Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2020-Q3

[Jolanta Masojada, Head of Investor Relations]

Good morning, and thank you for joining the Life360 September 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. 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 September quarterly business update call. While the resurgence of COVID had been challenging in the face of these difficult circumstances, the business has performed admirably and proved its resilience. We're excited that we're able to continue growth in revenue in Paying Circles, while also delivering our second quarter in a row of positive cash flow. Much of this success has been due to our new membership offering, which has significantly broadened the applicability of Life360 and continues to deliver a 30% uplift in average revenue per Paying Circle for new subscriber cohorts versus the first half. Beyond the business results this has driven, we are also delivering real value to our users and thousands of families have used our new Family Safety Assist features in real times of need. Although families have not returned to their normal routines and are impacted both by social distancing and new lockdown restrictions, MAU has continued to hold stable and even grow. This is despite less than $1 million of paid acquisition spend in the quarter, showing the strength of our brand and word-of-mouth effect. This is a considerable achievement given the worsening of COVID-19, which has a far more negative outlook than just a quarter ago.Getting into specifics, Life360's global MAU base was 25.8 million at the end of September, an increase of 0.5 million versus June. U.S. MAU of 16.7 million increased 16% year-on-year and 3% versus June. International MAU was in line with the June quarter, reflecting the strong resurgence of COVID-19 in many territories, and a modest-to-moderate impact of some platform changes on Android. Our Australian MAU base bucked the trends increasing 22% year-on-year and close to 2% for the quarter. Globally, new registrations were materially impacted in Q2 as excessive lockdowns were implemented in response to COVID-19. While Q3 new registrations remained below the previous corresponding quarter, they have increased 24% from Q2, with a 30% increase in the U.S. For the September quarter, revenue increased 24% year-on-year to $20.2 million. For the month of September, annualized monthly revenue was $81.2 million, a 20% year-on-year increase and 4% ahead of June AMR of $77.9 million. For the September quarter, direct revenue benefited from the 17% year-on-year growth in Paying Circles to 884,000 and the encouraging ARPPC performance of our new membership offering. We now have around 93,000 new and upsell subscribers in the membership tiers, accounting for around 13% of U.S. Paying Circles.This new membership cohort delivered an ARPPC uplift of around 30% versus the first half. Overall ARPPC increased 8% year-on-year as legacy subscribers are grandfathered on their previous plans. We've always been optimistic about the ARPPC opportunity coming from the membership launch, and it's exciting to see this become a reality.Indirect revenue, which includes data revenue and our Allstate lead generation partnership, delivered solid, but moderating growth for the quarter. The Allstate partnership contributed revenue of $1.5 million in line with the September 2019 quarter, which was the partnership's full quarterly contribution.Data revenue growth moderated due to the impact of COVID and timing issues. The deferral to 2021 of any potential changes to IDFA or Identifier for Advertisers, previously considered for iOS 14 is favorable short term for the data business, but Apple's ultimate plans remain unknown.During the September quarter, we continued to pause the majority of Paid User Acquisition spend to adapt to the COVID-19 environment. Investment of $900,000 was slightly ahead of the $200,000 undertaken in the June quarter and well below the $5.2 million in the September 2019 quarter.Other expense management initiatives continued, reflecting the discretionary nature of Life360's business model. We expect to resume investment in growth in the fourth quarter to support the strong momentum being achieved by our membership launch. While investment in user acquisition spend will remain well below normal until the operating environment recovers, we are investing ahead in new channels that could drive future growth. We are excited that the broader membership offering is conducive to things like direct-to-premium acquisition on the web and traditional TV, which were not as much of a fit for our legacy offering.I've previously spoken about the teen campaign to generate negative reviews of the Life360 app via TikTok. We have continued to engage with the teens, and during the quarter, launched a new Bubbles feature which provides the option of greater location privacy while maintaining all the safety features that are important to parents.Our recent TikTok Hashtag challenge has generated more than 4 billion views and overwhelmingly positive sentiment from teens. We are seeing encouraging early signs of a recovery in our iOS App Store ratings, which have now increased to more than 4 stars. 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, and thanks to all of you for joining us 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. Life360 ended the September quarter with cash and cash equivalents of $59.3 million and no debt, an increase from $58.4 million at the end of June. This provides the company with a strong capital position to continue to invest for sustained growth. Cash provided by operating activities was $1.0 million compared with $0.7 million in the June quarter and a use of cash of $7.1 million in the corresponding September 2019 quarter.Revenue of $20.2 million increased 24% year-on-year and 4% versus the June 2020 quarter. Receipts from customers of $15.7 million reduced from $16.9 million in the June quarter, with some impact from the timing of data revenue receipts. The difference between Q3 revenue and receipts reflects commissions, which are not included in the latter. Payments in the September quarter reflected disciplined spend in responding to the COVID-19 environment with a reduction of 29% year-on-year and 9% versus the June quarter. Staff payments of $8.3 million compared to $7.5 million in the June quarter. At the end of the quarter, our head count was 186. Administration and corporate payments of $1.2 million reduced from $3.0 million in the June quarter, mainly due to the timing of payments of annual insurance premiums. Advertising and marketing payments, which include Paid User Acquisition, of $1.3 million were slightly higher than June quarter payments of $0.8 million, however, were down from $8.2 million in the September 2019 quarter. Research and development payments of $2.1 million were in line with the $2.2 million in the June quarter. And technology payments of $1.4 million reduced from $2.4 million in the June quarter, primarily due to the timing of prepayments. Cash used in investing activities reflects minor purchases of capital assets. And cash flow from financing activities reflects modest proceeds from the exercise of employee share options. And with that, I'll hand it back to Chris.

