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. [Operator Instructions] I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies 2022 Third Quarter Financial Results Conference Call. Joining us from the Company are; Mr. Matthew McRae, CEO; and Mr. Kurt Binder, recently appointed CFO. The format of the call will start with an introduction and commentary on the business provided by Matt, followed by our review of the financials for the third quarter, along with guidance for the fourth quarter and full-year provided by Kurt. We'll then have time for any questions. If you have not received a copy of today's release, please visit Arlo's Investor Relation 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 condition, including descriptions of our revenue, gross margins, operating margins, earnings per share, tax rates, expenses, cash outlook, guidance for the fourth quarter and full year 2022, 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, partnership with various market leaders, continued new product and service differentiation, supply chain challenges, transportation costs and the impact of COVID-19 pandemic 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, Erik, and thank you everyone for joining us today on Arlo's 2022 third quarter earnings call. Amid the rapidly shifting economic environment, the team executed well to produce a solid quarter of financial results in Q3. Total revenue was within guidance at $128 million, up 7.7% sequentially and up more than 15% year-over-year, and non-GAAP gross profit reached a record $38 million, up over $13 million from a year ago. This resulted in a non-GAAP gross margin of nearly 30% in the quarter. Our growing consumer SaaS business continues to be a key driver of our results. Total paid accounts were up 91% year-over-year as we added 195,000 paid accounts in Q3. Service revenue reached $35.4 million, which is up 31% year-over-year, and our non-GAAP service gross margin rose to 66.7%. While we were pleased with our execution against a challenging supply picture, near the end of Q3, we started to see a shift in consumer behavior, where broad-based inflationary pressures, coupled with the threat of recession are dampening consumer demand industry-wide. With a weaker demand outlook, our retail partners are moving to increase promotions and lower inventory. In consideration of this, we took immediate action to adjust our strategy and match our operational footprint to this new outlook for Q4 and 2023. First, we decided to pause, our branding campaign. As we discussed, the initial awareness spend was a test implemented to measure via paid account uplift over our baseline subscriber run rate. However, despite creating nearly one billion impressions and a promising list in consideration in the first six weeks, the volatility of the baseline in this market makes it difficult to effectively measure and evaluate the efficacy and ROI of the spend. So this spend is paused indefinitely, until we see the market return to…

Thank you, Matt, and thank you, everyone, for joining us today. Let me start by saying that I am extremely excited to serve the company in my new role, and I look forward to working with you all in the future. I will start by sharing some financial details on Q3. Revenue for the third quarter came in at $128.2 million, up nearly 8% sequentially and 15% year-over-year. Against an uncertain macroeconomic backdrop and inflationary pressures impacting consumer spending, we experienced softening demand in our customer base in the second half of Q3. However, we are pleased that our channel diversification and ARR growth demonstrated resilience to deliver revenue within our guidance range. Our service revenue for Q3 2022 was another record $35.4 million, up 8% sequentially and 31% year-over-year. This was driven by the addition of 195,000 paid accounts in the quarter and a robust installed base of 1.7 million subscribers. While service revenue accounted for only 28% of our Q3 2022 total revenue, it represented 62% of our total gross profit. Product revenue for Q3 2022 was $92.7 million, which was up 8% sequentially and 10% year-over-year. Our year-over-year product revenue growth was driven by the shipment of 1.3 million cameras worldwide, with 45% of our revenue coming from our international customers. Within our globally diverse customer base, we have experienced continued strength from our strategic relationship with Verisure in the EMEA region, with revenue up 70% year-over-year in that region. Our ability to develop such a strong and collaborative relationship with Verisure has proven to be a great intangible for Arlo. And I am excited to see what similar opportunities we can develop in other regions across the globe. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures…

[Operator Instructions] And our first question will come from the line of Hamed Khorsand with BWS Financial. Please go ahead.

Hi. Could you just talk about the actions you're taking? Are you taking it from headcount perspective? Are you taking out from having already stocked inventory, you don't need to source expensive components right now. Could you just be a little bit more elaborate on that?

Yes. As part of reviewing the operations, I would say, it's comprehensive across the organization. So Kurt mentioned an overall reduction in headcount of about 10% across the company and that's an action that's already been taken. We have a full review of outside expenses, so we're going to look to reduce expenses from kind of outside parties and outside services. I would tell you as part of the analysis we're seeing as well, I think there's a lot of operational savings that are happening as these headwinds form. So we're seeing, obviously, freight expenses come down as part of COGS. We're seeing component supply obviously start to get more come off of restrictions and the ability to negotiate pricing as we go forward as well. So it's everything from supply chain costs, cost of goods sold to actual operational, both internal and external expenses of the company.

And why do you think -- it sounds like you were caught off guard. So why do you think that's the case? Was it really just consumer driven, or was this just retailers just across the board just cutting them out of inventory?

Yes. I don't think we were caught off guard. I think we were watching it very carefully. If you look at our commentary in the last quarter, we said there's a demand -- we were watching demand on a weekly basis. In fact, we would look at what's coming in from our channel on a twice weekly basis. And I would give you the detail in the quarter, the first half to even maybe two-thirds of the quarter were actually strong. And you can see that in the results of Q3. And it wasn't until after Labor Day that we saw some of the data and the signaling from our retailers, to your point, the retail partners kind of across the board that not only were they seeing a different demand profile and customer sentiment, but they were changing their operations on how much inventory they want to hold. And we've seen some retailers just to give you an idea, moving from the, kind of, normal range of 12 weeks to 15 weeks of inventory that they would hold down to as low as four or six weeks of inventory that they want to hold as they go through this holiday period. So there was some abrupt changes out there after Labor Day, and we reacted very quickly. And I'll tell you, after that Labor Day week, we collected that data is when we started adjusting some of the operations in the company.

