Life360 Inc

NASDAQ:LIF

Earnings Call Transcript 2022-Q4

[Jolanta Masojada, executive]

[Audio Gap] Masojada and I'm 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; and CFO, Russell Burke, after which Russell will provide detail on the financials. 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. I spoke with many of you earlier this week in relation to our exposure to Silicon Valley Bank. As we subsequently updated the market, we have regained access to our funds in SVB accounts, and we are transacting normally. 2022 has been a tremendous year of progress for Life360.

Before I get into our financial performance, I want to talk about the impact we are having on our users. The testimonial here is one of many we receive each week where actual lives were saved, and this is happening at huge scale. During the year, we sent out more than 2 million help alerts and protected over 200 billion miles of driving. This is significantly larger than Uber and one of the largest driving data sets in the world.

These user milestones have cemented our position as the market-leading family safety membership service. We delivered strong core subscription momentum with our largest ever annual growth in global MAU to around $49 million. Paying Circles increased 23% year-on-year to $1.5 million, while raising U.S. pricing significantly. As previously foreshadowed, Q4 Paying Circles were in line with Q3 while achieving an almost 50% price increase for existing monthly iOS subscribers late in the year. The churn impact from the November iOS price increase performed better than expected, showcasing our strong value proposition as well as the loyalty and engagement of our user base. We were back to subscriber growth in the U.S. in January and February, and international subscriber trends remain very strong.

CY '22-U.S. ARPPC increased 22% year-on-year. This accelerated to 42% year-on-year growth in January '23, reflecting the full month impact of price increases. We see further upside with the rollout of U.S. price increases for our existing monthly Android subscribers expected to take effect during the second quarter of CY '23. We executed the Tile integration strategy combining our 3 teams into a single company. We delivered major product enhancements, significantly increasing the size of the Tile finding network by adding more than 30 million Life360 phones and adding Tile's to the Life360 map.

And we established the platform for the bundled Tile hardware membership, which is launched and is scaling up over the course of March as we optimize the user experience. The early signs are positive, and we are excited about the opportunity to improve paid user conversion and retention and deploy upsell strategies over the longer term following encouraging results from our Gift with Membership trials in CY '22.

And finally, we established a pathway to profitability, finishing the year with a 61% year-on-year uplift in December and AMR. This has accelerated to 64% in January with a full month benefit of price increases. Our unified platform is in place to support improved subscriber conversion, retention metrics and pricing power. Our integrated leaner cost base, together with the reducing commissions are in place to drive efficiencies into CY '23. All of this sets up the business to deliver positive adjusted EBITDA and operating cash flow from Q2 CY '23 onwards.

This slide provides a high-level view of the financial performance for the past year. Revenue of $228 million, adjusted EBITDA loss of $40 million and cash and cash equivalents of $90 million were in line with our guidance. Subscription revenue performed strongly, up 77% supported, by a 54% uplift in Life360 core like-for-like revenue and the inclusion of tile and Jiobit subscriptions. Hardware revenue was constrained by broad consumer electronics softness. Other revenue increased 8%. Annualized monthly revenue of $224 million increased 61%, ahead of guidance and has reached almost $230 million in January, reflecting the full monthly benefit of subscriber price increases.

The adjusted EBITDA loss of $40 million for the year included a profit of $1.6 million in Q4 as a result of strong subscription revenue growth, lower operating costs and the seasonal holiday uplift in Tile hardware sales. The strong Q4 momentum in subscription revenue is clearly illustrated in this slide with a step-up in quarterly recurring revenue versus Q3. The Q4 increase in AMR is even more impressive as it reflects the uplift in the month of December from price increases across our existing U.S. iOS monthly subscriber base. And as mentioned earlier, AMR reached almost $230 million in January.

Turning now to our key metrics. Monthly active users increased 37% year-on-year to $49 million, and I'm excited to share that we passed the $50 million mark just this week. The 13 million net additions are our largest ever absolute annual growth. U.S. MAU increased 31% year-over-year, with Q4 delivering solid gains versus Q3. International MAU growth was very strong, increasing 49% year-over-year. The stable Q4 versus Q3 performance reflected normalization of the significant surges we experienced in some developing countries in Q3.

The strength of our returning monthly active users by cohort reflects what we believe to be absolute top-tier attention that is better than 99.99% of other mobile apps. We have users who have signed up nearly a decade ago just as engaged with the product as they were when they initially registered.

Russell will now run through the details of our 3 revenue lines.