[Chris Hulls, Co]

Although the ongoing COVID pandemic has worsened and caused significant uncertainty, our strong organic growth, retention, brand and balance sheet position us well to weather the storm. In the current environment, we intend to maintain our disciplined spending approach and will focus on stability until there is a clear line of sight to normalcy. For CY '20, we expect to deliver revenue in the range of $79 million to $82 million. Underlying EBITDA loss, excluding stock-based compensation, in the range of $10 million, this compares with our previous guidance of a loss between $10 million and $14 million. Operating cash outflow in the range of $10 million, this compares with our previous guidance of a cash outflow of between $10 million and $14 million. That concludes our prepared remarks, and I'll now turn the call over to Melissa, who'll manage the question-and-answer portion of our call today.

[Melissa Goodell, Executive Assistant]

[Operator Instructions] First up, we have Quinn. Quinn, please repeat your name and which company you're calling from.

[Quinn McComas Pierson, Co]

Quinn Pierson from Crédit Suisse. Maybe just firstly, so U.S. users are back to growth, which is great to see. You added about 0.5 million U.S. users in the quarter. Could you talk us through the slope of that growth through the quarter and how October is trending so far, please?

[Chris Hulls, Co]

Sure. It's -- I wouldn't say there's necessarily a clear trend. We've obviously had a strong uptick. So it's been a little bit noisy. And I wouldn't say there's been a clear direction, but I'd say we've had a lumpy return to growth, and a lot of that is in line with people going back to school, lockdowns happening, not happening. So no clear trend other than that in the current period.

[Quinn McComas Pierson, Co]

Yes. Understood. And it looks like the lower end of your CY '20 revenue guidance only needs a similar revenue outcome as Q3. I would have thought with Christmas seasonality, just general increasing levels of activity -- of physical activity, I would have thought that would be a very conservative figure. Other than the usual COVID headwinds, of course, are there any other headwinds or gives and takes to be cognizant of for that Q4 revenue number?

[Chris Hulls, Co]

Sure. A few things. So first off, we usually have a very large back-to-school bump, which was definitely moderated with COVID and COVID has gotten a lot worse since September, not better. Q4 until Christmas is actually historically one of our slowest quarters. So that's unrelated to COVID. That's normal seasonality. Christmas does have a very large spike, but it's a short one, and the impact on revenue is forward-looking. So even if we had a massive number of sign-ups at Christmas, we'd only book -- we actually wouldn't book any revenue because it's a 7-day trial period and then we prorate as well. So this is actually historically our slower period of the year.

[Russell Burke, Chief Financial Officer]

I guess just to layer in on that a little bit, Quinn, we certainly have been a little cautious because of the COVID environment. It's -- there's certainly unknowns there. And particularly in terms of the data business, there's real unknowns there. We're looking at that being somewhat flat in the fourth quarter, while the subscription business is consistent growth, but modest at this point.

[Quinn McComas Pierson, Co]

That's helpful. And just lastly from me, some of the new products and services, and particularly those in the Gold and Platinum packages, can you talk us through usage data, where you're seeing the best uptake, things like phone, film coverage or credit monitoring, I guess, to what degree you've seen usage of those and travel, for instance, using your travel system services, I would imagine those are potentially getting less used than they would in normal times. But I'd just be keen to hear kind of how you're actually seeing customer demand from the new services.

