Ladies and gentlemen, thank you 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 Fourth Quarter and Full Year 2022 Financial Results Conference Call. Joining us from the company are; Mr. Matthew McRae, CEO; and Mr. Kurt Binder, 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 fourth quarter and full year, along with guidance for the first 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 first quarter and full year 2023, 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 anticipate 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 fourth quarter and full year 2022 earnings call. Despite softening consumer demand and tightening retail inventory levels, Arlo delivered a solid fourth quarter with both revenue and non-GAAP net loss per share above the high-end of our guidance. Revenue was $118.5 million, which was down year-over-year, but non-GAAP gross profit rose 2% year-over-year. Our strong pace of subscriber growth continued with Arlo adding over 189,000 paid accounts in the quarter. This fueled our annual recurring revenue growth which was up 53% year-over-year to $138 million and non-GAAP service gross margin reached 70% both records for Arlo. Looking across 2022, you see the results of a cohesive team delivering stellar execution. Arlo produced total revenue for the full year of $490.4 million, a growth of 13% year-over-year and within the range of the guidance we provided at our Analyst Day a year ago. Our service revenue was up more than 30% to $136.5 million, while our service costs were up less than 10% exhibiting the leverage that drove a 7 percentage point increase in service gross margin to 67%. And if you remove our discretionary marketing spend, Arlo delivered four quarters of non-GAAP operating profit in 2022. And I'm thrilled to announce that Arlo will surpass 2 million paid accounts next week more than doubling our subscriber base over the last five quarters. This is another massive milestone for the company and prove that disciplined execution even when facing external headwinds can produce impactful results. Despite that impact, the full value of our services business is not widely understood. To be clear, when looking at total service revenue, and our annual recurring revenue, Arlo service business is growing at roughly 50% year-over-year, has 70% gross margins and we…

Thank you, Matt, and thank you everyone for joining us today. As Matt mentioned, 2022 was a transformative year for Arlo with our services first strategy leading to continually improving performance in our services business. We have not only seen consistent paid account additions, but continued best-in-class subscriber retention and margin expansion. Now, I will start by sharing some financial details on Q4 and the 2022 full year. Revenue for the fourth quarter came in above the high end of our guidance range at $118.5 million but down 8% sequentially and 17% year-over-year. As mentioned last quarter and consistent with commentary heard across the broader consumer retail market, we experienced softening demand in the second half of Q3, which continued into the fourth quarter. This trend coupled with certain retailers tightening their inventory level can be attributed to the revenue decline we experienced in Q4 and we expect these pressures to continue into early 2023. Revenue for the full year 2022 was $490.4 million, up nearly 13% year-over-year and within our original annual guidance range. We were pleased that our channel diversification and ARR growth demonstrated resilience to deliver revenue within our guidance range. Our strategic shift to a services first operating model was instrumental in driving our year end ARR to $137.8 million, up 53% year-over-year and thereby providing greater predictability and visibility into our ability to deliver near term revenue and profitability targets. Our service revenue for Q4 was another record at $38.3 million, an increase of $9.9 million or 35% year-over-year and an increase of $2.9 million or 8% quarter-over-quarter, driven by the addition of 189,000 paid accounts in the quarter. Our service revenue for the full year 2022 was $136.5 million, an increase of $33 million or 32% year-over-year driven by the addition of 795,000 paid…

[Operator Instructions] Your first question comes from the line of Jacob Stephan with Lake Street Capital. Your line is now open.

Yeah. Hey, guys. Congrats on the quarter. Maybe just starting out, could you talk about the kind of the home security market in general, what kind of trends are you seeing with your consumer channels, your Best Buy's and your Costco's and then maybe contrast that with kind of the strategic partners?