[Russell Burke, executive]

Thanks, Chris. Consolidated subscription revenue increased 77% year-on-year, including the contribution of Tile and Jiobit subscriptions. Core Life360 subscription revenue growth of 54% was in line with our guidance. Subscription revenue now makes up 2/3 of group revenue. Key drivers of subscription revenue were the 23% uplift in Paying Circles, a 19% increase in ARPPC. International revenue was currently a small contributor to our subscription revenue. However, it did increase 85% year-on-year, reflecting a 48% uplift in international Paying Circles together with the inclusion of the Tile and Jiobit subscriptions. Chris will outline the momentum of Paying Circle growth in key countries later in the presentation.

During CY '22, Global Paying Circles increased 23% year-on-year, with U.S. Paying Circles growth of 17% achieved even while implementing significant price increases during Q4. As we guided to in November, Q4 subscribers were stable at Q3 levels, reflecting the onetime impact on churn as we implemented the price increases across the existing iOS user base. U.S. subscriber growth has resumed in January and February and international trends remain very strong. Price increases were implemented across all of our U.S. iOS monthly membership tiers, including our legacy product lines. Price increases are already in place for new monthly Android subscribers and will extend to existing monthly Android subscribers during Q2.

The impact of the size and timing of these price increases is reflected in the U.S. ARPPC chart with 23% year-on-year growth to $120 in Q4 and a 40% uplift if you take it through to January at $138.

Hardware revenue delivered a seasonal uplift in Q4; however, continued to be impacted by headwinds in the U.S. consumer electronics market. Retailers adopted a very cautious approach, resulting in much lower inventory in retail channels. We also saw aggressive competition from Apple, which is nonetheless driving the category forward. While hardware sales were below our previous expectations, we have taken a prudent approach to managing hardware inventory, limiting the impact on our adjusted EBITDA and operating cash flow.

For CY '23, we expect hardware revenue growth in the range of 0% to 5%. This is based on the difficulty of forecasting hardware sales in the current challenging environment as well as a more constrained approach to marketing investment and promotional activities. While we're excited about the potential for long-term category growth, Tile's primary strategic value remains the opportunity to drive subscription revenue.

Other revenue increased 8% year-on-year. In January '22, we transitioned to a new partnership with Placer.ai, with a revenue agreement that was set at a level close to the CY '21 ending run rate. The agreement was part of an intentional decision to trade off the growth opportunity for predictability and reduced regulatory risk.

Lead generation remains an area of significant long-term growth potential. However, is a limited strategic focus in the short term. Looking forward to CY '23, we expect revenue of around $26 million based on the current agreements.

And with that, I'll hand back to Chris, who will provide an update on our strategy.

[Chris Hulls, executive]

Our key strategic initiatives are being implemented to deliver on our mission to simplify safety for families. Safety and security are a multibillion-dollar category, and our mobile and family first approach are key differentiators, which allow us to disrupt this market. There are 4 pillars to our CY '23 strategy, each of which build on the progress we achieved in CY '22. I'll cover each of these initiatives over the following slides.

We continue to believe we have significant opportunities to improve our core user experience and further differentiate ourselves from our competitors who have much more limited functionality. New developments include bringing the Life360 map to life with new features and a more dynamic interface, ongoing improvements in our communication capability and significantly expanded and improved driver safety functionality. We have delivered impressive subscription revenue growth in CY '22 with core Life360 growth of 54%. For CY '23, we see the opportunity to further leverage our proven pricing power and ongoing membership enhancements to deliver another year of strong momentum with guidance of 50% year-over-year growth.

Bundling Tile membership has launched and is scaling up over the course of March as we optimize the user experience. The early signs are positive, and we are excited about the opportunities to improve paid user conversion and retention over the longer term. And as mentioned earlier, we expect to roll out price increases to existing monthly U.S. Android subscribers during Q2.

For Tile, we see opportunities to leverage category creation with product use case orientation and differentiation. Tile's recently launched anti-theft mode is designed to protect valuables from a theft by increasing the chance of recovery. Our solution empowers users with choice to make their Tile devices invisible to scan and secure so that thief will not be able to misuse our stocking prevention features to locate and disable Tile devices after stealing valuables. This provides a key point of differentiation with AirTags.

We are also excited about our international opportunity based on our recent impressive performance in major non-U.S. regions. CY '22 core Life360 international subscription revenue increased 47% and Paying Circles in key markets of Australia, Canada and the U.K. have increased 143% since the beginning of 2020. We have established a dedicated international management team based in the U.K. Our international strategy has 2 key elements. First, we will improve the international user experience with the global core features. Second, we will focus on Tier 1 markets where we will undertake paid spend, research and launch features and other enhancements ahead of triple tier membership launch. Our first launch will take place in the U.K. in the second half of the year, followed by major European markets. The European region represents a major growth opportunity with the market size comparable to the U.S. and significant potential in '24 and beyond.

