Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2020-Q1

[Jolanta Masojada, Head of Investor Relations]

Good morning, and thank you for joining the Life360 March 2020 Quarterly Business Update and Appendix 4C Conference Call. This is Jolanta Masojada, and I head up Investor Relations for Life360. The call will begin with some prepared remarks from Co-founder and CEO, Chris Hulls; and VP of Finance, Dan Menudier, followed by a Q&A session.This call is being conducted as a Zoom audio webinar. [Operator Instructions]I would now like to turn the call over to Chris.

[Chris Hulls, Co]

Good morning, everyone, and thanks for joining our first ever at-home earnings call. If you're lucky, you might get to meet my whole family if either of my 2 young daughters decide to join me or throw a tantrum.Life360 has delivered strong results in the March quarter, particularly in the context of the rapid impact of COVID-19. While usage of our product has diminished when families are not able to leave their homes, we are confident that the use case will become stronger when lockdowns are lifted due to heightened general anxiety around health and safety.Prior to lockdowns being implemented, we continued to deliver strong growth that was exceeding our expectations. While growth in new users and subscribers is temporarily diminished, there is no evidence of users abandoning the app and monthly retention rates on a cohort basis are within normal range.We have continued to demonstrate our financial discipline and the flexibility of our discretionary expense model. Prior to the COVID-19 impact, we continued to improve cash burn with operating cash outflow for the March quarter of $6.2 million compared with $6.7 million in the December 2019 quarter.To adapt to the COVID-19 impact, we have paused the majority of Paid User Acquisition spend. April 2020 will be the first full month reflecting the impact of this decision on our performance, and as such, we've provided some additional information on our operating results. While we've yet to close the books for April, our preliminary estimates for the month indicate an unaudited underlying EBITDA loss, excluding stock-based compensation, of approximately $0.5 million, with a similar operating cash burn on a normalized basis. We expect to resume our paid acquisition spend as the environment returns to normal.Our Global Monthly Active User base exceeded 28 million for the quarter, a net increase of 900,000, relatively evenly split between U.S. and international markets. In the U.S., MAU of 16.7 million increased 49% year-on-year. International MAU of 11.4 million increased 21% year-on-year. In our listed home of Australia, MAU reached more than 600,000, a year-on-year increase of more than 50%.A material reduction of around 50% in new registrations in the second half of March accompanied the evolution of the COVID-19 crisis as successive lockdowns were implemented. Daily usage is similarly down, but as mentioned previously, monthly retention rates for both free and paid users is within a normal range on a cohort basis.Revenue of $19.1 million in the March quarter increased 71% year-on-year. Annualized monthly revenue in March 2020 was $76.1 million, a year-on-year growth rate of 64%.During the quarter, direct revenue grew strongly, supported by the 31% growth in Paying Circles to $862,000 and 15% growth in average revenue per Paying Circle. U.S. Paying Circles continued to grow for the month of March, although there was an impact on new subscriptions due to the COVID-19-related decrease in new user registration.Indirect revenue also delivered strong growth for the quarter. The Allstate lead generation partnership contributed revenue of $1.5 million and demand for our data products was healthy for the quarter. However, a prolonged lockdown with associated decreased people movement and marketing spend is detrimental to certain data partners and we expect some of them to press -- face pressure in Q2.Paid User Acquisition spend of $4 million reduced 24% year-on-year. Since late March, we have significantly scaled back spend and we'll do so until lockdowns are lifted. We are also implementing other expense management initiatives, including accelerating our plans to establish engineering resources in lower cost jurisdictions and adjusting the pace of hiring. These initiatives reflect the discretionary nature of our expense model.During the lockdown, we've also been part of an organized TikTok campaign by a small group of teenage influencers, who have been spamming certain apps such as video conferencing and homework apps with one star ratings and reviews. The fraudulent ratings have been removed by Google and Apple has recognized the issue.I'll now turn it over to Dan, who will share more details on our cash flow performance for the quarter.

