Arlo Technologies, Inc.

Thank you, operator. Good afternoon and welcome to Arlo Technologies' fourth quarter 2024 financial results conference call. Joining us from the company are Mr. Matthew McRae, CEO, and Mr. Kurt Binder, COO and CFO. If you've not received a copy of today's earnings release, please visit Arlo's investor relations website at investors.arlo.com. Some of the statements that we make today regarding our business, operations, and financial performance may be considered forward-looking. Such statements are based on current expectations and assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. Please refer to our Forms 10-K and 10-Q, including the risk factors. We undertake no obligation to update any forward-looking statements. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release, which is distributed and available to the public through our investor relations website.

Thank you, Tommen, and thank you everyone for joining us today. Kurt and I will be reporting Q4 and full year 2024 results, then providing a look ahead and guidance for Q1 and full year 2025. But before we dive in, I would like to take a moment to reintroduce Arlo, identify the pillars of our success, and highlight the outstanding operational execution over the last five years. This is especially important as we find ourselves engaging with so many new faces that are coming to the story without the benefit of traveling with us on our recent journey to becoming a top consumer SaaS company. Arlo is a trusted player in the smart home security market. In fact, we invented the category more than a decade ago with the first Arlo wire-free security camera. Through relentless focus and innovation, we have outpaced our competitors to build a highly profitable subscription business powered by a scaled SaaS platform with an AI enabled suite of services for our direct users and strategic partners. Arlo has been monetizing AI subscriptions since 2018, and our innovation has propelled the company to the top rung of public SaaS companies on a global basis. Let's take a look at Arlo's key business metrics. We currently have nearly 11 million registered accounts and over 4.5 million paid subscribers on our platform. That user base is generating over $250 million in annual recurring revenue, which is growing faster than 20% year over year. Arlo's gross margin on that service revenue is above 80%. And we have an LTV to CAC ratio of four, which highlights the efficiency of our sales model and the enormous return we're providing to shareholders as we continue to grow our business. These are world-class metrics for any type of subscription services business, consumer, commercial, enterprise, any business. And I believe this is substantially underappreciated or frankly missed because Arlo reached this level so quickly. The growth of our subscription business over the last five years has been virtually unparalleled. Registered accounts have more than doubled while our paid subscriptions have grown more than tenfold in the same timeframe. This has driven our annual recurring revenue above a quarter of a billion dollars. And as our revenue has scaled, we have gained operating leverage in the business to expand non-GAAP service gross margin to an exit velocity of more than 80% at the end of 2024. Our SaaS business model is predictable and has been sustainable over the last five years because we generate the recurring subscription revenue in a market segment that is sticky. And through stellar service, Arlo enjoys world-class customer retention. Let's look at how Arlo's growth stacks up against the best SaaS companies in the world. We found 47 SaaS companies trading on the NYSE or NASDAQ with an enterprise value of at least $250 million, and then looked at how long it took for them to reach $250 million in ARR. First, you will recognize the caliber of the companies listed here in each category. Second, you will see how rare it is for a consumer SaaS company to achieve this level of ARR growth in such a short time. By achieving over a quarter of a billion dollars in ARR in six years or less, Arlo is an elite company with only Nutanix, Rubrik, and Samsara achieving a similar feat. And with a big 2025 ahead of us, we have no intention of slowing down. Apple plays in a large and growing market of home security, which is now a $25 billion segment in the United States alone. And while penetration of smart cameras and video doorbells has doubled over the last five years, smart home security services have only reached 7% market adoption, leaving an enormous untapped market to grow into. The broader smart home market adds another $13 billion of addressable market in the United States. and we intend to launch user experiences and services in this area, starting with Arlo Secure 6. This brings the total addressable market to nearly $30 billion in the United States, with the rest of the world adding another two to three times that value, and other adjacent markets, such as SMB, adding another potential of three to four times. Arlo addresses this home security market today with a simple to use yet sophisticated smart security experience, coupled with a compelling subscription service. That experience manifests itself in our award-winning mobile application and starts with clear notifications for any type of event. Notifications can be easily customized by