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, Gabriel. Good afternoon, and welcome to Arlo Technologies' Fourth Quarter 2019 Financial Results Conference Call. Joining us from the company are Mr. Matthew McRae, CEO; and Ms. Christine Gorjanc, 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 fourth quarter and full year, along with guidance provided by Christine. We'll then have time for questions. If you have not received a copy of today's press release, please visit Arlo's Investor Relations website at www.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 expected revenue, gross margins, operating margins, tax rates, expenses, future cash outlook, our partnership with Verisure, continued new product and service differentiation and future business outlook. 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 mentioned on the call. A reconciliation of the non-GAAP to 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 fourth quarter 2019 earnings call. Before I discuss the fourth quarter, I want to take a moment to address the outbreak of the coronavirus. First and foremost, our thoughts are with the people who are being impacted by the spread of the virus as well as the associated quarantine. At Arlo, we are seeing an impact to our first quarter, although our products are manufactured outside of China, numerous key components are sourced from the effected region and we are now seeing a shortage in these components quickly reduce our anticipated supply. The second quarter will also be impacted from the continued component shortages and delay of several new product launches. We are working closely with all of our manufacturing partners as well as many of our component vendors as the factories work on recovery plans. We are also working with our channel partners on shelf dates and are developing options to maximize our performance through these unanticipated headwinds. The impact from coronavirus is temporary and we expect to return to our original growth trajectory in the second half of 2020. Christine will provide more specifics on the financial impact in her comments. With that, I will now move on to discuss our results and accomplishments from the recent quarter. Christine and I will walk you through major elements including financial results for the quarter and full-year, closing of our definitive agreements with Verisure, launch of Arlo SmartCloud, our Privacy Pledge, new product recognitions and the announcement of our first Floodlight Camera. Let's start by talking through some highlights for the quarter. In Q4, we achieved $122.4 million in revenue, near the high end of our guidance for the quarter and up slightly year-over-year. Service revenue was…

Thank you, Matt. Before I discuss the financials in detail, I would like to highlight that we closed the fourth quarter of 2019 with $256.7 million in cash and cash equivalents and short-term investments, which is a sequential increase of more than a $100 million. This cash increase is largely a result of the agreement we completed with Verisure, which increased our cash balance by approximately $75 million and prudent balance sheet management. Additionally, the team did an outstanding job managing working capital, which contributed to the sequential cash increase. First, with the sale of the European business and associated inventory, we added $55 million to the balance sheet. Additionally, in Q4, we received a prepayment of $20 million from Verisure for products to be purchased by them in 2020, which will show up as an increase in deferred revenue along with the $2.5 million prepayment for engineering development services. The gain on the sale of our EMEA commercial operations is reported as $54.9 million in our consolidated financial statements. Note that this number includes $50 million received for the sale of the EMEA commercial operations, $4.9 million for the sale of existing inventory in the EMEA distribution center as well as various working capital adjustments including the write-off of EMEA deferred service revenue as well as the $4.6 million de-recognition of goodwill associated with the EMEA business. As can be seen in our sequential decline in operating expenses, our restructuring activities continue to go well and we are still on the path to get down to a quarterly run rate, $33 million to $34 million per quarter of non-GAAP operating expense by the end of the second quarter of 2020. We’ve recorded approximately $600,000 of restructuring expenses during Q4 2019. Given these successes, we did not need to draw…

[Operator Instructions] Your first question will come from the line of Adam Tindle of Raymond James. Please go ahead.

Okay, thanks. Good afternoon. I just wanted to start Matt, you talked about the trial period of Ultra Pro 3 Video Doorbell customers still coming that lapsing and potentially accelerating growth of paid accounts, which would obviously be exciting. Just hoping for a little bit more color on the data that you guys are looking at to support that view, just from an outsider's perspective, we look at units shipped versus paid subscribers for a sense of attach rate improving and it's not, but just acknowledge that you obviously have more visibility than us. So curious on what's kind of driving your confidence behind that statement, what data you guys are looking at internally?

Yes, for the last couple of earnings calls and quarters, we've been conveying our confidence that, that the attach rate will go up especially on the new business model and actually being driven by the new business model, which to your point is exactly Ultra Pro 3 Video Doorbell so far. We obviously get a lot of internal data and like I said in the script we have some initial data that it allows us to remain very confident as we go forward, but I think we'll hold a more fulsome report in sharing a more statistically relevant and larger sample size for the next quarter's earnings.

Okay. That's fair. I guess maybe another question on services, if I could. I know it's just to key part of the story obviously. And you have grown revenue nicely, I think north of 20% for a couple of years now. But gross profit dollars are essentially flat during that time and margin is in decline that – that services margin decline accelerated in Q4. I think Christine alluded to some of the reasons behind that, but just maybe bigger picture comments on why margin isn't improving with scale, given it's kind of counterintuitive to us in a services business and maybe how Verisure is going to impact that with the one-to-one attach rate.

Right. So Adam when we look at this quarter, we have always we've been carving out from the old products and then we have all of our new products are basically still on free trial, Pro 3 came out during Q4. Our Video Doorbell came out during Q4 and they have three months trial. So those end sort of late in Q1 and then also Ultra. So once we start kicking in people paying for services, you'll see the margin increase there. And then also as we not as we're not selling anymore the older products with all of this free storage, you'll see that too. And then obviously with Verisure, when we start to see a larger attach rate, especially in their direct channel in a one-to-one attach rate, that will also give us those economies of scale that you're talking about and increase the margin. So, we think it's got quite a bit of a way to increase over time.

Is that $500 million of revenue that you identified related to Verisure the one-to-one attach rate on services, is that at consistent services gross margin as you've been experiencing or is there a way for us maybe to think about the impact because it obviously sounds like a pretty interesting opportunity just trying to help what the margin impact is going to be from it.

