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' 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 have not received the copy of today’s earnings release, please visit our Arlo’s Investor Relations website @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 statement. 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, Tom, 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,…

Thank you, Matt, and thank you, everyone, for joining us today. 2024 was another outstanding year for Arlo as we continued 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…

Thank you, Kurt. I would like to change gears now to start looking ahead at 2025 and some of the exciting components that will play a role in our future success. Innovation is at the core of what we do here at Arlo. Our history of innovation spans a decade from the launch of the original Arlo wire-free camera to the most recent updates to our complete security experience including Arlo Intelligence. Here’s what we have planned going forward. Looking ahead to the holiday season in 2025, Arlo will refresh nearly every camera in our lineup across Ultra, Pro and Essential. And we will also be expanding into several new camera segments like pan-tilt-zoom and more powered outdoor devices. This will be the largest device launch in our company’s history and sets the stage for growth with Arlo already securing an increase in shelf share at one of our largest channel partners. Simultaneously, Arlo has commenced development of a next generation home and small business security ecosystem launching in 2026 and 2027. This new concept was born out of a clean sheet of paper design study, ignoring the past precedents and old technology that still dominates the space, which enables a groundbreaking new way to think about and experience security. I could not be more excited about this program, which is a beneficiary of our organic capital allocation program and we will start sharing information with strategic partners later this year. This is true innovation, what has always made Arlo great and it will reset the bar for the entire industry once again. Based on the success and data we saw from our Arlo Secure 5 launch last year, we moved to simplify the subscription plans that we offer in 2025. Arlo now offers two plans, Plus in both single…

Thanks, Matt. Our strong operational performance in 2024 and groundbreaking innovations that Matt just discussed positions us for success in 2025 and beyond. Our large addressable market is expanding as the value proposition that we provide can serve a broader range of customers. Our SaaS business model is resilient and sustainable as we focus on acquiring new households through our highly leveraged channel and strategic partnerships. Using our compelling service offerings, we expect to convert purchases from new households at high rates into paid subscriptions. As customers are integrated into the Arlo ecosystem, we will expand ARPU through upsell opportunities led by sophisticated AI capabilities or lifesaving professional monitoring solutions. These efforts result in higher ARR and expanding margins, bolstering our profitability and generating additional free cash flow. The flywheel effect inherent in our business model is why we have such confidence in our ability to continue to deliver outstanding operational results now and into the future. We have now described the outstanding results that our subscription strategy has yielded, and our focus remains on driving additional unit sales to deliver highly profitable subscriptions. Even with our aggressive stance on growth, we don’t expect our customer acquisition costs to materially impact our consolidated margins or profitability goals. With that said, we expect the first quarter consolidated revenue for 2025 to be in the range of $114 million to $124 million. We expect our first quarter GAAP net loss per share to be between a loss of $0.06 and $0.00 and our non-GAAP net income per diluted share to be between $0.09 and $0.15 per share. We expect product margins in the period to rebound from the promotional driven activity that was experienced in the fourth quarter of 2024. For the full year of 2025, we expect consolidated revenue to be…

Thank you, Kurt. As you can tell from our guidance, 2025 is going to be a massive year at Arlo. We are executing extremely well and continuing to perform at the highest level across all SaaS peers. In fact, if you take the SaaS companies we highlighted earlier and down select further to only those companies that are achieving a near Rule of 40 status, it becomes a much smaller cohort. And this set of companies are currently being valued based on a revenue multiple of 7.6x. We then decided to take a look at a smaller group and only look at companies that are achieving revenue growth above 20%. That reduces the peer group to five companies, GitLab, Klaviyo, Life360, money.com and Semrush. And these companies are valued at a revenue multiple of nearly 10x. How does Arlo compare? Our 2025 guidance puts us squarely in the Rule of 40 club and our ARR growth rate puts us in that top tier set of only five companies. Yet, we trade at less than 4x multiple against our service revenue, which supports my earlier comment that we feel our true value has not yet been recognized by the market. You can see why we have been buying back stock. For those that have been on the journey with us, you will remember we set out some ambitious targets to achieve by 2027 in our original long range plan. Those targets were 5 million paid accounts, $300 million in ARR and more than 10% operating margin. It is clear that we will likely achieve all three of these metrics before the end of this year, 2025. So it was the correct decision to reset those targets last year and to put out audacious goals that doubled or more than doubled those…

[Operator Instructions] First question is from the line of Adam Tindle with Raymond James.

