Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2022-Q2

[Jolanta Masojada, executive]

Good morning and thank you for joining the Life360 2022 Q2 and Half Year Results Conference Call. This is Jolanta Masojada and our Head of Investor Relations for Life360. This call is being conducted as a Zoom audio webinar. [Operator Instructions] The agenda for this morning's call will include a business and strategy update by Co-Founder and CEO, Chris Hulls, which will be followed by an overview of the financials by CFO, Russell Burke. Chris will then provide some outlook comments, which will be followed by a Q&A session. I would now like to turn the call over to Chris.

[Chris Hulls, executive]

Good morning, everyone, and thanks for joining our call today. The first half of 2022 has been a period of significant progress for Life360 as we build a one-stop trusted family safety membership service. Our core subscriber business is delivering very strong momentum with Monthly Active Users up 29% year-on-year to 42 million and Paying Circles up 4% to 1.4 million. Our June quarter performance is our second highest ever quarter for net additions in what is normally a seasonally quieter period. We're also making significant progress on our integration with Tile and Jiobit. We have begun our initial rollout and have launched Gift with membership promotion to our entire user base where users can get a free Tile if they subscribe to Gold.

This is the second step, which builds upon our test earlier this year and is the precursor to our next phase where Tile devices show up on the map, which is launching in October. We are already seeing positive back-to-school momentum with this promotional rollout, which is performing better than the 35% uplift versus the control group that we saw in our more limited trial.

And more importantly, as we committed, we are establishing a pathway to profitability. Our average monthly revenue, excluding hardware, for June of $174 million is a 65% year-on-year uplift.

At the same time, our investment and cash burn to the first half is as expected, putting us on track. Our unified platform is in place to support improved subscriber conversion and retention metrics as well as increased pricing power. Looking forward into CY '23, our integrated leaner cost base and reducing commissions are driving efficiencies. Some people have noticed our website in the U.S. is now showing higher prices. This is part of an A/B test to understand the impact of higher pricing. Although early, the results confirm that we have significant pricing power, and we are exploring price increases as part of our overall strategy of expanding membership with hardware devices.

We continue to monitor global macroeconomic conditions. And to date, we have seen no impact on our user or subscriber growth outlook. As this slide highlights, our U.S. trials and new subscriptions continue to perform very strongly. While we did increase [ U.S. ] spend over the last year, we have seen margin payback to continue to improve over time. The value of our vision for family safety membership is illustrated on this slide with user metrics showing how we connect families, save lives and provide peace of mind. The testimonial is one of many receive each week, demonstrating the power of our word of mouth to drive organic growth. The high-level view of our first half performance is outlined on Slide 8 together with a bridge to our full year guidance, which I will discuss in more detail later in the presentation. Life360's continued strong subscriber momentum together with the impact of Tile and Jiobit saw subscription revenue up 90% year-on-year and 60% for Life360 subscriptions on a like-for-like basis. The contribution from hardware was constrained by our strategic shift to prioritize higher-margin sales channels, reduced paid acquisition spending, broad softness in the consumer electronics category and the deliberate strategy to clear inventory in preparation for a bundled Membership offering launch. Other revenue increased 23% year-on-year. Overall, adjusted EBITDA and cash burn were as expected. The adjusted EBITDA loss of $32.3 million in the first half reflects the normal seasonality in Tile's business which has strong positive earnings and cash flow in Q4 with usual losses in Q1 and Q2 due to seasonally lower sales and ongoing fixed costs.

Additionally, H1 reflects our peak dollar investment integration as we have successfully transitioned the Life360 Tile and Jiobit businesses into a single unit.

The synergies from the integration along with usual H2 positive seasonality will contribute to significantly lower cash burn for the second half of the year.

In addition, we expect cost efficiencies arising from the integration to save at least $11 million per year, which we are already starting to see. While we have tightened our guidance range for the year, these incorporate higher expectations for core Life360 subscription growth. The momentum of our subscription business is illustrated in this chart of quarterly annualized monthly revenue. Since our IPO in May 2019, our AMR has more than tripled in size, and we are achieving significant scale, in particular, in our core membership offering, which has been a huge success since its launch almost exactly 2 years ago. You can see here that the core Life360 AMR has continued to grow strongly, while we have increased scale with acquisitions of Tile and Jiobit. Turning now to the metric subscriber business, Monthly Active Users Increased 29% year-on-year with U.S. delivering an impressive 33% uplift. Our continual improvement of the free user experience is both driving MAU growth and increasing retention as you can see in the chart of Returning Monthly Active Users by cohort.

