Life360 - H2 2023

Transcript

Jolanta Masojada (Head of Investor Relations)

will be muted throughout the meeting. Q4 and full-year results conference call. This is Jolanta Masojada, and I head up investor relations for Life360. This call is being conducted as a Zoom audio webinar. All participants will be in a listen-only mode until the Q&A. When we come to the Q&A, please raise your hand by pressing the Raise Hand icon at the bottom center of your screen, and your line will be unmuted in turn. Participants who have joined by telephone will be in a listen-only mode throughout. Just a reminder that we'll be making forward-looking statements regarding future events and financial performance, which are subject to material risks and uncertainties. Some of these risks have been set forth in the risk factors in our filings with the ASX and SEC.

These forward-looking statements are based on assumptions that we believe to be reasonable as of today, and we have no obligation to update these statements as a result of new information or future events. Additionally, we will present both GAAP and non-GAAP financial measures on today's call. These non-GAAP measures are not intended to be considered in isolation from a substitute for, or superior to our GAAP results. The agenda for this morning's call will begin with a business overview by Co-founder and CEO Chris Hulls and CFO Russell Burke. This will be followed by a strategy overview by Chris and COO Lauren Antonoff. Russell will then provide an outline of Life360's market opportunity, followed by detail on the CY 2023 financials. Finally, Chris will 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 (Co-Founder and CEO)

Good morning, everyone, and thanks for joining our CY 2023 full year results call. We are incredibly proud that more than 61 million monthly active users globally enjoy the peace of mind that comes with the location sharing and safety features of Life360. In CY 2023, we made significant strides in our member experience, showing our users what their family members are up to, whether they're driving, walking, or biking. We put pets and other valuables on the map with Tile, all in the service of our mission to keep people close to the ones they love. At the same time, we made meaningful progress on our path to profitability as we significantly reduced our net loss and achieved a major milestone by delivering our first full year of positive Adjusted EBITDA and operating cash flow.

We are excited to continue building on our leading global position in location sharing and see exciting opportunities in CY 2024 and beyond to broaden our reach and deepen engagement with our members. We look forward to bringing the benefits of our subscriptions to more markets globally and creating new revenue streams that utilize the scale and quality of our member base. Before I turn to the summary of our results, I'll remind you of the scale at which we are connecting families and saving lives. During CY 2023, we dispatched almost 39,000 ambulances and protected more than 300 billion miles with Life360 Crash Detection. The real-world impact of our digital services is reflected in the user testimonial you see on Slide five, one of many we receive on a daily basis.

The strategy we outlined at the beginning of CY 2023 has driven the achievements you see outlined on Slide six. Our strategy to grow our audience has delivered a 26% year-over-year uplift in MAU to more than 61 million. International growth was particularly strong, increasing 40% year over year, with a record number of MAU additions. Our goal to drive membership saw the delivery of 1.8 million global paying circles, a 21% increase year over year. This outcome is particularly impressive in the context of U.S. price increases, which helped push global ARPPC up 25% and reflects the loyalty and engagement of our membership base. Our strategy to expand internationally saw paying circles outside the U.S. increase 43% year over year, with particularly good growth in predominantly English-speaking countries of Canada, the U.K., and Australia.

We launched Triple Tier membership in the U.K. in October 2023, with very encouraging early results. Finally, our focus on maintaining financial discipline while continuing to invest for growth underpinned a 33% year-over-year increase in revenue and our first full year of positive Adjusted EBITDA. Turning to the detail of our CY 2023 results, we met or exceeded all the guidance metrics we provided to the market. These results reflect our commitment to balancing financial discipline with prudent investment to position the business for long-term success. Highlighting a few key metrics on Slide seven, we delivered year-over-year revenue growth of 33%, while GAAP operating expenses increased only 4% year-over-year. Life360 core subscription revenue increased 52% year-over-year, driving consolidated subscription revenue growth of 44%.

