Arlo Technologies Q3 2024 Earnings Results & Report

Arlo Technologies EPS Results

• Actual EPS: N/A
• Consensus EPS: $0.10
• Beat/Miss: N/A
• One Year Ago EPS: -$0.01
• EPS Beat Rate: 7 of last 8 quarters

Arlo Technologies Revenue Results

• Actual Revenue: N/A
• Expected Revenue: $136.14 million
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Arlo Technologies (NYSE:ARLO) develops connected smart home security products and services. Its portfolio includes wire-free and wired security cameras, video doorbells, floodlight cameras, baby monitors and related accessories designed for residential and small-business use.

The company combines its hardware with cloud-based software and subscription services, including Arlo Secure. These services provide features such as video storage, activity notifications, person, vehicle and package detection, emergency response options and other monitoring and security capabilities, depending on the product and service plan.

Arlo was established as a standalone company following its separation from Netgear and became an independent publicly traded company in 2018. Based in Carlsbad, California, Arlo markets its products and services internationally through online and retail channels. Matthew McRae serves as the company’s chief executive officer.

Arlo Technologies Q3 2024 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Q3 revenue, earnings, and cash flow all improved. Arlo reported $137.7 million in revenue, EPS of $0.11, non-GAAP operating profit of $10.8 million, and free cash flow of $17.4 million, with year-to-date free cash flow up 54% year over year.
• Positive Sentiment: Services remain the main growth engine. Paid subscribers rose 255,000 to 4.2 million, service revenue increased 21% to a record $62 million, and service gross margin reached a record 77%, with ARPU also hitting a new high of $12.24.
• Positive Sentiment: Arlo Secure 5 is seeing strong early traction. Management said more than 40% of new users are choosing premium plans versus less than 20% historically, pushing new-subscriber ARPU above $14 and suggesting further ARPU gains into 2025.
• Neutral Sentiment: The company is leaning into lower hardware pricing to drive future subscriptions. Arlo expects ASPs and product revenue to remain pressured in Q4 as it becomes more promotional, but it is targeting nearly doubled North America retail camera POS sequentially to support household formation and future paid accounts.
• Positive Sentiment: Strategic partnerships and capital returns are expanding. Management highlighted continued strength in the Verisure relationship, the new phase-two Allstate rollout, development of Arlo Secure 6, and a newly announced $50 million share repurchase program.

Presentation

[Operator]

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. At that time, if you have a question, you will need to press star one on your push-button phone. I would now like to turn the conference over to Tahmin Clarke. Please go ahead, sir.

[Tahmin Clarke, Head of Investor Relations at Arlo Technologies]

Thank you, Operator. Good afternoon and welcome to Arlo Technologies third quarter of 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 third quarter, along with guidance for the fourth 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.

[Tahmin Clarke, Head of Investor Relations at Arlo Technologies]

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, expenses, cash outlook, free cash flow and free cash flow margin, guidance for the fourth quarter of 2024, the 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, 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 condition. Actual results or trends could differ materially from those contemplated by these forward-looking statements.

[Tahmin Clarke, Head of Investor Relations at Arlo Technologies]

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.

[Matt McRae, CEO at Arlo Technologies]

Thank you, Tahmin, and thank you, everyone, for joining us today on Arlo's third quarter 2024 earnings call. The team at Arlo delivered another strong quarter with total revenue reaching $137.7 million, up 6% from the same period last year, which was elevated due to the Q3 2023 stocking from our Essential 2 product launch across channels. This performance propelled non-GAAP gross profit to nearly $50 million in the quarter and generated $0.11 of earnings per share. The driving force behind the success continues to be our services business, which broke several records in Q3. Paid subscribers grew by 255,000, an increase of 70% year over year, to reach 4.2 million, and service revenue grew 21% to a record $62 million, while total service gross margin rose to over 77%, also a new record for Arlo.