As I mentioned previously, subscription revenue increased 90% year-on-year, with underlying Life360 growth of 60%, a significant acceleration from the prior half year growth rate. Pleasingly, we have seen strong growth in international subscription revenue with Paying Circles momentum in the U.K. and Australia. In fact, Paying Circles in both the U.K. and Australia were up more than 60% from June '21 to '22. The metrics underpinning Life360's growth rate are outlined on this slide, with a continued acceleration in U.S. Membership subscription drivers which more than doubled year-on-year, Membership now makes up 64% of U.S. Paying Circles. Average Revenue Per Paying Circle continued to increase up 13% for U.S. subscribers and 4% for international subscribers. ARPPC for new cohorts subscribers is 39% ahead of the first half of 2020 prior to the membership launch. Our subscriber performance is being supported by the dual drivers of record U.S. registrations and improving conversion metrics. Q2 net adds were a record for second quarter, and we look forward to seasonally stronger performance in Q3 and Q4 with early benefits from bundled Membership. This slide shows a consolidated view of our subscriptions, including Tile and Jiobit with a pro forma history prior to the time of acquisition. Average revenue per subscriber for Life360 and Jiobit have shown a strong upward trajectory and we see continued upside from the increased pricing power of the bundled launch. Tile units declined in the first half versus the pro forma prior period due to a number of strategic decisions we made ahead of the membership launch, negative press around AirTag stocking and broad softness in the consumer electronics category. We have prioritized higher margin sales channels and reduced paid acquisition spending as well as clearing our channel inventory as part of our overall inventory management. Managing risk with retail partners and thus setting us up for success including repositioning inventory for joint Tile/Life360 campaigns in the holiday period and preparing for the bundled Membership launch. Since the end of the quarter, we have seen some stabilization in unit sales with U.S. Amazon Prime Day sales in July, up 6% year-on-year. Our retail focus remains on Q4, which traditionally delivers more than 50% of annual sales. We are also pleased that press coverage has shifted from stocking to positive use cases such as finding lost luggage while traveling. Other revenue increased 23% year-on-year. In January, we transitioned to a new partnership with Placer.ai, with a revenue agreement that is set at a level close to the CY '21 ending run rate. The H1 year-on-year growth reflects the strong finish to the CY '21 year, with revenue continuing to grow and increasing the CY '21 ending run rate. Going forward, we have made the intentional decision to trade off the growth opportunity in this area for predictability and reduce regulatory risk. Turning now to an update on our strategy. Before I get into the detail, I want to provide a brief overview of the benefits that we see from our upcoming integrated offering of Life360, Tile and Jiobit.

As we have discussed previously, we see a significant opportunity to expand our addressable markets into areas like pets, younger children and older care. As our trials have demonstrated, we see the opportunity for higher conversion to paid and increased ARPPC with bundling supporting higher pricing and shift to higher tiers. We also see the opportunity to reduce our churn to the value associated with physical devices.

And finally, this improved pricing power, higher conversion and better retention will drive significantly higher lifetime value. We have spent the first half investing in our integration efforts to drive many of the initiatives which will be reflected in H2. This slide provides a high-level overview of what's coming. And in the following slides, I'll walk through the initiatives in more detail. Our back-to-school brand campaign introduces Life360 and Tile, taking a creative approach to unite the 2 brands under a family safety umbrella. We have a new series of streaming TV spots, streaming audio and social that are focused on building brand awareness and user acquisition for both brands. I'd like to share with you a short video that provides a view of the user experience that will accompany our integrated offering. [Presentation]

[Chris Hulls, executive]

Our bundled Membership launch is based on the vision of keeping everything that matters safe and sound. We will be looking to raise awareness and introduce Tiles as part of the bundled subscription offer. As I mentioned earlier, the initial rollout is replicating our encouraging trial results, which saw a 35% uplift in subscriptions versus the control group. In practical terms, bundling will be delivered initially via a Gift with membership promotional offer followed by a fully integrated membership offering, including Tile hardware. We are also weeks away from the launch of the Tile Finding Network. Life360's 42 million smartphone users and other access point partnerships will increase Tile's reach up to tenfold and strengthen its position is the only vertically integrated cross-platform solution of scale in the market. This also goes right to the heart of the primary advantage AirTags had over Tile. Although our network will still be smaller than Apple's, we expect to have near full coverage in heavily-trafficked areas and even an advantage in Android dominated regions. For the holiday season, we are planning to test a New Funnel for Life360 subscriber acquisition through leveraging Tile's retail presence. Under this concept, Tile's updated signage will include Life360 branding and activation codes and the holiday bundles that include Life360. Before I hand over to Russell to run through the detailed financials, I want to provide an overview of ESG initiatives we are undertaking to progress our sustainability journey.

