Earnings Call: Q1 2020

Apr 28, 2020

Quarterly report

our listed home of Australia, MAU reached more than 600,000, a year on year increase of more than 50%. A material reduction of around 50% and new registrations in the March accompanied the evolution of the COVID-nineteen crisis as successive lockdowns were implemented. Daily usage is similarly down, but as mentioned previously, monthly retention rates for both free and paid users is within a normal range on a cohort basis. Revenue of $19,100,000 in the March increased 71% year on year. Annualized monthly revenue in March 2020 was $76,100,000 a year on year growth rate of 64%. During the quarter, direct revenue grew strongly, supported by the 31% growth in paying circles to $862,000 and 15% growth in average revenue per paying circle. U. S. Paying circles continue to grow for the month of March, although there was an impact on new subscriptions due to COVID-nineteen related decrease in new user registration. Indirect revenue also delivered strong growth for the quarter. The Allstate lead generation partnership contributed revenue of $1,500,000 and demand for our data product was healthy for the quarter. However, a prolonged lockdown with associated decreased people movement and marketing spend is detrimental to certain data partners, and we expect some of them to face pressure in Q2. Paid user acquisition spend of $4,000,000 reduced 24% year on year. Since late March, we have significantly scaled back spend and will do so until lockdowns are lifted. We are also implementing other expense management initiatives, including accelerating our plans to establish engineering resources in lower cost jurisdictions and adjusting the pace of hiring. These initiatives reflect the discretionary nature of our expense model. During the lockdown, we've also been part of an organized TikTok campaign by a small group of teenage influencers who have been spamming certain apps such as video conferencing and homework apps with one star ratings and reviews. The fraudulent ratings have been removed by Google and Apple has recognized the issue. I'll now turn it over to Dan, who will share more details on our cash flow performance for the quarter. Thank you, Chris. Please note that all numbers I will be discussing are denominated in U. S. Dollars, are in accordance with US GAAP accounting standards, and are unaudited. Life360 ended the March with cash and cash equivalents of $57,500,000 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 $6,200,000 a sequential improvement from $6,700,000 in the December and $7,100,000 in the September. Looking forward to the remainder of 2020, we are committed to delivering improved annual operating cash outflows. Total revenue of $19,100,000 reflected 71% year on year growth and a 5% sequential increase compared with the December 2019 quarter. Receipts from customers of $12,000,000 reduced from the $21,300,000 we reported in the December. The difference between Q1 revenue and receipts from customers reflected timing differences of $6,300,000 and commissions of $3,000,000 which are no longer included in receipts. Payments in the first quarter reflected continued investment in the business, particularly in staff costs and advertising and marketing. Staff payments of $7,900,000 in the March increased 10% compared with the December. We continue to expand the Life360 team, particularly in engineering and product, and our headcount at the March was 170. Administration and corporate payments of $1,700,000 for the March were largely in line with the December. Research and development payments of $2,000,000 were lower than the $2,600,000 in December due to the timing of payments to our platform provider. Advertising and marketing payments, which include paid user acquisition, were $5,000,000 in the March compared with $8,000,000 in the December. Paid user acquisition spend of $4,000,000 was in line with the December, and $3,000,000 of commissions are no longer included in disbursements. As Chris indicated, we have significantly reduced paid user acquisition spend in Q2 to date reflecting the impact of COVID-nineteen. Technology payments of $1,300,000 reduced significantly from the $8,400,000 in the December quarter. This reflected a prepayment of $5,600,000 in December related to a multi year agreement with a cloud provider, which was negotiated on favorable terms. In addition, there was a benefit from improved pricing and timing differences. Cash used in investing activities of approximately $400,000 reflected minor purchases of capital assets. Cash from financing activities of approximately $100,000 reflected proceeds from the exercise of share options. We are pleased with our efforts to continue to reduce our quarterly operating cash outflow in the March. I will now turn the call back to Chris for closing remarks. While considerable uncertainties remain over the duration of the current environment, we expect the impact of COVID-nineteen to be greater in Q2 than in Q1. This reflects the expected impact on top of funnel new registrations as well as on data revenue. Q2 MAU and paying circles are likely to be slightly down versus Q1 with growth expected to resume in line with back to school in Q3. In this uncertain environment, we remain committed to controlling our discretionary expense model. Operating cash outflow in 2020 is still expected to decrease versus 2019. The launch of our membership offering remains largely on track for June 30, and any road map delays as a result of productivity loss due to forced lockdowns is expected to be less than one month. We expect this new membership offering to dramatically expand the scope and reach of Life360 as we add features relevant to a much wider range of families. This is the first family safety membership model of its kind and will deliver protection wherever your family may be and at every life stage. 