Excluding variable commissions, GAAP expenses were actually down year-over-year by 1%, reflecting the cost measures we implemented in January 2023. Net loss, EBITDA, and Adjusted EBITDA all delivered a greater than $60 million year-over-year improvement. A similar improvement in operating cash flow delivered the first full year of positive OCF. Since our IPO in May 2019, Life360's annualized monthly revenue has more than quadrupled to $274 million. The 22% growth in December 2023 is particularly impressive given the significant step-up provided by price increases in December 2022. Life360's MAU growth momentum is illustrated on Slide nine, with U.S. and international MAU up 19% and 40%, respectively. Australia, the U.K., and Canada were all strong, with U.K. delivering 41% growth year-over-year. Russell will now run through the details of our three revenue lines.

Russell Burke (CFO)

Life360 delivered strong consolidated subscription revenue growth across U.S. and international, increasing 44% year-on-year, including the contribution of hardware subscriptions. Core Life360 subscription growth of 52% was ahead of guidance, benefiting from U.S. price increases and the repricing of existing iOS and Android subscribers. Global Paying Circles increased 21% year-on-year, a very good outcome in the context of the price increases, while global ARPPC was 25% higher for the year. The continuing strong momentum in 2023 Paying Circle growth is illustrated on Slide 11. U.S. Paying Circles increased 14% year-on-year despite the price increases, while international Circles were 43% higher. Our current international Triple Tier markets of focus, Canada, the U.K., and Australia, all delivered significant growth, with particular outperformance in the U.K. and Australia.

The slightly lower growth rate in Canada reflects the impact of price increases, which accompanied the Triple Tier launch there, and which have lifted ARPPC very significantly since launch. Triple Tier launched in the U.K. in October and is planned for Q2 in Australia. We expect both markets to follow the Canadian experience of significant ARPPC increases, with some slowdown in the rate of Paying Circle growth. CY 2023 global ARPPC increased 25% year-on-year, underpinned by the significant uplift in the U.S.. International ARPPC was relatively stable, impacted by exchange rate fluctuations. Of our international Triple Tier markets of focus, only Canada has seen a meaningful price increase in the period, which underpinned its 51% revenue increase for the year. The impressive growth rates in the U.K. and Australia were driven by Paying Circle growth.

As the table on the side illustrates, U.K. Triple Tier pricing took effect for new subscribers from October, and existing subscribers have seen a price increase from January. We've already seen a significant uplift in ARPPC and revenue from the initial cohorts. GAAP hardware revenue increased 21% year-over-year, with the usual seasonal uplift in Q4. Key drivers were the 12% uplift in the hardware units sold, stable pricing, and benefits from bundling. Non-GAAP hardware revenue, which excludes bundling, increased 14% in line with guidance. Unit growth reflected higher sales and reduced returns. GAAP hardware margins improved significantly to 19% due to favorable returns adjustments and cost savings initiatives. As we outlined during the year, we've been prioritizing higher margin sales channels. Other revenue of $25.5 million delivered in line with guidance.

The modest year-on-year decline reflects the transition to a single data partnership from January 2022. As Chris and Lauren will talk about shortly, we are very optimistic about the opportunities to add new revenue streams that utilize our enormous free user base.

Chris Hulls (Co-Founder and CEO)

Now we're going to share more with you about our strategy. Lauren joined us nine months ago to partner with me as we take the company to the next level of scale. She will give you a glimpse into how our members are using Life360 and what we're doing to achieve our long-term goals. Everything we do begins with the mission and service of our users. Our strategy is anchored in our mission: to keep people close to the ones they love. In service of this mission, we serve families at all stages. Of course, this includes families with kids walking to school or those with teen drivers. When those kids head off to college, we continue to be an important connection back to the family. We also see more and more Circles with only adults, which is important as the population ages.

And now, with the addition of Tile devices, we're also reaching adoring pet parents that want to keep their eyes on their furry loved ones. I'm now going to pass to Lauren to give everyone a sense of the role Life360 plays in our members' lives.

