Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2019-Q4

[Operator]

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 call today. Before I get into the details of our December 2019 quarterly business update and Appendix 4C, please note that our full year results will be announced in the market on the 27th of February. So today, I'll be restricting my remarks to the numbers that are contained in the 4C. Life360 finished the year with the largest monthly active user growth in the company's history, adding 8.7 million MAU in the last 12 months. This performance validates our vision of becoming a leading service to protect and connect modern families. Our global MAU base reached 27.2 million, with a particularly strong performance in the U.S., which surpassed 16.3 million. U.S. MAU increased 1.9 million in the December quarter and 6.3 million for the year, representing a growth rate of 63%. If you look at it on an absolute basis, each quarter in the last year set a new record for U.S. MAU additions. On Christmas Day, a bellwether for the business, we had our highest ever single day of new U.S. registered user growth, a 38% uplift from a year ago. We see this as a sign that we are nowhere near a saturation point as the trends that have driven our business appear to be accelerating. International MAU reached 10.9 million, an increase of 600,000 in the December quarter and 2.4 million in the 2019 year. The 28% year-on-year growth was supported by a shift to higher-quality users in more valuable international markets. For example, in our listed home of Australia, the MAU base reached more than 570,000, with additions in the December quarter being the highest in the company's history. This reflected an increase of almost 90% for the year and was driven primarily by word-of-mouth growth with minimal marketing. Revenue of $18.2 million in the December quarter increased 58% year-on-year. Annualized monthly revenue in December 2019 was $75.4 million, excluding a onetime revenue contribution. This was slightly ahead of prospectus forecasts and reflected a year-on-year growth rate of 67%. Our overall book's 2019 revenue of $59 million increased 84% year-on-year, exceeding prospectus forecasts of $58.6 million. During 2019, Direct Revenue grew strongly, supported by the 43% growth in Paying Circles to around $827,000 and 10% growth in average revenue per Paying Circle. While Paying Circles were lower than prospectus forecasts, this was not a miss because we intentionally shifted users to Driver Protect, which not only supports much higher pricing, but also shows better retention. By the end of 2019, Driver Protect accounted for more than 70% of total subscriptions compared with prospectus model assumptions of less than 60%. In addition, there was a rebalancing of subscription packages from annual to monthly. ARPPC increased 10% compared with prospectus expectations for a decline of around 2%. We mentioned to the market early in the year that we are confident that this is an area we would likely outperform, and we are again confident that we will seek continued ARPPC growth as we roll out our broader membership platform over the course of 2020. Indirect revenue, which includes data revenue, our Allstate lead generation partnerships and legacy ADT partnership, also delivered very strong growth in 2019. This was despite the faster than expected wind down of legacy revenues from ADT, which resulted in a $2 million gap to our prospectus revenue forecast. We were pleased to be able to fill this shortfall with revenue, we believe, could be longer-term and more durable. The Allstate partnership contributed revenue of $1.5 million in the December quarter, and more than $4 million since its launch in May 2019. We are still in the early days of developing the user experience, which we expect to progress in 2020. Paid user acquisition spend was $3.9 million in the December quarter and $19.4 million in the 2019 year was below our prospectus forecast, which is exciting because it clearly demonstrates that our organic growth, which cost us nothing, continues to build momentum. We do, however, plan to increase spend again in 2020 as we open up new channels to show positive ROI based on our cash recovery model and LTV. I'll now turn it over to Wendell, who will share a few more details on our cash flow.

