Arlo Technologies, Inc. Price & Performance (ARLO)

Good afternoon, and welcome to Arlo Technologies Fourth Quarter twenty twenty four Financial Results Conference Call. Joining us from the company are Mr. Matthew McCray, CEO and Mr. Kurt Binder, COO and CFO. If you've not received a copy of today's earnings release, please visit Arlo's Investor Relations website at investors.arlo.com Arlo. 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 as assumptions that are subject to a number of risks and uncertainties. Actual results could differ materially. [indiscernible] 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. Curt 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 our 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 with an AI enabled suite of services for our direct users and strategic partners. Arlo has been monetizing AI subscriptions since 2018, '18, 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 11,000,000 registered accounts and over 4,500,000 paid subscribers on our platform.

That user base is generating over $250,000,000 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 service [indiscernible] [indiscernible] [indiscernible] any business. And I believe this is substantially underappreciated or frankly missed because Arlo reached this level so quickly. The growth of our subscription business over the last five years has been virtually unparalleled. Registered accounts have more than doubled while our paid to in the same timeframe, This has driven our annual recurring revenue above $250,000,000 And as our revenue is scaled, we have gained operating leverage in the business to expand non GAAP service gross margin to an exit velocity of more than 80% at the end of twenty twenty four. Our SaaS business model is predictable has been sustainable over the last five years, because we generate the recurring subscription revenue in a market segment that is sticky and through stellar service Arlo enjoys world class customer retention.

Let's look at how Arlo's growth stacks up against the best SaaS companies in the We found 47 SaaS companies trading on the NYSE or NASDAQ with an enterprise value of at least $250,000,000 and then looked at how long it took for them to reach $250,000,000 in ARR. First, you will recognize the caliber of the companies listed here in each category. Second, you will see how rare it is for a consumer SaaS company to achieve this level of ARR growth in such a short time. By achieving over $250,000,000 in ARR, in six years or less, Arlo is an elite company with only Nutanix, Rubrik, and Samsara achieving a similar feat. And with a big 2025 ahead of us, Palo plays in a large and growing market of home security which is now a $25,000,000,000 segment in The United States alone. And while penetration of smart cameras and video doorbells has doubled over the last five years, smart home security services have only reached 7% market adoption leaving an enormous untapped market to grow into. The broader smart home market adds another $13,000,000,000 of addressable market in The United States, And we intend to launch user experiences and services in this area starting with Arlo Secure six Arlo, This brings the total addressable market to nearly $30,000,000,000 in The United States with the rest of the world adding another two to three times that value and other adjacent markets such as SMB adding another potential of three to four times.

Arlo addresses this home security market today with a simple to use yet sophisticated smart security experience, coupled with a compelling subscription service. That experience manifests itself in our award winning mobile application, and starts with clear notifications for any type of event. Notifications can be easily customized by the user to filter out unwanted noise and prioritize the types of events that are important. These notifications include a preview of the event and optional actions that can be taken right from the notification screen. In the case of an emergency, Arlo can send a critical emergency alert, which bypasses any do not disturb settings to ensure the user receives the urgent information they need. Controlling your entire Arlo ecosystem is simple and can be done right from the home screen with our widgets that provide convenient access without needing to launch the app.

Or the Arla dashboard provides complete control of the system and the most frequently used devices from a single customizable screen. An event timeline shows a holistic view of everything that is happening across the home minute by minute with efficient video previews and intelligent AI driven descriptions to ensure the user is informed of important events and happening across the system. Our user experience also has a comprehensive emergency response center which provides immediate help when needed and an ongoing update of any emergency events happening in real time. The app also includes direct dispatch buttons allowing the user to make a request for a specific type of first responder. Depending on the type of emergency. Of course, the Arlo experience provides comprehensive access to all of the devices and cameras in the system. Providing quick live streaming, video recording playback, and two way talk to communicate with anybody in view whether they are intruders or a package delivery person. And the entire system can be automated with device and AI cross triggers in numerous ways, including automatic arming and disarming when family members arrive and leave to create an experience that adapts to your daily life routines. This is all built on the Arlo SaaS platform, has been developed, refined and deployed over the last ten years, Our platform was conceived and designed to specifically address the needs of the smart home security space from low latency event handling to real time processing of incoming video streams and connections to first responders on a global basis.

