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

Thank you, operator. Good afternoon, and welcome to Arlo Technologies' second quarter 2024 financial results conference call. Joining us from the company are Mr. Matthew McCray, CEO, and Mr. Kurt Binder, COO and 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 provided by Kurt. We will then take 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 conditions, 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 of 2024, our long range plan targets, 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 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, Tom, and thank you everyone for joining us today on Arlo's second quarter 2024 earnings call. Once again, Arlo executed well in a tough environment to deliver another truly outstanding quarter. Total revenue came in at $127 million, up 11% year-over-year, and our annual recurring revenue, or ARR, was up over 21% year-over-year to reach $235 million. Arlo also recently hit 4 million paid accounts, an increase of 74% year over year. Our average revenue per user, or ARPU, for retail and direct paid accounts grew to $12, a new record for Arlo, on the back of a small increase on single camera pricing and an overall mixed shift to higher tier service plans. Based on this strong performance, Arlo delivered non-GAAP earnings per share of 10 cents in Q2. which brings the earnings per share for the first half to 19 cents, up an incredible 171% year over year. Shortly, Kurt will walk you through our results in greater detail, but these highlights illustrate the power of our business model and our accelerating trajectory towards our long-range targets of 10 million paid accounts, $700 million in ARR, and over 25% operating margins. A huge congratulations to the entire Arlo team, and thank you for the focus on the execution of the business. It is a pleasure to work with such a dedicated team that cares so deeply about bringing the best security experience to our customers. We now find ourselves at the midpoint of the year with a big holiday season ahead of us. I thought I would provide some commentary on the trends we are seeing and our expectations for the balance of 2024. Across our channels, we see the consumer is under some pressure, which often results in a step down in the price segment of the initial hardware purchase. Arlo anticipated this environment with our pricing strategy, where we brought down our initial hardware margin, but raised our service pricing, which has driven an expansion of ARR and profitability. This decision has sustained our household formation, and coupled with the tailwind in the security segment, delivered excellent conversion and low turn rates in our subscription business. Looking ahead to the holiday season, Arlo has worked closely with our channel partners to create an aggressive promotional calendar. The Essential 2 product line is the right product at the right time to drive additional household adoption and address the category shift to mass market. Our current read is the second half of 2024 is going to look very similar to the second half of 2023. And Arlo is extremely well positioned to repeat our success and continue to drive new paid accounts. Switching to our strategic partner channel, I mentioned on our last earnings call that interest and engagement in this area has increased substantially. That remains the case. As you know, we recently renewed our successful partnership with Verisher for another five years. This collaboration has driven strong growth across the European region, and after a recent joint strategic planning session, we see opportunities to grow that relationship even further. Arlo also announced a strategic partnership with Allstate to bring additional security and protection options to both of our customer bases. There is a natural fit between Arlo and the insurance industry as we look at the full spectrum of services a customer can benefit from in the broader safety and security space. This is our initial foray into the insure tech segment, but you will see more activity from us in the future, including additional rollouts with Allstate as our full partnership unfolds. This resurgence of activity reaches beyond Verisure and Allstate. There are other major entities looking to partner with Arlo across several verticals, including smart security, insurance, and telecom. We expect a significant portion of our growth toward our long-range targets to come from future strategic partnerships and plan to bring additional engagements