[Wendell Laidley;Chief Financial Officer]

Thank you, Chris. Please note that all the numbers I will be discussing are denominated in U.S. dollar or in accordance with U.S. GAAP accounting standards and are unaudited. Life360 ended the December quarter with cash and cash equivalents of $64.1 million and no debt. This provides the company with a strong capital position to continue to invest for sustained growth. For the quarter, cash used in operating activities was $6.7 million, which represented a sequential improvement from the $7.1 million in the September quarter, $7.2 million in the June quarter and the $9.5 million we reported for the March quarter. Looking forward to 2020, we are committed to continue delivering sequential quarterly reduction in operating cash flow losses. Total revenue of $18.2 million reflected 58% year-on-year growth and a 12% sequential increase compared with the September quarter. Receipts from customers of $21.3 million increased from the $13.8 million we reported in the September quarter. The $3.2 million difference between Q4 revenue and receipts from customers, reflected a $2.3 million early payment from Apple, along with approximately $400,000 in changes in deferred revenue, and $500,000 in improved cash collections. Payments in the fourth quarter reflected another period of continued investment in the business, particularly in staff costs and advertising and marketing. Staff costs of $7.1 million in the December quarter increased 2.5% compared with the September quarter. We continue to expand the Life360 team in the fourth quarter, albeit at a slower rate than prior quarters and with a bias towards engineering end product and completed 2019 with 164 employees. Administration and corporate payments of $1.8 million for the December quarter were in line with the September quarter, reflecting our disciplined approach to costs. Research and development payments of $2.6 million increased from $1.9 million for the September quarter and were in line with payments in the first and second quarters. Advertising and marketing payments, which includes paid user acquisition, were $8 million in the December quarter, down slightly from $8.2 million in the September quarter. Paid user acquisition spend of $3.9 million was lower than the $5.2 million spent in the September quarter, as Chris noted, reflecting the achievement of significant efficiencies and strong organic growth. We anticipate a higher level of spend in the first quarter of 2020 and remain committed to paid user acquisition investment to drive the growth of the business. Technology payments of $8.4 million in Q4 increased significantly versus $1.9 million in each of the 3 prior quarters. This difference reflected $5.6 million in prepayment related to a multiyear agreement with a cloud provider, and the remainder reflected increases in overall server expenses. In exchange for a multiyear commitment and an increased dollar spend, we have been successful in realizing unit cost improvements. As a company, we are gradually embracing a managed services approach to how we consume technology infrastructure, which will result in more spend flowing through our primary cloud provider and its marketplace. Cash used in investing activities of approximately $200,000, reflected minor purchases of capital assets. Cash from financing activities of approximately $300,000 reflected proceeds from the exercise of share options. Life360 ended the year with operating cash outflows of $30.5 million, which was $6 million higher than the prospectus forecast. This difference reflected the year-end prepayments of $6 million I mentioned earlier, which were not included in the prospectus model. On our previous quarterly calls, I talked about our expectation that deferred revenue would be lower than prospectus model assumptions. This reflects the shift to monthly subscription as we move subscribers to the higher-priced Driver Protect product, along with developer guideline changes related to in-app billing. Deferred revenue was $3.9 million lower than prospectus model assumptions, however, was offset by $3 million of noncash expenses and other items. We are pleased with our ability to have steadily reduced our operating cash outflows for each quarter of 2019. And looking ahead, Life360 remains focused on continuing to deliver sequential reduction in quarterly operating cash outflows in 2020.I will now turn the call back to Chris for closing remarks.

[Chris Hulls, Co]

2019 has been a year of considerable progress for Life360. From the recognition of our brand to the size of our user base, we are bigger than we've ever been before. 2020 is shaping up to be an even more exciting year, as it will be the first time we live up to the 360 in Life360 with the unveiling membership service, which has been our primary focus since the IPO. Soon, our premium products will do far more than protect you in the car, and will offer all-encompassing support ranging from protecting your physical safety, assisting you when you travel, protecting your digital identity, providing assistance in natural disasters and a whole lot more. I look forward to sharing the details of this upcoming launch when we release the full year results on February 27. That concludes our prepared remarks, and I'll now turn the call over to Melissa, who will manage the question-and-answer portion of our call today.

[Melissa Goodell;Executive Assistant]

[Operator Instructions] First up, we have Quinn.

[Quinn McComas Pierson, Co]

Great. Congratulations on a strong finish to the year. Maybe just firstly, the U.S. MAU growth, so a record quarter. Really strong performance there. Could you just maybe just talk us through what's working there? Is it just the viral effect of kind of reaching critical mass in terms of reach and name brand recognition? Or is it brand building? I guess any kind of granularity you can give us there or color would be helpful, please.