And it operates at significant scale with over seventeen hundred hours of video being analyzed per minute generating over 170,000,000,000 AI alerts per year. While keeping the high levels of quality and availability required in a true security context. At the core of our platform is Arlo Intelligence, our real time high performance smart security AI engine built specifically for this market segment to drive our subscription services, This is an area where focus and clarity of use cases can create a higher performing AI model compared to the massive expensive general purpose models that seem to be quickly becoming a commodity. Google Intelligence is the most advanced AI model available in the security market. It processes video, audio and environmental events to create specific alerts and system triggers, which allow for faster response to potential emergency events while filtering out the noise and insignificant activities. A detection engine can detect objects such as a person, animal, vehicle or package and was recently updated to detect fire, allowing earlier alerts for dangerous situations. A robust recognition engine can identify a specific person to differentiate actions from known individuals or an unknown person approaching a property. And it can identify specific vehicles, enabling specific alerts or actions depending on whether that vehicle is known or unknown by the user.

Arlo Intelligence also includes our groundbreaking custom to tech [indiscernible] That enables users to create private AI micro models which detect nearly any type of event, dramatically expanding the power of our service. No other security AI platform has this advanced and comprehensive suite of capabilities, and this differentiation is helping us win and subscribers. Arlo prides itself in the performance and quality of these solutions we provide our users and partners. A great benchmark is the industry press and awards where we are judged by experts in the field. And in 2024, Arlo continues to be recognized as a leader in driving new technology to market and enabling a world class user experience. And a great judge of that user experience is the ability to retain subscribers. ARLO experiences a churn rate of between 1.11.3%, which translates to the average customer staying with Arlo Arlo for more than seven years. This puts us in a great position as a SaaS company and compares very favorably to other consumer subscription services. Arlo's singular focus on the smart home security market has allowed us to move quicker, innovate faster, and continues to lead the market. Every day every person at Arlo is dedicated to driving our platform forward to benefit our users and partners.

Video is at the heart of security now with some areas of the country where requiring video verification to dispatch first responders and users are demanding experiences that show them what is happening at all times. This coupled with our strict privacy pledge creates a relationship founded on trust. And our platform is the main asset of the business. The culmination of a decade of work And at its core is Arlo Intelligence, where we are at the forefront of leveraging AI to provide real tangible value to users in a scaled and performance experience. This is why we win. And now, I will turn the presentation over to Curt, who will present our Q4 twenty twenty four operating results.

Thank you, Matt, and thank you everyone for joining us today. 2024 was another outstanding year for Arlo 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 $511,000,000 for the full year of 2024. Up $19,700,000 over the prior year and within our original annual guidance range. Additionally, total revenue for the fourth quarter of $122,000,000 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 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 $250,000,000 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 twenty twenty four. As Matt mentioned earlier, we increased our cumulative paid accounts to $4,600,000 And along with it, our annual recurring revenue grew by over 20% to $257,000,000 Our services revenue increased to $243,000,000 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, management team is not complacent with our success as there are so much more to come in 2025, The Arlo subscription based operating model with its retail and direct paid accounts boast exceptional unit economics. Unit economics that are consistent with most world class SaaS enterprises. [indiscernible] we continued to expand our overall unit economics, as the gross profit from our services business exceeded our non GAAP operating expenses, by more than $35,000,000 During the year, we increased our ARPU from retail paid accounts to $12.6 from $11.3 in the prior year, representing a 12% growth rate ARPU expansion was driven by the value of enhanced AI and other robust features included in our higher tiered service plans. Amazingly, these retail paid accounts generated gross margins of 92% as we exited the year thereby catalyzing this outstanding financial performance. ARPU expansion and consistent monthly subscriber gross retention at 99% per month has driven our current LTV to an outstanding $750 per subscriber. It is important to highlight that we continue to employ a strategy of leveraging our product sales as a critical element in our customer acquisition model, Product revenue for the full year of 2024 was $268,000,000 down by $22,100,000 compared to the prior year.