[Matt McRae, CEO at Arlo Technologies]

The continuing upward mix across our plans lifted our retail and direct ARPU to a new high of $12.24 per month. In addition to these strong trends in our service business, we launched our latest offering, Arlo Secure 5, right at the end of Q3. Despite being very early in the rollout, I want to provide an overview of the launch and a sneak peek at the performance we are seeing over the first six weeks. Arlo Secure 5 has innovative new features, including person recognition, vehicle recognition, and widgets for iOS and Android that make controlling the Arlo ecosystem so much more convenient. It also includes our groundbreaking custom detection capability that enables users to create private AI micro models, which detect nearly any type of event, dramatically expanding the power of our service.

[Matt McRae, CEO at Arlo Technologies]

Arlo Secure 5 also includes in-app purchasing of our services for the first time, creating a purchase path that substantially reduces friction to become an Arlo subscriber. This release has allowed us to commence internal testing of an advertising model inside our user experience, as we previously communicated. Early results from our Arlo Secure 5 launch are impressive. Historically, less than 20% of our paid users sign up for our premium plans, which cost more than our single Cam and unlimited Cam basic plans. With Arlo Secure 5, we are witnessing more than 40% sign up for our more premium plans, which is more than two times the historical rate. This is accelerating ARPU on the new subscribers to over $14. We have also seen a doubling of users signing up for annual plans versus month-to-month.

[Matt McRae, CEO at Arlo Technologies]

While still early, we expect Arlo Secure 5 to contribute to an increasing retail and direct ARPU heading into 2025 and illustrate opportunities for additional service revenue growth as we explore options to migrate existing users to Arlo Secure 5. We have never seen a service launch have such an immediate impact on key service metrics. As discussed previously, when we look ahead across our channels, the market remains softer in general terms. Some retailers and partners are showing surprising strength, while others are underperforming due to a variety of factors, including customer sentiment, hurricane disruptions, and lower foot traffic. Similar to last year, Arlo has decided to be more aggressive in our promotional calendar and pricing as we focus on units sold, which leads to future household subscriptions, and this allows us to test new price points like we did last year ahead of our annual operating plan.

[Matt McRae, CEO at Arlo Technologies]

Reaching into these lower price points will lower our near-term hardware revenue but propel sales across our partners and drive additional household formation. In fact, we are targeting Q4 unit POS in North America retail to nearly double sequentially from Q3 to Q4, which would also represent a nearly 20% increase year over year, comping against our huge launch of Essential 2 in 2023. With our service gross margins for retail and direct paid accounts at nearly 90%, coupled with the positive ARPU trends I mentioned earlier, we expect service revenue to exceed our full-year guidance and be on track for strong growth in 2025. In addition to this growth, we are seeing continued progress in our pursuit of various strategic partner opportunities. The revenue growth in Europe shows the Verisure partnership remains strong in our last year of the initial term.

[Matt McRae, CEO at Arlo Technologies]

As a reminder, this partnership has been renewed for another five years as we look forward to innovating and growing together. Earlier this week, phase two of our Allstate partnership was announced, with Arlo Security Solutions now being marketed and sold to Allstate's six million home insurance customers in the United States. There are several other strategic partners that we hope to announce and provide more information on over the next several quarters. Finally, I would like to provide an update on our capital allocation plan. Our organic investment is already paying dividends with the successful Arlo Secure 5 launch. Our technology investment continues as we begin development on Arlo Secure 6 and plan a large product launch for the second half of 2025, with continued innovation in 2026.

[Matt McRae, CEO at Arlo Technologies]

Arlo also continues to review possible acquisition or investment options similar to what was conveyed before, but will only move forward if we feel it is right for the business and propels us towards our stated long-range targets of 10 million paid accounts, $700 million in ARR, and over 25% non-GAAP operating margin. Recently, Arlo announced a share buyback program of $50 million, which covers the third pillar of our capital allocation plan. A plan will be enabled this quarter, and it is likely that you will see Arlo active in the market in the short term. Now I'll turn it over to Kurt for a more in-depth review of our Q3 results.