Lauren Antonoff (COO)

Thanks, Chris. Most of you are familiar with our role protecting families. Parents get the peace of mind of being able to confirm that their kids are where they're supposed to be, and it makes kids feel more secure, too, truly knowing that their parents have their back. Beyond location sharing, our crash detection protects hundreds of billions of miles each year, and I think it's incredible that we dispatch over 100 ambulances a day. Members often start with us for location and safety, but inevitably, they discover that Life360 makes family life work better in all sorts of ways they didn't expect. Our members say they get a real sense of connection and peace of mind from knowing where their people are. That is, the benefit goes beyond the practical safety value to give people a priceless feeling that comes from being connected to loved ones.

When you're watching your kid drive off to college, it's not just about being worried about the drive. It's about the feeling of having a hand on their shoulder while they're taking a huge life step.... It's the everyday sense of connection that drives the outstanding engagement we see. In the U.S., users are checking Life360 an average of five times a day. That's extraordinary engagement! Let me share another fun example. Traditionally, introducing someone to your family is a big step in a relationship. This member points out that in modern love, adding them to your family circle in Life360 is the natural next step. The reality is that relationships are fundamentally complex, and that's especially true with close relationships. Our role is not only for safety and peace of mind, but to help make relationships work better and easier.

Our unique position in the relationships that matter most is one of the factors driving such strong growth, with daily active users jumping 31% year-over-year. We're super proud that over 61 million people actively use Life360 every month. Our product experiences and the peace of mind and delight they bring, fuel engagement and drive subscriptions, especially for families with kids and teen drivers. We see significant untapped potential with additional segments like young couples, that demonstrate product market fit with our free product, but have different priorities when it comes to reasons to pay. Whether they're free users or paying subscribers, Life360 is playing an increasingly valuable role in many aspects of our members' lives.

While the primary use of Life360 may be to make sure loved ones get to where they're supposed to be, from my own life, and I know I'm not alone in this one, an equally compelling use case is knowing when it's time to start cooking dinner. This is what I mean about making relationships easier. My husband's happy because he knows I'm on my way, and I'm happy that I don't have to field a bunch of texts as I'm wrapping up my day at work. Now, with the addition of Tile, location sharing extends beyond your phone to devices, dramatically expanding our impact on everyday life. Not only things like finding the remote or lost luggage, but making sure your pets are safe or finding them if they get lost.

The practical use cases are endless, but I also want to call attention to the social post on the slide. It exemplifies that feeling of connection that Life360 brings to millions of people. Whether it's catching your mom speeding or rolling your eyes because your brother can't keep his phone charged, the ability to stay connected while your family goes about doing what they do, is what feels good to our users and brings a lot of joy. And that emotional resonance is a key reason why our experience, which focuses on the people you care about most, is super different from utility tracking platforms. Chris?

Chris Hulls (Co-Founder and CEO)

Given our user base and the role our product plays in our members' lives, we're being intentional about where we're headed for the future, and we wanted to give you a glimpse into our aspirational goals. We're already the most beloved app for parents to keep track of their kids' safety, but we believe we have a broader role to play as we aim to be the number one brand to make everyday life better for families of all stages. As our relevance grows in this way, we see opportunities for significant incremental top-line growth and plotting our course to our first $1 billion of revenue by continuing to innovate in both our experiences and our business, and progress on our pathway to significant EBITDA margins. Along the way, we expect to surpass 100 million monthly active users.

That's actually a goal we set last fall, but that one is getting closer quickly, so we're now upping that to 150 million. Lauren will share our strategy to achieve these goals.

Lauren Antonoff (COO)

We're focused on four key initiatives for 2024. First, growing our audience is about doubling down to continue to grow our huge base of existing monthly active users. Next, we're focused on how to scale our paid offerings, including both subscriptions and the number of devices in use. Third, we're creating new revenue streams that go beyond our current offerings. And finally, as we do all this to drive our top line, we're being intentional about doing it in a way that delivers on our commitment to expand profitability. So let's double click on the first objective, growing our audience. We think about four key levers to grow the number of active users. Let's start with viral experiences. Life360's growth to date has been primarily fueled by organic word of mouth. We're looking to amplify this using product experience, experiences that encourage members to tell other people about Life360.