Product revenue for the fourth quarter was $57,400,000 and in line with our expectations communicated back in Q3. In Q4, the promotional activities across all retail channels were aggressive given consumer sentiment as well as other environmental and macroeconomic factors. In order to meet the consumers where they were, and drive growth in point of sale or POS activities Arlo instituted a number of incremental promotional campaigns which decreased the ASPs for our devices and also attributed to a decline in our overall product gross margins. As a result, our cost of customer acquisition or CAC increased from $100 in the prior year to $200 in 2024. Since the increase in CAC was driven by our intentional strategy to reduce ASPs and use our products to drive household formation, we were able to increase our unit POS in Q4 by 73% over the prior quarter This is a remarkable outcome considering that we launched the Essential two platform in 2023. Leveraging our sales channel, strong pricing power, and world class customer retention levels, we still have an industry leading LTV to CAC ratio of four times and we are just beginning to tap into this vast long term opportunity. It is important to discuss two critical growth metrics.

Paid accounts and ARR growth. Installed base of subscribers continued its strong trajectory coming in at 4,600,000 paid accounts at the end of twenty twenty four, an increase of 63% over the prior year.

As discussed in previous quarters, we remain committed to generating 170,000 to 190,000 new paid subscribers each quarter. In this past year, our paid accounts reflected a meaningful catch up of VeriShore subscribers. However, we believe that substantially all of the Verisure catch up related to firmware upgrades are completed. We recognize that paid account growth is instrumental in driving our year end ARR, which was $257,000,000 at the end of twenty twenty four. The ARR growth rate of 22% is exceptional. A factor of both paid account growth as well as the expansion of ARPU due to mix shifts in service plans. It is important to note that around 87% of the ARR is generated from our retail and direct [indiscernible] Our focus on subscription based services provides a significant uplift to our profitability and greater visibility and predictability in achieving near term revenue targets. Our service revenue was at record levels for at $64,100,000 for the fourth quarter and $243,000,000 for the full year of 2024. Service revenue increased by $42,000,000 21% year over year fueled by the addition of new paid accounts Further, service revenue as a percentage of total revenue represented 5348% for Q4 and for the full year respectively, Non GAAP service revenue gross margins were above 76% throughout the year and exited the fourth quarter at a remarkable rate of 82 The Q4 twenty twenty four services gross margin increased significantly from 74% in Q4 of twenty twenty three.

On a consolidated basis, our non GAAP gross profit for the fourth quarter was $45,600,000 resulting in a non GAAP gross margin of 37.5%, driven by the improvement in services profitability. Our non GAAP gross profit for the full year of 2024 was $192,300,000 $20,600,000 or 12% year over year. This resulted in a non GAAP gross margin of 37.6%. Up more than two sixty basis points from 35% in 2023. The year over year increase in non GAAP gross profit was primarily attributable to the growth revenue and improvement in gross margins in our services business. Coupled with an ongoing focus on cost optimizations, Our growth in non GAAP operating income and free cash flow was exceptional this year. To appreciate the operating leverage in our business model, you need to understand our disciplined approach to managing our non GAAP operating expenses and working capital in 2024. Total non GAAP operating expenses for the fourth quarter were $36,300,000 down more than $2,000,000 both sequentially year over year. Total non GAAP operating expenses for the full year of 2024 were $154,400,000 up about $7,700,000 or 5% from the $146,700,000 reported in the same period last year. Our ability to manage our operating expenses at these levels truly demonstrates the leverage in our business model.

