Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. At that time, if you have a question, you will need to press the star one on your push button phone. I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.
Thank you, Jesse. Good afternoon, and welcome to Arlo Technologies' fourth quarter of 2018 financial results conference call. Joining us from the company are Mr. Matthew McRae, CEO, and Ms. Christine Gorjanc, CFO. The format of the call will start with an introduction and commentary on the business provided by Matt, followed by a review of the financials for the fourth quarter and full-year, along with guidance provided by Christine. We will then have time for any questions. If you've not received a copy of today's press release, please visit Arlo's investor relations website at investors.arlo.com. Before we begin formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, gross margins, operating margins, tax rates, expenses, and future business outlook. Actual results or trends could differ materially from those contemplated by these forward-looking statements.
For more information, please refer to the risk factors discussed in Arlo's periodic filings with the SEC, including the most recent Form 10-Q. Any forward-looking statements that we make on this call are based on assumptions as of today. Arlo undertakes no obligation to update these statements as a result of new information or future events. In addition, several non-GAAP financial measures will be mentioned on this call. Reconciliation of the non-GAAP to GAAP measures can be found in today's press release on our investor relations website. At this time, I would like to turn the call over to Matt.
Thank you, Erik, and thank you everyone for joining us today on Arlo's fourth quarter 2018 earnings call. The past year was a transformative year for Arlo as we finalized the separation of the company and completed our first full quarter of operations as a standalone company. In Q4, we delivered $129.3 million in revenue, year-over-year growth of 4%, and near the high end of our revised guidance that we provided in December. Services revenue was $10.7 million in the fourth quarter, up 20% year-over-year, and comprised 8.3% of total revenue. For the full-year, Arlo achieved revenue of $472 million, for growth of 27% year-over-year. In Q4, we added approximately 350,000 registered users to the Arlo platform, highlighting the strong end-user demand and have grown the total by more than 71% year-over-year.
We are pleased to say that Arlo now has 2.85 million registered users. By the end of Q4, our paid subscriber base had grown to approximately 144,000, up 85% year-over-year. Arlo's subscriber base continues to outpace the growth of our new registered users. According to NPD, while the market for U.S. consumer network connected camera systems grew 35% year-over-year in 2016 and 2017, the growth of this market slowed considerably to 16% in 2018. With higher market growth expectations, our retail partners brought in more Arlo product than the market could absorb, and we expect them to return to normal inventory levels by the end of the second quarter of 2019. While I'm disappointed with how this will affect our guidance for the year, I remain confident Arlo's long-term outlook remains bright. Christine will share more detail on this in her prepared remarks.
Despite the market slowdown, Arlo's value proposition continues to resonate with customers, which keeps us in a dominant market share leadership position. In the fourth quarter, according to NPD, we have held a market share result of 41%. We achieved this through the years with a continuous stream of innovations that have put us at the forefront of features and functionality. Arlo, as you know, was the first to deliver a truly wire-free camera to the consumer IoT and security industry, and we've continued to innovate with Arlo Smart Services, which includes our class-leading AI and computer vision capabilities, as well as our cellular camera, Arlo Go. I was excited to launch our highly anticipated Arlo Ultra camera at CES. Ultra is our latest flagship wire-free security camera system, powered by the Arlo SmartHub.
Ultra integrates advanced features such as 4K video with color night vision, 180-degree field of view, an integrated spotlight, and crystal-clear two-way audio with advanced noise cancellation. This camera is well ahead of the competition and is the most advanced DIY monitoring solution available. We are bundling Ultra with a one-year free subscription to Arlo Smart Premier, our AI-powered service that provides cloud storage and sophisticated detection of people, vehicles, packages, and other objects. Coupling our Smart Premier service with the Ultra camera will enable a new business model to drive future growth of our paid subscriber base. We also expanded our smart home footprint into the home security market with the announcement of the Arlo Home Security System, which will increase our addressable market. At the heart of the system is an all-in-one multi-sensor, which integrates numerous intelligent sensors into an extremely small package.
The innovative multi-sensor can detect open windows, open doors, motion events, smoke alarms, carbon monoxide alarms, water leaks, gas leaks, and key temperature changes, including detecting freezing conditions. Any unwanted activity picked up by the multi-sensor can be instantly communicated to other Arlo products through the connected SmartHub to the mobile app, allowing homeowners to take immediate action. With a siren and a remote, the new security system is at the forefront of innovation, and I believe it exemplifies the future possibilities of the IoT smart home market. Components of the security system will begin rolling out in the second half of 2019, and we expect this product will drive more paid subscriptions. The introductions at CES garnered a broad set of accolades. First, the Arlo Ultra camera was named an official CES 2019 Innovation Award honoree, a distinction that celebrates outstanding design, functionality, consumer appeal, and engineering.