For example, making it convenient for members to use the app to meet up with friends or family outside their circle who may not be Life360 users yet. Experiences like this expose Life360 to new people, giving us an opportunity to win them over to becoming daily users. Next, we see the value in our free product experience as our not-so-secret sauce. We're investing in new features that give members more reasons to keep coming back. For example, we're in the process of introducing a fun and handy feature called Watch Me Fly, where your circle gets notified when you landed in an airport, saving the hassle of back and forth texting. The vast amount of data we have opens up endless opportunities to engage our customers with insights that make family life easier or just more fun.

At the same time, as we're continuing to lean into product-led growth, we're also upping our marketing game. We recently hired Mike Zeman as our Chief Marketing Officer. Mike has over 20 years of experience in digital marketing, subscriptions, brand building, and international expansion. So we're super excited to have Mike on board, and we look to his leadership to help us hone our marketing strategy and establish Life360 as the recognized brand leader in everyday family life. Finally, international expansion continues to be core to our growth strategy, and we're committed to ensuring that our product delights members around the world.

While our free base is a key component of our success, we're also investing to drive revenue growth. Our paid offers include both our app subscriptions and our devices, but increasingly, we see those as two sides of a connected experience that address the needs of our members at all life stages. What I mean is that some members come to the app for location and safety, and discover ways that our range of devices make family life easier. But other people may pick up a Tile at a retail store, and that might be their very first introduction to Life360. However people find us, we think about scaling our paid offers through four efforts. The first is creating new value for Life360 membership.

Near term, we're working on new features that appeal to a broad audience, but longer term, we actually believe there's tremendous upside in addressing the unique needs that customers have at specific stages. For example, adult children who are worried about aging parents and looking for solutions to keep them safe. Second, we're continuing to drive subscription growth and device sales around the globe. We introduced Triple Tier offering in the U.K. in October, and we'll be expanding that offering to Australia and New Zealand in Q2 of this year. And we're increasing our efforts to ensure that we meet the unique needs of customers in individual markets. Third, we continue to be super excited about the ways that devices expand our use cases and let us deliver more value to members. The reality is that when you put devices on the map, it changes their utility.

Standalone tracking apps are okay when you know something's lost, but when you're already checking Life360, like our U.S. members do an average of five times a day, you can discover that you left your stuff at home before you get to the gym. In 2024, we'll introduce our first release of Tile since the acquisition, and we're reimagining the Tile value prop from the perspective of your Life360 circle to deliver a native experience that's designed for the whole family. Finally, a key part of our monetization strategy is to drive continuous improvement through every detail of our user funnel using a test and learn approach.

We're super bullish about the growth opportunity in our paid offerings, but we also recognize the opportunity that lies in our enormous free user base, with around 24 million daily active users who rely on us to stay connected with the people they love. In 2024, we're starting the journey to introduce advertising into our free experience. Life360 offers advertisers a unique opportunity to reach a broad, highly engaged audience with unparalleled relevance across a wide range of categories. We're taking a measured approach as we enter the space because the quality of our free experience is a pillar of our company's success, and we're committed to continuing to delight our members and protect their privacy.

Still, it's clear to us that we have amazing potential to grow an ads revenue stream, and we love that this business model aligns the investment we've made in our free experience with the value we deliver to partners and shareholders. We see further opportunities to pursue a wide range of partnerships and adjacencies, from insurance to security products, but for now, we're keeping the focus of our new revenue efforts on ads because the opportunity is so compelling. To give you a sense of the opportunity, we've spent a lot of time reaching out to other companies that have been through a similar journey to incorporate advertising into their business. The range of outcomes is significant, from those that added meaningful revenue without giving advertising a major focus, to others that chose to lean in and create billion-dollar extensions to their core business.

For us, 2024 is about getting started and understanding an opportunity that we ultimately believe can achieve similar scale to our subscription business, given our extensive reach, high engagement, and the special role we play in our members' lives. So I hope this gives the strategy overview and gives you a sense of the priorities moving forward as we work to grow our audience, scale our paid offerings, and introduce new revenue streams. Now I'm going to turn it over to Russell to talk you through the final element of our strategy, which is our commitment to expanding profitability. Russell?