This was evident this year as services revenue grew by $42,000,000 or 21%. While the cost to deliver that revenue only grew by 2%. Representing a 97% gross margin on the incremental service We set another record in 2024 generating $37,900,000 in non GAAP operating profit or 7.4% operating margin. For that same period, non GAAP operating income was up a remarkable 52% over the prior year. This level of operating profit coupled with exceptional working capital management helped drive our free cash flow to $48,600,000 with free cash flow margin of 9.5%. The year over year growth in free cash flow was $13,200,000 or 37%. [indiscernible] In Q4, we posted a non GAAP net income of $10,400,000 or net income per diluted share of $0.1 in line with consensus. For 2024, non GAAP net income of $42,300,000 up more than $14,400,000 or 52% when compared to the same period in 2023. Our non GAAP net income translates to net income per diluted share of $0.4 again, a significant improvement from a net income per diluted share of $0.28 in 2023. [indiscernible] can expect us to continue to be focused on managing the operating expense to invest in growth opportunities ahead of us.

Regarding our balance sheet and liquidity position, we ended the quarter with $151,500,000 in available cash, cash equivalents short term investments. This balance was up $15,000,000 year over year underscoring the improvement in profitability. Given our growing cash balance, we are extremely focused on our ability to allocate capital in a manner that generates the best return. Our DSO levels for the quarter were forty four days in Q4 of twenty twenty four, relatively consistent with our DSO levels in the prior quarter and same quarter last year. Highlighting our enhanced collection efforts on our base of larger retail customers. We will continue to monitor our DSOs closely but we are pleased with the overall status and collectability of outstanding receivables.

Regarding inventory, we managed our inventory levels to $40,600,000 to meet the expected consumer demand in the fourth quarter. This balance was substantially reduced from our inventory balance of $52,000,000 in Q3. Which helped improve our inventory turns in Q4 to 6.4 times, up from 5.8 times in Q3.

That inventory improvement was driven by a well executed loading of product into mass market retailers like Walmart and Amazon to support their fourth quarter promotional events. 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 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 Shellshare 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 Based on the success and data we saw from our Arlo Secure five launch last year, We moved to simplify the subscription plans that we offer in 2025. Arlo now offers two Arlo, [indiscernible] in both single and unlimited camera options, and Premiere which includes professional monitoring, emergency response cellular backup and Arlo Arlo.

We have doubled the cloud video storage to sixty days and now every plan has access to our full suite of Arlo Arlo features. The new plans took effect January 1, and all current subscribers are being migrated to these plans starting this month. Early metrics confirm what we saw with our initial launch of Arlo Secure five. Average revenue per user for new subscribers is now 724% of our users are selecting annual plan which reduces churn, and we have seen a 20% increase in the mix of users selecting our premium plan.

And a quick stat we found interesting. When looking at our population of active devices in the field, roughly 65% are attached to a paid plan. Arlo Secure five is a resounding success and this change in plan structure will maximize the positive impact for users and our shareholders. And here's a quick sneak peek at a subset of the new features coming in Arlo six later this year. First, you will see Arlo begin its push into the $13,000,000,000 a year DIY smart home space, by adding third party device control and automation to our user experience. This is the beginning of a multiyear expansion into that market where we see security solution companies like Arlo having an advantage in owning the user engagement and relationship. As the Smart Home and Home Security segments combine into one concept, Smart Home Security. A single shortcut could arm the Arlo system at night while simultaneously locking the front door lowering the thermostat and turning off the lights downstairs. Second, you will see Arlo Intelligence expand into providing more detailed descriptions of an event for both video and audio portions of the data capture. For instance, it will be able to describe a person's clothes or what they Arlo holding as they walk up to or it can listen and determine what sound it hears such as a car alarm.