Ultra was also awarded a CES 2019 Editors' Choice Award by USA Today and Reviewed.com based on its innovation, technology, design, and value. Further, the website Android Police awarded both Ultra and Security System their Best of CES 2019 awards. TechRadar selected the Security System as a best smart home tech of CES 2019. Finally, The Ambient, a website dedicated to smart home news, selected the Security System as a smart home top pick for 2019. At CES, the amount of innovation on display was very impressive, and it was clear that Arlo continues to lead the industry.
Despite a slowing market and the resulting near-term challenges, we are confident that our market-leading products and commitment to innovation will continue to provide Arlo with a strong foundation for success. I remain optimistic that Arlo will remain a market leader and accelerate its path to long-term profitability and subscription growth. I'd like now to turn the call over to Christine for her commentary on the fourth quarter and guidance for the first quarter and full-year.
Thank you, Matt, and thank you all for joining us on Arlo's fourth quarter 2018 earnings call. As Matt shared, the fourth quarter, we recorded $129.3 million of revenue at the high end of our updated guidance and an increase of 3.6% year-over-year. Our services revenue for the quarter was $10.7 million, which is up 19.6% year-over-year. For 2018, we recorded $472 million in revenue, for a growth of 27.3% over 2017. As a reminder, the year-ago comparison period references carve-out financials for Q1 and Q2, whereas our Q3 and Q4 results are based on standalone financials. You can find further detail regarding Arlo's carve-out financials contained in our SEC filings, including our previously filed Form S-1 and the related public offering prospectus. During the fourth quarter, we shipped a total of 1.7 million devices, of which 1.6 million are cameras.
We added approximately 350,000 registered users to the Arlo platform in Q4. As of the end of the fourth quarter, we had about 2.85 million registered users, which is 71% more than we had a year ago. We continue to believe that growing our registered user base is critical to growing our recurring subscription business. Our paid subscriber count for Q4 was approximately 144,000, which is up 85% year-over-year. We're very pleased with the growth in our paid subscriber base and believe our new business model for Ultra will be a big driver of this subscriber base in the future. Our services revenue for Q4 2018 was $10.7 million, which is 9% quarter-over-quarter growth. From this point on, my discussion points will focus on non-GAAP numbers. The reconciliation from GAAP to non-GAAP is detailed in our earnings release distributed earlier today.
Our non-GAAP gross profit for the fourth quarter of 2018 was $12.7 million, which resulted in a non-GAAP gross margin of 9.9%, in line with guidance. This compares to $30.4 million in the year-ago comparable period and $30.4 million in the prior quarter. Note, the year-ago comparison period references carve-out financials, whereas our Q3 and Q4 results are based on standalone financials. Total non-GAAP operating expenses came in at $37.8 million, which is up 57.6% year-over-year and up 10.8% sequentially. Once again, the year-ago comparison period references carve-out financials, whereas our Q3 and Q4 results are based on standalone financials. Our headcount at the end of Q4 2018 was 386 employees. We are strategically investing in the areas which we believe are key to the growth of our business while adding the resources necessary to operate as a standalone public company.
Our non-GAAP R&D expense for the fourth quarter was 12.4% of revenue, an increase of 80 basis points from 11.6% of revenue in the prior quarter. R&D is critical to our product and service differentiation, and we continue to invest heavily in R&D for Arlo as we execute our hardware and service roadmaps. We expect our R&D expense to continue to grow in absolute dollars. Our non-GAAP tax expense for the fourth quarter of 2018 is $258,000. For the fourth quarter of 2018, we posted a non-GAAP loss per share of $0.33. We ended the quarter with $201 million in cash and cash equivalents and short-term investments. As a reminder, in Q3 2018, we received approximately $173.4 million in net proceeds from the IPO after deducting IPO-related fees paid for by Arlo and approximately $70 million from Netgear prior to the IPO.