I've spoken previously about our triple tier membership launch in Canada, which established the successful playbook we will be rolling out to other international territories. As you can see in this slide, the launch has resulted in some very positive metrics across the business. I'll make particular mention of the 72% year-on-year revenue growth, which significantly outperformed the 47% uplift delivered by the core Life360 international business. Although Canada did not move our overall metrics much due to its small population size, these results bode very well for our initiatives in larger regions.

The fourth pillar of our strategy is to maintain financial discipline. We are approaching CY '23 with an appropriate balance of fiscal responsibility and prudent investment to position the business for long-term success and make the most of the many exciting growth options available to us. Our business is at a pivot point to leverage scale in the cost base with operating costs as a percentage of revenue declining from 92% in CY '21 to 85% in CY '22. We see the opportunity for further improvements in the year ahead. As we announced in January, we have streamlined our workforce to drive a sharpened focus on our key strategic product initiatives with annualized savings of at least $15 million.

We also see opportunities for additional operating cost savings, including for platform commissions to continue reducing over time and greater marketing efficiency. In CY '22, we implemented a multiyear strategy to reduce our cloud infrastructure costs with significant efficiency improvements achieved during the year. We anticipate further efficiencies in CY '23 through operational optimization and a long-term agreement with AWS, which significantly lowers our rates. As a result of all these factors, our cost base is at a pivot point to leverage scale and deliver our first full year of positive adjusted EBITDA and operating cash flow in CY '23.

Finally, I'll make a mention of the ESG initiatives that we have underway to progress our sustainability journey. The focus on family, safety and security that is at the core of Life360 is undoubtedly the greatest value we can provide to the community. We have initiatives underway across all ESG pillars. I'll make a special mention of the progress we made with our people policies as we brought together the Life360 Tile and Jiobit teams during CY '22. We undertook a refresh of our corporate values and established a new approach to create a culture belonging. We launched the formal learning and development strategy aligned with our value proposition and extended the employee benefits to our people.

With that, I'll turn the call over to Russell, who will run through the financials.

[Russell Burke, executive]

Thanks, again, Chris. Please note that all of the numbers that I will be discussing are denominated in U.S. dollars, are in accordance with U.S. GAAP accounting standards and are unaudited. The filing of the 10-K, along with the audited financial statements is expected to be finalized next week, and we do not expect any changes to the financial statements. The 10-K is due to be filed with the SEC by the 31st of March, and the ASX has granted us a waiver, which was released in the market earlier today, to launch the Form 10-K within 90 days after the end of the accounting period or at the same time as it's lodged with the SEC.

I'll begin with an update of our longer-term pathway to profitability, which we initially outlined in our half year results call in August. We expect CY '23 to benefit from a full year of price increases, the bundled Tile membership offering and the cost efficiencies that we implemented with the full integration of the Life360 Tile and Jiobit teams. In January, we announced a workforce restructure which accelerated our plan for positive operating cash flow and adjusted EBITDA from Q3 to Q2. This means that Q2, Q3 and Q4 will be cash flow positive on the operating side with the weighting towards the seasonal impact in Q4.

Beyond CY '23, we see a continued expansion in revenue, along with stabilization in expense growth as we benefit from the opportunity to leverage the scale in the operating model. We expect this to underpin the expansion of our adjusted EBITDA margin from CY '23 onwards and ultimately our EBITDA margins as we continue that trajectory. This would, in turn, enable us to move into positive EBITDA in 2025 with our longer-term target for EBITDA margins in the range of 25% to 30%.

Slide 26 illustrates the retention rates of our U.S. organic users and membership subscribers. Our user retention rates remain at market-leading levels even as we continue to see a significantly higher number of new registrations. Month 1 user retention increased in 2020 and 2021 due to investment undertaken in the user experience and remained at historically high levels in 2022. The high rate of month 1 retention has flowed through to longer-term retention supporting higher levels of user growth, with U.S. MAU up more than 30% year-on-year.

The U.S. membership subscription retention chart at the bottom of the slide shows our subscriber retention since the launch of our membership model in mid-2020. The slightly lower retention of the March 2022 cohort over the past 3 months reflects the impact of our price increase. However, this has been significantly offset by the ARPPC uplift, which increased by more than 40% year-on-year. As Chris mentioned earlier, churn has performed better than we expected, and we are back to subscriber growth in January and February.

This slide shows the first full month of revenue by quarterly cohort over time, beginning in Q1 of 2018. Due to the significant seasonality of our business, we focus on cohorts by quarter. During Q1 of 2022, we saw a significant uplift in revenue due to higher registrations and conversion rates exiting 2021. Q2 and Q3 of '22 saw month 1 revenues increased approximately 10% from '21. At this point, there is insufficient data to show the Q4 '22 series, which we expect to experience an accelerated uplift due to the benefits of higher pricing.

