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 Tarmin Clark. Please go ahead, sir.

Thank you, Operator. Good afternoon and welcome to Arlo Technologies' third quarter of 2024 financial results conference call. Joining us from the company are Mr. Matthew McCrae, 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 third quarter, along with guidance for the fourth 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 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 margins, guidance for the fourth quarter of 2024, the 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, 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 four looking statements. For more information, please refer to the risk factors discussed in Arlo's Periodic Findings 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 third quarter 2024 earnings call. The team at Arlo delivered another strong quarter with total revenue reaching $137.7 million, up 6% from the same period last year, which was elevated due to the Q3 2023 stock-in for our Essential 2 product launch across channels. This performance propelled non-GAAP gross profit to nearly $50 million in the quarter and generated 11 cents of earnings per share. The driving force behind the success continues to be our services business, which broke several records in Q3. Paid subscribers grew by 255,000, an increase of 70% year over year. To reach 4.2 million, And service revenue grew 21% to a record $62 million, while total service gross margin rose to over 77%, also a new record for Arlo. And the continuing upward mix across our plans lifted our retail and direct ARPU to a new high of $12.24 per month. In addition to these strong trends in our service business, we launched our latest offering, Arlo Secure 5 right at the end of Q3. And despite being very early in the rollout, I want to provide an overview of the launch and a sneak peek at the performance we are seeing over the first six weeks. Arlo Secure 5 has innovative new features, including person recognition, vehicle recognition, and widgets for iOS and Android that makes controlling the Arlo ecosystem so much more convenient. It also includes our groundbreaking custom detection capability that enables users to create private AI micro models, which detect nearly any type of event, dramatically expanding the power of our service. Arlo Secure 5 also includes in-app purchasing of our services for the first time, creating a purchase path that substantially reduces friction to become an Arlo subscriber. And this release has allowed us to commence internal testing of an advertising model inside our user experience as we previously communicated. Early results from our Arlo Secure 5 launch are impressive. Historically, less than 20% of our paid users sign up for our premium plans, which cost more than our single-cam and unlimited-cam basic plans. With Arlo Secure 5, we are witnessing more than 40% sign up for our more premium plans, which is more than two times the historical rate. This is accelerating ARPU on the new subscribers to over $14. We have also seen a doubling of users signing up for annual plans versus month-to-month. While still early, we expect Arlo Secure 5 to contribute to an increasing retail and direct ARPU heading into 2025 and illustrate opportunities for additional service revenue growth as we explore options to migrate existing users to Arlo Secure 5. We have never seen a service launch have such an immediate impact on key service metrics. As discussed previously, when we look ahead across our channels, the market remains softer in general terms. Some retailers and partners are showing surprising strength, while others are underperforming due to a variety of factors, including customer sentiment, hurricane disruptions, and lower foot traffic. Similar to last year, Arlo has decided to be more aggressive in our promotional calendar and pricing as we focus on units sold, which leads to future household subscriptions. And this allows us to test new price points like we did last year ahead of our annual operating plan. Reaching into these lower price points will lower our near-term hardware revenue but propel sales across our partners and drive additional household formation. In fact, we are targeting Q4 unit POS in North America retail to nearly double sequentially from Q3 to Q4. which would also represent a nearly 20% increase year over year, comping against our huge launch of Essential 2 in 2023. With our service gross margins for retail and direct paid accounts at nearly 90%, coupled with the positive ARPU trends I mentioned earlier, we expect service revenue to exceed our full year guidance and be on track for strong growth in 2025. In addition to this growth, we are seeing continued progress in our pursuit of various strategic partner opportunities. The revenue growth in Europe shows the Verisher partnership remains strong in our last year of the initial term. And as a reminder, this partnership has been renewed for another five years as we look forward to innovating and growing together. Earlier this week, phase two of our Allstate partnership was announced, with Arlo Security Solutions now being marketed and sold to Allstate's 6 million home insurance customers in the United States. And there are several other strategic partners that we hope to announce and provide more information on over the next several quarters. And finally, I would like to provide an update on our capital allocation plan. Our organic investment is already paying dividends with a successful Arlo Secure 5 launch. And our technology investment continues as we begin development on Arlo Secure 6 and plan a large product launch for the second half of 2025. with continued innovation in 2026. ARL also continues to review possible acquisition or investment options similar to what was conveyed before, but will only move forward if we feel it is right for the business and propels us towards our stated long-range target of 10 million paid accounts, $700 million in ARR, and over 25% non-GAAP operating margin. Recently, Arlo announced a share buyback program of $50 million, which covers the third pillar of our capital allocation plan. A plan will be enabled this quarter, and it is likely that you will see Arlo active in the market in the short term. And now, I'll turn it over to Kurt for a more in-depth review of our Q3 results.