Yes, absolutely. And thanks for the congrats on the quarter. We feel really proud of what was accomplished and our outlook for the year. From a trend perspective, what I can tell you is, we saw towards the end of Q4 definitely some resilience in the security market especially from the consumer in the normal consumer channels that you've mentioned and that continues into Q1 and you see that reflected in the guidance. And I would say that's true across channels. So we don't -- we haven't seen the demand really drop across strategics or the retail channels for the most part. We do think there might be a little bit more softness coming from Europe over time and that was reflected in some of Kurt's comments just because of the macroeconomic situation there vis-a-vis the United States. But overall, I would say we're seeing some resilience in the demand for home security, but also Arlo in particular. And that's reflected not only in the quarter results, but in the guidance that you see as articulating going forward.

Okay. So maybe just focusing on kind of inventory levels and gross margins in Q4 here. Was kind of the margin decrease the result of the sales you guys were running or I guess what kind of what was the margin pressure there?

Well, I think on the product, our hardware margin side, we were ensuring that we recovered from overall channel inventory level. We wanted to make sure that as we get into 2023, we felt good about where our inventory levels were not just on hand for ourselves, but also with our retail partners. And I think that showed in the product gross margin. We were extremely pleased with the outcome on the services gross margin. We saw that actually exceed our expectations. And the beauty of that is that we see that going into the first part of 2023 and trending up as we mentioned in the guidance. I think if you look at 2023, we do believe that we can be very promotional in -- on the hardware side and we expect to do that. Our goal really is to continue to drive household formations and subscriber growth, super exciting news about us achieving the 2 million subscriber mark this upcoming week. So that's super exciting. And of course, we want to remain focused on our overall operating profitability. And as we indicated or Matt had suggested, we're targeting about 5% operating margin coming out of 2023. So although the hardware or product gross margin might be a bit under what was expected in Q4, we think that that will be a key lever going into 2023 to help us drive the new household formations and incremental subscriber growth.

Okay. Got it. Yeah. 2 million paid subs is certainly an excellent milestone. Maybe just one last one. Looking at the new security system launch, any early comments you guys can make on kind of what you're seeing?

Yeah. We've got it in a couple of channels now. You'll see the rollout as we mentioned in the prepared remarks, grow not only in additional retail locations, but probably with a strategic partner too as we go through this year. Initial feedback has been great. If you look at some of the reviews, they're all kind of 4.95 and some of our retail accounts. We're taking a lot of feedback in as well and making very quick iterations and so the product is getting better and better by the week. And we're looking forward to actually distributing it on kind of a broader basis. I would tell you most of our customers right now are existing Arlo customers and that's on purpose. We're really mining our existing customer base as the initial, target audience and then we'll see that grow as we broad distribution through the spring and going through the rest of this year.

Okay. Got it. That's helpful. Thank you.

You're welcome.

Your next question comes from the line of Jake Norrison (ph) with Raymond James. Your line is now open.

Hey, guys. Appreciate you taking my call. I just had -- I just wanted to dive a little deeper on services and product mix. Any comments on what happened throughout the quarter and how should we think about that mix going forward?

Yeah. Sure, Jake. I think that when you look at mix for 2022 in particular Q4, we were trending in sort of that 20% to 30% of our revenue coming from services and 60% to 70% coming from product. That was in line with our expectations and obviously that mix plays into our overall gross margin performance. I think as you look at 2023 and we move throughout 2023, there's going to be a considerable uplift in the services revenue and especially as a portion of the overall total revenue, we would expect that the mix would shift from say that 30% to probably higher maybe exceeding 40% into the 45% range of total revenue. So services in that say 40%, 45% hardware product in that say 60%, 65% range. That's going to have a considerable impact on our overall gross margin and obviously an impact on our overall operating profit. That's a big part of our overall strategy because as we mentioned before, they're driving this subscriber base, getting ARPUs up and really targeting cost optimization to drive that margin expansion is really, really important for us.

Awesome. And then last one for me. Can you just provide any metrics around the growth of Arlo Safe? What are you seeing there in terms of customers outside the Arlo ecosystem choosing safe as their entry point to Arlo? Just any color there would be helpful?