Now, I would like to turn to our outlook for 2019. To recap what Matt shared, the market growth rate for connected cameras slowed from about 35% in 2016 and 2017 to about 16% in 2018. The market growth decline has a twofold effect on our growth rate. Firstly, this slowdown is a reflection of slower revenue growth and consumer demand for cameras. However, there is a secondary effect that compounds the impact on our revenue guidance. Market revenue growth was considerably lower in the fourth quarter, but our retail partners were stocking in line with the anticipated growth of a normal holiday uptick. As a result, our channel partners exited the year with much higher than normal inventory levels.
Given the information we have today, we anticipate the slower market growth that we witnessed in Q4 2018 and are seeing in early 2019 will continue to impact us for the first half of 2019, as our channel partners return their inventory to normal channel inventory levels, which will require a higher promotional spend coupled with lower shipments to our customers. Both of these will adversely affect revenue. Taking these factors into account, we expect revenue in the first quarter to be in the range of $48 million-$52 million. We expect our non-GAAP gross margin to come in between - 1.3% and -1.7%, and non-GAAP gross margin to come in between 0% and 3% in the first quarter of 2019.
We expect our GAAP EPS to come in at between - $0.59 and - $0.63, and our non-GAAP EPS to come in between - $0.51 and - $0.55 per share. Our GAAP and non-GAAP tax expense will be approximately $300,000 for Q1 2019. Looking at the full-year, we expect a moderate recovery in the second quarter as the promotional spending slows, and Q2 will be the first full quarter of Ultra sales across the channel. In our seasonally strong second half of the year, we expect to have normalized channel inventory and anticipate a meaningful contribution from our new product introductions. We believe this will result in modest year-over-year growth for the second half of 2019.
With that, we expect revenue to come in between $380 million and $420 million for the full-year 2019. We believe our non-GAAP gross margin will improve in the second half of the year to mid-teens. We expect our GAAP operating loss will be in the range from $118.7 million - $128.7 million, and our non-GAAP operating loss will be in the range of $95 million-$105 million loss for 2019. Operator, that concludes our prepared comments. We can now take questions.
Certainly. At this time, I would like to remind everyone that in order to ask a question, please press star one on your touch- tone telephone. Your first question comes from the line of Adam Tindle with Raymond James. Please go ahead, your line is open.
Okay, thanks. Good afternoon. I just wanted to start on paid subscribers. I know that number is increasing, it's still about the same percentage of registered users. Continuing to have to add users is costly, I'm just hoping if you maybe touch on what are the puts and takes to instead spending on getting more broad uptake in the existing base to increase the percentage of paid users in the existing base?
Yeah, we're focused on both. You're right, there are puts and takes, it depends on the timing of the year. There's two main paths to generate paid subscribers historically. We've added one, as you know, through the new business model with Ultra. If you look historically, one of the primary ways was us marketing to our installed base, and that's something we continue to do and drove a bit of the growth that you're seeing in Q4 in paid subscribers, and those are offers that go to our 2.85 million registered users, especially when we launch new features like we did in Q4 and plan to do in 2019.
The other is new users when they out-of-box a new system and we give them a 30-day free trial and attempt to convert them from that, and we characterize the conversion ratio from a free trial into the paid subscribers being a healthy number, something we're happy with. I think from the most impact perspective going forward is the new business model that we announced with Ultra and have started to ship, where we're pre-bundling a service period with the product when purchased at retail and believe that that will drive a higher subscription attach as we go forward.
Okay, that's helpful. Maybe one for Christine. Can you maybe just touch on the cash burn rate expected in 2019? I know you've talked about channel inventory a little elevated. Could cash burn be higher than the operating losses that you're guiding to? Just give us a sense of bracketing that.
No, I would expect the cash burn to be approximately the operating loss. The other two factors affecting that are depreciation and amortization would be a credit of somewhere around $8 million, and then CapEx around $12 million, so there's a net $4 million there.
Okay. If you could maybe just touch on, remind us of some of the nuances to Arlo as a potential. I know there's been a lot of volatility in the public markets for the stock. The nuances to Arlo as a potential target for an acquisition, the timing of when you'd have to wait for that from a tax perspective and all that.
Yeah, I don't have enough information at my fingertips on that to be completely accurate as far as the tax. As far as I know, with the tax-free spin, there's obviously several safe harbors under that, or you pay the tax. I don't have that information at my fingertips right now.
Okay, no problem. Just maybe one final clarification on guidance. Sorry if I missed this, I think the math would imply that in Q2 and beyond, your gross margin would have to be somewhere in kind of the high teens rate. Is that a fair assumption? Just touch on what kind of gross margin we can expect.
