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 Tahmin Clarke. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to Arlo Technologies' Third Quarter 2024 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, 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 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, expenses, cash outlook, free cash flow and free cash flow margin, guidance for the fourth quarter of 2024, the long-range plan targets, the rate and timing of paid subscriber growth, the transition to our 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 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, Tahmin, 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 from our Essential 2 product launch across channels. This performance propelled non-GAAP gross profit to nearly $50 million in the quarter and generated $0.11 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 5.0 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 5.0 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 5.0 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…

Thank you, Matt, and thank you everyone for joining us today. I will start by sharing some financial details and provide an overview of the business for Q3 2024. Total revenue for the third quarter of 2024 came in at $137.7 million, up 6% over the prior year period. In the quarter, service revenue represented about 45% of total revenue, up from 39% in the same period last year as we continue the progression towards the 50% threshold. This shift in our recurring revenue base reflects the continued momentum that we have gained in our transformation to a services first business and the results are showing the power of the business model. Our installed base of subscribers continued its strong growth path, coming in at 4.2 million paid accounts at the end of Q3, an increase of approximately 255,000 paid accounts in the quarter. Paid accounts reflected a small catch up of Verisure subscribers and, as we have previously mentioned, this quarter concluded substantially all of the Verisure catch up related to firmware upgrades. Going forward, we remain committed to generating 170,000 to 190,000 new paid subscribers on a quarterly basis. Service revenue for Q3 was another record at $61.9 million or a 21% increase over the same period last year. The strong service revenue performance was driven in part by the growth in the overall paid subscriber base, but additionally a mix shift of subscribers to higher price rate plans resulting in ARPU expansion to $12.24 for our retail and direct paid accounts. Our annual recurring revenue at September 30th was $242 million, up more than 21% over the same period last year. I want to highlight the strength of our services revenue and ARR which helped deliver strong top line revenue performance and contributed to Arlo's improving profitability…

[Operator Instructions] Our first question comes from Jacob Stephan from Lake Street. Jacob, please go ahead.

Hi, guys. Thanks for taking my questions. Matt, Kurt, you guys made some comments on the call talking about kind of Q4 POS nearly doubling sequentially. And I think you guys said you had 1.5 million devices shipped in Q3. Does that -- help me clarify this, does that essentially assume that you guys will kind of ship 3 million in Q4 or maybe just some clarification there.

Yes, it's POS doubling from Q3 to Q4 is a measurement on cameras, and that's what actually drives the subscribers on the backend. So we're not including accessories into that. Those may grow as well. But when we look at what's driving subscriptions, we're looking at how many cameras did we sell through meaning at POS in Q3 versus what we think is going to happen in Q4 based on the promotional activity and what we're hearing from the retailers as things are starting to ramp up in the quarter. So we're expecting the POS in North America retail only cameras at nearly double what we did in Q3, which in turn would obviously drive subscribers. So it doesn't really equate to the 1.5 million because that's across very various regions and includes accessories.

Okay, got it. That's clear. And then maybe just talk about Secure 5.0 a little bit here. Obviously you guys are seeing some nice uptake, 40% are subscribing to the premium plan. But maybe could you help us understand how much of the customer base is currently on Secure 5.0? Is this broadly rolled out to all retail accounts or any color there?

Yes, no, great question. So we've had a couple great things happened in the last quarter. One is, like we said, the planning for Q4 and looking forward to a significant uptick in POS, which will lead to share gains in the market, which we're excited about. And as you know, we've been talking about that all year. But the second one is exactly what you talked about, Arlo Secure 5.0 launch really been in the market about six weeks as I mentioned in the prepared remarks. Like I said, it is the largest impact or biggest difference I've ever seen from just a service rollout on the key metrics. Right now it's available to all new subscribers. So we haven't done anything with our installed base, although we already have some of our installed base. Current paid accounts starting to cancel and actually buy the new plan because they're excited and they've seen the announcement, but mostly those are holding still at this point. It's really just being offered for new signups as of the last six weeks. I would say there's probably, you know, a certain number, maybe 80,000 to 100,000, just as an estimate, that are on the new account. So the data is a little bit early. But like you said when we look at our top two tier accounts, our premium accounts, used to be 20% or less, now it's 40% or more, so more than doubling. And that's driving the ARPU, which was already growing in kind of 12 -- to kind of 12 -- a little higher than 12. I think it's 12.24 in the quarter. We're now seeing well over 14 on those new subscribers. So to your point, that's what we're seeing on new subscribers. And what we're looking at as we go through this quarter and we start to look at Q1 next year is how do we migrate and actually bring all of our users onto Arlo Secure 5.0 and make that an exciting and potentially accretive event. Exciting for the users because all the new feature sets are getting and we're able to see how people are using Arlo Secure 5.0 and what to lean into. But obviously driving that higher ARPU through the entire installed base would be something that is not being accounted for. So those are two of, I would say, the big pieces of news that we're really excited about. Share gain POS lift as we get into Q4, which we've been planning all year, and actually a surprise to the upside in how successful Arlo Secure 5.0 has been in the early weeks of its rollout.