Thanks. Good afternoon and congrats on 2024. Appreciate the additional details on the call. As I look at your outlook for 2025, particularly on the services revenue side, I wanted to ask about that, Kurt. At or above $300 million or 20% plus year-over-year growth is obviously a very strong outlook. And if I compare that to 2024 where you just finished, it’s about a similar level of growth despite higher scale. In Q4, I think you were closer to mid-teens, so it’s a little bit of an acceleration from what we just saw in the past 90 days. And that’s what I wanted to ask about. What is sort of the buckets that underpin that $300 million services target for 2025? Imagine there’s some price lift in there that Matt talked about. If you could just kind of decompose some of that to give us a little bit more confidence in that outlook? Thanks.

Yes, Adam, thanks so much for the question. Certainly, a great outlook for 2025 of the $300 million plus in services revenue. So it’s a factor of several aspects. One, obviously we’ve been talking a lot about ARPU expansion. So we do see the pricing increasing. This past year, we highlighted the fact that we started the year at $11.30 grew that 12% to $12.60 exiting the year. So we expect that to continue, especially on the back of Arlo Secure 5. The volume in our subscriber base is increasing. We think that’s going to continue throughout the year. We’re doing a number of things to ensure that we incentivize our sell through or point of sale activity to ensure we can form some additional households and drive subscriber growth. That will be a big factor in it. And then of course, the other thing that’s going to, we believe, provide an accelerant there is also a number of these strategic partnerships, which Matt touched on in great detail. There’s a lot of runway there, a ton of opportunity. And finally, mix shift will also work in our favor. So it’s a combination of factors, and we just feel like the results from 2024 and what we’ve been able to accomplish there bode well for us delivering on a big 2025.

Got it. And maybe for Matt just to clarify on that, because I think I caught in the comments that you have a transition in your subscribers to the new services platform. ARPU is going to bump up to I think $17.54 you said in that. The clarification would be, is that for all of the existing subs or is there a way to kind of give us a sense of like what percent of subscribers are going to be making this transition? And secondly, how are you thinking about potentially mitigating any churn from that transition? Obviously, in consumer SaaS, you guys have had very strong churn metrics, but we’re always worried about that when we go through transition. So what percent of subs and how do you manage churn?

Yes, great question. So it started from our Arlo Secure launch in Q3 going into Q4 last year. And we as we always do, we’re very data driven. So we watched exactly what the consumer behavior was, what plans they were selecting after we launched our Secure 5, what features they were going after. And we onboarded all of that and then started to look at our annual operating plan for 2025 with that knowledge in place. And so what you’ve actually seen us do is actually just remove a plan and actually make it simpler because what we saw and you’ll remember this from last quarter’s call, we saw a lot of users stepping up and actually wanting to pay for the full AI and kind of moved away from our basic plan on a mix shift. So we did is we got rid of the basic plan and we actually put the full AI suite of services on the single cam plan and now on basically an unlimited cam plan and actually just reduced our plans by one. So that simplification, but also seeing people mix up and then just building the plans around the consumer behavior we’re witnessing in Q4 is the change that we made. Now the change was made on people who were signing up for new plans on January 1st. And then over the course of this month, February, we’ve been migrating all of our existing users on older plans to these new plans, basically mapping them to the most equivalent plan through the course of February. So that should be done by probably by this weekend. And that really just depends on what day they had their actual renewal date was going to be like we did our transition two years ago on this. So by the end of February, everybody will be, all of our paid subscribers will be on the new plans. And again, those were developed based on the data we were seeing in Arlo Secure 5. As far as churn, yes, we are very focused on churn and customer retention. Anytime you do a transition, you’ll see a little bit of a jump in churn and then you see it moderate down very quickly. I will say there’s a couple of things working for us. One is we use the data in Arlo Secure 5 to make these choices for how to position the plans this year. Two, we’ve actually seen some opportunities to increase conversion as well like in app payments and some things that we’re actually running as well. So there will be some puts and takes. Our expectation is while there might be a slight increase in churn temporarily, that will land back in that range of 1.1% to 1.3% like we’ve done over the last five or six years of deploying the service.

