Popular Mechanics, and Tech Junkie. We have also expanded our product portfolio to include a full security system with an advanced multi sensor at its core that provides numerous advantages over the competition. Arlo's extensive award winning product ecosystem is a powerful subscriber acquisition lever that continues to drive new paid accounts. And Arlo Safe, our new personal and family safety service, opens new doors for users to enter our ecosystem. A simple download from the Apple or Google App Store begins a user's engagement with Arlo. I am pleased to share that today we announced a partnership with PingID, a company known for world-class authentication and corporate security solutions. PingID will be providing Arlo Safe as an employee benefit across their company. This reflects an exciting new channel for Arlo to drive paid accounts. All of these services run on Arlo's Smart Cloud platform, that provides an unparalleled level of security and performance for our users and partners. The smart cloud architecture is flexible and scalable, allowing us to quickly bring new features, services, and solutions to market as we look to expand our capabilities and offerings over the next 24 months of our long-range plan. And with that, I'll turn it over to Kurt.