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] And 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’ Second 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 second quarter, along with guidance for the third 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 conditions, including descriptions of our revenue, gross margins, operating margin, earnings per share, expenses, cash outlook, free cash flow, and free cash flow margin, guidance for the third quarter of 2024, our long-range plan targets, the rate and timing of paid subscriber growth, the 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, 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 conditions. 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 second quarter 2024 earnings talk. Once again, Arlo executed well in a tough environment to deliver another truly outstanding quarter. Total revenue came in at $127 million, up 11% year-over-year and our annual recurring revenue or ARR, was up over 21% year-over-year to reach $235 million. Arlo also recently hit 4 million paid accounts, an increase of 74% year-over-year. Our average revenue per user or ARPU for retail and direct paid accounts grew to $12, a new record for Arlo on the back of a small increase on single camera pricing and an overall mixed shift to higher tier service plans. Based on this strong performance, Arlo delivered non-GAAP earnings per share of $0.10 in Q2, which brings the earnings per share for the first half to $0.19, up an incredible 171% year-over-year. Shortly, Kurt will walk you through our results in greater detail, but these highlights illustrate the power of our business model and our accelerating trajectory towards our long-range target of 10 million paid accounts, $700 million in ARR and over 25% operating margins. A huge congratulations to the entire Arlo team and thank you for the focus on the execution of the business. It is a pleasure to work with such a dedicated team that cares so deeply about bringing the best security experience to our customers. We now find ourselves at the midpoint of the year with a big holiday season ahead of us. I thought I would provide some commentary on the trends we are seeing and our expectations for the balance of 2024. Across our channels, we see the consumer is under some pressure, which often results in a step down in the price segment of the initial hardware purchase. Arlo…

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 Q2 2024. Total revenue for Q2 2024 came in at $127.4 million, up 11% over the prior year period. In the quarter, service revenue represented about 47% of total revenue, up from 44% in the same period last year and quickly approaching the 50% threshold. This shift in our growing recurring revenue base reflects the continued momentum that we have gained in our transformation to a services-first business. Our installed base of subscribers continued its strong growth trajectory as we reached just under 4 million paid accounts by the end of Q2, an increase of approximately 745,000 paid accounts in the quarter. The significant increase in paid accounts reflects a substantial catch-up in the Verisure subscribers as discussed on previous calls. We continue to believe that the catch-up will be largely complete by next quarter. Further, our paid account additions exclusive of this catch-up adjustment remains in the range of 150,000 to 190,000 subscribers that we expect to generate on a quarterly basis. Service revenue for Q2 was another record at $60.3 million or a 20% increase over the same period last year. The strong service revenue performance was driven in large part by the growth in our overall paid account base and to a lesser extent, a small price increase in our single camera plan and some migration of subscribers to higher price plans. Our annual recurring revenue at June 30th was $235 million, up more than 20% over the same period last year. I want to highlight the strength of our services revenue and ARR which helped deliver strong topline revenue performance and contributed to Arlo generating non-GAAP operating profit of…

Perfect. [Operator Instructions] The first question is from the line of Jacob Stephan with Lake Street. You may proceed.

Hey, guys. Thanks for taking my question. Congrats on the quarter. Maybe just starting out, you guys have talked a lot about kind of the potential for offering ads on the Arlo Secure 5 platform, but it sounds like you’re already working on Arlo Secure 6. So I’m just kind of curious, is this the ad server, is that an Arlo Secure 5 or is that a Secure 6 kind of project at this point?

Yeah. Great question. It’s in parallel to the actual official releases. So we’re on track, as we mentioned on the last call, to test the ad capability and the ad serving in Q4 of this year, before the end of the year, and probably going into part of next year as we collect data around that. And then we’ll be able to update investors and the market around a timing of an eventual rollout or if and when that makes sense to actually deploy into the field in a wider view. But it’s in a parallel track. All the capabilities are built into Arlo Secure 5 for testing, and then we can roll it out at a future date pending the performance of the rollout.

Okay. Got it. That’s helpful. And then maybe just around kind of promotional activity heading into the holiday season here and this year we kind of saw Walmart double down on the Walmart Day sale. We saw one in the earlier part of July here and we have one in the fall. But maybe if you could kind of help us think about what’s the potential with Walmart here in terms of Arlo?