[Kurt Binder, COO and CFO at Arlo Technologies]

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 Q3 2024. Total revenue for the third quarter of 2024 came in at $137.7 million, up 6% over the prior year period. In the quarter, service revenue represented about 45% of total revenue, up from 39% in the same period last year, as we continue the progression towards the 50% threshold. This shift in our recurring revenue base reflects the continued momentum that we have gained in our transformation to a services-first business, and the results are showing the power of the business model. Our installed base of subscribers continued its strong growth path, coming in at 4.2 million paid accounts at the end of Q3, an increase of approximately 255,000 paid accounts in the quarter.

[Kurt Binder, COO and CFO at Arlo Technologies]

Paid accounts reflected a small catch-up of Verisure subscribers, and as we have previously mentioned, this quarter concluded substantially all of the Verisure catch-up related to firmware upgrades. Going forward, we remain committed to generating 170,000-190,000 new paid subscribers on a quarterly basis. Service revenue for Q3 was another record at $61.9 million, or a 21% increase over the same period last year. The strong service revenue performance was driven in part by the growth in the overall paid subscriber base, but additionally, a mixed shift of subscribers to higher-priced rate plans resulting in ARPU expansion to $12.24 for our retail and direct paid accounts. Our annual recurring revenue at September 30th was $242 million, up more than 21% over the same period last year.

[Kurt Binder, COO and CFO at Arlo Technologies]

I want to highlight the strength of our services revenue and ARR, which helped deliver strong top-line revenue performance and contributed to Arlo's improving profitability with Q3 non-GAAP operating income up 28% and free cash flow up a robust 150% when compared to the same period last year. Product revenue for Q3 was $75.8 million, higher than our second quarter level, but down about 4% when compared to product revenue generated in the same period last year. As Matt discussed earlier, consumer purchase decisions as we enter into the mass market segment of DIY security have shifted to lower price points. This market dynamic is resulting in a significant reduction in ASPs for product hardware across the industry. Based on these conditions, we are focused on driving incremental POS volume to deliver on our services strategy.

[Kurt Binder, COO and CFO at Arlo Technologies]

So far, this approach is working as we shift a total of 1.5 million devices worldwide compared to 1.3 million in the prior period. We will participate at these lower price points in the upcoming holiday season, and we continue to believe that paid subscriptions are paramount to creating the best returns for our business. With the current market dynamics, leveraging product pricing is our best opportunity to drive paid account additions. Last year's launch of our low-cost Essential 2 camera has been critical to our success in the market, benefiting us in two distinctive ways. First, as the market has become more value-conscious, having a product that is both attractive in price and quality that appeals to this customer segment enables Arlo to remain competitive. Second, we are able to explore the characteristics of these customers by participating in these lower price segments.

[Kurt Binder, COO and CFO at Arlo Technologies]

We now understand that while they might need inducement through discounted upfront pricing on the device, the propensity to sign up for recurring service has continued to trend favorably, and in some cases, the metrics that these customers generate are better than we previously anticipated. Looking to the holiday season, we expect product gross margins to trend downward as we partner with major retailers like Walmart to meet the market dynamics head-on and deliver additional paid subscriber growth. As we participate in the mass market adoption of smart security, we will continue to use our product ASPs as a lever to ensure the continued growth trajectory of our services business. In the quarter, approximately $66 million, or 48% of our total revenue, was generated by our international customers. On a year-over-year basis, international revenue was up from the $50 million level, or 39% of total revenue in the prior period.