And these descriptions will be fully searchable to find patterns in your event feed or find specific events. And third, we will be rolling out a beta version of a new Arlo [indiscernible] Threat assessment, Our platform will analyze each event and provide threat scoring on several parametric classifications to determine how to react. The threat assessment could be used to send a critical alert trigger system Arlo Secure six is another example of our innovation edge and will continue our leadership in capabilities and user experience. Now I would like to shift to partnerships. This morning, we announced our partnership with RapidSOS, which extends the capabilities of the Arlo platform to provide world class emergency Arlo users will have a faster response time to any emergency request and have the option to share important information with first responders such as gate codes, profiles of people at the location, medical histories or other information that could vastly improve response times and deliver better outcomes. Arlo users can select specific cameras to share with emergency agents who can then use video verification of the event which enables a faster higher priority response from first responders. Looking ahead, RapidSOS will enable Arlo to bring Visa advanced emergency response services to new regions, fueling the international expansion of our premier subscription plan.

And we plan to collaborate with them on additional innovation opportunities in the space over the coming years. Additionally, we launched a deep technology partnership with Origin Wireless, whose verified human presence technology utilizes existing WiFi devices within the home or business to intelligently predict if a moving object on the premise is a person. It is a groundbreaking capability driven by a sophisticated AI model that not only brings a differentiated feature to the Arlo SaaS platform, but has also created a pipeline of strategic partners that want to deploy it as part of a security subscription service. Once integrated into Arlo Intelligence and our SaaS platform, it will provide simple motion detection without hardware help reduce false alarms, and drive new business opportunities for Arlo. As part of our relationship, Arlo has secured global exclusive rights to the technology itself and the ability to market and sell the technology as a service. And finally, we also announced this morning a deeper relationship with Samsung, which we are very excited about. As a first step, the teams are working closely together to bring our best in class experience to Samsung SmartThings users across Arlo cameras. This will include better performance, two way audio, event snapshot previews and AI powered notification [indiscernible] Other aspects of our partnership will be announced later this year.

And now, I will turn the presentation over to Curt again to provide our 2025 financial outlook. [indiscernible] and groundbreaking innovations that Matt just discussed positions us for success in 2025 and beyond. Our list 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 generate an 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 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 $114,000,000 to $124,000,000 We expect our first quarter GAAP net loss per share to be between a loss of $0.06 and $0 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 twenty twenty four. For the full year of 2025, we expect consolidated revenue to be in the range of $5.10 to $540,000,000 with service revenue comprising greater than 50% of total revenue. Based on the increase in paid accounts, an improvement in ARR we expect to generate service revenue at or above $300,000,000 in 2025 growing at over 20% year over year. Our approach to subscriptions will continue to drive our margin expansion as we expect non GAAP service gross margin to be greater than 80% throughout the year. Our cost management discipline will be an important factor in our expanding profitability As we expect, our non GAAP net income per diluted share to be between $0.56 and $0.66 per share.

Representing year over year growth of more than 50% at the midpoint of the guidance range. We expect our consolidated gross margins will again be up several hundred basis points emphasizing the operating leverage in the model. Even withstanding [indiscernible] in customer acquisition through product pricing. Again, all metrics [indiscernible] that Arlo is a world class SaaS business. Our strong balance sheet and profitability establishes a solid foundation for the company's robust capital allocation program. Previous calls, we have discussed the three dimensions of our capital allocation program, organic and inorganic investments as well as return of capital to shareholders. We prioritize organic investments because the addressable market of the smart security space is large, relatively untapped, and poised to expand over time. The investments that we have made so far have paid dividends yielding positive outcomes and enhancing our customer experience and achieving innovation milestones, such as the introduction of Arlo Secure five Arlo, With respect to inorganic investments, we continue to review potential candidates for external investment. That either strengthen our position in the smart security space or enhance our technology platform to expand into adjacent markets. We have remained cautious around inorganic investments. And will only execute a transaction that accelerates our path to achieving our long range goals.