Unquestionably, the greatest value provided to the community is our core value focus on family, safety and security, you're prioritizing all ESG pillars and highlight a few key initiatives in the past year. We achieved carbon neutrality for 2020 and 2021 and created our first ESG policy and materiality matrix. With that, I'll turn the call over to Russell, who will run through the financials.

[Russell Burke, executive]

Thanks, Chris, and thanks to everyone who's joined the call today. 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. Before I go through the financial results in more detail, I'll provide an update on some of the unit economics that I've discussed on previous calls with some additional perspectives. All of these unit economic slides focus on the core Life360 business.

Slide 26 illustrates the retention rates for our U.S. organic users and membership subscribers. Our organic user retention for March cohorts continue to show strong and improving retention rates even as our absolute numbers increase significantly. The longevity of our user relationships stretch out now for close to 5 years and show consistently stable and improving retention rates. The chart at the top right-hand corner measures month 1 user retention over time. While there's seasonality in this series, it illustrates the initial negative impact from COVID and the recovery to recent all-time highs. We've seen improving retention as we invest in the user experience and drive higher levels of engagement. The Membership subscriber charts on the bottom of the slide show our subscriber performance since the launch of our membership model. You can see that percentage retention is holding up strongly even as the absolute number of our subscribers increases significantly. Typically, retention suffers in periods of high growth and that it has not been our experience. This slide updates ones that we've shown previously, which is the first full month of revenue by quarterly cohort over time, beginning in Q3 of 2017. We focus on cohorts by quarter given the significant seasonality of our business. The impacts of COVID on the first 4 month are clearly visible in Q2 to Q4 of 2020. Equally visible is a strong bounce back we've seen in more recent quarters, reflecting our strong subscriber performance.

This slide shows the cumulative revenue of our quarterly cohorts over time, beginning in Q2 of 2017, with the length of the line showing the extended period over which we have been able to monetize users. In every year, apart from 2020, we have seen the gradient of the line steepen as we've benefited from improving retention and higher price points. The upsell of free users to paid and paid subscribers to higher price plans is illustrated on Slide 30. Over time, ARPPC has increased progressively and for successive cohorts, showing that we're able to increase average pricing even within the same cohort. The ARPPC step-up in Q3 of 2020 reflected the launch of the Membership model in July of that year, and we've seen further improvements in successive cohorts. This slide shows revenue retention by half year period for users who had signed up at the end of the previous period. Apart from the initial COVID period in the first half of 2020, we've seen net revenue retention remaining at or above 100%, reflecting our success in up-selling free users to paid and paid subscribers to higher price points. It's impressive to see that revenue retention remains strong even as gross subscriber additions has increased significantly reflected in the orange line on the chart.

Turning now to the details of the income statement. While I'll discuss and highlight variances from the first half of 2021 to the first half of 2022, I recognize that in many categories, there are significant movements due to the increased scale of the integrated businesses, the different nature of the subscription and hardware units and the significant investment in the integration in H1 of calendar year '22 along with the changed profile as we've become a U.S. reporting entity. Total revenue increased 108% to $99.8 million, driven by 90% growth in subscription revenue previously referred to as direct revenue. Life360's core subscription revenue was up 60% with further contribution from the Tile and Jiobit subscription businesses.

Other revenue previously referred to as indirect increased by 23% and hardware reflects the contribution of Tile and Jiobit devices. Gross profit increased 66% year-on-year to $64.4 million. The reduction in gross profit margin to 65% reflects the impact of hardware cost of sales as a result of the Tile and Jiobit acquisitions. Excluding hardware, gross margins remained stable at 80%. Operating expenses increased to $122.7 million as we increase investment to scale the business and took on the 2 acquisitions.