to fruition over the next two to three years. And now, I would like to provide a detailed update on Arlo's capital allocation planning. Our consistent and increasing levels of success will continue to generate substantial resources for Arlo to deploy on our journey towards the long-range targets we established earlier this year. Since the fourth quarter of last year, we have leveraged the broad experience and knowledge of our board strategic committee to explore and analyze numerous options to drive additional shareholder value. First is the area of organic investment in our business. The teams at Arlo have been developing truly groundbreaking technologies that will continue to extend our lead in the smart security industry and deliver new user experiences in our core market segments. I am convinced Now more than ever, that another wave of innovation is beginning, and Arlo will continue to set the pace like we did when we launched our first camera nearly 10 years ago. The first marker on our three-year roadmap will be the Arlo Secure 5 platform, which we announced earlier this year. It will deliver several major service enhancements and industry-first features, including custom private AI models to drive amazing smart security user experiences. And we are already beginning work on Arlo Secure 6, which we will talk more about sometime next year. Arlo has also defined and has started development of a three-year device roadmap that will solidify our leadership position in several key security segments. This will include key refreshes of existing product lines across the company, but also the design and development of a new DIY security concept that we believe will revolutionize the security market segment once again. We are targeting a 2026 or early 2027 launch, and I am genuinely excited about the impact it will have on our industry. And finally, Arlo will be increasing our investment and focus on enhancing our customer experience. Execution against these initiatives is more important than ever as our category enters the mass market phase, which started with our hugely successful holiday selling season with Walmart in the fourth quarter of last year. Our user community is broadening quickly And our ability to support and maintain these customers has an enormous ROI for the business. In the future, Arlo may include upper funnel marketing and brand awareness spending when the market conditions and consumer sentiment will result in a better outcome. But at this time, our assessment of the general market conditions does not provide the return we are looking for yet. The second major area of our capital allocation plan is external investments or acquisitions. We are actively filtering and evaluating potential transactions that would accelerate our execution towards our long-range targets. The prospective opportunities tend to fall into two major buckets. The first bucket is something new to Arlo, a new technology, a new product line, a new channel, or another area that is not part of our current core business. The second bucket represents possible paths to market consolidation. potentially acquiring an entity in our core market that could accelerate market expansion. In general, it is clear that some level of inorganic investment could drive additional growth for Arlo, and it is likely that you'll see the company take actions along this path in the next 12 to 18 months. Irrespective of the opportunity we pursue, we will remain disciplined in our approach, assess the risks of such transactions, and ensure that our path to our long-range targets is not compromised. The third and final area of our capital allocation discussion is around the direct shareholder return of capital, such as a stock repurchase. This approach is under active consideration, albeit at a lower priority, given the potential massive return from the other areas of our capital allocation plan. However, given the trajectory of the business, we will continue to explore the right time to execute such a program as we progress on our long-range plan. Arlo's capital allocation plan represents a new vector of shareholder value creation enabled through the monumental success in our business transformation. Market conditions may change, which may cause us to alter or update our thinking around the best path forward together, but you have Kurt and my commitment to remain transparent and open in our communication around the strategic direction of the company. And now I'll turn it over to Kurt for a more in-depth review of these Q2 results.