Okay. And have you seen a decent uptick in kind of the overall attach rate associated with Secure 5.0? I know in the past it's been about 65% but any uptake there?

We're seeing -- so one of the things I mentioned in the call is we've done -- we've enabled in some areas in-app purchases, which is new for us. And on the in-app purchase side, we are seeing an increase in conversion. It's small on a relative basis because we're only testing that in a couple of areas because we want to see how those customers progress through the entire lifespan. But that suggests there is a path to potentially lift conversion. Other than that, it seems really consistent with what we've seen over the last years and across the different cohorts.

Okay, got it. Thanks for taking the questions.

Thank you. Our next question comes from Mark Cash from Raymond James. Mark, please go ahead.

Yes, thanks. This is Mark on for Adam. Good afternoon, guys. Matt, maybe just starting with you on phase two with the new Arlo total security bundle for Allstate, so nicely building upon their relationship, 140 million Allstate Protection Plan customers or 16 million U.S. households are customers of them. So, really big numbers. I'm just wondering how you're thinking about the go to market mechanisms for Arlo and penetrating that base? And it might be helpful to maybe put that in context and compare it with the kind of the line of sight you have with Verisure when embarking on that relationship and how successful that's become now?

Yes, no, great question. So, Verisure, as you know, we're five years in, almost at the end of the fifth year with Verisure and that's been obviously strong partnership, took a while to grow, although I would say it came out of the gate pretty fast because we were able to implement some things pretty quickly into their systems, but definitely grew over those years. I think we'll see something similar to Allstate as far as it'll start slow, but the access to us -- an available TAM for us to address is sizable. As you know, phase one was really us selling Allstate products through arlo.com and starting to figure out how that attaches and how the brands work together in our user base. And what you're seeing in phase two is the opposite. Is Allstate starting to leverage emails, in-app messaging and their own vehicles to their large user base, selling Arlo hardware and service, the ATS bundle through there? Again, I think we're modest in our expectations in phase two. What I would suggest is both phase one and phase two is where you're seeing both parties start to understand how the brands resonate to the different user bases, how the products link together, where the value is being seen and collecting a lot of data. And I will tell you there will be future phases and you can expect things to kind of scale from here. But we're excited now to get the reciprocal that Arlo products and service to Allstate customers because that kind of closes the loop for us to gain some insight over the next couple quarters and plan what's coming next. The overall TAM and available for Allstate in particular is large, and we think what we're seeing through the initial data is we're reaching people that are not buying security through retail and may not have security at this point. So they look like new households or net new addressable households for Arlo, which is exciting.

Interesting. Okay, good. Thanks for that. And maybe that kind of ties into a question I had on geos and what you're seeing. So America is down year-over-year for two quarters in a row. Maybe Allstate is the answer to that. But then you have Europe with some countries ramping really quickly like we see with Sweden, while others are kind of destocking with some scale like we see with Spain. I guess what is causing that divergence, like domestically versus internationally? And I guess if you could kind of talk about what's going on regionally within Europe, that'd be helpful to understand.

Yes, we have to be careful we don't get too detailed in what's happening in Europe. There is some regional stuff there. I would say it's better to kind of look at it on a blended basis. And it depends where Verisure is actually deploying their resources or not given local market dynamics. There are some macroeconomic things that are happening in Europe that are different than the U.S. that impacts it as well. But overall, I would say, Verisure is strong, as you can see in the quarter, and we expect them to remain strong actually in Q4. One comment is, in prior years, you'll remember that Verisure ended up destocking sometimes in Q4 leading into the following year for various reasons that we've talked about. We're not sure that's going to happen this year. We think their ordering may remain relatively strong and this is for local regulatory reasons. Chinese New Year for manufacturing ends up earlier. There's a lot of reasons for that. But we think Verisure will remain a pretty strong partner in Q4. When you look at domestic retail versus that, some of that is timing of shipments going into holiday where Verisure get some earlier than we get them here as an example. So we had a pretty strong Q4 from a shipments perspective, but then POS will be stronger in Q4. And some of that is -- in Q4 or Q3 for us, we didn't lean as hard into prime day and a couple of the areas and we watched some of the price points that are being hit. And so we may have lost a little bit of share in Q3, even though we had a great quarter. What you're seeing is us adjusting to those price points with our retail partners and all of our channel partners going into Q4 and why we're -- we're feeling -- we're going to see nearly double the POS on camera systems going into Q4. So some of it's timing, some of it's market dynamics, and some of it is kind of relative strategy on where -- when and where you want to stock in.