This slide shows the payback of our performance marketing beginning with the 2018 cohort. In 2022, we accelerated our marketing investment to include more channels outside of the traditional performance marketing. We have expanded our highly efficient streaming TV as well as our broader brand campaigns to include linear TV and out-of-home channels. We're continuing to achieve breakeven well within our target of 24 months.

This slide illustrates the significant uplift in our U.S. ARPPC over the past quarter as we implemented the price increases right across our monthly iOS membership base. A summary of the new price points for new, existing and legacy subscribers is included on the slide. Our legacy subscribers remained as a distinct category due to the limitations of the price increases that we were able to implement. All of our cohorts have seen a meaningful uplift in ARPPC as these increases have taken effect.

The strength of our freemium model is demonstrated on this slide, which shows revenue retention by half year period for those who signed up at the end of the previous period. With the exception of the early stages of COVID, revenue retention has remained at or above 100%. This reflects our success in upselling free users to paid and higher price points for paid subscribers. These impressive revenue retention metrics have remained strong even as our gross subscriber additions have continued to accelerate. We expect to see this improve further in the first half of 2023 as the impact of the price increases flow through.

This page summarizes key metrics for CY '22. Greater detail on our cash flow and balance sheet are contained in the appendices to the presentation, along with the reconciliation of GAAP to non-GAAP operating expenses.

I outlined the key revenue drivers earlier on the call. So I'll begin my remarks with the non-GAAP gross profit, which increased 71% year-on-year to $154.8 million. The lower gross margin of 68% reflects the impact of hardware cost of sales from Tile and Jiobit. Subscription-only margins increased to 81%, reflecting benefits from our price increases.

Non-GAAP operating expenses increased 88% to $194.9 million, reflecting the Tile and Jiobit acquisitions and the increased investment to integrate these businesses with Life360. Research and development expenses of $82.5 million increased from $43.5 million due to the acquisitions and higher headcount to support product development. User acquisition costs and TV costs of $26.5 million increased from $12.5 million, largely due to the acquisitions. Other sales and marketing expenses of $26 million, increased due to the acquisitions as well as investment in brand advertising.

Commissions increased to $31.4 million, reflecting higher subscription revenue. For CY '22 commissions were 21% of subscription revenue, down from 26% in CY '21, largely driven by a commission rate change from one of our channel providers and the impact of a portion of Tile and Jiobit subscription revenue, not subject to commission. General and administrative expenses of $28.6 million, increased from $14.1 million, reflecting the scaling of headcount to support growth in the business and the impact of the acquisitions. In addition, there were higher insurance and facilities costs and increased public company-related expenses due to the introduction of SEC reporting requirements.

Adjusted EBITDA loss of $40.1 million, increased from $13.1 million, reflecting the Tile and Jiobit acquisitions and accelerated investment to integrate the businesses. Stock-based compensation of $34.7 million increased from $11.9 million due to the higher headcount retention initiatives for Tile and Jiobit employees and the competitive environment for talent. The EBITDA loss was $85.2 million, and the net loss was $91.6 million. Other non-GAAP adjustments reflect costs associated with the acquisitions and Form 10 filings and gains on revaluation of contingent consideration.

Turning to the key measures of cash flow. Operating cash flow increased to $57.1 million, reflecting higher adjusted EBITDA losses and the investment to grow the business. Investing cash outflows of $111.6 million related to the Tile acquisition and financing cash flows reflect the net proceeds from the November '22 capital raise, offset by repayment of convertible notes and the exercise of options and stock awards net of repurchase.

We finished the 2022 year with cash, cash equivalents and restricted cash of $90.4 million. As indicated in the ASX release in relation to SVB earlier in the week, we anticipate our cash position at the end of Q1 to be in the range of $70 million to $75 million, including the restricted funds. We expect to be operating cash flow positive from Q2 onwards. There will be 2 final payments in relation to the acquisitions with the Tile escrow payment of $13.3 million during Q2 and Jiobit convertible note payment of $3.9 million in Q3. After taking these items into account, we expect the low point of our cash balance to be in the range of $55 million to $60 million, which is the same range as we previously advised after adjusting for the November capital raise, but with a steeper move up in the second half of the year.

The GAAP income statement is on this slide, and as mentioned, the reconciliation of the non-GAAP to GAAP items can be found in the appendix.

Thanks for your attention, and I'll now turn the call back to Chris, who will discuss the outlook.

[Chris Hulls, executive]

For CY '23, Life360 expects to deliver core Life360 subscription revenue, excluding Tile and Jiobit growth in excess of 50% year-over-year, hardware revenue growth of 0% to 5%, reflecting the continuing current challenges in the category, other revenue of approximately $26 million, consolidated revenue of $300 million to $310 million, positive adjusted EBITDA and operating cash flow of $5 million to $10 million with positive adjusted EBITDA and operating cash flow anticipated from Q2 '23 and for the full year CY '23 year.