[Kurt Binder, COO and CFO at Arlo Technologies]

Verisure continues to be the driver of this international revenue growth and an outstanding partner for us, delivering strong results in the EMEA region. From this point on, my discussion will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP figures is detailed in our earnings release, which was distributed earlier today. Our non-GAAP gross profit for the third quarter was $49.5 million, a 12% increase year-over-year. This resulted in a non-GAAP gross margin of 36% in the quarter. The year-over-year increase in non-GAAP gross profit was attributable to the continued expansion of our services business and improvement in service gross margin, which was offset by a lower product gross margin. Non-GAAP service gross margin for the quarter was 77%, up over 300 basis points from 74% in the same period last year.

[Kurt Binder, COO and CFO at Arlo Technologies]

The improvement in non-GAAP service gross profit was driven by growth in our total paid subscriptions and improvement in ARPU. Non-GAAP product gross margin for the three and nine-month periods ended September 2024 was 2.2% and 4.4%, respectively, which is generally in line with the guidance that we provided earlier in the year. Total non-GAAP operating expenses for the third quarter were $38.7 million, up from $35.7 million in the same period last year. The year-over-year increase is primarily related to increased marketing spend and investment in Arlo Secure 5. Additionally, as mentioned on our previous earnings call, we plan to increase operating expenses in the back half of the year by a nominal amount, focusing on customer experience and other areas of innovation as part of the organic investment as described in our capital allocation plan.

[Kurt Binder, COO and CFO at Arlo Technologies]

In Q3, it is noteworthy that we set a record with $10.8 million in non-GAAP operating profit, or 8% operating margin. Additionally, our operating profit for the year-to-date period of 2024 was $28.6 million, up a remarkable 90% over the same period last year. Further, we posted non-GAAP net income of $11.8 million, which translates into non-GAAP net income per dilutive share of $0.11. Our non-GAAP net income year-to-date for 2024 was $31.8 million, also up about 90% over the same period last year, illustrating the tremendous operating leverage in our model driven by our services business. Regarding our balance sheet and liquidity position, we ended the quarter with $146.6 million in available cash, cash equivalents, and short-term investments. This balance is up more than $20 million since September of 2023.

[Kurt Binder, COO and CFO at Arlo Technologies]

Even more exciting is that we generated free cash flow of $17.4 million during the quarter, which represents a free cash flow margin of over 12% and up more than $10 million over the same period last year. This is driven by increased profitability and enhanced working capital management. Free cash flow is the true measure of the successful trajectory of our business. And year-to-date, we have generated $43 million in free cash flow, which is up 54% when compared to the same period last year. This level of free cash flow growth is tremendous, especially given the general market conditions and shows the resiliency of our business model. Our Q3 accounts receivable balance was $68.6 million at quarter end, with DSOs at 45 days, down from 49 days last year. Our Q3 inventory balance was $52 million, in line with the levels last year.

[Kurt Binder, COO and CFO at Arlo Technologies]

Inventory turns remained at 5.8 times, and in line with our expectations as we continue to optimize our inventory levels in an effort to minimize our spend on freight costs. Now turning to our outlook, the consumer market remains highly promotional, and we plan to be aggressive with our product pricing during the holiday season to drive additional POS volume and, in turn, paid subscriber growth. As a result of the shift in consumer purchase decisions to the lower price segment, we expect ASPs to continue to decline, resulting in lower product revenue and product gross margins for Q4. Given this trend, we expect fourth quarter total revenue to be in the range of $116 million-$126 million.

[Kurt Binder, COO and CFO at Arlo Technologies]

While we expect to come in at the lower end of our total revenue guidance for the full year, it is important to note that we expect to exceed our full-year guidance for our services business of $240 million and at a healthier gross margin target of around 80% exiting year. While product gross margin may be down, service gross margin will remain strong, and we expect combined non-GAAP gross margins to be higher in the fourth quarter as a result of the mix of revenue shifting more towards services. The key driver of this improvement is the fact that our services gross margin on retail and direct paid accounts is approaching 90%. We expect that our non-GAAP net income per dilutive share to be between $0.07-$0.13 per share, which translates to the midpoint of our EPS guidance for the full year.

