Arlo Technologies, Inc. (ARLO) on Q1 2021 Results - Earnings Call Transcript
Operator: Ladies and gentlemen, thank you for standing by. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir. Erik Bylin: Thank you, operator. Good afternoon and welcome to Arlo Technologies' first quarter of 2021 financial results conference call. Joining us from the company are Mr. Matthew McRae, CEO; and Mr. Gordon Mattingly, CFO. The format of the call will start with an introduction and commentary in the business provided by Matt, followed by a review of the financials for the first quarter, along with guidance, provided by Gordon. We'll then have time for any questions. If you have not received a copy of today's press release, please visit Arlo's investor relations website at investor.arlo.com. Matt McRae: Thank you, Eric, and thank you, everyone, for joining us today on Arlo's first-quarter 2021 earnings call. In my past commentary, I mentioned that Arlo is not the same company it was a year ago. And clearly, our Q1 results put an explanation point on that statement. Revenue is up 26% year over year. Service revenue is up 55% year over year. Paid accounts are up 115% year over year, and non-GAAP gross margin is up an incredible 336% year over year, reaching an all-time high for Arlo. Diving a bit deeper into our Q1 results, revenue came in above the top end of our guidance at $82.6 million, and our strong operational discipline lowered non-GAAP operating expenses by nearly $2.5 million year over year. Q1 marked the seventh consecutive quarter of record services revenue at $22.8 million. This drove non-GAAP gross margin of nearly 10% sequentially, again, to reach an all-time record for the company. This performance, coupled with our commitment to maintaining leverage, led to a soundly outperforming the high end of our guidance for non-GAAP net loss per share, which came in at a loss of just $0.03. And our cash, cash equivalents, and short-term investments balance remained solidly healthy at $177.1 million. Our strategic shift toward services, the success of our new business model, and the resulting momentum are undeniable as we look forward to reaching $100 million in service revenue this year and 1 million paid subscribers by our year-end earnings call after just passing through 500,000 subscribers on March 1. Gordon Mattingly: Thank you, Matt, and thank you, everyone, for joining us today. We delivered strong Q1 2021 financial results that exceeded our expectations, recording an all-time high for non-GAAP gross margin, our revenue was above the high end of guidance and up more than 20% over Q1 2020. Our financial performance for the quarter was driven primarily by the successful execution of our new business model, leading to record levels with paid account. The Arlo team navigated supply challenges to exceed our expectations on revenue, while significantly improving our profitability through prudent spend management. Operator: Your first question is from the line of Adam Tindle with Raymond James. Catherine Huntley: Hi. This is Catherine Huntley on for Adam. We were wondering what you're learning about characteristics from your subscriber base, specifically a lifetime value of sub-vectors? And on the same token, how do you believe that your partnerships will drive upside in the future? And when you spoke about Verisure, you have previously mentioned that there's a 1-1 attach rate. And how do you believe that this will impact the services? I know you gave a little bit of color on product already. Thank you. Matt McRae: Yeah. Thank you for the question. Talking about service and service growth as we're going forward. So as you can see, we're still accelerating as far as net adds on a quarter basis. And we've mentioned before that the churn rate on the new business model is also lower. So there's actually a double benefit of not only accelerating. It's seen a higher attach rate that approaches 65% over a six-month cohort, but the business model also is showing a lower churn rate. So we are learning a lot about the customers, the different segments, nothing we can share publicly, but we use those to drive not only our visibility into the customer base but driving some of the promotional activities that we're seeing actually have a better effect each quarter as we're going forward. We're getting smarter about how to address customers from a subscription perspective. Verisure, in particular, is and will be adding subscriptions really in three buckets. So the first bucket is our partnership in deploying Arlo branded product in the retail channel, retail, and e-commerce channel there. And we're seeing strong performance there, much like we're seeing here in the United States. Verisure is investing heavily in the Arlo brand throughout the channels. And as far as personnel and full-up marketing dollars, even running television ads in Europe to drive demand for Arlo through those traditional channels. So we're seeing strong growth in subscribers, just like we're seeing here in the United States. Also, the second bucket is Arlo branded product through their direct channels. And that's them upselling Arlo branded cameras and security cameras to traditional install, traditional channel that they sell security systems through. And we're starting to see that get added into the mix, and those are, to your point, a 1-1 attach. So we're seeing 100% attach rate on services to those cameras that are being deployed through their direct channel. And then finally, the third ramp of subscribers that we'll see on top of the product is what we mentioned in