That concludes our prepared remarks. And I'll now turn the call over to Melissa, who will manage the Q&A portion of our call today.

[Melissa Goodell, executive]

[Operator Instructions] First up, we have Chris Gawler. Which company are you calling from?

[Chris Gawler, analyst]

Yes, Chris Gawler from Goldman Sachs.

[Melissa Goodell, executive]

Yes.

[Chris Gawler, analyst]

Firstly, I wanted to ask about the Tile bundling benefits that you mentioned are showing positive early signs. Are you able to let us know how much of that benefit is factored into your subscription revenue growth guidance for FY '23? And are you expecting that to improve throughout the year?

[Chris Hulls, executive]

Yes. So it is factored into our projections. What we are seeing is much higher uptake of people redeeming Tile's and activating Tile's. We are mid rollout, so it is quite early. But the year forecast, obviously, we had our price increase, which gives us a big jump up. It does slow down growth in the short term because churn is up. The idea, as we dial in Tile bundling and leaning on other growth initiatives, we will see that accelerating towards the back half of the year. Some of that is due to our seasonality, but some of it is just due to what's coincidentally been, for the last few years, a very H2-loaded new initiative period. So it's going to be very similar cyclical pattern.

[Chris Gawler, analyst]

And then previously, you've put out numbers such as you expect the Tile bundling to potentially drive conversion uplift of around 30%. Is that still your thinking? Or has that changed as you've actually gone ahead to pushing that through to the customer base?

[Chris Hulls, executive]

So that 30% represents our gift with membership uptake, which is when we use Tile as a promo as it relates to marketing upsells. We expect that we have similar growth opportunities, possibly even more. But as we're putting Tile as part of the overall package, it's going to be hard to say what exactly what was Tile versus what were our new more aggressive onboarding flows. So if you go back and look at our vision, the general theme of membership is to have a holistic experience, of which Tile will be a very significant part, but not the sole part. So we do expect we have significant room to increase conversion.

As I think most people on this call know, our U.S. paying penetration is about 15% of Circles being covered. You see why high watermarks like Spotify at 50%. We think over time, we could see ourselves getting close to 25%, 30%, 35%, which would result in very significant increases in conversion. And that is, of course, in light of what was a pretty significant price increase, which will slow down that increase for a while. But over time, we think is still very achievable.

[Chris Gawler, analyst]

And just on the comments that you made around subscriber growth returning to the U.S. in January and February. Are you able to perhaps quantify that, maybe comparing to the PCP? Or is conversion back to normal on that $50 million MAU number? Or is it still a bit below where it was before the price increases?

[Chris Hulls, executive]

Well, it is below, but that's expected. When we look at the model, we look at LTV. So conversion has gone down, churn has gone up, but by no means offsets the increase. So that's all very expected. And it does factor into the year where we do have these headwinds of higher churn and lower registration, which is why we are going to take a couple of quarters to get back, dialed in with new flows that push that up to new levels. And I do hope over time and expect that over time, we will actually get all of those numbers back to record highs, but give us a few quarters to do that.

[Russell Burke, executive]

And given the financial impact of it, Chris, we've increased prices by more than 40%. So the financial benefit of doing that even with a slightly lower net adds is considerable.

[Chris Gawler, analyst]

Sure. And just one last question, guys. Just on the EBITDA margin comments that you made before. Can I just clarify, Russell, did you say that you'll be at positive statutory EBITDA from FY '25 and in the longer term, that EBITDA margin target is 25% to 30%. Did I hear that correctly?

[Russell Burke, executive]

That's the lines of sight that we have based on our current trajectory. Yes.

[Melissa Goodell, executive]

Next up, we have Lafitani. Please repeat your full name and which company you're calling from.

[Lafitani Sotiriou, analyst]

Lafitani Sotiriou from MST. Can I start off on the platform commissioning costs. Can you elaborate on where the savings will be coming through over the next few years? Specifically, if we think about -- when you talked about bundling, you mentioned because hardware was going to be included, there was an avenue for you guys to drop away the commission rates that you're paying to Apple and Google. But it sounds like in this update, you're talking more about transactions being made off platform. So can you just give us a little bit more color on the overall outlook on commission savings looking at both off-platform transactions, but also the possibility of Apple and Android commission rates falling away altogether?

[Chris Hulls, executive]

Russell, do you want to take that one?

[Russell Burke, executive]

Sure. So the situation left is that we're in the process of discussing with Apple, the move to essentially take billing off the app for hardware bundled product. That's unclear how long that will take, but that's in process as we speak. And I think as we've previously discussed, we already have the approval from Google. That said, once that happens, it will flow through to new subscribers. And we will also want to be sort of fairly careful as with the implementation of that to not ensure that we're not really detracting from conversion overall. So given all of that, we've been relatively safe in our projections for 2023, we're assuming a couple of points reduction. The biggest impact will flow through in subsequent years.

