Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2020-Q2

[Jolanta Masojada, Head of Investor Relations]

Good morning and thank you for joining the Life360 June 2020 Quarterly Activities Report 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 CFO, Russell Burke, followed by a Q&A session. [Operator Instructions] I would now like to turn the call over to Chris.

[Chris Hulls, Co]

Good morning, everyone, and thanks for joining us for our June Quarterly Business Activities Update Call. The quarter was one of significant progress for Life360 in spite of the headwinds we face due to COVID-19. We launched our new family membership service on time, reaching our first users on June 30 with the full rollout in July despite our entire team working remotely and many employees having to manage childcare at the same time. This is testament to the talent and commitment of our people. The early response is great, and we are excited about the value that our family safety membership model can provide to families at every life stage and the resultant opportunity to continue rapidly progressing our business. Despite the challenges of the environment, we have demonstrated the resilience of our subscription model. Retention of our paid users is exceptional, given the circumstances, and validated the value we provide to our customers. And as a result, we showed year-on-year revenue growth in spite of significant disruptions to the top of our funnel. Additionally, and it's a big deal, we crossed a very important milestone. For the first time ever, we delivered positive quarterly operating cash flow. This highlights what we have long said, we can be profitable whenever we want but have historically chosen to invest in accelerating the business over short-term profitability. Additionally, we have returned to growth from our initial COVID-related declines, even though we continue to spend very little on marketing. Preliminary estimates also indicate an unaudited underlying positive EBITDA for the quarter. Other initiatives undertaken during the June quarter include the strengthening of the Life360 management team with the new hires of Russell as Chief Financial Officer and Jonathan Benassaya as Chief Product Officer. And I'm delighted to have Russell joining me on the call today, so I don't have to pretend to be a CFO like last time around. We indicated on our March quarterly call that we expected the impact of COVID-19 to be greater in Q2 than in Q1 and for both MAU and Paying Circles to be slightly down for the quarter. The decline in international users was greater than anticipated, while the U.S. user base outperformed initial expectations, which contributed to our strong cash flow. While global MAU fell by approximately 9% to $25.2 million, our U.S. MAU count was down by just 2% for the quarter. Even more exciting was that our U.S. growth in May and June offset more than 70% of the original lockdown-related decline, and the growth continues in spite of the worsening of the pandemic. As of today, U.S. MAU has almost returned to March levels. Our belief is that the disparity is related to differences in social distancing norms, which are continuing to evolve. In our listed home of Australia, the monthly active user base of 566,000 increased 34% year-on-year. Globally, new registrations saw a material decline from mid-March as successive lockdowns were implemented, with April new registrations down more than 50% from March. However, new registrations have been trending higher since late April despite a near-complete pause in user acquisition spend. While still off their pre-COVID levels, new U.S. registrations in late June were more than 80% higher than the April lows. For the June quarter, normalized revenue of $19.5 million increased 46% year-on-year. For the month of June, annualized monthly revenue was $77.9 million, a 26% year-on-year increase and 2% ahead of March AMR of $76.1 million. Direct revenue benefited from the 21% year-on-year growth in Paying Circles to 845,000. Despite the disruptions associated with COVID-19, Paying Circles in the U.S. remained stable, an impressive outcome given there was very little driving, which prior to our membership launch was the primary use case covered by the premium service. In addition, average revenue per paying circle increased 9% year-on-year. We are highly confident that our new membership offering will continue to deliver accelerating growth in this metric. Indirect Revenue, which includes data revenue and our Allstate lead generation partnership, delivered strong growth for the quarter. The Allstate partnership contributed revenue of $1.5 million and demand for Life360's data products continued for the quarter. However, the prolonged lockdown with associated decreased people movement and marketing spend proved detrimental to certain data customers, some of whom came under pressure in Q2. These effects are likely to continue while COVID remains prevalent. During the June quarter, the majority of paid user acquisition spend was paused to adapt to the COVID-19 environment, which impacted new user demand for our service and amounted to just $200,000. This compared with $4 million of spend in March 2020 quarter and $5 million in the June 2019 quarter. Other expense management initiatives were also implemented, including more conservative hiring and a more limited expansion of R&D. We expect to resume investment growth, including paid user acquisition as the operating environment returns to normal, using our disciplined approach to higher-return spend. We will allocate marketing to judiciously support the launch of the new membership offering. Our ability to grow MAU in May and June without material paid user acquisition spend definitively proves our ability to grow slowly through word of mouth. Last quarter, I talked to you about the teen attack on the app's ratings via TikTok. We have begun working directly with many of the initial campaign organizers and have demonstrated significant progress in developing relationships with younger users. Recently, our average rating started to once again increase. Later in Q3, we will launch a range of new features targeted at teens, including a temporary safe zone feature, which will allow teens greater privacy by giving them the option to show up within the zone and hides their exact location but keep safety features still active. I'll now turn it over to Russell, who will share more details on our cash flow performance for the quarter.