the call that we've reached a milestone in our development of a custom product for Verisure that will be deployed in high-volume next year, and we'll see that start to phase in, in the second half of this year and full-volume deployments like I said, next year, and those will also be a 1-1 attach on service. So, Verisure is actually -- there's three buckets that are contributing to the service mix, and we expect that to accelerate and help us hit our 1 million subscribers by our year-end call next year. Catherine Huntley: Great. Thank you so much for the color. And also, can you talk about the shift to services, to your point, and what you were mentioning in the previous answer? And how you believe that's going to impact margins? What do you plan on seeing as your business shift is complete and also especially since you plan on breaking even so soon? Gordon Mattingly: Thanks. That's a great question. I think you can actually see already some of the benefits that services business is having on our gross margin even in Q1. Services in Q1 were actually a record percentage of our total mix, just under 28%. And obviously, you can see we were pretty pleased with the service gross margin itself, which we kept just under 58% in Q1. But the benefit of that great gross margin and the high mix that we saw in Q1, you can see in the gross margin result, 32% on a long-debt basis, a record for us as a company, and we're very pleased with that. So certainly, as a service revenue continues to grow, we would expect it to account for an increasingly large proportion of our mix, and we would expect that to reflect itself in the gross margin. But keep in mind the seasonality in our business. Q1, from a product revenue perspective, is the lowest seasonal point for us. And obviously, Q4 is the strongest point. So you'll see some mix variation. But I think Q1 results exemplify the benefits of that services business and what it does for our margins. Catherine Huntley: Thank you. And congrats on the quarter. Matt McRae: Thank you. Gordon Mattingly: Thank you. Operator: Your next question is from the line of Jeffrey Rand with Deutsche Bank. Jeffrey Rand: Hi. Congrats on a great quarter. Can you talk about your supply chain if you're seeing any areas of tightness? And do you have any -- do you have good visibility into securing enough components to meet your full-year revenue outlook? And how much upside in demand could your supply support? Matt McRae: Yeah. It's a great question. So we are, obviously, still in a world where COVID is having some impacts on the business, and I'll lay out a couple of components of that. So one, we still see elevated freight costs for both sea freight and airfreight. And sea freight, we're seeing a little bit of congestion. So a little bit longer lead time just from a freight perspective. I think we're managing very well. You can see in the quarter, we're managing very well those expenses. Those could go up again, you know, as we go through the year a bit, but we're managing it through the team and everything else. I think the area that has a little bit more of an impact will be component and component shortages. We have been forecasting out quite much further than we would normally forecast out to make sure that we're securing the supply we need. And at this point, we feel comfortable with our year guidance of, you know, having those components. Although, again, we may see that pressure intensify as we get into the second half. The biggest impact the component shortages are having out there is our ability to actually respond to upside. So, you know, we just published, you know, a great Q1, and I can tell you there was more demand in Q1 than we could actually service. And again, not because there's a big shortage in components, but because the lead times are higher. Our reaction time actually bringing in upside-finished goods is a little bit slower than normal. So I think we'll see that where potential upsides are being attenuated, but we're seeing strong demand at the same time that we're seeing some of the component shortage. But we are managing that out. We are taking our forecast out a lot farther. We're managing this, I think, very well with our -- with not only our suppliers but our manufacturers. And so while we're relatively comfortable now, I think what we're trying to adjust for is how do we address potential upsides through the year as they come up and how much of that can we actually execute. Jeffrey Rand: Great. And as my follow-up, maybe a little more high-level question, but the pandemic has changed a lot about how people work, go to school, and interact with people. And some of these change behaviors are likely to continue after a pandemic. Can you talk about how you think changing behavior during the pandemic will impact longer-term demand for your products? Matt McRae: Yeah. It's generated a tremendous amount of awareness. And I think there's been several, what I would call, vertical areas of awareness and uses for the product that I think will be, you know, still with us for quite a bit. Some of it will be a permanent change. The most obvious is the amount of deliveries and interactions that happen at the front door. And some of that is the shift to e-commerce, just in general, where people are buying things and they're being delivered. But even meals being delivered instead of going out to restaurants, and some of that has caused a lot higher traffic at your front door. And one of the things we noticed is people, not only do they want to know when something's left at the front door, they also want