[Lafitani Sotiriou, analyst]

That adds a lot more color. So can I move on to the international expansion? It looks like this has moved up the priority. You've called out Mainland Europe in 2024. Can you be a bit more specific on, is it going to be a bunch of countries at the same time or will it one country at a time? And will it be in next calendar year?

[Chris Hulls, executive]

So as you mentioned, we are starting with the U.K. Our COO, David Rice, is actually one of the guys who has moved to London to set this up. So we are taking it very seriously. We're not putting a junior team on this. It's one of our -- one of my right-hand lieutenants who's been here at the company for 6 plus years. So it's -- we are all in on it this year. We are very explicit about starting with the U.K. We don't have as firm a timeline on Europe. A lot of it will be based on the rollout and what we are trying to do though is look for vendors and integrate with the vendors who will be able to support our expansion into Europe.

It's a more complex topic than it might sound, so I won't go into detail on the call. But suffice it to say, we are trying to paint that long picture journey and do as much infrastructure work now that will make it easier to launch additional regions over time. And given what we saw in Canada, which was almost a double in performance there versus other regions from a revenue perspective, I am very bullish that we'll see that similar result in the U.K., and we'll push hard into EU shortly thereafter.

[Lafitani Sotiriou, analyst]

And that push doesn't come at a cost of the operating leverage that you've called out?

[Chris Hulls, executive]

No, it does not. And obviously we can go faster if we spend more. But everything that we have shared strategically will be within the bounds of our current cash burn profile.

[Lafitani Sotiriou, analyst]

And just 2 more quick questions. So just with the hardware guidance for financial year '23 of 0% to 5% growth. If you look at that in the context of there being significant inventory reduction from retailers in last calendar year, it almost implies that you're going backwards again this year. So can you just unpack that a little bit for us? Or is it just the case that you're being inherently conservative with this number, given that that's what you've missed a lot in the last year?

[Chris Hulls, executive]

I think if we look at the overall rationale for the purchases, it was driving membership. So a lot of what standalone hardware companies do is they're doing upside down sales or 0 margin sales because that's the way of getting the brand out there. We don't need to do that. We have now 50 million users to market to. So when the market did turn south, just the macro environment and when we were looking at how to get operating leverage more quickly, we really did focus on channels that drive margins. So we are trying to maintain the focus on bundling first and foremost. Then we're looking at direct channels with higher margins and things that were more optics on top line, we're not as focused on.

We also think with Apple getting much more aggressive now marketing AirTags. Short term, that's a bad thing, but long term, that's a good thing. As you might recall, part of the thesis of being comfortable buying Tile with Apple getting the space is that this is the pattern when they come in, they suck the initial oxygen out of the room, but they make the category so much bigger. So unlike 9 months ago, when we were taking this stocking controversy and the category wasn't growing. It's growing very quickly now, and we are in this transition moment. So I'm very confident, by the end of the year, we are going to continue to prove how effective Tile was for bundling. And I'm also hopeful that the market will have normalized by the end of the year, and the sales we do have will be high-quality ones with good channels that set us up for growth in '24 and beyond.

[Lafitani Sotiriou, analyst]

Just one last question. Can you just remind us of the subscription mix between Android and iOS or more specifically, just trying to get an idea and making sure that the repricing of the Android book to occur next quarter?

[Russell Burke, executive]

It's in the order of 75, 25 left.

[Melissa Goodell, executive]

Up next, we have Julian. Julian, please repeat your full name and which company you're calling from.

[Julian Mulcahy, analyst]

Julian Mulcahy from Evans & Partners. Chris, just interested in understanding some of the assumptions in the guidance because it does seem a little bit conservative given that you've said growth has resumed in January and February churn, after that initial spike, is coming back to normal levels. And then you've got a 50% price increase that sort of flow through for full year, and you've got the repricing of the Android book. So are you just being ultra conservative?

[Chris Hulls, executive]

No, I don't think it is conservative. I mean, yes, we are always trying to give guidance that we can meet. But remember, when you do a price increase, there is a negative impact we have to work through and to the prior question that I answered, we have to work through what is going to be higher initial churn and lower conversion. So you do get this big onetime spike, which we got. But now we do need to find new ways of accelerating that conversion. So there are going to be these couple of quarters where we got the benefit, but we have to work through the downside. It's very much expected. And so if you build a model and flow through that just so the algebra works out. And as we get bigger as well, one thing I will note is our gross adds versus net adds, gross adds are doing extremely well now and a lot of what we are going to be trying to do is improve retention, which as the paid book gets bigger, retention improvements will have an outsized impact in terms of driving numbers, and we have a lot in the works.