Research and development expenses of $43.8 million increased from $19.4 million as a result of integrating the acquisitions and a higher head count to support product development. User acquisition costs of $8.8 million increased from $2.4 million due to the Tile and Jiobit acquisitions and also incremental investment in efficient performance marketing. Sales and marketing expenses of $35.2 million include variable sales commissions paid to Apple and Google, which account for $14.7 million. The year-on-year increase resulted from strong growth in our subscription revenue with a proportionate commission increase and higher other marketing expenses, which reflect the investment in streaming TV channels brand and other performance marketing. General and administrative expenses of $19.2 million increased from $6.4 million, reflecting the scaling of head count to support growth in insurance, facilities, increased public company-related costs and costs incurred related to the acquisitions. Stock-based compensation of $16.5 million increased from $5.1 million as a result of retention initiatives geared towards the Tile and Jiobit employees added as well as new hires in the continuing competitive marketplace in which we operate. The statutory EBITDA loss of $56.1 million increased from $10.4 million, reflecting the Tile and Jiobit acquisitions and peak investment to integrate the businesses. Adjusted EBITDA loss, including stock-based compensation and nonrecurring items increased to $32.3 million. Turning now to the balance sheet. Cash and cash equivalents of $79.3 million including restricted cash of $15.1 million decreased from the $231 million, largely due to cash payments made in relation to the Tile acquisition in January. The cash balance at 30 June is on track to our projections and previously issued guidance. The accounts receivable increase of $7.7 million largely relates to the timing of receipts from a channel partner and the addition of Tile retail partner customers. The increases in inventory of $9.2 million, intangible assets of $48.8 million, goodwill of $102.1 million all related to the Tile acquisition. And finally, turning to cash flow. Operating cash outflow of $38.5 million for H1 increased by $33.6 million due to the onetime costs related to the acquisition in Q1 as well as investment to grow the business and the seasonality associated with the Tile and Jiobit acquisitions. As I mentioned before, Tile's hardware business has significant seasonality, experiencing peak cash burn in Q1 due to the timing of supplier payments and with sales weighted towards the second half and particularly the peak Q4 holiday season. Accordingly, as previously discussed, our expectations are unchanged, with reduced cash burn for Q3 and turning cash positive in Q4. Our guidance for the year-end remains in line with this. Net cash outflows from investing activities of $113.8 million are in relation to the Tile acquisition, and Life360 ended the period with a cash balance of $79.3 million. Thanks for your attention, and I'll now turn the call back to Chris, who will discuss the outlook.

[Chris Hulls, executive]

Before I provide our CY '22 outlook, I'd like to provide an overview of our pathway to profitability, which I mentioned at the beginning of the presentation. Firstly, as I've already mentioned, our first half adjusted EBITDA and cash burn were as expected, putting us on track. Our confidence in a trajectory to adjusted EBITDA profitability and positive cash flow for CY '24 is underpinned by both revenue and cost drivers. While the first half of CY '22 saw a strong Life360 subscriber growth, this was also a period of peak burn due to hardware's lower seasonal contribution, combined with the impact of our accelerated integration plans which increased costs by approximately $13 million in the short term, which resulted in our $32 million adjusted EBITDA loss for the half. Looking forward to H2, we see lower costs as we benefit from the early uplift from the bundled Membership launch Life360's seasonal Q3 uplift and Tile's Q4 seasonal high period in profitability. At the same time, we expect efficiencies from the integration undertaken in the first half that will provide around $11 million and annualized cost savings.

Looking forward into CY '23 and CY '24, we expect considerable conversion, upsell and retention upside from bundled Membership. At the same time, we look for cost benefit as our expense base reaches scale and our growth in head count becomes more limited. This provides profitability leverage along with the benefits from a leaner organizational structure and outlook for lower subscriber commissions based on out-of-app purchases. With that high-level overview, I'll turn to our outlook. As previously indicated, CY '22 H1 was a period of significant investment. The investment and cash burn were as anticipated and Life360 expects to start realizing the benefits of integration in H2, as we launch the bundled Membership offering and see an uplift in hardware in the seasonally higher holiday period in Q4. As a result, CY '22 H2 is expected to see considerably lower cash burn and a much lower adjusted EBITDA loss. For CY '22, Life360 expects to deliver core Life360 subscription revenue, excluding Tile and Jiobit, growth in excess of 55%. Consolidated revenue of USD 245 million to USD 260 million for subscription, hardware and other revenue. Adjusted EBITDA loss in the range of $35 million to $38 million. This includes efficiencies flowing in H2 from the Tile integration and restructuring. We have upgraded our guidance for core Life360 subscription revenue growth and narrowed the range for consolidated revenue and adjusted EBITDA. Life360 expects to finish CY '22 with cash and cash equivalents of approximately $65 million. We expect Life360 to be on a trajectory to consistently positive adjusted EBITDA and operating cash flow by late CY '23 such that we would record positive adjusted EBITDA and operating cash flow for CY '24. This trajectory could be further assisted by the positive impact of potential future price changes. 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]

[Operator Instructions] First up, we have Laf.

[Lafitani Sotiriou, analyst]

Guys, and it's been a very busy period for you, but I might start with the outlook statement. And just specifically, the last dot point that you have, there's a sentence that this trajectory could be further assisted by the positive impact of potential future price changes. And it's got to do with the EBITDA guidance being cash flow positive by the end of next calendar year. Can you just clarify, are you reliant on the price increases to get to cash flow breakeven by the end of next year? Or are you suggesting that if these price increases go better than expected that you may actually hit cash flow breakeven earlier?