[Kurt Binder, COO and CFO at Arlo Technologies]

And now I'll open it up for questions.

[Operator]

At this time, I'd like to remind everyone in order to ask a question, press Star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Jacob Stephan from Lake Street. Jacob, please go ahead.

[Jacob Stephan, Senior Research Analyst at Lake Street]

Hey, guys. Thanks for taking my questions. Matt, Kurt, you guys made some comments on the call talking about kind of Q4 POS nearly doubling sequentially. And I think you guys said you had 1.5 million devices shipped in Q3. Help me clarify this. Does that essentially assume that you guys will kind of ship 3 million in Q4? Maybe just some clarification there.

[Matt McRae, CEO at Arlo Technologies]

Yeah. POS doubling from Q3 to Q4 is a measurement on cameras. And that's what actually drives the subscribers on the back end.

[Matt McRae, CEO at Arlo Technologies]

So we're not including accessories into that. Those may grow as well. But when we look at what's driving subscriptions, we're looking at how many cameras did we sell through, meaning at POS in Q3 versus what we think is going to happen in Q4 based on the promotional activity and what we're hearing from the retailers as things are starting to ramp up in the quarter. So we're expecting the POS in North America retail only cameras at nearly double what we did in Q3, which in turn would obviously drive subscribers. So it doesn't really equate to 1.5 million because that's across various regions and includes accessories.

[Jacob Stephan, Senior Research Analyst at Lake Street]

Okay. Got it. That's clear. Maybe just talk about Secure 5 a little bit here. Obviously, you guys are seeing some nice uptake. 40% are subscribing to the premium plan.

[Jacob Stephan, Senior Research Analyst at Lake Street]

But maybe could you help us understand how much of the customer base is currently on Secure 5? Is this broadly rolled out to all retail accounts or any color there?

[Matt McRae, CEO at Arlo Technologies]

Yeah. No, great question. So we've had a couple of great things happen in the last quarter. One is, like we said, the planning for Q4 and looking forward to a significant uptick in POS, which will lead to share gain in the market, which we're excited about. And as you know, we've been talking about that all year. But the second one is exactly what you talked about. Arlo Secure 5 launch has really been in the market about six weeks, as I mentioned in the prepared remarks. Like I said, it is the largest impact or biggest difference I've ever seen from just a service rollout on the key metrics.

[Matt McRae, CEO at Arlo Technologies]

Right now, it's available to all new subscribers. So we haven't done anything with our installed base, although we already have some of our installed base. Current paid accounts are starting to cancel and actually buy the new plan because they're excited and they've seen the announcement. But mostly, those are holding still at this point. It's really just being offered for new sign-ups as of the last six weeks. I would say there's probably a certain number, maybe 80,000-100,000, just as an estimate that are on the new accounts. So the data is a little bit early. But like you said, when we look at our top two-tier accounts, our premium accounts used to be 20% or less. Now it's 40% or more. So more than doubling.

[Matt McRae, CEO at Arlo Technologies]

That's driving the ARPU, which was already growing in kind of $12 to kind of $12, a little higher than $12. I think it's $12.24 in the quarter. We're now seeing well over $14 on those new subscribers. So to your point, that's what we're seeing on new subscribers. And what we're looking at as we go through this quarter and we start to look at Q1 next year is how do we migrate and actually bring all of our users onto Arlo Secure 5 and make that an exciting and potentially a creative event. Exciting for the users because all the new feature sets are getting and we're able to see how people are using Arlo Secure 5 and what to lean into. But obviously, driving that higher ARPU through the entire install base would be something that is not being accounted for.

[Matt McRae, CEO at Arlo Technologies]

So those are two of, I would say, the big pieces of news that we're really excited about: share gain, POS lift as we get into Q4, which we've been planning all year, and actually a surprise to the upside in how successful Arlo Secure 5 has been in the early weeks of its rollout.