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. Thanks, Chris. As a reminder, to participate in the Q and A, please raise your hand by pressing the raise hand icon at the bottom of your screen within the Zoom app. You will need to unmute yourself to ask a question. Also, once unmuted, please tell us your name and what company you're calling from. So I'm going start with Quinn. Quinn, please unmute yourself. Good morning, Chris. Good morning, Dan. Good morning. Good morning. Firstly, I might just kind of focus on the March. We can kind of get the COVID impacts in a second. I thought it was a solid quarter. User growth is coming through really well, particularly in The U. S. So paying circle's growth is still lagging user growth somewhat. Is it realistic to have paying circle growth keep track to, I guess, keep pace with user growth at some point, whether that's through better conversion at point of registration or better conversion of current nonpaying users? Could we potentially see those numbers converge? Yes. I definitely think it could. And if you think of our membership offering, as we discussed on our full year earnings, this is by far the biggest launch in our company's history. It is giving massively more value to our premium customers And also very relevant to this COVID world where, as people saw in our last release, we have our Family Safety Assist feature, which includes disaster assistance, medical assistance and travel assistance. As part of that, pandemic response is quite literally a a feature we were building into that prior to to this pandemic. So having the ability to say, I'm stuck in Italy. I need to get home. What do I do? And and there's this outbreak. Where do I get right the right information? Can you help me? Can you get me a doctor referral? So I'm modestly disappointed that we just weren't three months ahead because it would have looked like geniuses timing this thing. But I'm pleased that we are actually building a product that will feel extremely relevant to a much broader set of needs that people will have. So I'm very bullish on that. And that, I think, could also happen while simultaneously increasing pricing as well. So I'm nearly 100% certain we're going to have a solid increase in ARPPC and that's going to continue to outperform. And I don't have hard proof of it, but I'm also very optimistic that conversion and retention will also get a really nice boost with our new membership release. It probably won't happen overnight. The experience with Driver Protect is that people see the new features, explore them, think about them, then decide to convert. But Driver Protect, over the course of a couple of years, became now 90 of our user base. We're optimistic that the same thing could happen for these new premium features that are just months away. That's helpful. And you might have answered one of my other questions, which would have been the June release for the membership plan. Would that be intentionally delayed if we're still in, you know, lockdowns in most important regions? No. It, it will go live when it's ready, because if anything, it makes our products, more powerful while we're in this lockdown mode because driving is unfortunately massively down. Trips are down. So the reason it drives conversion today, that use case is hampered. So membership gives us value even when people aren't leaving the house. So, we are definitely not going to delay that. Thanks. And, could you maybe just talk us through how to think about your, I guess, monthly or quarterly attrition from your existing user base? So in other words, if, you know, if if new registrations completely ceased, what what would your either your monthly or quarterly user base reductions look like? Sure. So you would see I don't have an exact number for you, but how I would approach that is I would look at the cohorts where users do churn for that first eighteen months. So theoretically, retention held, which we're seeing hold now, and clearly, if these lockdowns go on for eighteen months, it's a whole different ballgame, but let's play the hypothetical. We would have decreasing users for eighteen months, after which point we would have matured to a point where all cohorts at that point are flat. So, we would decrease for eighteen months, but that decrease would start slowing month by month because we would have fewer and fewer users that were earlier in their life cycle. Right. I guess, but I guess your current user base is a mix of different, cohorts, if you will. So, I