[Julian Mulcahy, analyst]

So you think churn rates are not really back to where they were at start of the last year, there's still [indiscernible]?

[Chris Hulls, executive]

Yes, exactly. But they are lower than we expected, but they're not back to where they were just in sort of a commonsense standpoint, you raised prices 50% even if it's absorbed well, it's going to have some impact. So that is -- there's probably going to be some long-term elevated churn until we add more value and part of adding value is using Tile and other things that will get us back to historical trend levels and even maybe improve them, but again, that takes time.

[Julian Mulcahy, analyst]

Right. And has there been much change in the mix between monthly and yearly subscriptions because of the price differential?

[Chris Hulls, executive]

Not that much -- oh, go ahead, Russell.

[Russell Burke, executive]

Yes. No, there really hasn't been as yet, Julian. It's -- the annual proportion has ticked up a little bit, but we also haven't been focusing on that in the flow. We really want to get this bedded in and get the bundling side bedded in, and then we can look at optimizing the flows.

[Julian Mulcahy, analyst]

And with the international rollout, is there much of a cost that you're assuming for this first year?

[Russell Burke, executive]

It's relatively small. It's a relatively small investment. It's a small team. As Chris said, David Rice is moving to the U.K. to head that up, and that will really give it some impetus. But the investment beyond a small team and a small amount of marketing, it's not much more than that in this period. And that's the advantage of our model. We can really sort of leverage the overall infrastructure for that purpose.

[Julian Mulcahy, analyst]

And just finally, with share-based payments and given all the job losses in Silicon Valley, et cetera. Do you -- is there a chance to actually cut back on what you have to pay to keep [indiscernible]?

[Chris Hulls, executive]

I don't think we'll see a cutback. We did see a recent report where we actually still saw increases at certain levels. That could obviously change if this downturn gets worse, but what it has seemed to be more of is a flattening and higher accessibility of talent, but we have not seen a pullback. I think there's been a very modest pullback in comp for C-level staff, but not at other levels. And most companies like us, we're more excited that it's -- we're able to get much higher quality talent with similar amounts of effort.

[Melissa Goodell, executive]

Next up, we have Chris Savage. Chris, please let us know which company you're calling from.

[Chris Savage, analyst]

Sure. Chris Savage, Bell Potter. Most of my questions have already been asked. So maybe just some clarification. Just on the bundling, you originally said it would be launched early Q1. It sounds like it's been more so late Q1 like this month. Is that accurate? And if so, what was the reason for the delay?

[Chris Hulls, executive]

Yes, that was accurate. It was a modest delay. There were some infrastructure issues that were a little bit slower to work through than we thought. We had a couple of other shorter-term things that the team leaned in on to accelerate other parts of the roadmap. But it was not anything deeply substantive and it was a modest delay in the big picture.

[Chris Savage, analyst]

And I think, Chris, you said earlier, it's not fully rolled out yet. So when do you expect that to be the case?

[Chris Hulls, executive]

We're in a -- we do a phased rollout of all our features, especially things of big infrastructure level. So most features, they go 0 to 100 over a period of 3 to 6 weeks depending on what the feature is. And so we're in the middle of…

[Chris Savage, analyst]

So fully rolled out by the end of the quarter or early next?

[Chris Hulls, executive]

Yes. No, no, definitely by -- we're in March now. So it will be in the next few weeks, will be complete. And then one thing just to clarify, although Phase 1 will be fully rolled out, as we've shared the strategy here is this is more the first rollout, it's like the infrastructure, having Tiles in the bundles, better fulfillment, all seamless. The real conversion improvements will come in the outyears as we push people harder to the bundle and have different contextual ways of upselling. For example, one thing that's not going to be out for a couple of months, but I think is going to be huge is, we call it the ghost Tile on the map. A Tile is going to appear on your Life360 map. This can act as an onboarding flow into that bundling solution. And that is when we think we're going to start seeing these much bigger conversion uplift was when we have things much more front and center in the user flow.

[Chris Savage, analyst]

And just on the churn being slightly higher than it was originally. Do you put that down to the price rises, Chris? Or do you put it down to some weakness in the consumer or the rising interest rate, any of that?

[Chris Hulls, executive]

Just price rises. We've seen holdout groups and it's very expected and actually lower than expected from the price increase. And to restate the obvious for everyone on the call, it was a 50% price increase. This was not a 5% price increase. It was quite substantial. So the fact that the churn is so modest, I think, bodes very well. But it is a new lower baseline or higher baseline, sorry.

[Chris Savage, analyst]

And just last question, perhaps for Russell, you said the low point in cash would be around that $55 to $60 mark. Does that assume the full payment of the $13 million escrow on Tile?