[Jacob Stephan, Senior Research Analyst at Lake Street]

Okay. And have you seen a decent uptick in kind of the overall attach rate associated with Secure 5? I know in the past it's been about 65%, but any uptake there?

[Matt McRae, CEO at Arlo Technologies]

So one of the things I mentioned in the call is we've enabled in some areas in-app purchases, which is new for us. And on the in-app purchase side, we are seeing an increase in conversion.

[Matt McRae, CEO at Arlo Technologies]

It's small on a relative basis because we're only testing that in a couple of areas because we want to see how those customers progress through the entire lifespan. But that suggests there is a path to potentially lift conversion. Other than that, it seems really consistent with what we've seen over the last years and across the different cohorts.

[Jacob Stephan, Senior Research Analyst at Lake Street]

Okay. Got it. Thanks for taking the questions.

[Matt McRae, CEO at Arlo Technologies]

Yeah. You're welcome.

[Operator]

Thank you. Our next question comes from Mark Cash from Raymond James. Mark, please go ahead.

[Mark Cash, Associate Analyst at Raymond James]

Yeah. Thanks. This is Mark. I'm for Adam. Good afternoon, guys. Matt, maybe just start with you on phase two with the new Arlo Total Security Bundle for Allstate, so nicely building upon that relationship. 140 million Allstate protection plan customers or 16 million U.S. households are customers of them. So really big numbers.

[Mark Cash, Associate Analyst at Raymond James]

I'm just wondering how you're thinking about the go-to-market mechanisms for Arlo and penetrating that base, and it might be helpful to maybe put that in context and compare it with the kind of alignment that you have with Verisure when embarking on that relationship and how successful that's become now.

[Matt McRae, CEO at Arlo Technologies]

Yeah. No, great question, so Verisure, as you know, we're five years in, almost at the end of the fifth year with Verisure, and that's been an obviously strong partnership. Took a while to grow, although I would say it came out of the gate pretty fast because we were able to implement some things pretty quickly into their systems, but definitely grew over those years. I think we'll see something similar to Allstate as far as it'll start slow, but the access to an available TAM for us to address is sizable.

[Matt McRae, CEO at Arlo Technologies]

As you know, phase one was really us selling Allstate products through Arlo.com and starting to figure out how that attaches and how the brands work together in our user base, and what you're seeing in phase two is the opposite, Allstate starting to leverage emails, in-app messaging, and their own vehicles to their large user base selling Arlo hardware and service, the ATS bundle through there. Again, I think we're modest in our expectations in phase two. What I would suggest is both phase one and phase two is where you're seeing both parties start to understand how the brands resonate to the different user bases, how the products link together, where the value is being seen, and collecting a lot of data, and I will tell you there will be future phases, and you can expect things to kind of scale from here.

[Matt McRae, CEO at Arlo Technologies]

But we're excited now to get the reciprocal, the Arlo products and service to Allstate customers because that kind of closes the loop for us to gain some insight over the next couple of quarters and plans and what's coming next. The overall TAM and available for Allstate in particular is large. And we think what we're seeing through the initial data is we're reaching people that are not buying security through retail and may not have security at this point. So they look like new households or net new addressable households for Arlo, which is exciting.

[Mark Cash, Associate Analyst at Raymond James]

Interesting. Okay. Good. Thanks for that. And maybe that kind of ties into a question I had on geos and what you're seeing. So Americas down year over year for two quarters in a row. Maybe Allstate is the answer to that.

[Mark Cash, Associate Analyst at Raymond James]

But then you have Europe with some countries ramping really quickly, like we see with Sweden, while others are kind of de-sunk with some scale, like we see with Spain. I guess what is causing that divergence domestically versus internationally? and I guess if you could kind of talk about what's going on regionally within Europe, that'd be helpful to understand.