[Chris Hulls, Co]

Sure. So a few things. So identity theft you automatically get popped into. So you're sort of just using it and that sits in the background once you start paying. The other services across the board are largely ones we don't expect high usage of per se because these are outlier events. It's sort of -- if you ask maybe an insurance company, how often are people -- how much uptick you have in your homeowners claims, the answer is always going to be a very small number relative to the overall base. So it's a very similar effect here that a lot of the new Platinum tier services, with the exception of roadside, which we already had, they are really truly contingency events. So they are being used, for sure. I mean you've got many thousands of calls across the board from medical to travel and all these identity -- but relative to the base, it's lower. So we're much more interested in what is the sentiment of users? Are they feeling protected? Are they feeling like they're getting a benefit much more than the actual usage? With some of the upcoming product work we're doing, which we talked a little bit about on our last call, there's a big emphasis on product marketing and tweaks to the flows in the app where we actually might make users take setup steps to "activate" these features. And they honestly wouldn't truly be activating anything. It's more just making them activate to help them understand the product and reinforce to them that we are giving them that value. Because right now, it's still relatively easy to actually have benefit from these services, and you might not be fully aware of it. So that's all stuff that's coming up soon.

[Melissa Goodell, Executive Assistant]

Thanks, Quinn. Next up, we have Laf. Laf, please repeat your first and last name and which company you're calling from.

[Lafitani Sotiriou, Senior Analyst]

It's Lafitani Sotiriou from Bell Potter. I've just got a few questions, if I may. The first is in relation to the new memberships, it looks like you're getting good traction. Are you able to add a little bit of color as to what the mix is, that is new completely to memberships versus upgrades?

[Chris Hulls, Co]

The vast majority of those new adds are actually new subs versus upgrades, Laf.

[Lafitani Sotiriou, Senior Analyst]

Oh, wow. So I would have thought the mix the other way around. So it's actually new people completely to the products.

[Chris Hulls, Co]

Yes. Remember that we are grandfathering people in. So if you're already paying, you kind of got a sweet deal moving into those tiers. So the only...

[Lafitani Sotiriou, Senior Analyst]

No, I understand that. I remember you provided some incentives for people to upgrade and some specials, so I thought that they would have made up a reasonable amount of the overall people on the new memberships. But the fact that there's new ones, the mix is actually encouraging. Just on the attrition -- sorry, go ahead.

[Chris Hulls, Co]

Yes. Just agreeing with you that we're very pleased with that.

[Lafitani Sotiriou, Senior Analyst]

Just on the attrition rates, has it changed much now that people have got a broader apps? I know it's only early days, but the 3-month, 4-month period that they've been using these additional features, have you found that less people have been dropping off?

[Chris Hulls, Co]

It's relatively stable-ish. Our expectation, though, has been when you have higher pricing, you're always going to actually go a little bit more early on as the out years will be better because we need to start reinforcing this value over time. And as you might recall from the membership update, the idea is to have different triggers at life stage that we can now hit. So when they -- people have kids and they go off to college, they might be driving less. They don't trend there. So the short answer is that it hasn't changed all that much, either direction as expected. When we have COVID, it's just very hard to have an apples-to-oranges kind of comparison because we have no clue how much of an effect of COVID is having on early retention because it's a little bit tougher to get habitualized to the product. But what we can very clearly say is it's performing very well, in line with expectations. And again, that litmus test is going to be in the further out periods where we would often have life stage-based churn.

[Lafitani Sotiriou, Senior Analyst]

Okay. And just finally, on the product road map, can you just add a little bit more specific examples as to what is currently being worked on and rough time line? And where is wearables going on that as well?

[Chris Hulls, Co]

I'll go backwards order. So wearables is much more in the future out years. And one of the things we have done in response to COVID was temper a little bit the growth in R&D and hone in on the core because we have felt that given how crazy the world is, we should have a bias to a little more stability and cash management, which we've obviously done extremely well with. So there's nothing short-term there. I will say, though, very quickly on that topic that Apple's new watch is exciting in the sense that we certainly hope it becomes mainstream and they open up those APIs because it's so much better for us if there's an iPhone movement around wearables where we just don't have to really bother with a partnership or development of our own device. And so that's something we're watching very closely. If I get into specific things you will see as a user, the biggest one is to -- this is a little more indirect, but just to emphasize the point, we did shift our road map pretty aggressively in response to the big wave of what was initially negative sentiment from teens. So we've done a lot of new teen features, including our Bubbles feature, which is now fully live in production on the second iteration of that. We're also working on the free version of our identity theft products, which will bring the dark web monitoring experience to everyone and also do a much better job of introducing what this means, how it works and giving people value within the app. And then the other things we're working on are a little bit longer term, but really revamping the communication elements of the app. Focusing on free users is another. And then a lot on the product marketing side, which might not sound like product or road map work, but we see it that way, like how do we bring the features to life in the app because right now, a lot of the membership features you have to kind of explore to interact with them and discover the value, and we're trying to bring them front and center. And we're also -- a pretty large initiative we're having is our direct-to-premium website, which is exciting because it's opening up a new channel for us, that for the first time in the company's history gets us off the App Store for that first download and brings us more to new channels where we can bring people in as paying customers directly, which is also much, much easier to measure from an ROI spend basis.So most of this will be coming in Q1, is more incremental over Q4, although we're getting some of the identity stuff out and some smaller individual features and then very big changes coming over 2021 and beyond, obviously.