mean, cognizant you might might not have the number off the top of your head. But, I mean, do you have a a broad feel for any given month based on the the mix of different cohorts, you lose a percent, 5%, 10% of your of your user base? I can maybe back of the envelope while we're live. But the majority of our users are long term retained users. So I would imagine two thirds of our u please don't quote me on the exact numbers, but directionally, I bet twothree of our users are already past that one year mark where churn is much, much lower. And so if we say, like, let's just say half of like first year churn, that would be like you might lose 20% of our users. Again, I'm back of the envelope in here. Maybe a bit more over time because we are going to get a bit of a trail. But our registration is down about 50%, and it has normalized. So in the first couple of weeks of things, we didn't know where it was going to bottom out. As of now, it has very much bottomed out. I can't say what tomorrow will bring. But even in this lockdown mode, decreases have stopped. That's helpful. And just lastly for me. Microsoft has announced competitive product. I was just wondering if you have any thoughts on that in particular or competitive environment more generally that you'd like to share? Sure. So I'll start with Microsoft. It's actually not a new product as far as we can tell. They've had announcements in our space a number of times throughout our history. There was an announcement one or two years ago and we're unclear if that ever launched. So this looked a little more polished from some of the screenshots that they released as part of their PR. But we see very little details of that. And what we can see is it's tied to Microsoft Office, which seems a little bit odd. So if it's a subset of that, I I I don't know if they're gonna be pushing this as a stand alone product. It doesn't seem very Microsoft like. In the Valley, the the corp dev departments are usually pretty active with something of the deep strategic initiative, and we have not heard much from Microsoft. So I would think that if they were really looking at our space at a CEO level, we would have heard about it. That's making an assumption. But we do hear from other big companies when they're interested in our space. So I am guessing it's more of an add on than a core. So I don't mean to be dismissive of Microsoft. We, of course, watch them. It's a huge behemoth. I'm hoping, and if I'm a betting man, it is likely a smaller initiative. And I'm also perhaps optimistic that it could bring awareness to our space and highlight our strategic value as being such a dominant leader in the market currently. Helpful. Thank you. And any other broader competitive comments? Really. Screen monitoring is something we continue to keep an eye on. FamilyLink, which is a Google product, is getting used, but it's not competitive with us now, but we do watch it. But other than that, we haven't really seen anything new. I'd say we continue, in our view, to cement our market lead. Very helpful. I appreciate your time. Thank you. Okay. Next up, we have Brendan. Brendan, please repeat your name and which company you're calling from. Chris. Hi, Dan. It's Brennan Kelly from Wallace. Thanks for the update. Just a couple of questions for me. Firstly, just on the Q1, can you just help us understand how the paid user acquisition spend and the MAU adds track throughout the quarter? So paid acquisition spend was normally it was planned until the March When we saw that the fall metrics were getting a little bit wonky, we decided to pause it. As another clarification, not exactly what you're asking, but most of the decrease in new registrations happened before we shut off the paid spend. So as far as we we're actually very, very confident that the majority of the decrease in organic traffic or in the traffic is with the organic traffic from the COVID lockdowns not spend. But we did see it was tougher to do the curve matching to see if these users would breakeven because they get habitualized less. So we that is when we paused it. So at the back March, we did start seeing a bit of a small downtick in MAU. So it would have been a bigger number if it were not for COVID. But I would say the vast majority of the quarter was largely as expected and tracked very linearly, especially in The U. S. Where the majority of the spend is. Sure. And just with that paid user acquisition spend, recognizing that it is a very dynamic environment out there. But can you just give us a sense of what the monthly rate has been so far in April, just broadly where you're tracking to? We have spent well, in April, we'll probably spend less than $100,000 So we've turned off all but the lowest hanging fruit. I will use that as a moment to toot our own horn a little bit that we've long said that if we ever need to significantly cut, burn or be profitable, we could almost do that purely just by shutting off paid user acquisition. So now we've done it. We'll have a burn this month of right around $05,000,000 both underlying EBITDA and cash flow. That is not an audited number. It's directional. But if you then look at our cash balance, if we freeze