Thank you, Matt, and thank you everyone for joining us today. I will start by sharing some financial details and provide an overview of the business for Q2 2024. Total revenue for the second quarter of 2024 came in at $127.4 million, up 11% over the prior year period. In the quarter, service revenue represented about 47% of total revenue, up from 44% in the same period last year and quickly approaching the 50% threshold. This shift in our growing recurring revenue base reflects the continued momentum that we have gained in our transformation to a services first business. Our installed base of subscribers continued its strong growth trajectory as we reached just under 4 million paid accounts by the end of Q2. an increase of approximately 745,000 paid accounts in the quarter. The significant increase in paid accounts reflects a substantial catch-up in the bearish or subscribers as discussed on previous calls. We continue to believe that the catch-up will be largely complete by next quarter. Further, our paid account additions exclusive of this catch-up adjustment remains in the range of 150,000 to 190,000 subscribers that we expect to generate on a quarterly basis. Service revenue for Q2 was another record at $60.3 million, or a 20% increase over the same period last year. The strong service revenue performance was driven in large part by the growth in our overall paid account base, and to a lesser extent, a small price increase in our single camera plan, and some migration of subscribers to higher price plans. Our annual recurring revenue at June 30th was $235 million, up more than 20% over the same period last year. I want to highlight the strength of our services revenue and ARR, which helped deliver strong top-line revenue performance, and contributed to Arlo generating non-GAAP operating profit of $9.2 million in the quarter, a 70% improvement over the prior year period. Even more impressive is that the non-GAAP operating profit for the first half of 2024 grew by 166% when compared to the same period last year. Product revenue for Q2 was $67.2 million, which was in line with our first quarter level and up about $2.4 million or 3.8% when compared to the product revenue generated in the same period last year. During the quarter, we shipped a total of 1.3 million devices worldwide compared to 954,000 in the prior year period. Product revenue at these levels was driven by higher unit volume, but partially offset by a decline in average selling prices, or ASPs. Over the past year, we have deliberately reduced the ASPs for our devices to successfully drive household formation and service revenue growth, and we will continue to do so as we approach the 2024 holiday season. Our investment in our low-cost Essential 2 camera lineup has enabled us to remain competitive in uncertain economic times while helping us to expand into the mass market segment of home security. The solid top line growth and exceptional profitability is driven by the conversion of our customers from a singular product purchase to participation in a service offering that generates a strong value proposition for our customers. As we look to the remainder of 2024, we expect product gross margins to remain in the low to mid single digit range as we partner with major retailers like Walmart to deliver incremental paid subscribers into our services business. As we participate in the mass market adoption of smart security, we will continue to use our product ASPs as a lever to ensure that we secure incremental market share. In the quarter, approximately $64.1 million, or 50% of our total revenue, was generated from our international customers. On a year-over-year basis, international revenue was up significantly from the $37 million level, or 32% of total revenue in the prior year period. Verisher continues to be an outstanding partner for us, especially considering we renewed our contract with them last quarter and we are grateful for their strategic collaboration in the near and long term. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release distributed earlier today. Our non-GAAP gross profit for the second quarter was $48.3 million, up $5.3 million, or 12% year-over-year. This resulted in a non-GAAP gross margin of 38% in the quarter. The year-over-year increase in non-GAAP gross profit was primarily attributable to the continued expansion of our services business and associated gross margin improvement, which was partially offset by lower product gross margin. Non-GAAP service gross margin for the quarter was 76.4%. up from approximately 75.2% in the same period last year. The improvement in non-GAAP service gross profit was driven by growth in our total paid subscriptions and cost optimization. Non-GAAP product gross margin for the quarter was 3.4% and 5.7% for the first half of 2024, which is in line with the guidance that we provided earlier in the year. With that said, we expect to continue our aggressive approach to hardware pricing to drive incremental unit volume, coupled with new household formation to support our services business. Total non-GAAP operating expenses for the second quarter were $39.1 million, down from $40.3 million reported in the first quarter, but up from $37.5 million in the same period last year. The year over year increase is primarily related to a slight increase in headcount and related compensation expense. We expect the organic investment that Matt described earlier as part of our capital allocation plan to increase operating expenses by a nominal amount to our original guidance range, starting in the second half of this year and continuing throughout 2025. In Q2, we posted non-GAAP net income of $10.5 million, which translates into non-GAAP net income per dilutive share of 10 cents. Our non-GAAP net income for the first half of 2024 was $20 million, up almost 180% over the same period last year, showing the tremendous operating leverage in our business model. Regarding our balance sheet and liquidity positions, We ended the quarter with $144 million in available cash, cash equivalents, and short-term investments. This balance was up more than $20 million since June of 2023. Further, we generated $25.6 million in free cash flow in the first half of this year, which represents free cash flow margin of 10% during that period. a solid improvement over the same period last year driven by increased profitability and enhanced working capital management. Our Q2 accounts receivable balance was $61.7 million at quarter end with DSOs at 44 days and in line with the same period last year. Our Q2 inventory balance was $45.2 million up $6.8 million from Q4 of 2023 levels. Inventory turns were 5.8 times and in line with our expectations as we continue to optimize our inventory levels in an effort to minimize our spend on freight costs. Now turning to our outlook. We expect third quarter revenue for 2024 to be in the range of $132 to $142 million, and our non-GAAP net income per dilutive share to be between $0.08 and $0.14 per share. Consumer sentiment still remains a bit uncertain, with most buyers looking for heavily discounted or promotional offers before making their purchase decision. Given our low-cost Essential 2 Camera product portfolio, we are able to comfortably meet the needs of these customers who demand innovative, feature-rich solutions at an affordable price point. Further, we are committed to supporting our critical retail partnerships, which we believe will help us drive higher levels of market share for our brand and ultimately generate high-quality paid account growth for our services business. We reiterate that service revenue is forecasted to grow at approximately 20% over last year, thereby becoming a much larger portion of our overall revenue and profitability mix, and we continue to expect non-GAAP service gross margins to be at or slightly above 75% for 2024. And now I will open it up for questions.

