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.