Russell Burke (CFO)

Thanks, Lauren. On our conference call a year ago, we outlined how Life360 was at a pivotal point to leverage scale in the cost base and deliver a pathway to profitability. Our disciplined approach to cost, combined with strong revenue momentum, has underpinned our first full year of Adjusted EBITDA breakeven and our expectation of a trajectory to positive EBITDA in calendar year 2025, and ultimately, strong EBITDA margins. During CY 2023, operating costs as a percentage of revenue declined to 68% from 85% in the prior year. The reorganization we undertook at the beginning of the year to deliver more than $15 million in annualized savings, saw personnel costs as a percentage of revenue decline from 37%-27%, and further proportionate reductions as we optimized marketing investments and other costs.

At the same time, we've maintained strong revenue momentum with prudent investment to underpin future growth. Following on from Chris and Lauren's overview of the key elements of our growth strategy, I'd like to touch briefly on how we're thinking about the value creation opportunity that's available to us and the scale of our addressable markets. Our growth and valuation opportunity is anchored in the market position that we've already established and the powerful foundation that that provides. We believe that our international brand, as a trusted leader in family location, sharing, and safety, together with a highly engaged member base and differentiated user experience, makes us unique in the marketplace.... We knew that families weren't being served by the incumbent players, and we've created a competitive moat based on household dominance, which makes us strongly positioned to keep scaling. Location sharing is a commodity.

Focusing on family and safety is our unique unlock, riding demographic tailwinds as millennials are just starting to have families and their parents age. We know that the non-family and friends also want to share their locations. Our significant scale underpins a durable value creation model that enables multiple growth levers. The strength of our subscription growth and the size of our subscriber base means that the nominal cost to add features is low. We've now reached a pivot point with scale, where we can truly leverage costs even as we continue to bolster growth. And finally, we are a founder-led organization with a seasoned executive team focused on creating ever greater value and utility for our member base. Our significant addressable market opportunity can be viewed through a number of different lenses.

Our core market has a $60 billion global serviceable addressable market, which includes the markets we're currently servicing. We've already proven that we're bigger than location sharing as a trusted platform that's expanded into other market segments, including crash and roadside assistance, identity theft protection, and more. Looking forward, we believe we've got the ability to disrupt legacy players, as we've already done in markets such as driver safety. Our near and midterm growth opportunities include adjacent addressable markets in industries such as auto insurance and eldercare, expanding our serviceable addressable market from $60 billion to a total addressable market of $190 billion. And then beyond that, we see potential adjacent markets, which can deliver on our vision of building a family safety and security platform and ecosystem.

We want to be the go-to place for digitally native families, with the ability to service additional verticals such as life, home and travel insurance, and family financial services. At the same time, our subscription business still has a very long runway. As an example, in the U.S., which is clearly our most highly penetrated territory, we're still seeing accelerating growth rates in our most highly penetrated states. This gives us great confidence that there's still significant headroom for future growth in the U.S. before we even get to international expansion. The appendix to this presentation also contains some additional slides on our membership model, positioning, and competitive differentiation, as these factors enable our growth spot flywheel. Turning now to the detailed financial overview. Please note that the numbers I'll be discussing are denominated in U.S. dollars, and where noted, are in accordance with U.S. GAAP accounting standards.

Our market-leading retention metrics are outlined on this slide. Starting with the charts at the top, U.S. organic user retention has remained stable, even as we've significantly lifted new registration volumes. Net subscription revenue retention by half year period measures revenue retention of subscribers who signed up at the end of the previous period. Revenue retention has remained at approximately 100%, even as the number of gross subscriber additions has continued to accelerate. The charts at the bottom of the slide show revenue by retention cohort by registration cohort for U.S. and international subscribers. They highlight the longevity of our subscriber relationships with ongoing contributions from cohorts that signed up prior to 2016. The U.S. chart illustrates the impact of our price increases, with a major step up in the monthly contribution from all of our cohorts.