Finally, we have embarked on a share repurchase program that enables us to return capital to our shareholders. During the period, we executed repurchasing shares at an average price of $11.67 with proceeds totaling $4,400,000 we will continue to be opportunistic at repurchasing our shares which we believe are still undervalued given our growth and profitability profile, 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, Klavio, Life360, monday.com and Semrush. These companies are valued at a revenue multiple of nearly 10 times.

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 four times 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. So 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 5,000,000 paid accounts, dollars 300,000,000 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 original targets to achieve over the next five years. And while 10,000,000 paid accounts, dollars 700,000,000 in ARR and over 25% operating margin remain our current long range target. Is clear Arlo is likely to substantially beat these targets given our current growth rate and the incremental opportunities that lie in front of us. Refocusing to the year ahead. Arlo is set up for an absolutely incredible 2025. Past investments in technology innovation, partner development and operational excellence will come to fruition and begin reading through the business as we endeavor to maximize shareholder value creation. Some of the highlights. Arlo will continue to lead on platform technologies and specifically in category AI innovation. The impact of last year's Arlo Secure five launch is clear. And we have given you a small sneak peek at Arlo Secure six, which pushes Arlo Intelligence much further in providing real world tangible value to our users. Our device refresh cycle for holiday twenty twenty five is the largest in company history touching nearly every camera we produce and pushing us into several growing segments of the smart security camera market.

These innovations and product launches have positioned us to secure additional shelf share in some of the largest retailers in the world, with additional opportunities available. Today, we announced several new strategic partners that will expand our capabilities, provide additional growth opportunities and continue to diversify our revenue base. Routes to incremental Arlo Arlo. The partnerships with RapidSOS and Origin AI immediately compound our technological differentiation in the market. Expect more to come throughout the year. The result is an annual operating plan targeting $300,000,000 or more of service revenue, which represents nearly 25% year over year growth. And our full year guidance means you are looking at a rule of 40 company, Coupled with the ARR growth rate, this puts Arlo in an extremely small and elite list of publicly traded SaaS companies and shows the power of our subscription service offering.

This outstanding outlook for Arlo is the culmination of years of strategy transformation and hard work across the team. And it shows the power of a company with clarity of vision and focused execution towards well defined goals. Thank you to everyone at Arvo Arlo. And now I will open the call up for questions.

At this time, I would like to remind everyone in order First question is from the line of Adam Tindle with Raymond James. Your line is now open. Okay. Thanks. Good afternoon. And congrats on 2024. Appreciate the additional details on the call.

As I look at your outlook for 2025, particularly on services revenue side, I wanted to ask about that, Kurt. At or above $300,000,000 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 ninety days and that's what I wanted to ask about. What are sort of the buckets that underpin that $300,000,000 services target for 2025? Imagine there's so 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. Yes, Adam, thanks so much for the question. Certainly, a great outlook for 2025 of the $300,000,000 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 $11.3 grew that 12% to $12.6 exiting the year. So we expect that to continue, especially on the back of Arlo Secure V, 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 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 and ton of opportunity.

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 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 your 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 ARR with Secure five, what features they were going after and we onboarded all of that and then started to look at our annual operating [indiscernible] for 2025 with that knowledge in place. 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 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 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 1. 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 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 five Arlo. As far as churn, yes, we are very focused on churn in 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 five 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 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 that at our conference next week. But on the product side, Matt, you talked about the largest device launch in company's history coming up. Also noticed that your channel inventory in U. S. Retail is very, very healthy. [indiscernible] clean channel. Wonder the question would be, if you could compare this launch versus prior launches, what you've maybe learned from prior launches what you might do differently since this is such a notable one? And for Curt, just a little bit confused. I wonder if there's some timing or something here because of was backing into the product revenue growth expectations for 2025 and 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 [indiscernible] So think of the entire Essential lineup which is our volume mover, as you know, [indiscernible] which is our kind of mid tier product that a lot of people step up to and then Ultra, hasn't been updated in at least two or two point five 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 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 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 the first three quarters will be on the Yes. In response to your question, Adam, on the 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 [indiscernible] was very active and a big part of the overall market share that was out there. We want to make sure that we Arlo able to do that in 2025 on a very consistent basis across our entire portfolio. So looking at our overall revenue you can expect a continuation of declines in ASPs and also aggressive promotional activity throughout the year, in particular in the second half of twenty twenty five.