[Daniel Menudier, Corporate Controller]

Thank you, Chris. Please note that all numbers I will be discussing are denominated in U.S. dollars, are in accordance with U.S. GAAP accounting standards and are unaudited.Life360 ended the March quarter with cash and cash equivalents of $57.5 million and no debt. This provides the company with a strong capital position to continue to invest for sustained growth. For the quarter, cash used in operating activities was $6.2 million, a sequential improvement from $6.7 million in the December 2019 quarter and $7.1 million in the September quarter. Looking forward to the remainder of 2020, we are committed to delivering improved annual operating cash outflows.Total revenue of $19.1 million reflected 71% year-on-year growth and a 5% sequential increase compared with the December 2019 quarter. Receipts from customers of $12 million reduced from the $21.3 million we reported in the December quarter. The difference between Q1 revenue in receipts from customers reflected timing differences of $6.3 million and commissions of $3 million, which are no longer included in receipts.Payments in the first quarter reflected continued investment in the business, particularly in staff costs and advertising and marketing. Staff payments of $7.9 million in the March quarter increased 10% compared with the December quarter. We continue to expand the Life360 team, particularly in engineering and product, and our head count at the end of March was 170.Administration and corporate payments of $1.7 million for the March quarter were largely in line with the December quarter. Research and development payments of $2 million were lower than the $2.6 million in December quarter due to the timing of payments to our platform provider.Advertising and marketing payments, which include Paid User Acquisition, were $5 million in the March quarter compared with $8 million in the December quarter. Paid User Acquisition spend of $4 million was in line with the December quarter and $3 million of commissions are no longer included in disbursements. As Chris indicated, we have significantly reduced Paid User Acquisition spend in Q2 to date, reflecting the impact of COVID-19.Technology payments of $1.3 million reduced significantly from the $8.4 million in the December quarter. This reflected a prepayment of $5.6 million in December related to a multiyear agreement with a cloud provider, which was negotiated on favorable terms. In addition, there was a benefit from improved pricing and timing differences.Cash used in investing activities of approximately $400,000 reflected minor purchases of capital assets. Cash from financing activities of approximately $100,000 reflected proceeds from the exercise of share options. We are pleased with our efforts to continue to reduce our quarterly operating cash outflow in the March quarter.I will now turn the call back to Chris for closing remarks.

[Chris Hulls, Co]

While considerable uncertainties remain over the duration of the current environment, we expect the impact of COVID-19 to be greater in Q2 than in Q1. This reflects the expected impact on top-of-funnel new registrations as well as on data revenue. Q2 MAU and Paying Circles are likely to be slightly down versus Q1, with the growth expected to resume in line with back-to-school in Q3.In this uncertain environment, we remain committed to controlling our discretionary expense model. Operating cash outflow in 2020 is still expected to decrease versus 2019.The launch of our membership offering remains largely on track for June 30 and any road map delays as a result of productivity lost due to forced lockdowns is expected to be less than 1 month. We expect this new membership offering to dramatically expand the scope and reach of Life360 as we add features relevant to a much wider range of families. This is the first family safety membership model of its kind and will deliver protection wherever your family may be and at every life stage.That concludes our prepared remarks. And I'll now turn the call over to Melissa, who will manage the question-and-answer portion of our call today.

[Melissa Goodell, Executive Assistant]

Thanks, Chris. [Operator Instructions]So I'm going to start with Quinn. Quinn, please unmute yourself.

[Quinn McComas Pierson, Co]

Firstly, I might just kind of focus on the March quarter. We can kind of get the COVID impacts in a second. I thought it was a solid quarter. User growth is coming through really well, particularly in the U.S. Paying Circles growth is still lagging user growth somewhat. Is it realistic to have Paying Circle growth keep track -- to, I guess, keep pace with user growth at some point, whether that's through better conversion at point of registration or better conversion of current nonpaying users? Could we potentially see those numbers converge?