[Chris Hulls, Co]

I think in a very good way, there's no single factor for this and really is just the aggregate flywheel spinning up. I would say, from a very macro trend standpoint, we anticipated more and more people, essentially, aging their families into our sweet spot because a younger family is just more comfortable with location, in general, and there has just been a big tipping point, location going mainstream. And as you've seen from the press, it's not, will you share location, it's everybody is sharing location, and we're always listed as the market leader. We've also seen Driver Protect now have a very significant reach. So we've been able to migrate beyond just being a location sharing app into this driver safety app. You have 2020 continue that as our -- being known as this all-encompassing membership. And obviously, as we get bigger -- if we survey our users, they talk about us more. So it's the flywheel in aggregate. And we did mention that Christmas was a record day for us. Christmas is usually a record day every year. And we like that. This is the proxy of these trends because we can see this spike because there -- a large number of parents buy their kid a phone on Christmas with the explicit intent of buying Life360. So the fact that, that was a new all-time high, it makes us feel like these trends are accelerating, not decelerating. And then the U.S., unlike other parts of the world, we have the full feature set. I think it does show that the full feature set led us to increase growth as we broaden out.

[Quinn McComas Pierson, Co]

That's helpful. Just on the Christmas period in specifics. So it's an important gifting time, new phones are a common gift. Do you think that some of that benefit also trickles into January once the phones are actually set up properly, once kids go back to school? Or do you think that gifting period is kind of fully captured in that December period?

[Chris Hulls, Co]

Pretty much fully calculated. There's a bit of a trickle over. But Christmas is really -- it's a few days where we get this really a big spike. So it's not that Christmas is this, like, massive absolute number of users. It's just this momentary spike in demand that we think does act as a bit of a bellwether for the future. So the answer is no, it won't necessarily trickle in too much into January.

[Quinn McComas Pierson, Co]

That's helpful. And then just lastly for me, what was the headline EBITDA that compares to the $30.2 million EBITDA loss as per the prospectus?

[Chris Hulls, Co]

I think we had to hold off on that one until the full year earnings.

[Wendell Laidley;Chief Financial Officer]

When we report the 4G in about 3 weeks, Quinn, we will have more of that detail for you.

[Quinn McComas Pierson, Co]

Okay. I mean, presumably, it would be kind of tracking thereabouts. Obviously, the cash flow was a bit weaker, given some of those kind of cash timing comments you made. But I mean, just -- could you just maybe give us a high-level feel of, it's kind of in that ballpark. And the way to be thinking about is the 2 big expense line items where CAC would be below and R&D would be above the prospectus forecast? If you can just maybe make a few maybe higher level comments?

[Wendell Laidley;Chief Financial Officer]

I guess, what I'd say at a high level is that we're pleased with the progress that we've been able to deliver on a sequential basis for the year. When we release the more detailed results next month, I think people will be pleasantly surprised at the extent to which in the second half of the year, we were able to make considerable progress relative to prospectus assumptions for a number of different areas. So we'll go into that in more detail. But I think we were transparent for the first half of the year in terms of where we were tracking behind, and we're all feeling very good about our confidence in our ability to deliver, in some cases, numbers that were an improvement relative to the prospectus forecast.

[Melissa Goodell;Executive Assistant]

Okay. Next up, we have Brendon.

[Brendon Kelly, Analyst]

It's Brendon Kelly from Moelis here. Firstly, congratulations on meeting the prospectus forecasts. I just had a couple of questions around some of the drivers of the result. Firstly, just on the conversion of the Paying Circles, just with the record level of growth you're getting in the user growth, it's tracking ahead of the Paying Circles growth. Just wondering how you're expecting that conversion rates on some of those new MAUs you've added to track in the first half of 2020?