Got it. All right. And maybe just one last one. I’ve got a lot more, but I know we’ll discuss more at our conference next week. But on the product side, Matt, you talked about the largest device launch in company history coming up. I also noticed that your channel inventory in U. S. Retail is very, very healthy levels, I think the lowest of 2021. So a big launch ahead of a very clean channel. I wonder the question would be, if you could compare this launch versus prior launches, what you’ve maybe learned for prior launches and what you might do differently since this is such a notable one? And for Kurt, just a little bit confused, I wonder if there’s some timing or something here because I was backing into the product revenue growth expectations for 2025 and I think they’re down double digits. So why would that be the case in a year where we’ve got a big launch? Thank you.

Yes. So from a launch and product perspective, like I said in the prepared remarks, this will touch basically every camera we ship. So think of the entire Essential lineup, which is our volume mover as you know, the Pro Series, which is our kind of mid-tier product that a lot of people step up to and then Ultra, which hasn’t been updated in at least two or two and half years. So every single lineup will be updated. So that gives us an ability to kind of reset pricing, reset the steps through the different price segmentation. But also what you’re going to see in key areas, we’re actually going to grow the assortment, meaning the number of SKUs for instance inside of Essential. And that’s -- it’s doing a couple of things. One, it’s tapping into some of the smaller segments that are actually experiencing fast growth. So that’s really important as we see consumers start to buy slightly different cameras year-over-year. But it’s also driving new use models and new user experiences through that time period as well. So what we’re seeing, like I mentioned in the prepared remarks, is not only is there excitement about this large launch, but you’re also seeing us be able to capture additional shelf share in some of our existing retailers because these are very popular type of products. And I’m trying to do it without giving you exactly what we’re going to be shipping. But you can see the expansion is not just replacing existing products, it’s actually creating incremental share. And so most of that launch will be towards the end of the year. So just talking a little bit in front of Kurt. A lot of the growth and the unit growth and the new products that will land will be kind of moving into that Q4. So the first three quarters will be on the existing product.

Yes. In response to your question, Adam, on the product revenue, this will be a pretty broad assortment. And as Matt just mentioned, we are going to be targeting some price segments that historically Arlo has not played in. We saw this in Q4 a bit where the price segmentation around $50 and below was very active and a big part of the overall market share that was out there. We want to make sure that we are able to do that in 2025 on a very consistent basis across our entire portfolio. So looking at our overall revenue assumptions, you can expect continuation of declines in ASPs and also aggressive promotional activity throughout the year, in particular in the second half of 2025. But the great thing is that we’ve been working closely with our supply chain and ultimately, we’ve incorporated in somewhere between probably 25% to 35% BOM cost downs, which will help us play in that price range and ultimately be profitable. So we’re really excited about this launch. And we think that it will really dovetail well into our ability to generate greater household formation and ultimately more subscribers to fuel our services business.

Next question is from the line of Jacob Stephan with Lake Street Capital.

Thank you. I appreciate you taking the questions and congrats on the results and strong outlook here. I just want to touch on kind of customer acquisition costs, actually doubling year-over-year, but LTV has actually grown. So the 401, is this kind of a comfortable level? How can we expect this to trend as we look through 2025?

Yes. So in talking with analysts and everybody, obviously anything over 3 to 1, we think is world class. But if you look at enterprise SaaS or other consumer service customers or companies, you’ll see that 3 to 1 is kind of where you want to be to be a world class. So we’re still well above that. In fact, as you know, we’ve talked in the past, we’ve had investors come and say, look, 7 to 1 is too high. You’re under investing in the customer acquisition and potential growth of the company. So I would say we’re targeting somewhere between, call it, 3.5 and maybe 4.5 or 5 over time. I think four is really comfortable right now, but it will fluctuate up and down, especially if you look at it quarter to quarter because we will dig in deeper like you saw in Q4 and then you’ll see that rebound back in Q1. Ultimately, what we’re doing is we’re optimizing the business to capture the shelf share, which then captures the household formation that is driving our subscription business just like Kurt just mentioned. So we’ll keep an eye on that and move it up and down. I think when we were 7 to 1, I actually agree that we were under investing in the business a bit. I think where we are now is probably an appropriate level and again it will kind of move up and down as we’re maximizing that household formation and generating future service revenue.

Yes, got it. Okay, that makes sense. And maybe just the rebound in product margin that was referenced in the outlook from the negative 12% in Q4 here, what kind of rebound are we talking about either in terms of a percentage or dollar amount?