[Russell Burke, Chief Financial Officer]

Thank you, Chris. I'm very pleased to participate in my first conference call as CFO of Life360. I'm very happy to be joining the company at an inflection point with significant opportunities ahead. Please note that all the 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 June quarter with cash and cash equivalents of $58.4 million and no debt, an increase from $57.5 million at the end of March. This provides the company with a strong capital position to continue to invest for sustained growth. For the June quarter, cash provided by operating activities was $0.7 million compared with a use of cash of $6.2 million in the March 2020 quarter and a use of $7.2 million in the corresponding June 2019 quarter. Normalized revenue of $19.5 million increased 46% year-on-year and 2% versus the March 2020 quarter. Reported revenue was $18.7 million for a nonrecurring adjustment of approximately $0.9 million in relation to the deferral of subscription revenue. Receipts from customers of $16.9 million in the June quarter increased from $12 million in the March quarter, with some impact from the timing of receipts. The difference between the Q2 revenue and receipts reflects commissions, which are not included in the latter. Payments in the June quarter reflected our control of expenses as we've responded to the COVID-19 environment. Staff payments of $7.5 million compared to $7.9 million in the March quarter. At the end of the quarter, our headcount was 172. Administration and corporate payments of $3 million increased from $1.7 million in the March quarter mainly due to payments of annual insurance premiums. Advertising and marketing payments, which include paid user acquisition of $0.8 million, were significantly lower than March quarter payments of $5 million, reflecting the pause in paid user acquisition spend, which Chris mentioned. Research and development payments of $2.2 million were in line with the $2 million in the March quarter. And technology payments of $2.4 million increased from $1.3 million in the March quarter primarily due to service prepayments in order to obtain discounts. Cash used in investing activities reflects minor purchases of capital assets. And cash flow from financing activities of $0.3 million reflects proceeds from the exercise of employee share options. Before I turn the call back to Chris for closing remarks, I just wanted to say that I've enjoyed the conversations that I've had with many of you since I came on board and have very much appreciated the feedback that I've received. One of the things that we're doing is working through ways to provide additional disclosure of Life360's unit economics. And I'm very much looking forward to discussing that in our half year results presentation in August. And with that, I'll hand it back to Chris.

[Chris Hulls, Co]

While the outlook remains uncertain given the evolving COVID-19 situation in the U.S., Life360's performance during the June quarter demonstrates the strength and resilience of our business model. We will retain our disciplined approach to expenditure while we resume investment in paid user acquisition to accelerate growth as the operating environment returns to normal. We expect to see growth in MAU and Paying Circles in Q3. However, the pace of growth will be subject to COVID-19 conditions in the U.S., including the resumption of back-to-school activities. We also expect a heightened concern around health and safety, combined with the launch of the membership offering to only strengthen the use case for families over the long term. In addition, the membership offering is expected to drive significant growth in average revenue per paying circle. Operating cash flow in 2020 is expected to be less than 2019. That concludes our prepared remarks. And I'll now turn the call over to Melissa, who will manage the Q&A portion of our call today.

