Arlo Technologies, Inc.

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 one on your push button phone. I would now like to turn the conference over to Tom and Clark. Please go ahead, sir.

Good afternoon, and welcome to Arlo Technologies' third quarter 2023 financial results conference call. Joining us from the company are Mr. Matthew McCrae, CEO, and Mr. Kurt Binder, 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 provided by Kurt. We will then take your 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 fourth quarter 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 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 the 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 like to turn the call over to Matt.

Thank you, Tom, and thank you, everyone, for joining us today on ARLO's third quarter 2023 earnings call. Arlo delivered an outstanding performance in Q3 across both financial and operational measures. The decisions that we made 12 months ago in anticipation of the shifting market landscape and consumer sentiment were on target and have positioned Arlo for success despite the challenging macro environment. Our first decision focused on lowering the barrier of entry into the Arlo ecosystem. This led to us rebalancing our pricing across hardware and services by lowering upfront hardware costs and increasing recurring service prices. Implementing this change allowed us to maintain our robust product sales, which in turn drove our highly profitable and predictable services business, despite a weakening consumer environment. The outcome of this decision is clearly illustrated in our outstanding results. After crossing over 2 million subscribers earlier this year, Arlo now has 2.5 million subscribers and is growing paid accounts at roughly 50% year over year. Additionally, annual recurring revenue, or ARR, grew 60% year over year to $200 million. This robust paid account growth comes along with increased ARPU and an LTV that is now $700 per subscriber. And as a reminder, our customer acquisition cost is roughly $100, which means our LTV to CAC ratio is a stellar 7. This morning, to further bring down the barrier of entry, Arlo launched our new total security subscription offerings in partnership with Affirm, which combines hardware and service solutions into a single low monthly payment. Pricing for this package starts at just $9.99 per month, including professional monitoring and dramatically lowers the cost of entry for consumers in the need of a security solution. This new offering represents an outstanding value proposition and compelling opportunity for those customers looking for their first security system or upgrading from a traditional security system where they're paying too much for antiquated technology and poor service. The second decision that we made a year ago to counter the initial macroeconomic indicators was to change our normal roadmap cadence and prioritize developing a new low-cost essential platform. The team worked tirelessly over the last 12 months to develop our new Essential 2 platform, which includes significant user experience enhancements, video quality upgrades, battery life improvements, and new features all at a substantially lower price. In fact, a significant portion of the innovation cycle came from the close hardware integration and resulting cost reductions with our supply partners that enabled Arlo to target lower price segments with a superior product and user experience. The launch of Essential 2 also demonstrates our operational excellence across our supply chain capabilities. This is the largest product launch in Arlo's history. We ramped our production to 800,000 units across more than 40 SKUs in less than eight weeks in order to support a robust holiday sales plan in collaboration with our channel partners. This strong execution contributed to our Q3 revenue of $130 million, which is at the high end of our guidance range. Additionally, we generated record non-GAAP earnings per share of nine cents which represents an operating margin of 6.5%, another record for the company. Stepping back and comparing the first nine months of this year to last year, free cash flow is up about $65 million. This strong financial performance puts us well ahead of the long-range plan we communicated to investors at the beginning of last year. As I look across our channels and even recent promotional events like Amazon's big deal days, Arlo is seeing continued resilience in consumer demand that defies the broader economic trends being reported. Rising safety awareness, concern about crime, and our pricing strategy have continued to successfully counter any macroeconomic headwinds. Throughout the year, we have gained share, and coupled with the Essential 2 launch, Arlo could not be positioned any better to deliver a successful holiday season. The result of those decisions speak for themselves. As a result of strong operational trends, we are raising our guidance for Q4 in the full year. Our results and expectations for continued operational and financial success highlight the inherent strength and resilience of a true SaaS recurring revenue business. And while it may sound counterintuitive given the volatile times in which we currently operate, Arlo is better positioned than it's ever been and boasts a future that is only getting brighter with each quarter as we continue to execute our plan with a dogged determination and focus. We know the important role we play in our users' lives, and there is a clarity of purpose coupled with a consistent cadence of execution towards our key goals of paid account growth, expansion of profitability, and ultimately the creation of additional shareholder value. And with that, I'll turn it over to Kurt.