Perfect at this time, I would like to remind everyone in order to ask a question press star than the number one on your telephone keypad will pause for just a moment to compile the Q amp a roster. The first question is from the line of Jacob Stephen with lake street, you may proceed.

hey guys thanks for taking my question congrats on the quarter um. Maybe just starting out, you know, you guys have talked a lot about kind of the potential for offering ads on the Arlo Secure 5 platform, but it sounds like you're already working on Arlo Secure 6. So I'm just kind of curious, you know, is this the ad server? Is that an Arlo Secure 5 or is that a Secure 6 kind of project at this point?

Yeah. Tad Piper- yeah great question it's in parallel to the actual official releases so we're on track, as we mentioned on the last call to test the ad capability. Tad Piper- And the ad serving in Q4 of this year before the end of the year and probably going into part of next year as we collect data around that and then we'll be able to update. uh uh investors and the market around a timing of an eventual rollout or if and when that makes sense to actually deploy into the field in a wider wider view but it's in a parallel track all the capabilities are built into arlo secure five uh for testing and then we can roll it out at a future date pending the performance of the rollout okay yeah that's helpful

And then maybe, you know, just around kind of promotional activity heading into the holiday season here. And, you know, this year we kind of saw Walmart double down on the Walmart Day sale. We saw one in earlier part of July here, and we have one in the fall. But maybe if you could kind of help us think about, you know, what's the potential with Walmart here in terms of our loan?

Yeah, I think it's going to look a lot like last year in some ways. So, as you know, most of our promotional activity for the second half, and obviously most of that's in Q4, gets locked down in roughly the April-May timeframe in the planning sessions with them. Obviously, discussions start earlier than that. So, we already know exactly what's going to happen, both from an Arlo perspective across the various channels, but some indication of what's going to happen on a competitive set as well as we go in. And so... The best I can tell you right now is I think you're going to see Walmart be a significant partner for Arlo again. That's part of what we mean when we say this holiday season is probably going to look a lot like last holiday season because we're seeing a lot of similar dynamics in the competitive set, the offerings, the promotional areas, same timing. We know that Arlo, we did a great job executing through that holiday period and generated a lot of incremental households for future subscribers. That's really the plan, and that's what we're seeing as far as the roll-up into the holiday season this year.

Got it. Maybe just one last one. You talked about kind of the single camera plan, you know, the price increase there. Maybe if you could just give us a sense on what percentage price increase that was, that'd be helpful.

Yeah, it was about 15, 20%. It depends on if you're talking annual or single CAM. It can be as high as like 30% if it's on the monthly plan. And that was done just on the single CAM plan. If you remember, we described that on the last call in the middle of kind of Q1. So you're seeing a little bit of a full quarter of effect. But I would tell you, you know, single CAM plan is not our most popular plan by far. So it is a relatively small impact when you look at ARPU. The other impact, obviously, is what we talked about in the script around seeing just an overall mix shift in the tiers. So we are seeing, you know, interest in more capabilities and people kind of mixing up in our plans. And so those both together is what allowed Arlo to hit a record level of $12 of ARPU for our retail and direct paid accounts this quarter.

Yeah. Okay, awesome. I appreciate you guys and all the comments. I'll hop back in the queue. Yeah, you're welcome.

The next question is from the line of Mark Cash with Raymond James. You may proceed.

All right, thanks. Yeah, this is Mark. I'm for Adam. Now, if I could start with you, understanding the consumer environment is challenging, but it's sort of a sale of two geos in this quarter. So could you talk about trends being seen in the Americas and the strategy timeline to accelerate growth here? And then in EMEA, you know, really strong. So how much of that is Verisure contribution and catch up and, you know, what is left to catch up there? Thank you.