Yes. So I’m not in a position to quantify it because obviously we’re going to be very opportunistic to meet the consumer where they are for the quarter. But what I’ll say is that Q4 was a very aggressive promotional quarter. There was a new number of factors going on and we felt it appropriate to go after and garnish that demand. Obviously, that was a good decision considering we exited Q4 with 80 plus percent gross margins on the services. And so that service business continues to perform very well. As we look at Q1, I mean, I would expect it to rebound. And I think that it will be neutral probably at best. We may be positive in the positive range, but we’ll play that by year as the quarter unfolds.

Okay. And just one last one for me here. New subs at $17 ARPU, that’s a nice step up. Is that inclusive of the Essential ad platform that you guys have been testing or does that not include the any contribution from that?

No, it does not include anything from the ad platform. That’s still in test. I think you could expect us to update investors a bit more of that on the next call. So what you’re seeing there is really just the impact of the new structure of the price plans that we made a change in January. So that’s the first data reading through after we made the change in January that we talked about earlier. So it’s only subscription revenue on the plans that we’ve talked about. It’s not including any other things like the ad platform.

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Hi. Could you just talk about just the competitive environment here? I mean, you were talking about you have to do a lot more promotions. Do you think you took market share here or are you maintaining it? It sounds like you’re being very aggressive here with it.

Yes. I’d say the competitive landscape hasn’t changed a lot. It’s the same players. I would say the pricing and promotion in Q4 was slightly deeper than we had probably anticipated at the beginning of the year. If you’ll remember, we gave investors a heads up, I think, last quarter and kind of mentioned that we’re going to go a step deeper and try and drive some household formation, which we did. From a share perspective, Q3, we were a little bit lower in share that got recovered in Q4. And I’ll tell you during the holiday week, we gained significant share. So when we had our pricing at the lowest and we were testing some of the price points with some of our key retailers, we actually gained share during the quarter. So what we’re seeing is there is some price elasticity. When we hit certain price points, we can see the growth in the household formation. Q4 obviously is a unique quarter in that it’s very promotional and that’s why we see the rebound coming back into Q1. But if I step back and just answer your question at the high level, we’re not seeing a lot of change in the competitive dynamics. It was just Q4 was maybe one click deeper on the promotional scale. And we saw that happening in summer and then already communicated that to investors. So it played out exactly as we thought.

Okay. And then any change as far as the timing as to when these customers who bought the units would actually convert to paid subscription?

No, it will be very similar to what we saw last year. Historically, if you go back three or four years, we had a 90 day free trial and that would delay almost all of those customers into Q1. When we moved to a 30 day trial, which was about, I think on most of our products about 18 months to 24 months ago, then it’s mixed. You’ll see a little bit in December and then a little bit more in Q1 because it’s a shorter free trial. So it will be a similar dynamic to what you saw last year.

Your next question comes from the line of Scott Searle with Roth Capital.

Hey, Good afternoon. Thanks for taking the questions. Great job on the outlook guys. Very exciting to look at 2025. I apologize to follow-up on the pricing question, but just wanted to get clarification. The price increases will go, have gone into effect for those who are on monthly subscriptions, but annual subscriptions will kind of be a rolling basis as they come up for renewals. Is that the way to think about it? And then just to clarify the impact of the price increase itself, is there a blend, you’ve given a target number, but I’m kind of wondering what the average ARPU number will be in terms of increase for this year? Quick back of the napkin math, when I look at the subscription range or net additions that you’re talking about on a quarterly basis, it’s mid-teens kind of growth. So to get to 25%, I’m assuming it’s about 10% price increase overall. Is that the way to think about it?

Yes. I think that’s in general, yes. I mean, we honestly won’t know until the migration is totally done. But let me back up and because you touched on a correct point. The migration that we’re doing through February is for the monthlies. You’re 100% right there. Annuals would click over when those annuals come up. So you’re right, some of our annual, which is still a vast minority of our plans, especially the historic plans, but those would actually transfer through the year on whatever month and day that their renewal. So just to be very clear, so on January 1st, the plan new pricing and structures hit for all new subscribers coming into the Arlo system and signing up. In February, we migrated all of our monthly customers. Some of those annual customers also obviously moved over in February if that’s when their planned renewal is happening. And then other annual customers will turn over throughout the year. So that is a correct way to think about it. We ended the year on ARPU. Yes, we ended the year on ARPU around $11 and change, I think it was $11.50 some cents or going to $12. We’re seeing on the new subscribers over $17. So that’s a great indicator. And so what you’re going to see is probably a blend through the year. It’ll land somewhere in the middle. And again, I would wait to give you a number until we get more of the migrations of the plans and which plans they end up in afterwards. But you will see an ARPU expansion over this year, which will obviously lead into some of the growth that we’re talking about on both ARR and service revenue.