[Russell Burke, executive]

It does. Yes, it does include that.

[Chris Savage, analyst]

And you suggested, Russell, earlier in the week that that's potentially up for discussion or negotiation. So when will you have sort of…

[Russell Burke, executive]

So I want to clarify that, there was some confusion perhaps between the earnout for Tile, which was almost a year ago, was not achieved, and that is not being paid out. At this point in time, there's no reason this is the -- essentially the last piece of the Tile acquisition, and there's no reason that that wouldn't be paid out.

[Chris Savage, analyst]

All right. So it's almost certainly going to be paid out next quarter?

[Russell Burke, executive]

That's what we're planning on. Absolutely.

[Melissa Goodell, executive]

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

[James Bales, analyst]

Yes. This is James Bales from Morgan Stanley. Firstly, I would like to touch on the margin profiles that you outlined in Slide 22. Can you maybe help us understand your expectations in terms of gross margin, which wasn't on that slide and the impact that you expect to see from the price rise?

[Russell Burke, executive]

So I think we're looking to a sort of several point increase in the raw gross margin for subscription and we're looking to stabilize the hardware margins. And the other factor is, as we move forward, is that subscription will become a larger part of the overall pie. So that will increase overall margins as well.

[James Bales, analyst]

And then in terms of the operating costs, which are on that slide, where should we expect leverage in FY '23 on those cost buckets?

[Russell Burke, executive]

The biggest piece will be R&D just because that's the biggest part of the pie, and that's also, therefore, with the reduction that we did in the early part of the year, that's probably the largest impact. So that will flow through. That would be the largest piece. We'd probably use acquisition and TV will probably be relatively stable for '23 and commissions, as I said earlier, may drop a couple of points.

[James Bales, analyst]

And then one element that isn't on that slide is the noncash stock-based comp. When -- I don't know how you want to talk to this, but can you give us a sense of what you expect that number to be on a P&L basis or in terms of new shares issued for the next 12 months?

[Russell Burke, executive]

So let me start with the latter part of that. We are aiming to get back to our sort of historical level of dilution of 5% or under. But in flowing through the way the share-based commission is calculated under Black-Scholes. That will flow through a bigger number in '23, and we would expect it to be then sort of stabilizing thereafter. But there's a few pieces that continue to flow through from Tile retention payments and some transition payments related to the restructure that will flow through this year.

[James Bales, analyst]

And so when you think about that sort of percentage for FY '23, what sort of range makes sense to you?

[Russell Burke, executive]

In terms of a percentage increase, James?

[James Bales, analyst]

Yes, yes, in the share count.

[Russell Burke, executive]

Yes. In the share count, it's definitely going to be within that sort of 5% dilution number.

[James Bales, analyst]

And then on the bundling, I'd just like to understand the percentage of nonpaying now that have been served the Tile promotions to date. And maybe you could talk to the changes in behavior in terms of conversion rates that you're seeing there?

[Chris Hulls, executive]

So if you take our gift with membership promo, that has gone to all our users, but those are specifically promotions. And it was those specific promotions at the 30% uplift. Don't quote me on the exact number, but I think we've got over 200,000 people convert through some sort of bundled offer already. And most of our conversions from the overall platform are not through promotions, and that is what gives us a lot of confidence about the legroom this has.

So very soon, over the next couple of weeks, anytime someone goes to our premium page to see what they get, they're going to permanently get Tiles. The checkout flow will be much better. Previously you had to go to a different page, put in a code. It was a very clunky system. So soon, it will be 100% of those bundles, and then we will be upgrading different upsell hooks to be pushing tile more aggressively. So it's much more complex in like, is bundling on, is it off, and we have seen again that everyone's already got the promos and now we're going to the next phase of that.

[James Bales, analyst]

And then maybe one last one on hardware. You've sort of given guidance of 0% to 5%. You've just traded through the peak selling season in fourth quarter and have seen the results for January and February. Can you give us some idea of the trends that you're seeing in sell-through from the retailers in the last sort of 4 or 5 months?

[Russell Burke, executive]

I think the biggest factor there, James, is that we talked about the conservative attitude of retailers going into year-end in terms of inventory for days of sales on hand. That has not changed. I guess there was some expectation that going into the New Year, they may start to move back to normal practices. But that conservatism in the current environment is not changing. In fact, it may be coming a little tighter even in some respects. So while the general market is basically as we expected, we're not necessarily seeing any benefit to sell in at this point versus sell-through.

[Melissa Goodell, executive]

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

[Chris Hulls, executive]

Thank you all. I'm going to be meeting with many of you over the coming days and weeks. Looking forward to more conversations in a big CY '23. Thank you all.