[Chris Hulls, Co]

Sure. So I'd first make sure to highlight that we did shift to the higher price point product. So although that's not tracking, you do see the ARPPC has tracked ahead, which has resulted in aggregate run rates also trending, I'd say, more in line with active user growth. So I think that's a little bit of an optics thing. When you look to what we're launching this year, I'm supremely confident that we will continue to increase how we monetize our users because we're going to be giving a lot more value and offering higher price point services. So I would say that if you don't look at Paying Circles growth relative to MAU, but ARPU and ARPPC, in particular in the U.S., where it's more normalized, that will show acceleration, where the revenue will grow faster than MAU.

[Brendon Kelly, Analyst]

That makes sense. And then on the Allstate lead generation trial. It looks like the revenue contribution was pretty stable on a quarter-on-quarter basis in the second half. Just wondering what the drivers were for that? Because I just would have expected that would be ramping up potentially within this past half.

[Chris Hulls, Co]

So we're still in the phase where there's not true market pricing, where Allstate is essentially building a market. So it's artificially constrained to this 500,000 a month number. So it's probably going to be like that for at least the first half of this year, until we get enough volume outside of Allstate on the system.

[Melissa Goodell;Executive Assistant]

Up next, we have Laf.

[Chris Hulls, Co]

Do we have you, Lafi?[Technical Difficulty]

[Melissa Goodell;Executive Assistant]

[indiscernible]

[Chris Hulls, Co]

Bear with us, Laf. We just have a technical difficulty.

[Lafitani Sotiriou, Senior Analyst]

Can you hear me now?

[Chris Hulls, Co]

We hear you now.

[Melissa Goodell;Executive Assistant]

We hear you now.

[Lafitani Sotiriou, Senior Analyst]

I've got a few questions, if I may. First, I'd like to just clarify some of the language in the release, just to make sure I understand what you're meaning. So when you're talking about some of the growth, I think some of the comments are that we'll roll out a broader membership platform over the course of 2020. And then later on, I think you note that as Life360 expands more aggressively into new channels, so it's broader membership platform, new channels. And then at the very end, there's some comments around new areas such as protecting your physical safety, assisting you when you travel, protecting your digital identity and so forth. Now just would like some comments as to, are they all the same thing? Are the new channels and the broader membership platform in those areas sort of the overall extension of the platform? And the different membership levels that you flagged late last year? Or is there something new in some of this? And also, could you give us an update as to how you anticipate the timing of the rollout of some of these new features?

[Chris Hulls, Co]

Sure. So first off, when we reference channels, I think that was in the context of look exactly where the script you're looking, best regards to paid user acquisition as bringing in users through new channels, because we -- as we build out that capability, get up LTV, different channels become profitable. So new way -- that's what's brings -- new ways of bringing users into the platform. The membership service and rollout, we've given people small teasers around specific pieces of that on previous calls and road shows. I've referenced some of the broader set of features that we're going to give the market a very, very deep look at in a very granular way at our call next month. So I don't want to steal our thunder for that one. I'm extremely excited to show everyone what it is and what's coming up, but the offering will be extremely comprehensive. And the timing on that, it's going to be a year-long project, so it's extremely comprehensive. But we will have first things hitting users in early Q2, a pretty full feature set, including identity theft protection and our first SOS feature by largely ramping in Q3, but definitely in beta end of Q2, and then additional refinements over the course of the year. So without getting into too much detail, which I will be covering next month, you'll see a slow incremental set of releases over time as sort of the initial big bang coming in Q2. And then the leading indicator that we'd like investors to start paying attention to is ARPPC on a cohort basis, which we will very likely start reporting, because as a subscription business, it takes time to move the average, whereas the new sign ups, I think, will give us a really good indicator in terms of how we're performing relatively shortly after launch.

[Lafitani Sotiriou, Senior Analyst]

That makes sense. And just one last final question. So when do I take your comments around the payment for technology expenses being $8.4 million in this quarter. And usually, it's around $2-odd million. Can I just clarify, were there any one-off revenue gains during this quarter? And how should we think about the following quarters because there's a big $6 million-odd difference in that spend? Do you anticipate reallocating most of that $6 million elsewhere during the quarter? Or do you get what I'm trying to arrive at, why there shouldn't be a meaningful improvement in the next quarter?