the user to filter out unwanted noise and prioritize the types of events that are important. These notifications include a preview of the event and optional actions that can be taken right from the notification screen. In the case of an emergency, Arlo can send a critical emergency alert which bypasses any Do Not Disturb settings to ensure the user receives the urgent information they need. Controlling your entire Arlo ecosystem is simple and can be done right from the home screen with our widgets that provide convenient access without needing to launch the app. or the Arlo dashboard provides complete control of the system and the most frequently used devices from a single customizable screen. An event timeline shows a holistic view of everything that is happening across the home minute by minute with efficient video previews and intelligent AI driven descriptions to ensure the user is informed of important events and actions happening across the system. Our user experience also has a comprehensive emergency response center, which provides immediate help when needed and an ongoing update of any emergency events happening in real time. The app also includes direct dispatch buttons allowing the user to make a request for a specific type of first responder, depending on the type of emergency. Of course, the Arlo experience provides comprehensive access to all of the devices and cameras in the system, providing quick live streaming, video recording playback, and two-way talk to communicate with anybody in view, whether they are intruders or a package delivery person. And the entire system can be automated with device and AI cross-triggers in numerous ways, including automatic arming and disarming when family members arrive and leave to create an experience that adapts to your daily life routines. This is all built on the Arlo SaaS platform, which has been developed, refined, and deployed over the last 10 years. Our platform was conceived and designed to specifically address the needs of the smart home security space, from low latency event handling to real-time processing of incoming video streams and connections to first responders on a global basis. And it operates at significant scale with over 1700 hours of video being analyzed per minute, generating over 170 billion AI alerts per year while keeping the high levels of quality and availability required in a true security context. At the core of our platform is Arlo Intelligence, our real-time high-performance smart security AI engine built specifically for this market segment to drive our subscription services. This is an area where focus and clarity of use cases can create a higher performing AI model compared to the massive expensive general purpose models that seem to be quickly becoming a commodity. Blue intelligence is the most advanced AI model available in the security market. It processes video, audio, and environmental events to create specific alerts and system triggers, which allow for faster response to potential emergency events while filtering out the noise and insignificant activities. A detection engine can detect objects such as a person, animal, vehicle, or package, and was recently updated to detect fire, allowing earlier alerts for dangerous situations. A robust recognition engine can identify a specific person to differentiate actions for known individuals or an unknown person approaching a property. And it can identify specific vehicles, enabling specific alerts or actions depending on whether that vehicle is known or unknown by the user. Arlo Intelligence 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. No other security AI platform has this advanced and comprehensive suite of capabilities. And this differentiation is helping us win and retain subscribers. Arlo prides itself in the performance and quality of the solutions we provide our users and partners. A great benchmark is the industry press and awards where we are judged by experts in the field. And in 2024, Arlo continues to be recognized as a leader in driving new technology to market and enabling a world-class user experience. And a great judge of that user experience is the ability to retain subscribers. Arlo experiences a churn rate of between 1.1 and 1.3%, which translates to the average customer staying with Arlo services for more than seven years. This puts us in a great position as a SaaS company and compares very favorably to other consumer subscription services. Arlo's singular focus on the smart home security market has allowed us to move quicker, innovate faster, and continue to lead the market. Every day, every person at Arlo is dedicated to driving our platform forward to benefit our users and partners. Video is at the heart of security now with some areas of the country requiring video verification to dispatch first responders and users are demanding experiences that show them what is happening at all times. This coupled with our strict privacy pledge creates a relationship founded on trust. And our platform is the main asset of the business, the culmination of a decade of work. And at its core is Arlo Intelligence, where we are at the forefront of leveraging AI to provide real, tangible value to users in a scaled and performant experience. This is why we win. And now I will turn the presentation over to Kurt, who will present our Q4 2024 operating results.