Yeah. I think it’s going to look a lot like last year in some ways. So, as you know, most of our promotional activity for the second half, and obviously, most of that’s in Q4, gets locked down in roughly the April-May timeframe in the planning sessions with them. Obviously, discussions start earlier than that. So, we already know exactly what’s going to happen, both from an Arlo perspective across the various channels, but some indication of what’s going to happen on a competitive set, as well as we go in. And so, the best I can tell you right now is I think you’re going to see Walmart be a significant partner for Arlo again and that’s part of what we mean when we say this holiday season is probably going to look a lot like last holiday season, because we’re seeing a lot of similar dynamics in the competitive set, the offerings, kind of the promotional areas, same timing. And we know that Arlo, did a great job executing through that holiday period and generated a lot of incremental households for future subscribers. So, that’s really the plan, and that’s what we’re seeing as far as the roll-up into the holiday season this year.

Got it. Maybe just one last one. You talked about kind of the single camera plan, the price increase there. Maybe if you could just give us a sense on what percentage price increase that was, that’d be helpful?

Yeah. It was about 15%, 20%. It depends on if you’re talking annual or single cam. It can be as high as like 30% if it’s on the monthly plan. And that was done just on the single cam plan, if you remember. We described that on the last call in the middle of kind of Q1. So, you’re seeing a little bit of a full quarter of effect, but I would tell you, single cam plan is not our most popular plan by far. So, it is a relatively small impact when you look at ARPU. The other impact, obviously, is what we talked about in the script around seeing just an overall mixed shift in the tiers. So, we are seeing interest in more capabilities and people kind of mixing up in our plan. And so, those both together is what allowed Arlo to hit a record level of $12 of ARPU for our retail and direct paid accounts this quarter.

Yeah. Okay. Awesome. I appreciate you guys and all the comments. I’ll hop back in queue.

Yeah. You’re welcome.

The next question is from the line of Mark Cash with Raymond James. You may proceed.

All right. Thanks. Yeah. This is Mark on for Adam. Now, if I could start with you, understanding the consumer environment is challenging, but it’s sort of a sale of two geos in this quarter. So, could you talk about trends being seen in the Americas and the strategy timeline to accelerate growth here? And then in EMEA, really strong. So, how much of that is Verisure contribution and catch up and what is left to catch up there? Thank you.

Yeah. Yeah. Let me tackle that in a couple of sections. So, one, on the Verisure side, the catch up you’re seeing is really just the numerical number of paid accounts of cameras that have been previously installed in people’s homes but haven’t been really incrementing on the number. So, that’s the catch up we’re doing there. It really doesn’t have an impact on the finances of the company. It really is just us, correcting some of the issues they had in their firmware in the South region and making sure those are being counted properly. Kurt mentioned on the call, we expect most of the catch up to be done in the following quarter, so in Q3, and then we’ll be on a kind of our normal run rate where you’ll be able to correlate actual paid account ads with service revenue increase more one to one because we don’t have the divergence of some catch up that’s happening on the paid account. Part of what you’re seeing from Verisure is some strength, I think, in the relationship and in the region in Europe, but some of it is also, if you remember them bringing down their inventory towards the end of last year and kind of starting this year relatively dry and trying to build up inventory as they continue to deploy Verisure Security systems in their direct channel. So, this was expected. We kind of mentioned that we expected Verisure to be strong in Q1 and Q2 as they’re building back up their inventory after kind of winding it down last year. So, that’s what you’re seeing in the international front and what you’re seeing from Verisure in particular. In the U.S., like I said, I think this holiday season is going to look a lot like…

Okay. Very helpful. Thank you. And I appreciate you guys going through the capital allocation plan. That was great. If I could switch to Kurt and ask, really appreciate the color you gave on product risk margin expectations in the second half. But kind of two questions here is, one is, I was wondering if you could get some thoughts on how this year’s Prime event went for Arlo. I mean, kind of not related, but if my math is correct, based on like the 20% service growth commentary you gave, it seems like services would be in the 45%, 46% of sales in the second half. So, I was just kind of curious when you’re expecting services to become a larger portion of the mix.

Yeah. Maybe I’ll take the commentary on the Prime Day first and then Kurt can kind of talk about service revenue mix across the company. Prime Day went pretty much as planned. We saw, I think, a good amount of activity. It was basically sales were pretty much on what we were expecting across the Board. We are kind of -- we’re curious about what the October, it’s not called Prime Day. I think it’s called Amazon Deal Days or something like that. That happens in October as a ramp up. So, I would say, again, what we’re seeing from the promotional activities across our channels, including Prime Day, is landing almost exactly where we’re expecting and that’s why you see the predictability, both in our revenue, but also, obviously, in the paid accounts going forward. So, a lot of it looks like a repeat from last year and I think that’s because we’re dealing with similar market conditions.