The international business is yet to see the benefit of any meaningful price increases. However, revenue continues to grow strongly from a small base due to the strong performance of Paying Circles additions. The cumulative revenue of our quarterly cohorts over time is shown on this slide. The time series begins in Q1 of 2018, with the length of the lines again showing the extended period over which we've been able to retain and monetize users. Every year, apart from 2020, has seen the gradient of the line steepen as we've benefited from higher pricing, higher registration volumes, and improved re-user retention. The GAAP income statement is on this slide, and the reconciliation of the non-GAAP to GAAP items can be found in Appendix 3. A summary of our key CY 2023 financial metrics is outlined on Slide 37.

A full cash flow and balance sheet are included in the appendices to the presentation, along with reconciliation of GAAP to non-GAAP metrics. Non-GAAP revenue increased 33%, underpinned by the key drivers outlined earlier, particularly the 46% year-on-year increase in overall non-GAAP subscription revenue. Non-GAAP gross profit of $226.8 million increased 48%, with overall margins increasing from 67%-75%, and non-GAAP subscription margins increasing from 81%-84%. Higher pricing contributed to subscription margins, with hardware benefiting from increased margin improvement initiatives, higher volume of units shipped, and lower returns. Our focus on operating cost leverage is evident from the fact that the non-GAAP operating expenses increased only 6% year-on-year, benefiting from efficiency gains and the workforce reductions undertaken earlier in the year. Excluding the variable cost impact of commissions, total non-GAAP expenses increased just 1%.

Research and development expenses of $76.1 million were 8% lower as a result of the reduced headcount. User acquisition costs and TV costs of $28.9 million increased 9%, while other sales and marketing expenses of $19.4 million reduced 26%, largely due to lower brand and PR spend. Commissions of $42.7 million increased 36% year-on-year, reflecting the higher subscription revenue. For the year, commissions were 19% of subscription revenue, down from 20% in CY 2022, largely due to mix shift, including a higher proportion of one-year-plus subscribers. General and administrative expenses of $39.7 million increased 39% year-on-year, primarily due to increased accounting costs related to Sarbanes-Oxley compliance and higher legal expenses.

The positive Adjusted EBITDA of $20.6 million represented a $60.7 million turnaround from the Adjusted EBITDA loss of $40.1 million in CY 2022, benefiting from stable operating costs combined with strong revenue growth. Stock-based compensation of $38.5 million increased from $34.7 million due to the increased award volumes and transition equity. The EBITDA loss of $20.8 million and the net loss of $28.2 million, with both experiencing a significant improvement from the prior year. Other non-GAAP adjustments reflect costs associated with acquisitions in the Form 10 filing in the prior period, workplace restructuring and non-recurring adjustments relating to raw materials write-off, offset by a positive adjustment related to membership benefits, which was taken out of Adjusted EBITDA earlier in the year. Turning to the key measures of cash flow.

Operating cash flow of $7.5 million improved by around $65 million year-on-year, reflecting the Adjusted EBITDA performance, working capital efficiency following the integration of the acquisitions. Q4 2023 operating cash flow of $9 million was largely in line with Adjusted EBITDA of $8.9 million. For the full year, operating cash flows saw a differential to Adjusted EBITDA due to timing of receipts, manufacturing payments and Q1 restructuring costs. Investing cash flows of $2.2 million primarily relate to payments for internally developed software, and financing cash outflows of $25 million relate to the final payments associated with the Tile acquisition. U.S. GAAP rules dictate that we show this as financing, even though it's part of the acquisition cost, which was shown in investing in the prior period.

Also included in financing are taxes paid for net settlement of equity awards, offset by the proceeds from the exercise of options. At December 2023, cash, cash equivalents, and restricted cash was $70.7 million, up from $63.7 million at the end of Q3. Thanks for your attention. I'll now hand back to Chris, who will provide an outlook for 2024.

Chris Hulls (Co-Founder and CEO)

For CY 2024, Life360 expects to deliver the following metrics, which include both the early revenue and setup costs for the new advertising business. Consolidated revenue of $365 million-$375 million, with core Life360 subscription revenue growth of at least 20% year-over-year. Positive Adjusted EBITDA of $30 million-$35 million, EBITDA loss of $8 million-$13 million, positive operating cash flow for each quarter of CY 2024, with usual seasonal low point in Q1, year-end cash, cash equivalents, and restricted cash of $80 million-$90 million. The company expects to continue to be Adjusted EBITDA positive on a quarterly basis going forward, and to achieve positive EBITDA in the first half of CY 2025. I'll now hand over to Melissa, who will run the Q&A portion of today's call.