But the great thing is, is that we've been working closely with our supply chain and ultimately we've incorporated in 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.

Makes sense. Thank you. Thank you for your question. Next question is from the line of Jacob Stefan with Lake Street Capital. Your line is now open.

Thanks. 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. Essentially doubling year over year, but LTV has actually grown. So So the four to one, 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 three:one, we think is world class. But if you look at enterprise SaaS or other consumer service customers or companies, you'll see that three zero one 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, seven to one is too high. You're under investing.

In the customer acquisition and potential growth of the company. I would say we're targeting somewhere between, call it, 3.5 and maybe 4.5 or five. 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 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 seven zero one, I actually agree that we were under investing in the business a bit. 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, 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 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 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 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'll 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 the central 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 the 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 talked about. It's not including any other things like the ad platform.

Thank you for your question. Next question comes from the line of Hamad Khorsand with BWS Financial.

Your line is now open.

Hi. Could you talk about just the competitive environment here? I mean, you were talking about you had to do a lot more promotions Did you do you think you took market share here or Are you maintaining it? It sounds like you're being very aggressive here with Yes, I'd say the competitive landscape hasn't changed a lot. It's the same players I would say it 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 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, 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 already communicated that investors. So it played out exactly as we thought.

Okay. And then any change as far as the timing as to Wendy's customers who bought the units would actually convert to a 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 ninety day free trial. And that would delay almost all of those customers into Q1. When we moved to a thirty day trial, which was about on most of our products, about eighteen months to twenty four months ago, Then it's mix. 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.

Okay, great. Thank you.

You're welcome.

Thank you for your question. Next question comes from the line of Scott Searle with ROTH Capital. Your line is now open. Guys. Very exciting to look at 2025.

Hey, 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 this [indiscernible] 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 with clickover when those annuals come up. So you're right, some of our annual, which is still a vast majority of our plan, especially the historic plans, but those would actually transfer through the year on whatever month and day that they're renewal. So just to be very clear, so on January 1, 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 plan renewal is happening. And then, other annual customers will turn over throughout the year. So that is a correct way to think about We ended the year at ARPU, Yes, we ended the year on ARPU around $11 and change. I think it was 11 some sense. Dollars or going to $12 We're seeing on the new subscribers over $17 So that's a great indicator. So what you're going to see is probably a blend through the year It will land somewhere in the middle. And again, I would wait to give you a number in the migrations of the plans and which plans they actually 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 retail partners. Is that due to promotional activity or is that due more to a realization your retail partner that certain vendors Arlo actually stealing revenue from them. They buy one and then the follow on comes through online sales or otherwise. And just kind of curious how that 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 this is a physical store company we're talking about. But also the expanded assortment in our product launch that's coming in the September, October timeframe for holiday. So they looked at our assortment 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 like the expansion. They like 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 heard any commentary specifically about insurance on the call. I'm wondering if you could elaborate on Natche's 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 fronts? Yes. I will make some general comments and then also touch on some of the specifics you talked about. I will I will tell you that the amount of activity and interest in just strategic accounts in general, and I know I 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 this morning. You see the announcement with Sam 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 Arlo Secure V 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 Curt 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, twelve months. Great.

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 Orlo 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 2026 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 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 in our business, 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, 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.

Thank you for your question. This concludes today's conference call. You may now disconnect your lines.