[Chris Hulls, Co]

Yes. I definitely think it could. And if you think of our membership offering, as we discussed on our full year earnings, this is by far the biggest launch in our company's history. It is giving massively more value to our premium customers and also very relevant to this COVID world where, as people saw in our last release, we have our family safety assist feature, which include disaster assistance, medical assistance and travel assistance. As part of that, pandemic response is quite literally a feature we were building into that prior to this pandemic. So having the ability to have -- I'm stuck in Italy, I need to get home, what do I do? And there's this outbreak -- where do I get the right information? Can you help me? Can you get me a doctor referral? So I'm modestly disappointed that we [ sorted ] 3 months ahead because we would have looked like geniuses timing this thing, but I am pleased that we are actually building a product that will feel extremely relevant to a much broader set of needs that people will have. So I'm very bullish on that, and that, I think, could also happen while simultaneously increasing pricing as well.So I am nearly 100% certain we're going to have a solid increase in ARPPC, and that's going to continue to outperform. And I don't have hard proof of it, but I'm also very optimistic that conversion and retention will also get a really nice boost with our new membership release. It probably won't happen overnight. The experience with Driver Protect is that people have to see the new features, explore them, think about them, then decide to convert. But Driver Protect, over the course of a couple of years, became now 90% of our user base. We're optimistic that the same thing could happen for these new premium features that are just months away.

[Quinn McComas Pierson, Co]

That's helpful. And you might have answered one of my other questions, which would have been, the June release for the membership plan, would that be intentionally delayed if we're still in lockdown in the most important regions?

[Chris Hulls, Co]

No. It will go live when it's ready because, if anything, it makes our product more powerful while we're in this lockdown mode because driving is, unfortunately, massively down. Trips are down. So the reason it drives conversion today -- that use case is hampered. So membership gives us value even when people aren't leaving the house. So we are definitely not going to delay that.

[Quinn McComas Pierson, Co]

And could you maybe just talk us through how to think about your, I guess, monthly or quarterly attrition from your existing user base? So in other words, if new registrations completely ceased, what would your either your monthly or quarterly user base reductions look like?

[Chris Hulls, Co]

Sure. So you would see -- I don't have an exact number for you, but how I would approach that, I would look at the cohorts where users do churn for that first 18 months, so theoretically, retention held, which we're seeing hold now. And clearly, if these lockdowns go on for 18 months, it's a whole different ball game, but let's play that hypothetical. We would have decreasing users for 18 months, after which point we would have matured to a point where all cohorts at that point are flat. So we would decrease for 18 months, but that decrease would start slowing month-by-month because it would have fewer and fewer users that were earlier in their life cycle.

[Quinn McComas Pierson, Co]

Right. I guess your current user base is a mix of different cohorts, if you will. So I mean, cognizant that you might not have the number off the top of your head, but I mean, do you have a broad feel for in a given month, based on the mix of different cohorts, you lose 1%, 5%, 10% of your user base?

[Chris Hulls, Co]

I can maybe back of the envelope while we're live, but the majority of our users are long-term retained users. So I would imagine 2/3 of our -- please don't quote me on the exact numbers, but directionally, about 2/3 of our users are already past that 1-year mark where churn is much, much lower. And so if we say like, let's just say half of first year churn, that would be like -- you might lose 20% of our users. Again, I'm back of the enveloping here.Maybe a bit more over time because we are going to get a bit of a trail, but our registration is down about 50% and it has normalized. So in the first couple of weeks of things, we didn't know where it was going to bottom out. As of now, it has very much bottomed out. I can't say what tomorrow will bring. But even in this lockdown mode, the decreases have stopped.

[Quinn McComas Pierson, Co]

That's helpful. And then just lastly for me. Microsoft has announced a competitive product. I'm just wondering if you have any thoughts on that in particular or competitive environment more generally that you'd like to share.