I think that basically what I said at the end of the script is we would expect in the back half of the year mid-teens, given the guidance and that kind of rolls into the bottom line operating loss.
Got it. Okay, thank you very much.
Thank you.
Your next question comes from the line of Jeffrey Rand with Deutsche Bank. Please go ahead, your line is open.
Hi. Thanks for taking my call. Just a quick question on the gross margin outlook for the first quarter. Obviously, it's pretty low. How much is the kind of contra revenue impacting that, and how much is other things like underutilization impacting that?
I would say it's a combination. Clearly, we continue to promote, some of that is without orders from the customers, there are also some fixed costs that as the revenue or the gross shifts are lower, that will be a higher percentage of the total.
Great, thank you. Just as a follow-up, in kind of the first half of the year and kind of other times when things get slow, how much flexibility do you have to lower operating expenses?
We obviously always have flexibility with our hiring plans, with our outsourcing and everything. We will obviously take a good look at that, as we continue to go through, we'll watch that very carefully.
Great, thank you.
Your next question comes from Saliq Khan with Imperial Capital. Please go ahead, your line is open.
Great, thank you. Just a few quick questions on my end, guys. First one being, you had already taken the Q1 guidance down back in December due to the timing issues with the Ultra. How much of the impact that we're seeing with the Q1 revenue guidance right now is due to Ultra versus some of the other market conditions that you alluded to?
As we said in December that we were basically pushing forward Ultra into Q1 from Q4, which means that Ultra starts going into distribution in Q1, is in full distribution in Q2. The majority of the, when I look at the year-over-year decrease in the revenue from $100 million a year ago to the guide today is not related to Ultra. That is really more related to the market slowdown. In addition to that, to the channel inventory that we see or that our partners have, because we really did see that last six weeks selling period of 2018 not materialize with the holiday uptick that we expected.
Christine, are you seeing any impact at all from competition, out of the Amazon, SimpliSafe, or even the traditional security providers?
We're in a market with big competitors, but we also have showed the 41% market share achievement in Q4. We are obviously staying focused on what we do best around innovation and everything else. The growth drop-off in December is really what affected the quarter.
Got it. Then one final one on my end. Matt, one of the things you kind of talked about in your opening remarks was the NPD data?
Yeah.
A lot of the data work that they do is on the consumer network market or the network IP camera marketplace. If that is slowing down, is there a way for you to repurpose or refocus your efforts towards the commercial or the SMB market? Is that an opportunity for you to be able to offset some of the slowdown in the consumer market?
Yeah, it's a good question, and it is something we've commented in the past. There's two things that are coming that we've commented in the past. One is yes, you're right, there are incremental channels, we're starting the business development areas in some of those yet. We're not ready to announce those, do believe diversification of channel is something that we're focused on as we go forward. In addition, we've talked about the more robust product cycle in the second half of 2019. You could foresee those moving into some of the new categories. For instance, the security device we announced at CES.
Got it. Thank you, guys.
Thank you.
Your next question comes through the line of Woo Jin Ho with Bloomberg Intelligence. Your line is open, please go ahead.
Great, thank you for taking my question. A couple of things in terms of the inventory that's in the channel. Can you just talk a little bit briefly on the constitution of the inventory of the channel? Is it predominantly the Arlo Pro and the Arlo standard and the Pro 2s that are just being backlogged, or is it also Arlo Ultra that's being slowed down, especially given the slow reception that you've had for the product?
Yeah, it's not Arlo Ultra wasn't even in the channel at 12/31. To be honest, it's a mix of all of our products. It's the original Arlo that's been out since 2015 and Pro, which are our older products. Pro 2 is in there too, and then there's some other things like lights and baby and a few other things in the channel. It's really quite mixed.
In terms of the first half gross margin guidance, implicit in that gross margin guidance, it seems as if you're going to aggressively promote to clear out the channel. Is that the right way of thinking of it, then have new products on the second half to ramp up to your $400 million guidance for the year?
Yes, absolutely.
Okay. Just to be clear, based on your cash flow, cash burn comment, Christine, do you expect to end the year with roughly about $100 million in cash, or could that potentially go a little bit lower?
Obviously, our goal is to end the year with $100+ million of cash, we'll continue to move forward that. There's a lot of balance sheet management that we can also do.
Are there any other sources of cash that you can tap into?
I think we have options out there that nothing at this point in time.
Understood. Thank you.
As there are no further questions for this call at the time, this concludes today's conference call. You may now disconnect.