[Chris Hulls, executive]

We're definitely not needing to have the price increase hit very hard to hit those numbers. In general, the forecasts are based on what we can see now. We're obviously in a period of very high inflation, and we've been very happy how we haven't had the same issues as a number of our peer group companies.

So if we are able to have the pricing power that we have good indicators of that could accelerate things and also provide a very good buffer that would also allow us to invest in some of the growth areas that we've had to pull back on a bit. But, yes, it absolutely could be an opportunity to outperform.

[Russell Burke, executive]

So just I'd be specific, Laf, we -- the projections through next year have not been -- have not been changed. So any potential pricing power would be in addition to that.

[Lafitani Sotiriou, analyst]

And so can we just then unpack that in the context of the second half year guidance for this year being between minus USD 3 million and minus USD 6 million EBITDA -- adjusted EBITDA. Is it likely or are you rolling out being -- having a positive EBITDA figure for the second half next year?

[Chris Hulls, executive]

Russ, do you want to take that one?

[Russell Burke, executive]

Yes. I don't think we've been that specific in terms of our guidance, Laf. What we're doing is we're very specifically on a trajectory to reach that point by the end of next year. And as we've said, the Q4 in all cases because of the hardware business is going to be cash flow positive going forward, but the overall trajectory is moving us towards that overall cash flow positive point by the end of next year.

[Lafitani Sotiriou, analyst]

Look, I understand that, but you've got the trajectory that you're talking to. You've got the subscriber growth. You've also got the synergies and you've got the accelerated integration costs also not rolling through. So there's quite a few positive impacts that are working to your advantage. Are you just being conservative by not calling out positive EBITDA second half next year?

[Russell Burke, executive]

I would agree that there's definitely some strong positive elements on the horizon there. Until we sort of work through our testing on the pricing component, we don't want to lay that out as part of our projections, but that's definitely a factor that could layer in on that.

[Lafitani Sotiriou, analyst]

Look, understood. And so can I just move to the Tile products and the overall hardware products. So there's 2 sides to this, right? One is the supply side. And so can you give us a more specific update around how the supply issues are looking in comparison to last year versus this year and next year.

Then can we go into the demand side. So there's really 2 sides now on the demand. You've got your traditional demand where you sell the products. But then you've also now got internal demand for the products that you'll use in bundling. So could you give us an idea of the mix of how the demand side will look going forward?

[Chris Hulls, executive]

Sure. On the demand side, as everyone knows the rationale for purchasing Tile was largely the ability to use Tile devices to drive Membership. The business model of taking hardware and turning that into a recurring subscription business is obviously quite powerful. And it was a very good match because we had many of the natural upsell points for the Tile device, and we also have the challenge of customers sometimes thinking the Life360 membership is expensive, but that's usually more of an emotional reflex because people are not used to subscriptions via apps. So putting the 2 products together, we think, will absolutely increase demand. On the supply side, we are going to prioritize having Tiles that can drive membership because if that works, it takes something as onetime payment into a recurring revenue stream. As of now, it doesn't appear that demand -- or supply will be an issue. We've done quite a bit of work to spin up various suppliers, SoCs, which is systems on a chip to be ready for that. And so it is very much a focus on demand, especially as we look to the full CY '23 when we have more time to plan and build inventory as demand recovers.

[Lafitani Sotiriou, analyst]

Just to clarify, the mix would half of the units be going to the bundling of products or an half going elsewhere? Or how do you envisage this working?

[Chris Hulls, executive]

Russell, do you have an exact number on the split?

[Russell Burke, executive]

No, I don't. But Laf, it wouldn't be that sort of proportion just given the volume of retail, particularly in Q4. But we definitely see that building up over time. It will also depend on a range of other factors in terms of timing and redemption rates, et cetera. But needless to say, we're managing the inventory in such a way as we will prioritize that inventory for bundling.

[Lafitani Sotiriou, analyst]

Yes. Okay. And so from an accounting perspective, how will we see it in the account. So if the hardware division, would there be transfer pricing at market cost or cost price, how are you going to -- how will we say flow through the numbers?

[Russell Burke, executive]

It will -- there will be a component of -- under GAAP, we'll be obliged to break out the subscription into a subscription component and a hardware component. But in terms of non-GAAP measures, we'll also provide the breakdown of that.

[Lafitani Sotiriou, analyst]

And just so I'm clear on the supply side, you're saying that the issues are dissipating. Because if you look at the quarterly number of units shipped in the last 2 quarters, they're down by around 30%, 40%. Are you stockpiling some for the memberships? How should we think about the next sort of 1 year or 2?

[Chris Hulls, executive]

Will you take that, Russell?