Thank you, Matt. And thank you everyone for joining us today. 2024 was another outstanding year for Arlo as we continue to advance our track record of operational excellence guided by our subscription driven strategy. Before I provide additional details on our subscription services business, I wanted to highlight that the consolidated business generated total revenue of $511 million for the full year of 2024, up $19.7 million over the prior year and within our original annual guidance range. Additionally, Total revenue for the fourth quarter of $122 million came in slightly ahead of consensus expectations and was driven by the strong growth of our services business. Over the past several years, Arlo has been on a transformational journey. During this time, we have been told on many occasions that to be considered a world-class SaaS company, we need to achieve certain KPIs. These milestones include service revenue composition greater than 50% of total revenue, minimum ARR of $250 million, and services gross margins greater than 80%. While the Arlo team accepted this feedback and undertook the challenge, and we are proud to announce that we have hit all of these key milestones during the fourth quarter of 2024. As Matt mentioned earlier, we increased our cumulative paid accounts to $4.6 million, and along with it, our annual recurring revenue grew by over 20% to $257 million. Our services revenue increased to $243 million in 2024, and in Q4 comprised 53% of our total revenue. Further, we have expanded our services gross margins to 82% as we exited this year, and although we are pleased with our execution, this management team is not complacent with our success as there is so much more to come in 2025. The Arlo subscription-based operating model, with its retail and direct paid accounts, boasts exceptional unit economics. unit economics that are consistent with most world-class SaaS enterprises. During 2024, we continued to expand our overall unit economics as the gross profit from our services business exceeded our non-GAAP operating expenses by more than $35 million. During the year, we increased our ARPU from retail paid accounts to $12.60 from $11.30 in the prior year, representing a 12% growth rate. ARPU expansion was driven by the value of enhanced AI and other robust features included in our higher tiered service plans. Amazingly, these retail paid accounts generated gross margins of 92% as we exited the year, thereby catalyzing this outstanding financial performance. ARPU expansion and consistent monthly subscriber gross retention at 99% per month has driven our current LTV to an outstanding $750 per subscriber. It is important to highlight that we continue to employ a strategy of leveraging our product sales as a critical element in our customer acquisition model. Product revenue for the full year of 2024 was $268 million, down by $22.1 million compared to the prior year. Product revenue for the fourth quarter was $57.4 million and in line with our expectations communicated back in Q3. In Q4, the promotional activities across all retail channels were aggressive given consumer sentiment as well as other environmental and macroeconomic factors. In order to meet the consumers where they were and drive growth in point of sale or POS activities, Arlo instituted a number of incremental promotional campaigns which decreased the ASPs for our devices and also attributed to a decline in our overall product gross margins. As a result, our cost of customer acquisition, or CAC, increased from $100 in the prior year to $200 in 2024. Since the increase in CAC was driven by our intentional strategy to reduce ASPs and use our products to drive household formation, we were able to increase our unit POS in Q4 by 73% over the prior quarter and 5% over the prior year. This is a remarkable outcome considering that we launched the Essential 2 platform in 2023. Leveraging our sales channel, strong pricing power, and world-class customer retention levels, we still have an industry-leading LTV to CAC ratio of four times and we are just beginning to tap into this vast long-term opportunity. It is important to discuss two critical growth metrics, paid accounts and ARR growth. Our installed base of subscribers continued its strong trajectory, coming in at 4.6 million paid accounts at the end of 2024, an increase of 63% over the prior year. As discussed in previous quarters, we remain committed to generating 170,000 to 190,000 new paid subscribers each quarter. In this past year, our paid accounts reflected a meaningful catch up of VeriShare subscribers. However, we believe that substantially all of the VeriShare catch up related to firmware upgrades are completed. We recognize that paid account growth is instrumental in driving our year end ARR, which was $257 