Yes. It's Arlo Safe actually a very exciting product for us. And then when I say product, it's really a service. And what's interesting is, it's the first service from Arlo where you do not have to buy a piece of hardware to actually come in. And so it's a simple app store download gets you into Arlo Safe. So that's one. Two, we've chosen to actually bundle it and are in a higher priced peer. So in our now $25 pricing per month peer includes Arlo Secure, which is professional monitoring for all of our cameras and security system and Arlo Safe. And it's a little early to provide some metrics, but Kurt just alluded to some ARPU increase. We're hoping by next quarter we could share some actual numbers on that. But I would say early indications were positive on both Arlo Safe and the Bundle, which is what we call our Safe and Secure Bundle. And we think it's a really important strategic asset to bring Arlo from protecting a location with its hardware and Arlo Secure service to actually protecting families and individuals on the go. And it's resonating quite well. I do believe also that you'll see some action in some verticals with that space as far as Arlo Safe over time as well. So we think there's some deep partnership opportunities that will provide some additional upside as we get through 2023.

Perfect. Thank you so much.

You’re welcome.

Your next question comes from the line of Hamed Khorsand with BWS. Your line is now open.

Hi. Could you just talk about customer demographics of the households you're now targeting with the approach of having lower price point on the hardware. How sticky are they to just continue to pay for that monthly subscription?

Yeah. It's something we've looked at quite a bit. And when you looked at the market data a couple of years ago, some of the very low price points, not that we'll hit some of the price points in this range, had a relatively low attach rate on service. Part of the prepared remarks, we talked about looking at the latest market data and as we on promotion has hit some relatively low price points through Q4 for holiday promotions. We're seeing very consistent attach rates on service now at these lower price points. So what we're seeing is, consumers being able to buy lower price hardware is not reflecting in a much lower attach rate on service. And that's a relative change since we originally spend from [indiscernible] and took a look at the market call it, three years ago. So what we're expecting is, might be a little bit lower, but relatively consistent level of both attach rates and churn as some of the new price points will hit. And of course, a broader market from a demographic perspective, especially as we're looking at some of the retail headwinds from pricing and things that we're seeing in the market just from an overall economic perspective. So some of the information we've seen in Q4 has led us to look at some of the rebalancing of the hardware price points versus the service price points. And so what you've seen us do is, lower some entry point pricing for some of our hardware and we've actually increased service pricing on a monthly basis and that rebalancing is part of what's leading into the big boost in profitability that we're forecasting for 2023.

Okay. And then a year ago, you had been talked about how the consumer is not really aware of your brand and now forward to the year, you're talking about pricing capturing sounds like market share. Is this coming because of the price points or is this coming because of your competitor having issues from management changes and pricing issues as well?

Yeah. I would say it's mostly coming from just a change in consumer behavior and us tapping into that change, especially in Q4 and what we saw in Q4. Some of our competitors are going through some changes in the like. And I'm sure that has an impact as well. But a lot of it is us rebalancing our strategy against what we are seeing in the market, what we're seeing from a consumer perspective. And some of this is a natural transition that you see when a market goes from what I'll call early adopter to becoming more of an early part of the mass market where if you can bring down at the right time some of those entry price points still get them subscribed and have that long term relationship, you start to tap into a broader market and we're -- we saw the beginning of that in Q4 and that's something we're going to continue to do in 2023.

Okay. Great. Thank you.

You're welcome.

There are no further questions at this time. Matt, I turn the call back over to you.

Thank you, operator. Arlo has a proven track record of executing through hardship and headwinds from shifting consumer demand to a global pandemic. Our disciplined focus and continual optimization of our business has created a services first company serving nearly 2 million subscribers and rapidly driving to profitability. Looking ahead, the journey from 2 million to 3 million subscribers will be just as transformative and impactful to our business. We look forward to keeping you up to date and thank you everyone for joining us on the call today.

This concludes today's conference call. You may now disconnect.