today, that's over one hundred months of runway. And that is why we are all the while continuing to hire pretty aggressively. Absolutely. And sorry, just to clarify, was that $05,000,000 EBITDA loss, was that pre or including sorry, that's a cash flow number as well? Roughly. Yes, yes. Yes. Yes. Cool. Thanks for that. Yes. And it's not our plan to always give forward looking months, but given that given COVID is on everybody's mind, our thought was that we'll do this as a bit of a one off because if we it's obviously the more relevant part of the equation for how the business is doing right now. Absolutely. Appreciate the additional disclosure. Thanks, Chris. You, Brendan. Next up, have Ben. Ben, please repeat your name and which company you're calling from. Ben, are you there? We can't hear you. I think you're on mute on the computer, maybe. Yeah, guys. Can you hear me now? Loud and clear. Yes. Excellent. Thanks. And just in terms of the hiring, are you seeing is it too early to see any reduction in the cost of engineering employees in the Valley yet? Or is it too early to tell? Or is that something that you expect to play out over a couple of months potentially? Too early to tell, likely will play out over a couple of months. If I answer that a little more indirectly, what we are seeing is the candidates that we were getting from larger stable companies, they are largely staying put. And we're seeing a very large wave of candidates from some even prominent companies that perhaps had a little more levered or negative unit economics. So we're still so early in this that I don't think things have course corrected. Anecdotally, what we're hearing is some of the sweeteners you need to sometimes get someone such as a signing bonus or things on the margin, those are already starting to go away. And pipeline is very strong just given that there's a perhaps the biggest supply rush I've seen since the GFC a decade ago. And then just in terms of the states where you've got much stronger penetration, is it if you look at the states across The U. S. Whereby they are lifting the lockdown restrictions, is it fair to assume that some of those states where you've got where a decent chunk of your user base are located that those restrictions are lifting sooner than, say, some of the states on the East Coast? Or how do you think about coming out of this lockdown on a state by state basis, overlaying your user base? Sure. It's a bit of a wait and see there. A lot of the announcements of lockdowns just came out today. If you look at all the foot traffic data, which actually, if many of you have seen the social distancing scorecards and things like that, that is a lot of it coming from our underlying data. So that's a live example of some of what the data partners are doing. Even in the states that have started to ease, over the last week, there has not been a significant change because it's all very new. My guess is that next week is the first week we might start seeing a little bit more regional activity, but it will probably be slow. My suspicion is that we're probably two weeks out at least from seeing this be a meaningful shift. And at that point in time, we will start to selectively reactivate different regions. And some of that will be a bit of a shift in marketing to existing to our existing to our existing users about getting them reengaged so that people might have dropped, especially those new users who turned and weren't rehabilized will spend some money to get them going again. Okay. And then is there any anecdotal information about I know that you're a clear leader in the space, but some of the smaller competitors that were sort of nibbling away that they're even they're underfunded and starting to drop away? Or is it, again, still a bit too early to see any real time impacts on the low hanging fruit? The small underfunded ones were already kinda so small that they were not making much of a dent in us. So we would we would likely not see anything immediately. To keep an app on the App Store costs almost nothing, but, are those people hemorrhaging the employees they have and really getting upside down in unit economics? I'm sure they are, although it will be very hard for me to point that to you definitively. It would be what I would imagine we would see is our product continues to advance very aggressively while they stagnate or go backwards. And we are getting into operating system update season, which is a massive drain on resources that doesn't scale linearly with the size of your team. So the amount of work we need to do for iOS 14 is not gonna be that much more work than the small guys need to do. And so if their team gets clobbered, that they're still gonna have to do all that base essentially, fixed engineering, whereas relatively speaking, it will be much smaller proportion of our company doing that type of work. Got it. That's all for me. Thanks, guys. Well done. Thank you. Okay. And as there are no more questions, I'll hand it back over to Chris for some closing remarks. These are very quick closing remarks. Thanks again, everyone, for joining, and have a great day. I appreciate everyone attending our first remote earnings call. Thank you.