Yeah. Yeah. Let me tackle that in a couple of sections. So one, on the Verisure side, the catch up you're seeing is really just the numerical number of paid accounts of cameras that have been previously installed in people's homes, but haven't been really incrementing on the paid account number. So that's the catch-up we're doing there. It really doesn't have an impact on the finances of the company. It really is just us correcting some of the issues they had in their firmware in the South region and making sure those are being counted properly. Kurt mentioned on the call, we expect most of the catch-up to be done in the following quarter, so in Q3, and then we'll be on kind of our normal run rate where you'll be able to correlate actual paid account ads with service revenue increase more one-to-one because we don't have the divergence of some catch-up that's happening on the paid account. Part of what you're seeing from Verisure is some strength, I think, in the relationship and in the region in Europe, but some of it is also, if you remember them, bringing down their inventory towards the end of last year and kind of starting this year relatively dry and trying to build up inventory as they continue to deploy Verisure security systems in their direct channel. So this was expected. We kind of mentioned that we expected Verisure to be strong in Q1 and Q2 as they're building back up their inventory after kind of winding it down last year. So that's what you're seeing in the international front and what you're seeing from Verisure in particular. In the U.S., like I said, I think this holiday season is going to look a lot like last holiday season. The consumers are, there is some headwind from a consumer But there is some offset. We know that consumers feel less safe in general, and there's a bit of a tailwind just in the security segment in general. And so we're benefiting from that while we do see a little bit of headwind coming from just macroeconomic conditions in the United States. Those are somewhat offsetting. And again, we predicted that this was going to be the environment that we were probably walking into in the second half, and we adjusted our pricing strategies to match. So again, our expectation is that we will gain a good amount of households in the Americas going into the second half, which will often lead to additional subscribers late Q4, but really spilling into Q1 timeframe. So that's kind of the commentary there. We're a little bit ahead of what's going to happen in 2025. But I think for at least the first half, I think, again, our first inclination would be that the consumer sentiment stuff may continue into the first part of next year, and then we'll We'll take a better look at it as we start to wind down this year and start to do our annual operating plan for 2025. OK.

Very helpful. Thank you. And I appreciate you guys going through the capital allocation plan. That was great. If I could switch to Kurt and ask, I really appreciate the color you gave on product risk margin expectation for the second half. But I have two questions here. One is, I was wondering if you had some thoughts on how this year's prime event went for Arlo. I mean, kind of not related, but if I'm not as correct, based on like the 20% service growth commentary you gave, you took services to be in the 45, 46% of sales in the second half. So I'm just kind of curious when you're expecting services to become a larger portion of the mix.

Yeah, maybe I'll take the commentary on the prime day first, and then Kurt can kind of talk about service revenue mix across the company. Um, prime day went pretty much as planned. Um, you know, we saw, uh, I think a good amount of activity. It was basically sales were pretty much on what we were expecting, uh, across the board. We're, we're kind of, we're curious about what the October, you know, it's not called prime day. I think it's called, um, Amazon deal days or something like that. Uh, that happens in October as a ramp up. So I would say again, what we're seeing from the promotional activities across our channels, including prime day. is landing almost exactly where we're expecting. And that's why you see the predictability both in our revenue, but also obviously in the paid accounts going forward. So a lot of it looks like a repeat from last year. And I think that's because we're dealing with similar market conditions.

Yeah. And as related to your question regarding mix, you know, when we communicated back, I think in the early part of May, we had indicated that for the full year, we thought the mix of service revenue to our total consolidated revenue would be somewhere in the range of 46 to 47% for this 2024. We feel really good about that guidance. Actually, as we mentioned then, we feel very confident that the 20% growth trajectory in our services business is spot on. We think we could be a bit closer to 47% of the total mix when we end the year, just as we were this past quarter. So we feel like we're trending appropriately. As it relates to a little bit further out, certainly our target is to get to us up over 50%. And I know we've had some discussion on that in the past. And we think that that's within the near term. Let's just say within the next year to two, we think we can be there. So I think we're trending quite nice relative to our initial expectations and the annual guidance we gave back in May.

Great. Thanks so much. I'll pass it on.

You're welcome. The next question is from the line of Scott Searle with Roth Capital. You may proceed.

Hey, good afternoon. Thanks for taking my questions. Nice job on the quarter, guys. Hey, Kurt, maybe just to dive in quickly on the gross margin front, you know, you've articulated that, look, you're going to keep your pedal, your foot on the pedal here in terms of, you know, driving sales to drive basically, you know, the recurring revenue on the back end. But the second quarter gross margins, I think, were an all-time low for you guys at 3% or so adjusted for non-GAAP charges, et cetera. Is that the level that we should be thinking about in the second half of this year, or do you get a little bit more aggressive than that? And then similarly, kind of extrapolating that into 25, is this the new norm, or is there a little bit of an aberration in the June quarter?