[Matt McRae, CEO at Arlo Technologies]

Yeah. We have to be careful we don't get too detailed in what's happening in Europe. There is some regional stuff there. I would say it's better to kind of look at it on a blended basis, and it depends where Verisure is actually deploying their resources or not given local market dynamics. There are some macroeconomic things that are happening in Europe that are different than the U.S. That impacts it as well.

[Matt McRae, CEO at Arlo Technologies]

But overall, I would say Verisure is strong, as you can see in the quarter, and we expect them to remain strong actually in Q4. One comment is in prior years, you'll remember that Verisure ended up destocking sometimes in Q4 leading into the following year for various reasons that we've talked about. We're not sure that's going to happen this year. We think their ordering may remain relatively strong, and this is for local regulatory reasons. Chinese New Year for manufacturing ends up earlier. There's a lot of reasons for that, but we think Verisure will remain a pretty strong partner in Q4. When you look at domestic retail versus that, some of that is timing of shipments going into holiday, where Verisure gets them earlier than we get them here, as an example.

[Matt McRae, CEO at Arlo Technologies]

So we had a pretty strong Q4 from a shipments perspective, but then POS will be stronger in Q4. And some of that is in Q4 or Q3 for us, we didn't lean as hard into Prime Day and a couple of the areas, and we watched some of the price points that are being hit. And so we may have lost a little bit of share in Q3, even though we had a great quarter. What you're seeing is us adjusting to those price points with our retail partners and all of our channel partners going into Q4 and why we're feeling we're going to see nearly double the POS on camera systems going into Q4. So some of it's timing, some of it's market dynamics, and some of it is kind of relative strategy on when and where you want to stock in.

[Kurt Binder, COO and CFO at Arlo Technologies]

Yeah. I'll just highlight something in addition to that and why we shared some commentary regarding the POS is just last year, if you recall. Q3 and Q4 for us were the transition periods where we were going from the Essential 1 to the Essential 2 platform. The Essential 2 resulted in a fair amount of stock in both Q3 as well as in Q4. You have to factor that into play, which is why we wanted to kind of normalize that factor and really talk about POS because we think that's the factor or metric that helps us get a clear indication or line of sight to household formation.

[Mark Cash, Associate Analyst at Raymond James]

Okay. Great. Matt, just kind of going back to your comments on Prime Day and leaning in, or maybe not as much there.

[Mark Cash, Associate Analyst at Raymond James]

And I think in your prepared remarks, you talked about the customer sentiment kind of being a headwind. You have hurricane disruptions, which we know very well about down here. You have lower foot traffic. I'm just wondering how these factors do play into your process of thinking about where to be more aggressive the holiday season because Walmart's obviously an important partner as you go mainstream and broad with your product. But can you lean more into Amazon or Arlo with those disruptions happening?

[Matt McRae, CEO at Arlo Technologies]

Yeah. No, that's exactly it. So when you look at both the price points, but more importantly, especially recently as we plan for Q4 in the final stages, is seeing where things are strong and where are weak. And we are seeing strength. So we have certain retailers, you mentioned one, Walmart, where we're seeing actually strength and good foot traffic.

[Matt McRae, CEO at Arlo Technologies]

We see other ones where we don't. We double-click in and start to look at the details of that, what's going on. What you're seeing us is adjust some price points and length of certain promotions in some areas and shifting in some areas of the country online when maybe foot traffic is low. That could be Arlo.com. It could be Amazon as an example. It could be a retail.com with one of the retail partners that is seeing less foot traffic but still decent online traffic. We're making those adjustments. Those are the last adjustments you can really make. You can't change the product you are promoting because those are already shipped in.

[Matt McRae, CEO at Arlo Technologies]

But what you can do is you can tweak price points, tweak offers, tweak length of offers to then maximize what we're looking for, which is unit POS in Q4 that leads to then future subscribers. And we think we've done a great job optimizing that. And we're seeing some real strength from the planning of what we think is going to happen as we get into Q4 and execute through Q4 starting 2025.