[Melissa Goodell, Executive Assistant]

Thanks, Laf. Next up, we have Matthew Chen. Matthew, please repeat your name and which company you're calling from.

[Matthew Chen, Equities Research Analyst]

It's Matthew Chen here from Foster Stockbroking. I just wanted to ask about how you are thinking about acquisitions spend, customer acquisition spend going forward? Is it largely going to be in response to sort of the improving environment, namely around COVID? How are you thinking about that?

[Chris Hulls, Co]

Sure. I'd answer it in 2 ways. One is just the directly measurable ROI. The second is more the company's overall posture in the face of what is extremely unusual times. So from a macro element, unrelated to anything we measure, we feel prudence is warranted. And I'm glad we took that approach because I think everyone has been a little bit surprised that here we are. When you thought this thing might be going away, we're having all-time peaks and restriction getting worse, not better. So we certainly hope this passes quickly, and we're equally surprised by how quickly it goes away. But we think it's prudent to remain disciplined until we just have a clear line of sight to that being gone. And given this is a little more discretionary, we're just watching it in that sense.The second, which is also COVID-related, but much more algebra is, there have been a couple of shifts of just the scale where many digital apps and services are benefiting from COVID because we are at home and we're using our devices more and that's actually bid up the cost of some of the channels we operate in. And we've obviously held up quite well. But we have more elements of like more the brick-and-mortar side, where we need people out and about and their behavior in the real world impacts our funnel.So our view is that just the economics will become more favorable as things return to normal because we expect that the metrics and the performance of those channels will eventually come back to what they were before COVID. We will be spending more though in new areas, which are a little bit more exploratory, some of it on the influencer side. There's the stuff we've done in TikTok. There's the new website to do TV. So those ones, we don't have a definitive ROI in the same way we were able to pretty directly measure things on mobile. So it's going to be far, far, far lower spend than we've had if you kind of go period-to-period year-over-year, but will be increasing because we do want to be in a position where as we reemerge, we were not just reverting back to old channels, which we certainly hope will recover, but there's a lot of unknown. And we can have 3 or 4 new channels in the works that can very much well position us for very accelerated growth whenever we have our routines back.

[Matthew Chen, Equities Research Analyst]

Great. And are you able to talk about the kind of delta from that -- well, I guess, the return of the cost? Can you sort of talk to any of those sort of measurable quantities in the difference that you've seen so far?

[Chris Hulls, Co]

It's very different by channel and different by region and different by platform. So the short answer is it's very tough to give specifics, and there are so many moving variables that I'm reticent to say something that wouldn't be completely accurate. But in general, our funnel has been negatively impacted because so much of what encourages people to download and use the app is being away from their families and having these just general routines that are unique coordination, and there have been competitors thinking about gaming and other apps that are very much benefited from COVID. So this is just a simple supply and demand there that has not worked in our favor for the short term. But the silver lining, it has shown just how well organic has held up, we're literally growing with that extremely little spend at all.

[Matthew Chen, Equities Research Analyst]

That's right.

[Russell Burke, Chief Financial Officer]

And I guess, Matthew, we feel like we're in a sort of great position to be nimble sort of going forward with both the sort of traditional paid acquisition and the new channels that we're looking at, so that when we see the opportunity, we'll be very opportunistic in jumping on that to help us accelerate growth.

[Matthew Chen, Equities Research Analyst]

Great. And do you have a sense of the timing of that sort of more exploratory acquisition channels like the website that you spoke of and influencers? Or is that something that's ongoing?

[Chris Hulls, Co]

Some of the stuff like influencers is already happening now, and that was some of our big TikTok Hashtag challenge, which generated -- I think it's up to like 4 billion views. That did involve some payments to TikTok and influencers. And that was less to drive downloads, more to drive brand and teen sentiment. Things like the TV testing, website, most of that would be Q1 with some possible early signals in late Q4, but I want to more set expectations for Q1 on that.

[Melissa Goodell, Executive Assistant]

As there are no more questions, I will hand the call 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.