[Melissa Goodell, Executive Assistant]

Thanks, Chris. [Operator Instructions] First up, we have Quinn.

[Quinn McComas Pierson, Co]

Chris, Russell, Quinn Pierson from Crédit Suisse. Can you hear me okay this morning?

[Chris Hulls, Co]

I can. Hello, Quinn.

[Russell Burke, Chief Financial Officer]

Hi, Quinn.

[Quinn McComas Pierson, Co]

Firstly, you touched on it briefly, but could you just elaborate a little more on what you're seeing in terms of differences between the international user base and the U.S. user base? Where we saw the U.S. user base, the MAUs were only slightly down from March. The international, we saw a lot more, I guess, attrition there. I guess to what degree -- is it higher churn levels? Is it lower new adds? What kind of change -- differences in behavior are you seeing between those 2 regional groups?

[Chris Hulls, Co]

It's a combination of both, and a lot of it is really speculative. But we think the behavior between different regions is a strong driver of it. And we don't see any uniformity with international versus U.S. It is very different on a country-by-country basis, and top of the funnel is one of the bigger drivers and long-term retention a little bit less so. What we have seen, which we're pretty proud about is, especially on a monthly basis, retention has actually been quite strong. And for Paying Circles, in particular, it's demonstrated by the fact we're now cash flow positive. That's all holding quite well. It's -- the top of funnel is the biggest driver as far as we can see.

[Quinn McComas Pierson, Co]

Are you seeing the, I guess, churn in the international markets being higher in some of the regions you're not trying to monetize? So for instance, you have some large user bases in certain, I guess, maybe emerging countries, which are, I guess, less of a target from a monetization perspective. Are you able to see that you're having higher retention levels in the more targeted regions or not so much?

[Chris Hulls, Co]

Yes, for sure. I mean the product in the U.S., in particular, is so much stronger, and it's why most of the revenue comes there because it's a very different product. And definitely, in those developing regions, it's not nearly as good. It was less of the retention.

[Quinn McComas Pierson, Co]

Secondly, you've had another 2 weeks of kind of new sign-ups and new data. Just hoping you might have some insights that you could share with us in terms of how you're seeing new members signing up into the new membership plans and conversion rates?

[Chris Hulls, Co]

We can't share full details until the 4D next month. But I am extremely excited and proud about everything. And I think we're very, very well set up for an exciting rest of year in 2021 because we did really come through and deliver on this, and it's a dramatic step forward for the company.

[Quinn McComas Pierson, Co]

Okay. Great. And lastly, I guess, can you just talk us through your latest thinking on CAC spend going forward? And to me, it looks like your new adds are not far off of pre-COVID levels, like you did that with $200,000 of CAC spend versus $4 million in the March quarter. So I mean, to me, it looks like there's an opportunity here to continue growing the user base at attractive levels and yet run this business closer to a free cash flow breakeven level, which I think -- I suspect the market would probably view favorably. Just any thoughts on kind of your thinking, having had a real-life test experience here with pulling back CAC spend would be appreciated.

[Chris Hulls, Co]

Sure. So at a high level, this was a trial by fire of our statement that we could be profitable on a cash flow basis whenever we wanted. So we've clearly proven that now. But our general belief is that if we can see a positive ROI on users, we should spend it. That being said, especially in this environment, which is nowhere close to normal at all, even now. In the U.S., obviously, we're at all-time highs by the day. We're not in normal space. So what we've been doing now is saying because it's much less measurable because it's more unknown, let's, a, run closer to profitability or even positive cash flow we've done. And let's also look at other areas of investment and things like R&D or possible new channels. So we are looking holistically at overall spend. I'd say our plan definitely is when the profitable spend is there to do it, but given that we're not back to normal operating environment, I think -- I hope our investor base and our employees as well, they feel very secured that we're going to be prudent and disciplined around how we turn that back on.

[Melissa Goodell, Executive Assistant]

Next up, we have Laf.

[Chris Hulls, Co]

Laf, I cannot hear you.