to make sure that it's not being taken and lifted from a test perspective. But even in a meal delivery scenario, people want to see the meal delivered and then actually see the delivery person leave, so they don't come face to face during the pandemic and can pick the food up after people have left. So I think the entire activity and the traffic and the awareness around the front door is something that's going to persist. There are other trends as well, you know, being able to check in on loved ones remotely and make sure they're moving around because you don't get there as often. So I think some of these trends are long term. And then, in fact, we think we'll see some increased demand as actually, people get to leave the house, and they want to make sure now that they're not in the home all the time, that it's secure when they're remote. So we think some of these trends will continue. And then some of them may accelerate as actually people start to travel again and want to launch their premise as they start to leave their home again. Jeffrey Rand: Great. Thank you. Operator: Your next question is from the line of Thomas Boyes with Cowen. Thomas Boyes: Excellent. So really nice quarter. The product gross margins were up significantly, and it looks like there was a lot of some healthy destocking into the channel. I was just wondering if you could remind us how many inventory you're typically targeting. And then maybe provide us some insight into maybe the steady-state margins for the product business, you know, for the balance of the year. Gordon Mattingly: Yeah. Great questions. Really, in Q1, the product gross margin benefited from a couple of main things. We were able to control airfreight in Q1 pretty nicely. So that was the first thing. And then the second thing, it was a relatively quiet quarter for the promotional activity. Not a lot of events going on in Q1 from a promotional perspective, and that certainly helped gross margin as well from a product perspective. Addressing your question on the channel inventory, we actually did destock the channel in Q1. I just need to remind you that the denominator in that calculation is the final six weeks of sell-through. Now, if you look at it, Q1 is our seasonally weakest quarter from a sell-through perspective. And you're comparing that to Q4. The last six weeks of Q4 actually included the holiday period. So the denominator in that calculation in Q1 is a lot lower than what it was in Q4. So I know it looks like we've stopped in the channel, we actually destocked it. And I think looking at the channel inventory level now where it's at for North America retail, 12.5 weeks. I think that it's pretty reasonable stop. I think for the rest of the year, we'll see the normal seasonal pattern of stocking, destocking that we would see. I don't think there's going to be any tailwinds or headwinds from our COVID perspective on channel inventory. So I think we're relatively normalized. But just to clarify, we did actually destock from a dollar perspective in Q1 in Americas. I'm sorry, what was the final question you had? Thomas Boyes: It was just on the steady-state margin for the product business. Gordon Mattingly: Steady-state margin from a product perspective, we would expect mid-teens is a reasonable guideline for steady-state product gross margins. Thomas Boyes: Got it. And then just as my follow-up, you know, the entire product line has now had a, you know, complete refresh. Everyone's offering smart bundles, and you're making adapting on the software side. I was wondering what potential hardware refreshes you could do down the line? Is it something simply is just you're going to go from 4K to 8K? Or are there other, you know, hardware technology gaps that you see down the line? Matt McRae: Yeah. I think there are several areas, and we don't want to, you know, get too much into roadmap at this time. But I would tell you that there's still significant opportunity to innovate on the core camera lineup from a technology perspective and in ways that consumers would care about, and we're working on several of those aspects right now. I would tell you the monthly service, our subscription, which includes all those AI components, I do believe it's still at its early stages of providing value to customers, and we're already at a very healthy conversion rate and an even more healthy attach rate. And I think there's a lot we can do over time to actually add value there. The last thing I would say is, you know, our mission and vision here at Arlo is to really protect and connect people and provide that peace of mind. And I think there's some adjacent categories that we'll be looking at over time. So without announcing anything, in particular, we are moving some of our innovation engine, like I said on the call, not only are we going to continue to drive and the company that's delivering the best products, physical products with the highest technology in the industry first and delivering the best service from a feature set and functionality perspective. But we will be starting to look at opportunities to scale beyond what we've just refreshed, which is our core kind of smart monitoring camera lineup. Operator: There are no further questions at this time. I'd like to turn it back over to management for closing remarks. Matt McRae: Yeah. Thank you, operator, and thank you, everybody, for joining us on what was another great quarter for Arlo. We look forward to speaking to you again next quarter. Operator: This does conclude today’s conference. Thank you for participating. You may now disconnect.