[Russell Burke, executive]

Sure. Sure. We're not necessarily stockpiling, Laf, but we are managing it closely. We certainly don't want to be in a situation in the current environment where we're overstocked.

But we're managing that closely. Part of the reason that the units were down in Q2 was accepting some returns as part of our overall strategy to clear out channel inventory moving into the holiday period. So it's all part of an overall inventory management process.

[Lafitani Sotiriou, analyst]

Okay. Just moving on. So you mentioned the timing of, or you flagged that the commission is falling away to Apple and Google is a key cost saving measure. And you then inflated, it's about $15 million, $14.7 million, I think you mentioned in the first half. Can you just update us on the timing of when you think those commissions that you pay to Apple and Google will fall or fall away?

[Chris Hulls, executive]

So timing is very hard to speak with precision on, in particular for Apple. We do have more flexibility around what we do with Google. So we're going to be exploring that right now, and we're midstream with Apple. As we've long shared, we're very confident that in the long run, this will go in our favor. But in the short and mid-run, it's very hard to predict.

So as we forecast internally, we don't model in a binary shift because that's a little bit too much uncertainty there, but we do just see those coming down over time. And the other thing, unrelated to subscription commissions is the shift from in-app purchase to credit card also will have very significant changes to conversion retention, which we're testing right now. We expect conversion will go down due to increased friction, but we expect retention to go up because we have much more control of how we message things to users like Cancel, Save, ways to give people discounts if they're at risk of loss and also being able to control or cancel flow and avoid things like people just going into iTunes and canceling all subscriptions and mass.

So those things will take quite a while to fully play out. But again, our, we're very confident to say that in the long run, we're very -- we're convinced this is going to be where the world goes.

[Lafitani Sotiriou, analyst]

Sure. And just so we understand, in terms of the guidance that you've provided for not so much just the second half this year, but more particularly breakeven positive cash flow by the end of next year. Do you have -- or do you include any commission savings in that guidance?

[Chris Hulls, executive]

So in the long-term guidance, the internal model is much more. We look at a range of things that could go well, a range of things that don't, kind of, as you mentioned, with price increases, and we just take a kind of a midpoint. So it's very hard to say what lever was which, but we just, in aggregate, make some assumptions. So we continue to expect the world to overall shape up in the way we expect, but we don't necessarily say item x or item y is in that model.

[Lafitani Sotiriou, analyst]

Got it. Got it. Just moving on to one last question on the wearables and a lot of progress with the Tile and bundling and integration of that product. Could you just give us an update to the road map around the other sort of 2 areas of pets and seniors, whether there's been much progress in those areas?

[Chris Hulls, executive]

Sure. So seniors is definitely much an out-year thing. Pets, we're looking at more actively as part of moving Jiobit into the overall Tile lineup, and we are also exploring having a more lightweight Bluetooth-only version for pets, but none of that will be until at least the middle of next year and elder care is definitely in '24 or beyond.

[Melissa Goodell, executive]

Thanks, Laf. Up next, we have Julian.

[Julian Mulcahy, analyst]

Julian Mulcahy from Evans & Partners. Just a first question on the breakup of the $32 million loss. I see the integration costs sort of closer to [ 13% ]. How does sort of the core Tile business compared with the core sort of 360 business in that sort of makeup of the operating loss?

[Russell Burke, executive]

Julian, we're not necessarily tracking the business as a whole, given the integration. But we are laying out each of the revenue streams and the results and the gross margins for those streams at this point. The hardware business was definitely significantly down in the first half and Q2 in particular because of the things that we've talked about, particularly returns and promotions for retailers as we reestablish those inventory levels and relationships going into the holiday period including sort of combined promotions for Life360 and Tile.

[Julian Mulcahy, analyst]

Just so I can get an idea of the seasonality. So if the first quarter is the weakest and the strongest is the fourth, where does sort of 2 and 3 seat?

[Russell Burke, executive]

Traditionally 2 and 3 are sort of fairly similar levels for the hardware business. This year, certainly, Q3 will be a little stronger, and we have currently expected that Q4 will be followed sort of traditional lines and represent more than 50% of the revenue for the year for hardware.

[Julian Mulcahy, analyst]

Right, cool. And with the way the bundles are rolled out. So for all the existing subscribers of Gold and Platinum, do they automatically get issued with free Tile units? Or is that only going to be for new subscribers?

[Russell Burke, executive]

Chris, do you want to take that one?

[Chris Hulls, executive]

Over time, we are going to have Tile devices in all tiers, and we're exploring different ways to do things like price changes over time and where -- the different promotions using Tile devices to make that transition, but a lot of that is in testing right now.