Yeah. And as related to your question regarding mix, when we communicated back, I think, in the early part of May, we had indicated that for the full year, we thought the mix of service revenue to our total consolidated revenue would be somewhere in the range of 46% to 47% for this 2024. We feel really good about that guidance. Actually, as we mentioned then, we feel very confident that the 20% growth trajectory in our services business is spot on. We think we could be a bit closer to 47% of the total mix when we end the year, just as we were this past quarter. So, we feel like we’re trending appropriately. As it relates to a little bit further out, certainly, our target is to get to us over 50%. And I know we’ve had some discussion on that in the past and we think that that’s within the near-term. Let’s just say within the next year to two, we think we can be there. So, I think we’re trending quite nice relative to our initial expectations and the annual guidance we gave back in May.

Great. Thanks so much. I’ll pass it on.

You’re welcome.

The next question is from the line of Scott Searle with ROTH Capital. You may proceed.

Hey. Good afternoon. Thanks for taking my questions. Nice job on the quarter, guys. Hey, Kurt, maybe just to dive in quickly on the gross margin front. You’ve articulated that, look, you’re going to keep your pedal -- your foot on the pedal here in terms of driving sales to drive basically the recurring revenue on the back end. But the second quarter gross margins, I think, were an all-time low for you guys at 3% or so adjusted for non-GAAP charges, et cetera. Is that the level that we should be thinking about in the second half of this year or do you get a little bit more aggressive than that? And then, similarly, kind of extrapolating that into 2025, is this the new norm or is there a little bit of an aberration in the June quarter?

Right. Hey, Scott. Thanks for the question. So, yeah, just to sort of set the record straight, this past quarter we did on a non-GAAP basis for product gross margin about 3.4%. And actually, for the six-month period, that put us at about 5.7% for the first half. And as we’ve mentioned in the past, we have felt that it would make sense at the right time to take our product gross margins to the mid-single digits, essentially 5% to 7%, which is where we are right now. We expect that, given the, I would say, muted kind of consumer environment we’re in right now, that we would continue for the second half at around that mid-single-digit range of about 5%. So, I guess the point, Scott, is, yeah, you should expect us to be very promotional and ultimately hit our targeted guidance around that 5% to 6% for product gross margin for the remainder of the year.

Okay. Great. Very helpful. And Matt, exciting to see the all-state announcement and you guys stepping into the InsureTech market. I’m wondering if you could start to help us understand the opportunity within that market, how we’ll start to see the evolution of that relationship into more recurring revenue opportunities going forward and what other opportunities there are in the pipeline within InsureTech? Because I think it’s a relatively greenfield opportunity. I think SimpliSafe has got a couple of relationships there, but for the most part, these potential partners out there are unoccupied with existing solutions.

Yeah. You’re absolutely right, Scott. It’s something we’re very excited about. It’s a market that takes time to form, I’ll just tell you that. These are big entities whose entire life’s work is mitigating risk and understanding risk portfolios and things like that. So it does take some time, but it’s also an opportunity once you get started, there’s actually tremendous value there. And so what you see us doing now is what I would say some transactional benefits to both companies. So us selling all-state protection plans on our website. You may see something, a little bit of vice versa on the other side soon as well. And that’s really working with our customer bases and doing cross-offerings into those customer bases to provide kind of a wider set. When I step back and I look at the market segment, right, and there -- and I mentioned this on the call, there’s such a natural fit, right? Arlo exists in this world to be able to help you detect, notify you and potentially mitigate some of the damage that may be happening in your life, whether that’s theft or fire or smoke or water leaks or some of these items. And the insurance industry exists to make sure you’re okay if something does happen, right, and backstop you with financial help if you do have those damages. So when you look at that breadth of experience, right, that kind of whole gamut of experience, having both of those together is really then providing the entire user experience from top to bottom, right, from being able to detect an issue and mitigate it and everything else, but also be able to backstop you if something does happen in your life that you can’t control. So there is this natural set…

And Matt, given that this is the first inning, this probably isn’t a fair question, but it sounds like you’re engaged in talking to other parties out there within InsureTech. I’m wondering if there’s a bogey that you’re thinking about in terms of the number of relationships you’d like to have looking 12 months or 18 months out. And then to lump onto the unfair questions. If you look at the size of the opportunity, if we start looking down into late 2025, 2026, what’s going to constitute success in terms of strategic relationships like this, like outside of Verisure, what this could represent in terms of your recurring services revenue stream? Thanks.