[Mark Cash, Associate Analyst at Raymond James]

Okay. Thank you. And I just have one more for Kurt. I appreciate the commentary you gave around the Essential 1 to 2 and then stocking. But how are you thinking about with this promotional and holiday season and the POS growth? And so how are you thinking about inventory levels throughout the fourth quarter and kind of how that flows into what you're expecting for cash flow to close out the year?

[Kurt Binder, COO and CFO at Arlo Technologies]

Yeah. A couple of questions embedded in that question. I'll start by saying that first off, as you look at what's happening in the space, we have seen ASPs declining. And so we were prepared for that, obviously, with Essential 2, and that's allowing us to be very, very promotional in the fourth quarter. So we're prepared to kind of play at price points that we may not have been in that position to play at in the past. And I think that's a good situation to be in. As we look at what's happening at the retailers, we do believe for the North America retail that we will be more into a destocking position this year in Q4 relative to where we were last year. Again, last year, because of the load-in that occurred over two quarters for Essential 2, that phenomenon doesn't exist.

[Kurt Binder, COO and CFO at Arlo Technologies]

This year, we believe the retailers will be more into a destocking position. But all that being said, what we're prepared to do is be very aggressive with the promotional activity, ultimately to get those units out into new consumer hands and ultimately convert them into subs in the Q1 and Q2 of 2025.

[Mark Cash, Associate Analyst at Raymond James]

Got it. Well, thank you so much, guys, for taking the questions.

[Matt McRae, CEO at Arlo Technologies]

You're welcome.

[Operator]

Thank you. As a reminder, if you would like to ask a question, press star, then the number one, and your telephone keypad. Our next question comes from Hamed Khorsand from BWS Financial. Hamid, please go ahead.

[Hamed Khorsand, Principal at BWS Financial]

Hi. So my question was really about how you're trying to plan this out. If ASPs are declining, are you going to get the same amount of traction from getting new subscribers on paid accounts?

[Matt McRae, CEO at Arlo Technologies]

Yeah. Obviously, at certain price points, we don't know.

[Matt McRae, CEO at Arlo Technologies]

Some of the price points we'll be hitting are ones we've hit on promotion before, and we've seen very consistent performance. Early indication is we'll see similar performance as well, that they're really independent decisions by the consumer. But we won't be able to really report that data until we get into Q1.

[Hamed Khorsand, Principal at BWS Financial]

Okay. And my other question was, how are you going to basically partner with more of these insurance companies if there's a lot of competition already in your field?

[Matt McRae, CEO at Arlo Technologies]

Well, what we've noticed is there's actually less competition in the partnership space. And it's one of the reasons Kurt and I have emphasized the strategic accounts being a big part of how Arlo is going to get to where it is today to our long-range plan. Partners worry about security. They worry about data privacy.

[Matt McRae, CEO at Arlo Technologies]

They're looking for somebody who's concentrated in the space and innovating in the space and not this product line or services being more of a side hustle or a small part of a very large company. So what we've seen is there's partners in the insurance space are looking for a trustworthy company, an American company to be very clear, where they can trust what's happening, where the development's happening and everything, and a company that's really focused on the space and treats people's data correctly and somebody that can actually innovate with over time. So we're actually seeing less competition in the strategic account area than we are in just physical retail.

[Hamed Khorsand, Principal at BWS Financial]

Got it. All right. Thank you.

[Matt McRae, CEO at Arlo Technologies]

You're welcome.

[Operator]

Thank you. There are no further questions. So that concludes today's call. Thank you for joining, everyone. You may now disconnect your lines.

Participants

Executives

• Tahmin Clarke, Head of Investor Relations
• Matt McRae, CEO
• Kurt Binder, COO and CFO

Analysts

• Jacob Stephan, Senior Research Analyst at Lake Street
• Mark Cash, Associate Analyst at Raymond James
• Hamed Khorsand, Principal at BWS Financial