million at the end of 2024. The ARR growth rate of 22% is exceptional and a factor of both paid account growth as well as the expansion of ARPU due to mixed shifts in service plans. It is important to note that around 87% of the ARR is generated from our retail and direct paid accounts. Our focus on subscription-based services provides a significant uplift to our profitability and greater visibility and predictability in achieving our near-term revenue targets. Our service revenue was at record levels for Arlo at $64.1 million for the fourth quarter and $243 million for the full year of 2024. Service revenue increased by $42 million or 21% year-over-year fueled by the addition of new paid accounts and ARPU expansion. Further, service revenue as a percentage of total revenue represented 53% and 48% for Q4 and for the full year respectively. Non-GAAP service revenue gross margins were above 76% throughout the year and exited the fourth quarter at a remarkable rate of 82%. The Q4 2024 services gross margin increased significantly from 74% in Q4 of 2023. On a consolidated basis, our non-GAAP gross profit for the fourth quarter was $45.6 million resulting in a non-GAAP gross margin of 37.5% driven by the improvement in services profitability. Our non-GAAP gross profit for the full year of 2024 was $192.3 million up $20.6 million or 12% year over year. This resulted in a non-GAAP gross margin of 37.6%. up more than 260 basis points from 35 in 2023 the year-over-year increase in non-gap gross profit was primarily attributable to the growth in revenue and improvement in gross margins in our services business coupled with an ongoing focus on cost optimizations our growth in non-gap operating income and free cash flow was exceptional this year To appreciate the operating leverage in our business model, you need to understand our disciplined approach to managing our non-GAAP operating expenses and working capital in 2024. Total non-GAAP operating expenses for the fourth quarter were $36.3 million, down more than $2 million both sequentially and year-over-year. Total non-GAAP operating expenses for the full year of 2024 were $154.4 million, up about $7.7 million or 5% from the $146.7 million reported in the same period last year. Our ability to manage our operating expenses at these levels truly demonstrates the leverage in our business model. This was evident this year as services revenue grew by $42 million or 21%, while the cost to deliver that revenue only grew by 2%, representing a 97% gross margin on the incremental service revenue. We set another record in 2024, generating $37.9 million in non-GAAP operating profit or 7.4% operating margin, For that same period, non-GAAP operating income was up a remarkable 52% over the prior year. This level of operating profit, coupled with exceptional working capital management, helped drive our free cash flow to $48.6 million, with free cash flow margin of 9.5%. The year-over-year growth in free cash flow was $13.2 million, or 37%. In Q4, we posted a non-GAAP net income of $10.4 million, or net income per dilutive share of 10 cents, in line with consensus. For 2024, we recorded non-GAAP net income of $42.3 million, up more than $14.4 million or 52% when compared to the same period in 2023. Our non-GAAP net income translates to net income per dilutive share of 40 cents. Again, a significant improvement from a net income per dilutive share of 28 cents in 2023. You can expect us to continue to be focused on managing the operating expenses to investing growth opportunities ahead of us. Regarding our balance sheet and liquidity position, we ended the quarter with $151.5 million in available cash, cash equivalents, and short-term investments. This balance was up $15 million year-over-year, underscoring the improvement in profitability. Given our growing cash balance, we are extremely focused on our ability to allocate capital in a manner that generates the best return. Our DSO levels for the quarter were 44 days in Q4 of 2024 and relatively consistent with our DSO levels in the prior quarter and same quarter last year, highlighting our enhanced collection efforts on our base of larger retail customers. We will continue to monitor our DSOs closely, but we are pleased with the overall status and collectability of outstanding receivables. Regarding inventory, we managed our inventory levels to $40.6 million to meet the expected consumer demand in the fourth quarter. This balance was substantially reduced from our inventory balance of $52 million in Q3, which helped improve our inventory turns in Q4 to 6.4 times, up from 5.8 times in Q3. That inventory improvement was driven by a well-executed load-in of product into mass market retailers like Walmart and Amazon to support their fourth quarter promotional events.