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 the 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' second 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 second quarter, along with guidance for the third 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 third quarter and full year of 2023, the rate and timing of paid 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 RLO'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 second quarter 2023 earnings call. Arlo has completed the transformation to a service business as evidenced by the underlying drivers of our outstanding financial performance. Paid accounts grew 55% year over year to 2.3 million subscribers. Service revenue grew 54 percent year-over-year, reaching a record $50 million. And our annual recurring revenue grew 66 percent year-over-year to $194 million. We also achieved a record service gross margin of 75 percent. All of these metrics are substantially ahead of where we hoped to be when we rolled out our long-range plan a little more than a year ago. This service acceleration is partially attributable to the pricing strategy Arlo implemented in Q4, where we brought down hardware pricing and raised subscription service pricing. While this rebalancing of value reduces product revenue and gross margin, it generates incremental product demand by lowering the barrier of entry for the Arlo solution and substantially increases service revenue with no material impact on churn. This inelasticity in the subscription pricing is the truest testament to the value our services provide our customers. Diving in a bit deeper, average revenue per user for retail and direct paid accounts is up roughly 24% when compared to a year ago. This, in turn, has pushed the lifetime value of a retail and direct paid account over $700. What's more, even though the current number is small, Households that have the new Arlo security system show an ARPU that is an additional 60% higher, which highlights a clear avenue to drive ARPU up over time. This services performance and the excellent execution by the Arlo team drove our overall results for the quarter. Revenue came in at $115.1 million, which was at the top end of our guidance. and we delivered a record non-GAAP earnings per share of $0.06. Arlo achieved record company gross margin of 37% and record operating margin of 5%. And with great working capital management, Arlo produced 10% free cash flow margin. Comparing the first half of 2023 with the first half of 2022, Arlo improved its cash from operating activities by $52 million, And for the first time in company history, our non-GAAP gross profit from services alone exceeded our non-GAAP operating expenses. This is a huge crossover point for Arlo and highlights the exciting trajectory we are on. Our strategy and execution are driving these results and generating significant shareholder value. Despite the macroeconomic conditions, we are seeing strong demand as is evidenced by our key metrics and our inventory levels. Most recently, we saw that demand carried through to a successful prime day, which gives us a glimpse into the current consumer mindset ahead of the second half. This upcoming holiday season, Arlo will lean further into our successful pricing strategy by launching a totally new, low-cost security camera platform, and we have secured substantial placement in promotional vehicles across our major channels. Customer acquisition drives paid accounts, which drives the expansion of Arlo's profitability. With this backdrop, we expect full year service revenue to grow nearly 50% year over year and now exceed our $200 million target. Our non-GAAP service gross margin for the full year will be roughly 75% and should propel us to our target of 5% non-GAAP operating margin for the full year, a more than six percentage point improvement compared to 2022. It is an exciting time at Arlo as we witness the years of hard work begin to materialize in a meaningful way across the business. Congratulations and thank you to the whole Arlo team for the milestones we passed and the ones we are focused on next. And with that, I'll turn it over to Kurt.