[Julian Mulcahy, analyst]

Right. So I mean, is there a chance that existing subscribers cancel a subscription and take up a sort of free offer with the bundle included?

[Chris Hulls, executive]

Yes, they could absolutely do that, but what we will be looking at is doing things like even offering devices proactively to reduce churn and moving people across Membership tiers. So it's both.

[Julian Mulcahy, analyst]

Right. Okay. And where has the extra investment that went in the quarter in terms of the preparing for the bundle releases? Was it advertising? Or was it mainly around integration costs?

[Chris Hulls, executive]

Mainly around integration because we accelerated the roll up of the 3 companies, which is in the short term, very inefficient for obvious reasons. When you combine different functions and change people's roles while also trying to keep the road map moving, it's very jarring for the org. So to do that while making priorities -- progress and other priorities, you do have to spend quite a bit. So we've gotten through that right now. Marketing has continued to increase, but that's mainly because paid user acquisition has done really well. It's much less related to the integration. And I should note that the stand-alone paid market, just for clarity's sake, has gone down for the hardware businesses. And we've put more of it into the Life360 side because that's where we've had the highly efficient ROI.

[Julian Mulcahy, analyst]

Right. So the integration costs are now finished, so there will be nothing in the second half. Is that right?

[Russell Burke, executive]

Nothing direct, we're much more going to be reaping the benefits of the combined business structure.

[Julian Mulcahy, analyst]

Right. Okay. And just finally, any -- what's any update on Canada?

[Chris Hulls, executive]

Canada numbers look good, continue to make progress. International has been one of those things we've frustratingly had to punt a little bit longer than we would like. That was both based off the decision to accelerate the integration and then also Ukraine, where we had our developers who are working on the project. So we still expect to do the next international rollout next year.

[Russell Burke, executive]

Good -- just that's fine.

[Melissa Goodell, executive]

Okay. Next up, we have Chris.

[Chris Savage, analyst]

It's Chris Savage from Bell Potter. First one around the revenue guidance, just the reduction from $245 million to $275 million to $240 million to $260 million. Can I presume the reduction at the top end is just from anticipated lower hardware sales given the strength we've seen in both indirect and subscription in the first half?

[Chris Hulls, executive]

Exactly.

[Russell Burke, executive]

Exactly right, Chris. And we have intentionally prioritized the higher margin channels as well. So as part of the cost savings, we have traded off some top line numbers for better underlying structural burn. And then as to your first question, the subscription is outperforming very nicely.

[Chris Savage, analyst]

Yes. And just a follow-on from that 6 months ago at you said indirect, you thought it would be flat year-on-year, and yet we had 23% growth in the first half. So is your expectation still flat? Or should we now expect growth year-on-year?

[Russell Burke, executive]

So Chris, the 23% is first-half-over-first-half. And what happened was that the -- in the latter part of last year, the revenue continued to grow, and the way the new Placer agreement works is that our expectation is that, that will deliver revenue at a similar level to the end-of-year run rate. for last year. So we're, to some extent, comparing apples-and-oranges there. But that 23% was achieved in the second half of last year, and that run rate then becomes the starting point of the comparison point for the new deal.

[Chris Savage, analyst]

Okay. And just in the pack order presentation, you said cash and cash equivalents of $79 million a few times. And then in the outlook slide, you've got cash and cash equivalents of $72.3 million. So can you just explain the difference between the 2 figures?

[Russell Burke, executive]

The difference there is purely an allocation of the restricted piece. We can get you a bit more detail on that.

[Chris Savage, analyst]

Okay. And last question, perhaps more so for you, Chris. I accept that with the addition of the 42 million MAUs, your network for Tile is going to expand significantly like the tenfold you've quoted, and that takes out one of the disadvantages to AirTags. But one of the other disadvantages is that you're not offering Ultra-Wideband whereas AirTag is. Is that coming? You've said it's coming in the past so we haven't seen it yet. So can we expect it soon?

[Chris Hulls, executive]

Sure. We're watching Ultra-Wideband for right now. It's actually very much more of a marketing front that hasn't necessarily lived up to user expectations, especially on non-iOS devices. So we are sensitive about just doing something because it gives us a marketing monitor curve versus adding value to customers. There are different things coming up like Bluetooth range finding, which in some ways, we use a Bluetooth chip set to do a better experience in Ultra-Wideband. One of the challenges with Ultra-Wideband now is it hasn't lived up to its range expectations. So if you look at a lot of the marketing materials, it gives you the impression that you can kind of like be on the other side of the house and go down to the inch locating your devices. In the real world, it's been quite disappointing, but you have to be kind of within 10 or 15 feet.