[Lafitani Sotiriou, Senior Analyst]

Hi. Can you hear me?

[Chris Hulls, Co]

Now I can.

[Lafitani Sotiriou, Senior Analyst]

Great. So it's Lafitani Sotiriou from Bell Potter Securities. I've got a couple of questions, if I may. The first one is around cash flow and the cash flow guidance, in particular. So it's quite a large range in terms of the guidance that you'll beat last year's cash flow. And just as a reminder, your operating cash flow was minus USD 30.5 million last year, and you're currently tracking at minus USD 5.5 million and just delivered a positive cash flow. Is there a reason why that guidance wasn't adjusted? Or can you add a little bit more color because that's quite a big band for the remaining 6 months? And given the context that you've also guided that you expect higher average revenue per paying circle on the back of the new plans and that you are seeing an improvement in MAU.

[Chris Hulls, Co]

Why don't I take it high level, and then I'll hand it to Russell for some specifics. So the macro view is we don't want to put a number out there and then not either wildly go over or under given how quickly the operating environment is changing. So what we feel very confident to say is that it will decrease and likely very meaningfully. But if there is an opportunity that opens up, we do want to be able to go after it. And then I can hand it to Russell, who can give a little bit more color on specific numbers.

[Russell Burke, Chief Financial Officer]

Thanks, Chris. Lafitani, I'm not sure I would add too much more to what Chris has said. Given the current environment, we want to be cautious in terms of the guidance that we're giving. I recognize it is fairly, fairly big range at this point. Needless to say, as Chris said, we're going to be very disciplined in our approach moving forward. And we'll certainly refine that guidance as we move forward, I think, is the best way to put it.

[Lafitani Sotiriou, Senior Analyst]

But I guess it may -- so it's likely to bounce around the January -- sorry, the March and the June quarter levels as it might be slightly positive or might be around that range, I guess. It's not -- you're not really expecting a major ramp-up of the -- in the cost base or the user acquisition cost ahead of what we've seen in the past.

[Chris Hulls, Co]

Well, we are -- are you saying ahead of what we've seen pre-COVID or...

[Lafitani Sotiriou, Senior Analyst]

Yes.

[Chris Hulls, Co]

Yes, it will not -- I highly doubt that it will go above pre-COVID levels for sure. If that did happen, that would be a very high-class problem. It means that there's some scorch here or something that happened that meant we're acquiring users so inexpensively that growth would be so high. So I think that's a theoretical possibility, but it's not a plan. [ That's my theory ] about it.

[Lafitani Sotiriou, Senior Analyst]

Okay. And just following up from the last set of questions in relation to the international geographies and -- at a breakdown, maybe just take on notice, Russell, I mean you mentioned you're looking to put increased disclosure around unit economics. Maybe if you could possibly also provide a bit more color on the split of the various international geographies so we can actually see what's happening in some of those jurisdictions at the result in August.

[Russell Burke, Chief Financial Officer]

Sure. No, I appreciate that on notice, Laf. And the thing to emphasize with the international MAU is the revenue driver aspect of that. It's significantly less than the U.S. And while the MAUs are down, again, it's partly top of the funnel. But as we look at the way that's measured, it really is a lot to do with the activity in those territories at that point in time. So we'll try and add some more color to that in the 4D presentation.

[Lafitani Sotiriou, Senior Analyst]

But there's probably 2 parts to that, right? So there's -- it's interesting from our perspective, as called out already, which parts are developing economies versus developed. But it's also interesting for us in the context that Chris flagged at the product launch at the next markets where you'd look to roll out the new product would be probably the U.K. and maybe Mainland Europe. And so for us to start thinking about how big those opportunities are, we kind of need to see what user bases are in those markets. And so that's -- as you look to roll out the features, we kind of need to work that out.

[Chris Hulls, Co]

Understand. We'll take that on board.

[Melissa Goodell, Executive Assistant]

Next up, we have Brendon.

[Brendon Kelly, Analyst]

Can you hear me?