Absolutely, that's hardware revenue. On top of that, we are paid when any of Verisure’s customers use our service and Arlo Smart and that will be on top of that. And so both of that 500 million, both as in the retail channel and in the direct channel, and we're not really giving a breakdown. And to be honest, we're not sure exactly what that breakdown will be going forward, but we're, we're very much, they're very much looking forward to selling this in their direct channel.

Okay, got it. One just quick last clarification. Does your 2020 guidance include any benefit that you're expecting from Verisure in any way you can help us with the timing of when that's going to hit, I assume maybe Q3, Q4 more so? Or is it just the magnitude and timing related to Verisure in 2020 guidance?

Yes. On the last call, we had mentioned that most of the Verisure impact will start in 2021. So when we talk about the European growth, for instance, going from 5% CAGR to 25% CAGR, a lot of that will actually start to phase in 2021 with this year being around transition integration and getting both channels and some of the products ready for full deployment through them, especially on the incremental channels beyond the retail channel that they purchased.

Got it. That's helpful. Thank you.

Yes.

Your next question will come from the line of Jeffrey Rand of Deutsche Bank. Please go ahead.

Hi. Thanks for taking my call. Just on the gross margin for Q1 is that – how much of that is being impacted by the coronavirus and how do you kind of look at your gross margin trajectory throughout the year?

So it is affected because of some of the fixed costs that are in there and as we're bringing over less materials, those fixed costs become a bigger piece of that or are they hit the gross margin a little bit on that. And then also, you know, potentially we'll end up spending a little bit up more on freight if we do try to air freight some stuff in that as it comes over once it – once the factory starts having a bigger output. And as we look towards gross margin then it should get better towards the back half of the year. Q4 is always a little bit less depending on what we decide to promo.

Got you. Thank you. And the lost revenue in the first half of 2020, is that something you expect to recover some of it in the second half or is that just mostly lost revenue?

I would say we're working daily on mitigation plans to try and recover as much as possible. But in reality, especially on a component shortage when you're losing those POs and replenishment at the retail channel, most of that is lost and we'll get the recovery from a growth trajectory back in the second half. Also when you do a new product launch, which we have several that we’re kind of targeting the spring reset may get pushed out into Q3. Those stocking orders will move over, but again any in quarter replenishment and sales that you're having you won't get back. And so that's why we're looking at that and being very transparent about the impact we see for the first half and what we think will actually happen in the second half for 2020.

Understood. Thank you.

Your next question will come from the line of Hamed Khorsand of BWS Financial. Please go ahead.

Hi. Could you just clarify the component shortages you're seeing? Is that different from what you were talking about last quarter that impacted Q4?

Yes.

Absolutely. These are factories that were – obviously, they were shutdown for Chinese New Year and normally that's a week. Some of them are just coming back online this week and they're coming in anywhere at 20% to 40% capacity because a lot of the cities have had separate shutdowns. There are quarantines before they can get in the factory. So even though we manufacture outside of China, a lot of our components are coming from China and we are literally on the phone with them every day talking, but those factories are coming back up to speed slowly as their people come back to work slowly.

Are you able to source anything outside of China right now?

We do already source some things outside of China, which is good, but a lot of the major components are still sourced in China.

And this impact that you're talking about in Q2, is this from products that you're planning to release or is this products that you've already released that you’re – the impact that you’re expected?

It'll be a little of both, but we do have some new product introductions. We talked about the Floodlight already and there is a few more and it will slow those down a little bit as we're doing the builds and getting the tooling and all that depending on how we move forward with that.

And could you clarify the comment you made earlier in your statements about the Q2, the 20% or 25% impact, is that to revenue and would that mean that revenue would be actually down sequentially in Q2 versus Q1?

It is to revenue. And it’s probably not quite down, probably slightly up.

Okay. All right. Thank you.

Sure.

And your next question comes from the line of Jeff Osborne of Cowen and Company. Please go ahead.

Yes. Good afternoon. Most of the questions I had have been asked, but just a couple of quick ones on my end. Can you give us a sense of on the service margins? What the target is at scale or as Verisure kicks in?

I mean, we're obviously targeting, we'd love to see 50% and above, but we'll continue to make our way back to that. And we do believe as we get this attach rate up with our new business model with Verisure, we have a lot of catalysts to really move this thing forward.

Makes sense. Is there any way to book in the attach rates? I know you don't want to give specifics until the next call it sounds like, but is there any kind of a minimum and maximum or any commentary you can make on cameras versus non-cameras? What you're seeing in terms of attach rates itself?

Not at this time. I don't think there's enough data for us to really comment on that. But again, as I mentioned in the script, the early data we have is, is reaffirming our confidence and we’ll provide a lot more on the next call.

Got it. And then just a couple of other smaller ones here, I might've missed it, but did you give the NPD share this quarter and how it compared to the third quarter?

No, we didn't. NPD changed some methodology a couple quarters ago. And so, there's no way to really provide an apples to apples comparison. So we don't comment on the market share from that perspective anymore, at least from a numerical perspective. We do – obviously, we've had a lot of product introductions. We've been trying to share a lot of the product reviews. And we know ASPs. We did a great job holding ASPs quarter-over-quarter going into Q4. So the quarter was kind of progressed as expected and we think we did very well in the quarter, especially given the supply shortage we talked about on the previous call.

Got it. And the last question I had is just the – can you – you mentioned the change in headcount sequentially with the restructuring. Can you remind us on what the employee count that went to Verisure was?

Right. So we came down about 57 headcount quarter-over-quarter and it was about 26. It was an evenly split the difference, right, I think 26 was Verisure and the balance was part of the restructuring.

Got it. Thank you. That's all I had.

Sure.

You’re welcome.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.