[Wendell Laidley;Chief Financial Officer]

Yes. So first off, no material onetime revenue event. You'll see a consistency across our 3 primary revenue streams. With respect to the spend around technology, we've talked about how we become a bigger business and how we spend more in exchange for either vendor commitments, larger vendor commitments or periods of duration that we were seeking lower unit costs, which will flow through the P&L. The negotiation that we had with a major cloud provider was a multi-month exercise. We're excited about how that will play out with respect to greater cost efficiency over the next 3 years. It has been a major area of spend for us, but we're leaning in. And I think that the other thing is, we'll certainly see a benefit from a cash flow standpoint of having made a prepayment in December. So as I referenced in response to one of the earlier answers, our ability to show improvement sequentially across all the profit measures is something we're very proud of. We think that the efficiencies that we'll get by virtue of this multiyear commitment will pay dividends over the course of the next 3 years.

[Lafitani Sotiriou, Senior Analyst]

And is this a one-off? Or can we expect a similar level of payment this coming December 2020?

[Wendell Laidley;Chief Financial Officer]

This is -- I think this locks us into a much meaningfully higher spend number. Not inconsistent with what we've been budgeting internally. But in exchange for prepayment, there are -- these are complex negotiations. And we're excited about the concessions that we got in exchange. But to answer your question, we would not expect a prepayment anywhere near this magnitude over the course of the next year.

[Melissa Goodell;Executive Assistant]

Up next, we have Stella.

[Unknown Attendee]

Can you guys hear me?

[Chris Hulls, Co]

Yes.

[Melissa Goodell;Executive Assistant]

Yes.

[Unknown Attendee]

[ Stella Wong ] here. I'm a private investor. I got just 2 questions, please. Firstly, the AMR for this quarter is a little bit lower than September. Just wondering whether that's seasonal? Or whether it's due to some one-off exclusion?

[Chris Hulls, Co]

I would need to fully reference the numbers, but my guess is that you might be looking at one that included our Allstate payments without an adjustment. So we do adjust that over 3 months. And I'm guessing -- so I'm guessing you're referencing a normalized versus non normalized number, but [indiscernible] as expected.

[Unknown Attendee]

I see. So I look at the September reporting of 79.7%. That's before adjusting for Allstate? Whereas this quarter, the 75.4% is after the adjustment?

[Wendell Laidley;Chief Financial Officer]

Let me just clarify. If from a revenue standpoint, we do get paid by Allstate in the third month of the quarter. So to be intellectually honest, with the spirit of how we represent AMR, what we've done is effectively normalize that third month revenue event to be equal across the month. So I think what you'll -- there's no question, if you make that adjustment for both the September quarter and the December quarter, you'll see that AMR increased meaningfully.

[Unknown Attendee]

Great. That clarifies that for me. My second and last question is about the shift from annual subscription to monthly. Now that was because of change of developer guidance earlier on this last year. Is there any chance they changed that, and there would be a shift from -- or back from monthly to annually?

[Chris Hulls, Co]

They could. But we're continuing to focus on what's best for the user. And our new membership here is in the pricing anyway, so we're assuming status quo. But if Apple loosens their guidelines, sure, we would take advantage of that. Because, as a reminder, they made it tougher to get people to sign up for annual subscriptions because there were less scrupulous companies taking advantage of loopholes in the system, which I won't get into in detail. But the change was, we think, long term, good, because it's trust up around subscriptions, although with a short term headwind, which we've obviously been able to navigate.

[Unknown Attendee]

Great. Just to sort of clarify on that. Have you guys managed to quantify the effect on your average -- on average user revenue just from that annually to monthly shift?

[Chris Hulls, Co]

We have not because it coincided with our redesign of our app. So we, of course, do have numbers internally, but there are a number of conflating factors. So I can't give an explicit number.

[Melissa Goodell;Executive Assistant]

Okay. As there are no more questions, I'll hand over the call back to Chris for concluding remarks.

[Chris Hulls, Co]

Thanks again, everyone, for joining. I look forward to meeting with many of you in person in Australia during our first year results road show. Have a great day.