[Chris Hulls, Co]

We can, Brendon.

[Russell Burke, Chief Financial Officer]

We can.

[Brendon Kelly, Analyst]

Congratulations on a strong quarter in a pretty difficult operating environment. If I can just start, I think some of these questions have already been touched upon.

[Melissa Goodell, Executive Assistant]

Brendon, it looks like you are on mute.

[Chris Hulls, Co]

Brendon, we lost you.

[Brendon Kelly, Analyst]

Sorry, can you hear me?

[Chris Hulls, Co]

We can, yes. You're back.

[Brendon Kelly, Analyst]

Sorry. So I'm not sure where I lost you, but some of these have been touched upon already. But just with the user growth, if I can just ask if you can give us a bit more color into how the user growth could or the MAUs trended throughout the quarter and what their exit run rate was looking like in June?

[Chris Hulls, Co]

Russell, do you want to take that one?

[Russell Burke, Chief Financial Officer]

Yes. I think in particular, if you look at the U.S. MAUs, we did experience a fairly significant drop in April. And then since that point, it has really been trending upwards. So I think we said at the end of the quarter, we've recovered sort of 70% of that. And certainly, at this stage, we're very close to -- back to March MAU levels for the U.S.

[Brendon Kelly, Analyst]

Okay. And is there any kind of acceleration in that net new adds throughout July? Or is the trend just pretty consistent?

[Russell Burke, Chief Financial Officer]

We've seen a fairly consistent level. But we're now looking forward to what happens with the new membership launch.

[Brendon Kelly, Analyst]

Cool. And then just on that user acquisition spend, you obviously pulled back a lot during the quarter. Now that conditions are becoming more favorable, can you just give us a bit more sense of how that's going to play out this quarter?

[Chris Hulls, Co]

Sure. So I'll take it. Things are somewhat more favorable, but family dynamics are, by no means, back to normal. So even if people are out traveling, out of their houses, it's usually very insular as a family unit. And so the -- I would not say we're back at a normal operating environment, which is why we're being very prudent around how we turn that back on. So it's going to be a lot of testing, a lot of measuring. And it won't be something we just go back to normal right away. We'll almost use it as a chance to re-baseline. And to follow up on some earlier questions about whether we want to continue it, this more positive cash flow result, well, that is not an explicit goal. It is a great way of slightly reallocating balancing based on what I would call more a 0 dollar-based budgeting approach.

[Brendon Kelly, Analyst]

Cool. That makes sense. And then just moving to the R&D spend. Now that you do have this membership offering implemented, how can we expect that to look going forward? Is it something that's just going to be maintained at the current levels or is that something that maybe you'll look to strip out some costs now that you've been through a pretty heavy product development period?

[Chris Hulls, Co]

No. I'd say, if anything, we believe we're a long, long way from the end here. And the idea, which we're so excited about is that we have this platform to live up to that 360 in our name, which can support so much more in terms of being like this rich platform that is this one-stop shop for a whole lot more, and needless to say, there's the entire international markets out there. So while we will, at some point, hit a stage of product maturity, where we really do say now is the time to be profitable, our view is as we continue to succeed, R&D will continue to grow for the foreseeable future. I don't think we'll be at Amazon levels or anything like that. But thematically, I think R&D going down would say we've lost opportunities to grow, and there's so much low-hanging fruit in our view.

[Brendon Kelly, Analyst]

Cool. And then just lastly for me, just on the Allstate data revenue, I mean, we expected that to be flat this half. What can we expect from that going forward now that we're past that period?

[Chris Hulls, Co]

There's still a lot of noise in the system. And I would not say we're past the period in terms of PPP loans running out. I think a lot of possible economic impacts have not been felt yet. So in terms of those companies we're working with, I think there is -- there still remains some unknown there. But as we've long mentioned, that is not our core focus. And so I'd say COVID has really emphasized this, it's not our core focus. It's there, we don't expect it to really grow. That is a bit different than Allstate, which we're all excited about. And that is continuing to make progress, albeit -- although execution might have slowed down a little bit more than our membership launch, given that there were a number of third parties involved, some of whom were not set up for remote work as us. But that is obviously still something we're very excited about [ related ] with COVID.