Got you. Very helpful. And Matt, you mentioned shelf space at one of your key retail partners. Is that due to promotional activity or is that due to a realization from your retail partner that certain vendors are actually stealing revenue from them. They buy one and then the follow on comes through online sales or otherwise. I’m just kind of curious how that evolution is going within your retail customer base.

Yes, it’s a great question. So in this case, it’s less about the latter part of your comment. It’s more about, I think, the success that they’re seeing of Arlo on the shelf, but also drawing customers into the store because this is a fiscal store company we’re talking about, also the expanded assortment in our product launch that’s coming in the September, October timeframe for holiday. So they looked at our assortment and actually made an early commitment, a commitment much earlier than they normally do when they do their shelf selection for the second half of the year. We positioned all of the product. They liked the expansion. They liked what they saw. And they actually decided to nearly double our shelf slots in their stores because of the expanded portfolio and how we performed with them over the last year or two.

Got you. And if I could then, on the longer term horizon, a couple of things. I’m not sure if I heard any commentary specifically about insurance on the call. I’m wondering if you could elaborate on that strategic partnership. And then it sounds like the freemium model is starting to ramp up a little bit. I think it’s in beta right now. It sounds like that there might be more to come in the not too distant future. Any thoughts on both of those for us?

Yes. I will make some general comments and then also touch on some of the specifics you talked about. I will tell you that the amount of activity and interest in just strategic accounts in general, and I know they said this on the last call, you could see some of our platform agreements and partnerships come through and we announced those over the last week and one of them is this morning. You see the announcement with Samsung and that’s going to lead to additional things later in the year with Samsung. The Origin announcement, meaning the ability to detect motion in a home without additional hardware and using AI to actually characterize what that is, has generated a tremendous amount of interest. And so the amount of inbound interest in using the Arlo platform for additional services is at an all-time high. We are meeting with multiple insurance providers now, so that is accelerating. Again, it’s a slow go-to-market. They don’t move as fast as many technology companies in the way they assess and actually roll things out. But I would say in general from an insurance vertical, it’s gone from really engaging with one to talking to and starting to engage with two or three. So I hope by within the next six months, we’ll be able to talk more specifically about some additional opportunities that are in front of us, but the activity is an all-time high. And I think again, some of that is from our Arlo Secure 5 and the success you’re seeing there. Some of the technology and platform expansion announcements we have done, including Origin and now RapidSOS. And some of the product portfolio that we have not only already shared with them what we’re doing this year, but soon like I mentioned in the prepared remarks, we’re going to start sharing our next generation platform and I would expect that to drive some additional interest as well. So Kurt and I, I think mentioned about a year ago that we thought looking over the long range plan, more of our incremental growth may come from strategic accounts over the more traditional retailers. We’re still seeing that. And in fact, I think we are going to be proven right over the next, let’s call it, 12 months.

Very helpful. And lastly, if I could maybe from a, I guess, a very high conceptual level, I start to look at the new product portfolio coming in and the expansion of Arlo into more of a platform to incorporate other technologies, whether it’s sensing presence, some of the other opportunities I think within the home that you’re talking about with AI and otherwise. As we look into ’26 and beyond, is it safe to assume that we’re going to continue to see ARPUs picking up or will we start moving back in the other direction just because of pricing pressure within the marketplace? Thanks.

Yes, great question. What I’ll tell you at this early stage is that yes, I think the expectation should be that ARPUs continue to grow over time. Some of that will come maybe from additional over the long range plan cycle. Some of that may come from additional plan optimizations and additional functionality we can roll out to our existing customers. But I will tell you the next generation platform and some of the things we’re seeing going into 2026 and 2027 is you should expect us to start moving into some adjacent markets. What I would tell you is there is a higher confidence than ever in our company, in our execution as a team, in the operational excellence, the leverage we’ve got on our business that we feel the foundation of this company is now very, very strong. And so we’re more comfortable than ever to start exploring some of these adjacent markets and new opportunities. And I think you’ll see us maybe talk about some of those this year and execute some of those going into the back half of next year. But to your time horizon on the question, kind of talking ’26 going into ’27, yes, I think you should assume that Arlo will be in some adjacent markets by then and that you could likely see ARPU expansion via those markets and new opportunities.

This concludes today’s conference call. You may now disconnect your lines.