Yeah. No. I love unfair questions. Yeah. I think there’s a lot of activity just starting in the general space. I would tell you, Arlo, we’re very much concentrated on Allstate right now because there is, I think, a shared vision in what happens in this space. But what we see is when things do get announced or when things get rolling, some of these industries move in packs and they kind of move together as they start to discover that someone may have an advantage in a certain space. So I do think there’s a broader opportunity in general right now. Arlo is really focused on executing Allstate and expanding that relationship in some really innovative ways for consumers of both companies, and so that’s a -- it’s a bit of an answer to your question, at least at this point. But I think a focused approach initially to drive the solution and learn from that on both sides is probably the first stage and then the second stage is expansion potentially. As far as where does this -- how do we provide a metric or a measure of success as we kind of get into maybe the second half of our long-range plan, like 2027 or something like that. I think, the first thing we would look at is, how many homes were we able to address through this incremental channel. And I would hope, by that point, we’re looking at hundreds of thousands, if not maybe even a million homes that have been able to be addressed through the InsureTech channel, in particular, and incremental to the growth that we’re seeing in retail and some of our other strategic accounts. So that’s kind of how we would measure initially. We drive a lot of our success and even measurements internally on how many people have we’ve been able to keep safe. And to us, that’s a household that’s actually active in being a paid account.

Okay. Thanks so much. Very helpful and a great job on the quarter.

Thank you, Scott.

The next question is from the line of Hamed Khorsand with BWS Financial. You may proceed.

Hi. So my first question was, are you seeing any changes as far as your major retail partners is concerned, as far as the composition of who’s important?

Not major. I mean, what I would say is, we’ve described this over the previous, I would say maybe three quarters or four quarters, is as the market is starting to shift into more of a mass market product segment, there is a natural transition of at least the pie chart, right? All potential retailers can grow, but you’ll see retailers like a Walmart, as an example, start to take a bigger portion of the pie as the awareness of the product segment, awareness of the solution becomes a little bit broader. And you’ll remember we said we kind of took a bet last year that we thought that kind of mass market adoption at the beginning of that phase was going to start last year. That’s what triggered some of the discussions with Walmart and then the ultimate promotion we did with them in Q4 that was very successful. And I think that promotion and that success in Q4 proved that mass market is starting not only to us, but also to Walmart, maybe some other channel partners. So, in an initial technology journey, in the market, you’ll see a Best Buy or others have a significant portion of the share because it’s a new technology. It needs a consultative sale, needs a lot of description behind it. It’s a certain demographic of people looking at it because it’s brand new. And then as that technology matures and becomes more a mass market phenomenon from an awareness perspective, you’ll start to see the Walmarts then start to catch up and start to gain share. So long-winded answer to your question is we are seeing a little bit more growth on a relative basis in more of the mass market channels because of this transition of the product segment becoming a little bit more mass market.

Okay. And then what was the reason behind expanding the range in your commentary about what your organic subscriber additions are per quarter? In this quarter, you said 150,000 to 190,000. Previous quarters, you had said it’s 170,000 to 190,000.

Yeah. It’s some of that seasonality. So, as you know, you’ll see more often a little bit higher in Q1 after the holiday season and then a little bit more in Q4. So, we’re kind of widening the range a little bit in Q2. But I don’t think anything’s really changed in the business. So, it’s 160,000, 170,000 to 190,000. We’ll get a much better read on that after the catch-up is done on Verisure next quarter. But there’s nothing fundamental in the business has changed and that’s not what we’re trying to communicate.

Okay. And my other question was, are you going into the holiday season with just the Essentials 2 product just like last year or will there be an updated product?

Typically, our products are every other year. So, we launched Essential 2 right before the holiday season. I mean, it really landed in October of last year and so we’re leaning back into that platform this year as well and it’s the right product, like I said, at the right time. Now, obviously, as we work through quarter-by-quarter and the volume picks up as it has over the last couple of quarters after our launch, we’re able to get additional price concessions from the supply chain as we go through. So, our cost basis for that product is not the same as last year, but the product assortment is going to be very similar to last year.

Okay. Thank you.

You’re welcome.

There are no further questions waiting at this time. I would like to turn the call back over to the presenters.

Thank you, everyone, for joining us on the call today. We look forward to executing the quarter and speaking it in to you in 90 days.

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