[Brendon Kelly, Analyst]

So we shouldn't be factoring really any kind of ramp-up for Allstate into the second half?

[Chris Hulls, Co]

No, probably not.

[Melissa Goodell, Executive Assistant]

Up next, we have Matthew.

[Matthew Chen, Equities Research Analyst]

Chris, Russell, it's Matthew Chen here from Foster Stockbroking. Just a couple of questions from me. So is there a time line for entry into the ex U.S. geographies? Have you talked about that or can you provide some more detail on that? I note that you touched on sort of the U.K. and Europe. But in terms of timing, can you talk about that?

[Chris Hulls, Co]

No explicit time line. I'd say that is one of the things that definitely with COVID, we focused more on the core and things that were a little ancillary didn't get as much attention. We'll very likely test Canada first because it's the same thing. And then as we've discussed in the past, that most similar regions are U.K. and Australia with the EU being right there in terms of one big block of users. But it will be another year at least until we look at that more aggressively.

[Matthew Chen, Equities Research Analyst]

And so that gives a bit of time around -- sorry, you go.

[Chris Hulls, Co]

We do continue to improve the free user experience.

[Matthew Chen, Equities Research Analyst]

Yes. Okay. And in terms of how you actually sort of think about the U.S., do you -- I mean do you consider it a homogenous market in terms of your rollout strategy?

[Chris Hulls, Co]

In terms of by region or just by types of consumer? Can you clarify that?

[Matthew Chen, Equities Research Analyst]

Well, both, yes. Just want some more color on how you think about that and the rest -- and potentially for the international experience.

[Chris Hulls, Co]

Sure. So from a product standpoint, it is very homogenous. Now we do have different features in the membership that are very conducive to different age segments and channels. So in terms of how we market the tactics we use, who gets targeted, we have opened up a whole lot of new opportunity. But the product is the same across the country. And a lot of the logistics of international is the need to get these third parties, customer support, call centers, tow trucks, [ cashless factors ]. So it's not technically difficult, it's just a lot of moving parts, which takes time. And then internationally, it is different with -- a driving product in Hong Kong would not resonate very much, whereas it might in the U.K., which is a little more like a driving culture like the U.S. So different regions clearly have more relevance to the premium products that we offer than others.

[Matthew Chen, Equities Research Analyst]

So will that ultimately drive like a difference in how you approach pricing in international markets or will it be sort of similar?

[Chris Hulls, Co]

Yes, it definitely will be localized and regionalized, and there's a lot of margin to play with. So we will figure out how to maximize revenue.

[Matthew Chen, Equities Research Analyst]

And then just in terms of the communication aspect of the platform, just sort of turning to the technical. Can you talk a little bit more about how you sort of contemplate that to function and to be as part of the, I guess, the value prop for consumer?

[Chris Hulls, Co]

Sure. So we'll have a lot more on that at the full year results -- or the half year results, sorry. And it does tie into our COVID reemergence strategy where the world has taken this huge step forward in terms of using digital communications to communicate. And one of the things we have talked about as a company is that where are you is always the Phase 1 question of what we answer. Phase 2 is very much how are you. So we are putting a big priority on building out new capabilities that continue this theme that we're all experiencing of having more emotional-style communications with digital devices. And it does tie into some of the features we're building for teens, where teens will be able to hide their exact location and be within the zone. But it will be then very important for parents that request check-ins to their kids and see how they're doing, ask them how they're feeling. And so that will be tied with more very quick interactions for communication.

[Melissa Goodell, Executive Assistant]

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

[Chris Hulls, Co]

All right. Well, thank you, everyone, for joining. We're really excited about the progress this quarter in spite of the lockdowns. Extremely proud of the team with the membership offering that's now live, and I'm looking forward to the full update in a few weeks. Thank you very much.