Arlo Technologies Gains on Q2 Beat
Arlo Technologies (NYSE:ARLO) shares rose more than 3% intra-day today following the company's announcement of Q2 results that exceeded expectations.
Earnings per share (EPS) was $0.06, surpassing the Street estimate of $0.04. The revenue experienced a 3.3% decrease year-over-year, amounting to $115.1 million, compared to the Street estimate of $110.18 million.
The quarter concluded with an Annual Recurring Revenue (ARR) of $193.6 million, showcasing a remarkable growth rate of 66.1% compared to the previous year. Throughout the quarter, the company added 245,000 paid accounts, bringing the cumulative number of paid accounts to approximately 2.3 million, up 54.9% year-over-year.
Arlo Technologies Gains on Q2 Beat
Arlo Technologies (NYSE:ARLO) shares rose more than 3% intra-day today following the company's announcement of Q2 results that exceeded expectations.
Earnings per share (EPS) was $0.06, surpassing the Street estimate of $0.04. The revenue experienced a 3.3% decrease year-over-year, amounting to $115.1 million, compared to the Street estimate of $110.18 million.
The quarter concluded with an Annual Recurring Revenue (ARR) of $193.6 million, showcasing a remarkable growth rate of 66.1% compared to the previous year. Throughout the quarter, the company added 245,000 paid accounts, bringing the cumulative number of paid accounts to approximately 2.3 million, up 54.9% year-over-year.
Arlo Technologies Shares Up 10.41% Following Encouraging Q3 Results
Arlo Technologies, Inc. (NYSE:ARLO) shares closed 10.41% higher on Wednesday, following the company’s reported Q3 results, with EPS coming in at ($0.08), better than the consensus estimate ($0.14). Quarterly revenues of $111.15 million beat the consensus estimate by 5.03%.
Analysts at Deutsche Bank said they are encouraged by Q3 results and Q4 guidance as the company is seeing healthy Product demand and robust growth in its Services business. According to the brokerage, the company did a good job in the quarter navigating the supply-chain and logistical challenges to report upside to the high-end of Q3 guidance, while Q4 guidance indicates continued strong Product and Services demand. Post results, the brokerage has increased confidence in the continued growth of the company's Services business and believes the company has done a good job in adjusting its business model to support Services growth and executing during the pandemic. While the brokerage raised its price target from $9 to $10, it believes a meaningful multiple expansion from the Services transformation will still take some time.
Arlo Technologies Shares Up 10.41% Following Encouraging Q3 Results
Arlo Technologies, Inc. (NYSE:ARLO) shares closed 10.41% higher on Wednesday, following the company’s reported Q3 results, with EPS coming in at ($0.08), better than the consensus estimate ($0.14). Quarterly revenues of $111.15 million beat the consensus estimate by 5.03%.
Analysts at Deutsche Bank said they are encouraged by Q3 results and Q4 guidance as the company is seeing healthy Product demand and robust growth in its Services business. According to the brokerage, the company did a good job in the quarter navigating the supply-chain and logistical challenges to report upside to the high-end of Q3 guidance, while Q4 guidance indicates continued strong Product and Services demand. Post results, the brokerage has increased confidence in the continued growth of the company's Services business and believes the company has done a good job in adjusting its business model to support Services growth and executing during the pandemic. While the brokerage raised its price target from $9 to $10, it believes a meaningful multiple expansion from the Services transformation will still take some time.
Arlo Technologies Shares Up 10.41% Following Encouraging Q3 Results
Arlo Technologies, Inc. (NYSE:ARLO) shares closed 10.41% higher on Wednesday, following the company’s reported Q3 results, with EPS coming in at ($0.08), better than the consensus estimate ($0.14). Quarterly revenues of $111.15 million beat the consensus estimate by 5.03%.
Analysts at Deutsche Bank said they are encouraged by Q3 results and Q4 guidance as the company is seeing healthy Product demand and robust growth in its Services business. According to the brokerage, the company did a good job in the quarter navigating the supply-chain and logistical challenges to report upside to the high-end of Q3 guidance, while Q4 guidance indicates continued strong Product and Services demand. Post results, the brokerage has increased confidence in the continued growth of the company's Services business and believes the company has done a good job in adjusting its business model to support Services growth and executing during the pandemic. While the brokerage raised its price target from $9 to $10, it believes a meaningful multiple expansion from the Services transformation will still take some time.