Right. Hey, Scott, thanks for the question. Yeah, just to sort of set the record straight, so this past quarter we did on a non-GAAP basis for product gross margin about 3.4%. And actually for the six-month period, that put us at about 5.7% for the first half. And as we've mentioned in the past, you know, we have felt that it would make sense at the right time to take our product gross margins to the mid-single digits, essentially 5-7%, which is where we are right now. We expect that given the, I would say, muted kind of consumer environment we're in right now, that we would continue for the second half at around that mid-single-digit range of about 5%. So I guess the point, Scott, is, yeah, you should expect us to be very promotional and ultimately hit our targeted guidance around that 5% to 6% for product gross margin for the remainder of the year.

Okay, great. Very helpful. And Matt, exciting to see the Allstate announcement and you guys stepping into the InsurTech market. I'm wondering if you could start to help us understand the opportunity within that market, how we'll start to see the evolution of that relationship into more recurring revenue opportunities going forward, and what other opportunities there are in the pipeline within InsurTech. Because I think it's a relatively greenfield opportunity. I think SimplifiedSafe has got a couple of relationships there. But for the most part, these potential partners out there are unoccupied with existing solutions.

Yeah, you're absolutely right, Scott. It's something we're very excited about. It's a market that takes time to form, I'll just tell you that. These are big entities whose entire life's work is mitigating risk and understanding risk portfolios and things like that. So it does take some time, but it's also an opportunity once you get started, there's actually tremendous value there. And so what you see us doing now is what I would say some transactional benefits to both companies. So us selling all state protection plans on our website. You may see something, you know, a little bit of vice versa on the other side soon as well. And that's really working with our customer bases and doing cross offerings into those customer bases to provide kind of a wider set. When I step back and I look at the market segment, right, and I mentioned this on the call, there's such a natural fit, right? Arlo exists in this world to be able to help you detect, you know, notify you and potentially mitigate some of the damage that may be happening in your life, whether that's theft or fire or smoke or water leaks or some of these items. And the insurance industry exists to make sure you're okay if something does happen, right, and backstop you with financial help if you do have those damages. So when you look at that breadth of experience, right, that kind of whole gamut of experience, Having both of those together is really then providing the entire user experience from top to bottom, right? From being able to detect an issue and mitigate it and everything else, but also be able to backstop you if something does happen in your life that you can't control. So there is this natural set of a consumer offering where both of these really do click together in a really natural way. I think what you'll see in the space, you know, is moving from some of these kind of tactical engagements and rollouts of specific offers to maybe more strategic offers where you see, you know, potentially products on both sides being offered together. So, you know, home insurance with, you know, home security in a more integral and integrated way to provide a single user experience. And that may blossom even further, you know, in the future where we may see home insurance companies take a more active role in this space because if they are able to deploy technologies and services that mitigate damage, it fundamentally changes their finances and their risk tables and everything else. So it's them taking not just a passive role by running some numbers and cutting a check if something goes wrong on you based on some broad demographic, but actually taking much more granular data and an active role in potentially detecting and mitigating the damage in the first place. So I do believe this is the beginning of a revolution in the home insurance space. Similar to some of the beginnings you're starting to see in the driver space with driver safety scores and things like that, completely changing how insurance companies, quote, engage and provide insurance for drivers for car, automobile drivers and the like. So that gives you a little bit of it. I mean, again, I think we're barely in the first inning of what this is, but we've now got a great partner, one of the top brands in the home insurance space, And I'll think you'll see more activity of this rolling forward. And this could become a significant part of our business as we look towards the rest of our long-range plan.

And Matt, given that this is the first inning, this probably isn't a fair question. But it sounds like you're engaged in talking to other parties out there within InsurTech. I'm wondering if there's a bogey that you're thinking about in terms of the number of relationships you'd like to have looking 12 or 18 months out. And then to lump onto the unfair questions If you look at the size of the opportunity, if we start looking down into late 25, 26, what's going to constitute success in terms of strategic relationships like this, like outside of Verishore, what this could represent in terms of your recurring services revenue stream? Thanks.