[Chris Hulls, Co]

Sure. So I'll start with Microsoft. It's actually not a new product as far as we can tell. They've had announcements in our space a number of times throughout our history. There was an announcement 1 or 2 years ago and we're unclear if that ever launched. So this looked a little more polished from some of the screenshots that they released. It was part of their PR, but we see very little details of that. And what we can see is it's tied to Microsoft Office, which seems a little bit odd. So if it's a subset of that, I don't know if they're going to be pushing it as a stand-alone product. It doesn't seem very Microsoft-like.In the Valley, the corp dev departments, they're usually pretty active if something is a deep strategic initiative, and we have not heard much from Microsoft. So I would think that if they were really looking at our space at a CEO level, we would have heard about it, but that's me making an assumption. But we do hear from other big companies when they're interested in our space. So I am guessing it's more of an add-on than a core.So I don't mean to be dismissive of Microsoft. We have, of course, watched them. It's a huge behemoth. I'm hoping and I would -- if I'm a betting man, it is likely a smaller initiative and I'm also perhaps optimistic that it could bring awareness to our space and highlight our strategic value as being such a dominant leader in the market currently.

[Quinn McComas Pierson, Co]

Helpful. And any other broader competitor comments?

[Chris Hulls, Co]

Not really. Screen monitoring is something we continue to keep an eye on. Family Link, which is a Google product, is getting used, but it's not competitive with us now, but we do watch it. But other than that, we haven't really seen anything new. And I'd say we continue, in our view, to cement our market lead.

[Melissa Goodell, Executive Assistant]

Okay. Next up, we have Brendon. Brendon, please repeat your name and which company you're calling from.

[Brendon Kelly, Analyst]

It's Brendon Kelly from Moelis. Just a couple of questions for me. Firstly, just on the Q1, can you just help us understand how the Paid User Acquisition spend and the MAU adds tracked throughout the quarter?

[Chris Hulls, Co]

So paid acquisition spend was normally -- it was as planned and I would -- until the back half of March. When we saw that the funnel metrics were getting a little bit wonky, we decided to pause it.So -- and another clarification, not exactly what you're asking, but the -- most of the decrease in new registrations happened before we shut off the paid spend. So as far as we -- we're actually very, very confident that the majority of the decrease in organic traffic -- or in the traffic is -- was the organic traffic from the COVID lockdowns, not spend. But we did see it was tougher to do the curve matching to see if these users were breakeven because they get habitualized less. So we -- that is when we paused it.So at the back half of March, we did start seeing a bit of a small downtick in MAU. So it would have been a bigger number if it were not for COVID. But I would say, the vast majority of the quarter was largely as expected and tracked very linearly, especially in the U.S. where the majority of the spend is.

[Brendon Kelly, Analyst]

Sure. And just with that Paid User Acquisition spend, recognizing that it is a very dynamic environment out there, but can you just give us a sense of what the monthly rate has been so far in April, just broadly where you're tracking to?

[Chris Hulls, Co]

We have spent -- well, in April, we'll probably spend less than $100,000. So we've turned off all but the lowest hanging fruit. I will use that as a moment to toot our own horn a little bit that we've long said that if we ever need to significantly cut burn or be profitable, we could almost do that purely just by shutting off Paid User Acquisition. So now we've done it. We'll have a burn this month of right around $0.5 million, both underlying EBITDA and cash flow. That is not an audited number, it's directional. But if you then look at our cash balance, if we freeze today, that's over 100 months of runway, and that is why we are all the while continuing to hire pretty aggressively.

[Brendon Kelly, Analyst]

Yes, absolutely. And sorry, just to clarify, was that $0.5 million EBITDA loss, was that pre or including -- I'd say that's a cash flow number as well?

[Chris Hulls, Co]

Well, they're going to...

[Brendon Kelly, Analyst]

Yes, yes. Yes, cool.