And my last question is, if you're pausing the ad spend and cutting headcount, why are you expecting net losses to continue through the first half of 2023, given that subscriber -- service revenue is going up, previously you have been talking about Verisure adding to your service revenue as well through their roll out of their cameras?

Okay. Well, I think in terms of our guidance and direction for 2023, our overall feeling is we want to make sure that we're a bit cautious. We believe that the plan that we've laid out and the actions that we're in the process of taking will get us to a point where we're at breakeven non-GAAP operating target, profit target. But -- and our hope is that certain things will start to unfold here in probably Q1 to Q2 to get us a bit to that level earlier, but we thought it was best to be a bit cautious given the uncertainty and the economic climate that we're dealing with right now.

Okay. All right. Thank you.

[Operator Instructions] Our next question will come from Jacob Stephan with Lake Street Capital Markets. Please go ahead.

Yeah. Hey, guys. Thanks for taking my questions. Can you just confirm the guide for 2023, I think previously it was doubling the growth rate and adjusted income positive. Is that on a quarterly basis, or are you coming in to that for the year?

Well, I think that was assuming that the brand spend obviously continued into next year. And so when we look at the market kind of going into next year, we're seeing -- we're assuming that the current environment is going to continue into next year and that the market, meaning our segment, but also the overall market in our entire product segment is going to be flat to down. And that's what we're seeing from the channel perspective and the early data that we're seeing on what they think is going to continue after the holiday period. Kurt mentioned in his remarks that we always expect to do a bit better than that. So we're hoping to grow a little bit year-over-year as we go through. And then you would see the normal seasonality, as we exit this year then going into next year. So I would say that's obviously pausing the brand spend and seeing what's happening in Q4 and thinking that's going to continue at least into the first half of next year from a customer sentiment perspective gives you a bit of an update on what we think is going to happen next year.

Okay. That's helpful. Maybe just talk about the increase in inventories. Where is the softness in the US? I mean, there's a fourth quarter of -- I mean, fourth consecutive quarter of shipments of Verisure over $50 million. But maybe just talk about where you're seeing the softness in the US. Is it on the retailer side, or are customers not coming to arlo.com as much?

Yeah. I would say the -- if you look at it from a demand perspective, it's definitely in the consumer retail channels is where we're seeing it. And that's part of our commentary is around our diversified revenue base is really helpful in that we have this big services business, which is our primary strategy as a company and provides a foundation in an engine room for the company. Partners like Verisure obviously, are very strong for us. Where we're seeing that weakness is really through the retail channel partners on the consumer side. A – Matthew McRae: Yes. And just to add to that, we made an investment leading into the fourth quarter, about $34 million of incremental inventory and in the midst of that, as Matt mentioned earlier that there was a bit of this shift in expectation with the retailers on the weeks on hand inventory that they plan to hold, especially in the club channel. We -- have been adjusting to that. But what that has resulted in, is a bit of destocking that occurred in Q3, probably will continue into Q4, and that is impacting some of the revenue targets. So -- the investment we think in inventory is going to pay off over the next couple of quarters, mainly because we think we'll be at levels where we'll be able to meet consumer demand a bit quicker. And also because we are trying to find ways to reduce the overall COGS associated with logistics and freight and getting inventory here into the DCs and into our retailers.

Okay. Maybe just one last one on brand awareness. Can you give us a more specific kind of time line on when you may have paused that campaign and maybe just talk about the burn rate on the increased ad spend, give us a better hint on sales and marketing expense. A – Matthew McRae: Yes. So the -- when we started getting the signals towards the end of Q3, that's when we made the decision to pause the spend. There's a bit of a lag because you buy the media a bit ahead of time for that. So the spend has been stopped as we talked about, you'll see a little bit of a residual in Q4. But after that, you'll see nothing from that brand awareness campaign as we go forward. Again, we saw some great initial results. It only ran for about six or seven weeks, but we had over 1 billion impressions and had a huge amount of kind of access to the demographics that we were targeting over 80% reach in some of those key categories, and we were just starting to see flow through. But we think at this time, despite the early success there, given that one of the primary reasons for doing this was to judge lift over a baseline and now that the baseline has changed and the customer sentiment has changed. We feel it's the right thing to do is just stop that until the market kind of gets more stable and starts to go in a more positive direction. So stopped it towards the end of Q3 in the week or two after Labor Day. You'll see some residual spend because, again, the purchases of some of that media happens months and months earlier and then it will tailor off as we get into next year, it'll go back basically down to zero.

All right. Thanks, guys. A – Matthew McRae: Yes.

And with no further questions, I'd like to turn the call back over to Mr. Matthew McRae, CEO.

Thank you, operator. I would like to take a moment to thank all the teams at Arlo for the hard work to deliver such outstanding results in the face of continuing pandemic and macroeconomic headwinds. While we could not predict the current customer spend environment when we developed our long-range plan, our diversified revenue base, innovation leadership, coupled with our expense reduction plan and disciplined execution means our confidence in achieving those long-range targets is unchanged. Thank you, everyone, for joining us today.

And this will conclude today's conference. Thank you for your participation, and you may now disconnect.