Yeah, no, I love unfair questions. Yeah, I think there's a lot of activity just starting in the general space. I would tell you, Arlo, we're very much concentrated in Allstate right now. because there is, I think, a shared vision in what happens in this space. But what we see is when things do get announced or when things get rolling, some of these industries move in packs, and they kind of move together as they start to discover that someone may have an advantage in a certain space. So I do think there's a broader opportunity in general. Right now, Arlo is really focused on executing Allstate and expanding that relationship in some really innovative ways for consumers of both companies. And so that's a, you know, it's a bit of an answer to your question, at least at this point. But I think a focused approach initially to drive the solution and learn from that on both sides is probably the first stage. And then the second stage is expansion potentially. As far as, you know, where does this, how do we, you know, provide a metric or a measure of success as we kind of get into, you know, maybe the second half of our long-range plan, like 2027 or something like that. I think, you know, the first thing we would look at is, you know, how many homes were we able to address, you know, through this incremental channel? And I would hope, you know, by that point, we're looking at hundreds of thousands, if not maybe even a million homes that have been able to be addressed through the InsureTech channel in particular and incremental to the growth that we're seeing in retail and some of our other strategic accounts. So that's kind of how we would measure initially. You know, we drive a lot of our success and even measurements internally on how many people have we been able to keep safe. And to us, that's a household that's actually active and being a paid account.

Okay, thanks so much. Very helpful and a great job on the quarter.

Thank you, Scott.

The next question is from the line of Hamed Korsand with BWS Financial. You may proceed. Hi.

So my first question was, are you seeing any changes as far as your major retail partners is concerned as far as the composition of who's important?

Not major. I mean, what I would say is, and we've described this over the previous, I would say maybe three or four quarters, is as the market is starting to shift, into more of a mass market product segment, there is a natural transition of at least the pie chart, right? All potential retailers can grow, but you'll see retailers like a Walmart, as an example, start to take a bigger portion of the pie as the awareness of the product segment, awareness of the solution becomes a little bit broader. And you'll remember we said we kind of took a bet last year that we thought that kind of mass market adoption at the beginning of that phase was going to start last year. That's what triggered some of the discussions with Walmart and then the ultimate promotion we did with them in Q4 that was very successful. And I think that promotion and that success in Q4 proved that, you know, that mass market is starting not only to us, but also to Walmart, maybe some other channel partners. So an initial technology journey in the market, you'll see a Best Buy or others have a significant portion of the share because it's a new technology. It needs a consultative sale. It needs a lot of description behind it. It's a certain demographic of people looking at it because it's brand new. And then as that technology matures and becomes more a mass market phenomenon from an awareness perspective, you'll start to see the Walmarts then start to catch up and start to gain share. So long-winded answer to your question is we are seeing a little bit more growth on a relative basis in more of the mass market channels because of this transition of the product segment becoming a little bit more mass market.

Okay. And then what was the reason behind expanding the range in your commentary about what your organic subscriber additions are per quarter? In this quarter, you said it's 150 to 190. Previous quarters, you had said it's 170 to 190.

Yeah, it's some of that seasonality. So as you know, you'll see more, often a little bit higher in Q1 after the holiday season and then a little bit more in Q4. So we're kind of widening the range a little bit in Q2. But I don't think anything's really changed in the business. So it's, you know, it's 160, 170 to 190,000. We'll get a much better read on that after the catch-up is done on Verisure next quarter, but there's nothing fundamental in the business has changed, and that's not what we're trying to communicate.

Okay. My other question was, are you going into the holiday season with just the Essentials 2 products, just like last year, or will there be an updated product?

Typically, our products are every other year. So we launched Essential 2 right before the holiday season. I mean, it really landed in October of last year. And so we're leaning back into that platform this year as well. And it's the right product, like I said, at the right time. Now, obviously, as we work through quarter by quarter and the volume picks up, as it has over the last couple of quarters after our launch, we're able to get additional price concessions. from the supply chain as we go through. So our cost basis for that product is not the same as last year, but the product assortment is going to be very similar to last year.

Okay. Thank you.

You're welcome.

There are no further questions waiting at this time. I would like to turn the call back over to the presenters.

Thank you everyone for joining us on the call today. We look forward to executing the quarter and speaking it into you in 90 days.

This concludes today's conference call. You may now disconnect.