[Chris Hulls, Co]

Yes. And it's not our plan to always give forward-looking months, but given that -- given COVID is on everybody's mind, our thought was that we'll do this as a bit of a one-off because if we -- it's obviously the more relevant part of the equation for how the business is doing right now.

[Melissa Goodell, Executive Assistant]

Thank you, Brendon. Next up, we have Ben. Ben, please repeat your name and which company you're calling from.

[Unknown Analyst]

Excellent. Just in terms of the hiring, are you seeing -- is it too early to see any reduction in the cost of engineering employees in the Valley yet? Is it too early to tell? Or is that something that you expect to play out over a couple of months potentially?

[Chris Hulls, Co]

Too early to tell. Likely, it will play out over a couple of months. If I answer that a little more indirectly, what we are seeing is the candidates that we were getting from larger stable companies, they are largely staying put, and we're seeing a very large wave of candidates from some even prominent companies that perhaps had a little more levered or negative unit economics. So we're still so early in this that I don't think things have course-corrected. The -- anecdotally, what we're hearing is some of the sweeteners you need to sometimes get someone such as a signing bonus or things on the margin, those are already starting to go away. And pipeline is very strong, just given that there's a -- perhaps the biggest supply rush I have seen since the GFC a decade ago.

[Unknown Analyst]

And then just in terms of the states where you've got much stronger penetration, is it -- if you look at the states across the U.S. whereby they are lifting the lockdown restrictions, is it fair to assume that some of those states where you've got -- where a decent chunk of your user base are located, that those restrictions are lifting sooner than, say, some of the states on the East Coast? Or how do you think about coming out of this lockdown on a state-by-state basis, overlaying your user base?

[Chris Hulls, Co]

Sure. So it's a bit of a wait and see there. A lot of the announcements of lockdown just came out today. If you look at all the foot traffic data, which -- actually, that many of you have seen, the social distancing scorecards and things like that, that is -- a lot of it coming for our underlying data. So that's a live example of some of what the data partners are doing.Even in the states that have started to ease, over the last week, there has not been a significant change because it's all very new. My guess is that next week is the first week we might start seeing a little bit more regional activity, but it will probably be slow. My suspicion is that we're probably 2 weeks out at least from seeing this be a meaningful shift. And at that point in time, we will start to selectively reactivate different regions and some of that will be a bit of a shift in marketing to existing to our -- marketing to our existing users about getting them reengaged. So the people that might have dropped, especially in those new users who churned and weren't rehabitualized, we'll spend some money to get them going again.

[Unknown Analyst]

Okay. And then is there any anecdotal information about -- I know that you're a clear leader in the space, but some of the smaller competitors that were sort of nibbling away that they're -- even they're -- underfunded and starting to drop away? Or is it, again, still a bit too early to see any real-time impact on the low-hanging...

[Chris Hulls, Co]

The under -- the small underfunded ones were already kind of so small that they were not making much of a dent in us. So we would likely not see anything immediately. To keep an app on the App Store costs almost nothing, but are those people hemorrhaging the employees they have and really getting upside out in unit economics? I'm sure they are, although it will be very hard for me to point that to you definitively. It would be -- what I would imagine we would see is our product continues to advance very aggressively while they stagnate or go backwards. And we are getting into operating system update season, which is a massive drain on resources. That doesn't scale linearly with the size of your team. So the amount of work we need to do for iOS 14 is not going to be that much more work than the small guys need to do. And so if their team gets clobbered, they're still going to have to do all that base layer, essentially fixed engineering, whereas, relatively speaking, it will be much smaller proportion of our company doing that type of work.

[Melissa Goodell, Executive Assistant]

Okay. And as there are no more questions, I'll hand it back over to Chris for some closing remarks.

[Chris Hulls, Co]

These are very quick closing remarks. Thanks again, everyone, for joining, and have a great day. I appreciate everyone attending our first remote earnings call. Thank you.