So we would rather use Bluetooth and the new ranging capabilities, which actually could work fully across a large house to help you find your devices. So our view is this is a probably a mid-term thing, Ultra-Wideband will get better, but we'll probably hold off on launching it until we can feel really good about it, actually delivering the value to users that hit markets.

[Melissa Goodell, executive]

Next up, we have James.

[James Bales, analyst]

This is James Bales from Morgan Stanley. I'd like to just dig into the price changes that you've announced. Maybe you could help us understand a couple of basic questions like have any of the price -- have there been any price rises for grandfathered plans? And what's the expected change in mix between monthly and annual plans from the subscription? And can you give us a sense of where you expect ARPPC to land?

[Russell Burke, executive]

So we are in a testing phase right now. So we're not ready to give firm numbers here. I'm impressed by the vigilance many investors and analysts have had seeing the change on our website. That is what we are using to collect data that will inform our decision-making and rollout.

And we're, of course, very pleased that the early results are very positive, and it does look like we will be one of those companies that does have pricing power, which obviously, a number of companies do not. So as we roll out those tests and learn we will get firmer numbers, which I hope we'll be able to share next quarter.

[Chris Hulls, executive]

And I guess I'd say it's part of an overall process that we're implementing, James. So we're doing this test. We really want to understand the impact both at the gross level potentially on conversion as well. And once we're able to analyze that, we'll then make further decisions on price changes for new subscribers, which is what we're testing at the moment. And we've made no firm decisions at this point in terms of our legacy subs or existing subs.

[James Bales, analyst]

Got it. And then I think you pointed to the hardware impact on retention for Jiobit as having twice the retention of Life360. With these bundlings, is that the sort of benchmark that you see as realistic when Tile devices sold into your subscriber base?

[Russell Burke, executive]

I think Tile and Jiobit are very different. Tile devices are one that are not associated with a subscription fee usually. So -- but that will be very high volume. That's going to be basically all our members getting Tiles, whereas Jiobit devices, it's a bit of a longer term play where we'll build out things like the pet products, the eldercare products. They will always have much lower numbers, but we might have them bundled with Platinum, so it will give us a reason to push more people to Platinum as well as have higher retention on platinum.

So no, I wouldn't necessarily expect that as the baseline. I do think, though, that having Tile devices as part of the membership offering are going to contribute to that ultimate long-term price leverage, where we will be able to increase prices while possibly not seeing a churn impact, whereas if we didn't have these devices to give away both of the initial upsell or as a retention tool, we might not get the full benefit, and we might not have quite as much pricing power as I'm anticipating we're going to have.

[James Bales, analyst]

Got it. And maybe just one more. On net revenue retention, you guys called that out as being like right at 100% and the lowest it's been for a while. Can you maybe talk to why that was the case and what you expect for net revenue retention once you've got Tile integrated into the offer?

[Chris Hulls, executive]

Why don't I take that at a high level and Russell can drill into the numbers a little bit. In some ways, it's an oversimplified metric that you could actually -- good performance early on puts pressure on that metric. So as one example, if you get a lot more people converting, which we have, that does mean you're going to get more people are in who will then turn more quickly that hurts net revenue retention, even though the overall cohort revenue goes up.

So when I look at net revenue retention from a CEO perspective, I actually drill down much deeper and look at the cohort base numbers and look at where they're flattening out. And I look at it from an absolute number perspective as well as a relative percent, so net revenue tranche is really a roll up of that.

So depending on how Tile does, if it really increases early conversion, that will counter intuitively net revenue retention would then go down. But then as we use Tiles, for example, as a retention tool would make net revenue go up. So I generally just want to see that, that number is staying healthy and normal because if we were ever to see that go significantly down, then you might say, hey, have we been jamming people to convert who are lower quality.

And the flip side of that went way up, that might mean we're having some really good ability to upsell people to different member tiers. But as long as it kind of hovers in that same zone, I feel very comfortable. Russell, any deeper thoughts to add?

[Russell Burke, executive]

Yes, not too much to add to that other than just to say that the actual decrease in the net revenue retention was very small while the increase in subscriber adds in the last couple of periods was pretty significant. So you would expect that reaction that Chris was referring to.

And I think there's -- as we go forward with pricing power, with bundling looking at shifts between the tiers, there's a lot of levers that we can pull in that regard.

[Melissa Goodell, executive]

As there are no more questions, I will now turn it over to Chris for some closing remarks.

[Chris Hulls, executive]

I'll be very brief. Thank you, everyone, for joining. We're coming into an extremely exciting H2, with our full rollout of the integrated offering, and I'm excited for our back-to-school and holiday seasons and looking forward to giving everyone a new update shortly. Have a great day.