Yes. I'll just highlight something in addition to that and why we shared some commentary regarding the POS is just last year, if you recall, Q3 and Q4 for us where -- the transition periods where we were going from the Essential 1 to the Essential 2 platform. And the Essential 2 resulted in a fair amount of stock-in in both Q3 as well as in Q4. So you have to factor that into play, which is why we wanted to kind of normalize that factor and really talk about POS, because we think that's the factor or metrics that helps us get a clear indication or line of sight to household formation.

Okay, great. Matt, just kind of going back to your comments on prime day in and leaning in and -- or maybe not as much there. And I think in your prepared remarks you talked about the customer sentiment kind of being a headwind, you have hurricane disruptions which we know very well about down here lower foot traffic.

Yes.

I'm just wondering how these factors do play into your process of thinking about where to be more aggressive holiday season, because Walmart is obviously an important partner as you go mainstream and broad with your product. But can you lean more into Amazon or Arlo with those disruptions happening?

Yes, no, that's exactly it. So when you look at both the price points, but more importantly, especially recently as we plan for Q4 in the final stages, is we're seeing where things are strong and where weak and we are seeing strength. So we have certain retailers, you mentioned one, Walmart, where we're seeing actually strength and good foot traffic and we see other ones where we don't. And we double click in and start to look at the details of that, what's going on and what you're seeing us is adjust some price points and length of certain promotions in some areas and shifting in some areas of the country online when there maybe foot traffic is low. So that could be arlo.com, it could be Amazon as an example, could be a retail.com with one of the retail partners that is seeing less foot traffic, but still decent online traffic. So we're making those adjustments. Those are the last adjustments you can really make. You can't change the product you are promoting because those are already shipped in. But what you can do is you can tweak price points, tweak offers, tweak length of offers to then maximize what we're looking for, which is unit POS in Q4 that leads to then future subscribers. And we think we've done a great job optimizing that and we're seeing some real strength from the planning of what we think is going to happen as we get into Q4 and execute through Q4 starting 2025.

Okay, thank you. If I could just ask one more for Kurt. I appreciate the commentary you gave around the Essential 1 to 2 and then stock-in. But how are you thinking about with this promotional on the holiday season, the POS growth? And so how are you thinking about inventory levels throughout the fourth quarter and kind of how that flows into what you're expecting for cash flow to close out the year?

Yes, a couple of questions embedded in that question. I'll start by saying that first off, as you look at what's happening in the space, we have seen ASPs declining. And so we're prepared for that obviously with Essential 2. And that's allowing us to be very, very promotional in the fourth quarter. So we're prepared to kind of play at price points that we may not have been in that position to play at in the past. And I think that's a good situation to be in. As we look at what's happening at the retailers, we do believe for the North American retail that we will be more into a destocking position this year in Q4 relative to where we were last year again last year because of the load in that occurred over two quarters for Essential 2, that phenomenon doesn't exist. This year we believe the retailers will be more into a destocking position. But all that being said, what we're prepared to do is be very aggressive with the promotional activity ultimately to get those units out into new consumer hands and ultimately convert them into subs in the Q1 and Q2 of 2025.

Got it. Well, thank you so much guys for taking the questions.

You're welcome.

Thank you. [Operator Instructions] Our next question comes from Hamed Khorsand from BWS Financial. Hamed, please go ahead.

Hi. So my question was really about how you're trying to plan this out? If ASPs are declining, are you going to get the same amount of traction from your -- getting new subscribers on paid accounts?

Yes, we -- obviously at certain price points we don't know. Some of the price points we'll be hitting are ones we've hit on promotion before and we've seen very consistent performance. Early indication is we'll see similar performance as well that it's -- they're really independent decisions by the consumer, but we won't be able to really report that data until we get into Q1.

Okay. And my other question was -- how are you going to basically partner with more of these insurance companies if there is a lot of competition already in your field?

Well, what we've noticed is there's actually less competition in the partnership space. And it's one of the reasons Kurt and I have emphasized the strategic accounts being a big part of how Arlo is going to get to where it is today to our long range plan. Partners worry about security. They worry about data privacy. They're looking for somebody who is concentrated in the space and innovating in the space and not this product line or services being more of a side hustle or a small part of a very large company. So what we've seen is there's partners in the insurance space are looking for a trustworthy company, an American company, to be very clear where they can trust what's happening, where the development is happening and everything, and a company that's really focused on the space and treats people's data correctly and somebody that can actually innovate with over time. So we're actually seeing less competition in the strategic account area than we are in just physical retail.

Got it. All right. Thank you.

You're welcome.

Thank you. There are no further questions. So that concludes today's call. Thank you for joining everyone. You may now disconnect your lines.