Melissa Goodell (Director of Investor Relations)

Thanks, Chris. As a reminder, to participate in the Q&A, please raise your hand by pressing the Raise Hand icon at the bottom of your screen within the Zoom app. You'll need to unmute yourself to ask your question. Also, once unmuted, please tell us your full name and what company you're calling from. First up, we have Chris Schaller.

Chris Schaller (Equity Research Analyst)

Good morning, Chris Schaller from Goldman Sachs. Can you hear me okay?

Russell Burke (CFO)

Sure can, Chris.

Chris Schaller (Equity Research Analyst)

Perfect. First question, just on the revenue guidance, was just hoping you could give us a bit of a sense for the split between core subscription revenue growth versus hardware versus other revenue sources in 2024?

Russell Burke (CFO)

... Yeah, I think we generally characterize it as, you know, we've said core subscription growth of more than 20%, in 2024. Hardware growth on a sort of similar trajectory, and then we're adding in a small amount for advertising. The other revenue as was the case this year, would be fairly stable.

Chris Schaller (Equity Research Analyst)

Yep, that's very clear. Secondly, just on the incremental margin, your guidance implies that that's a little bit lower in FY 2024 versus FY 2023. Just interested in where you see the greatest areas of cost reinvestment in 2024, and just interested to get a sense for how material that advertising investment could be versus the revenue in 2024.

Russell Burke (CFO)

So taking the last part first, our investment will be less than the revenue that we expect to obtain and the margin effectively that we expect to obtain in 2024. Although all of those will be sort of relatively modest, and we expect to see the larger impact of advertising in the second half. You know, otherwise, we really don't -- we expect to be consistent with margins across the business, if not slightly improving. So if that goes to your answer... If that answers your question, Chris?

Chris Schaller (Equity Research Analyst)

Sure. And then following up on advertising, just interested to get your thoughts around how material you think that opportunity could be over the next couple of years. Like, can you give us a bit of a sense for maybe the contribution to the group or how quickly you think that business could scale?

Chris Hulls (Co-Founder and CEO)

Over the long run, we think the monetization of our free users could equal subscription revenue. We don't have an exact timeline for that, but one thing that has been a trend, companies that have the engagement and data that we have, they've really been skyrocketing in terms of what they've been able to achieve. We were always looking at this category, as I think everybody knows, but we had been more focused on new verticals for actual products for customers.

But when we were looking at strategy for the year, we'd done some early testing on advertising that went better than planned and seeing the success in the market, we said, "Hey, here's an opportunity to do something that has a much quicker payback than longer bets with new verticals, with much lower risk." So one thing many people have heard us talk about before is when we go to new verticals, it's usually one year to build it, second year we start breaking even on it, third year we really harvest. That's been a pattern on the things that hit, and not everything hits. Advertising is a bit different, where relatively small investment, much lower risk. I think it's unlikely to be a flop. It's more like, how big can it get? And then, how quickly can it happen?

But we are highly confident that this year it's gonna show some meaningful contributions with extremely high margins, and it won't be one of these things where we have to do a very long period of forward investment to show the ROI. And then long-term, genuinely, if you look at the monetization of free users, over time, I think it will rival subscriptions, but that's a much longer-term expectation.

Chris Schaller (Equity Research Analyst)

Thanks. I'll jump back in the queue.

Melissa Goodell (Director of Investor Relations)

Thanks, Chris. Next up, we have Lafitani.

Lafitani Sotiriou (Senior Emerging Analyst)

Hi, guys, and congratulations on a good result. I just wanted to unpack the advertising opportunity a little bit more. So, you currently have some lead generation, and you're also selling some of the data, which then kind of overlaps a little bit. So can you just talk us through the advertising opportunity? Are you looking to use a partner? Is it starting off in the U.S., or are you gonna do international at the same time? And based on the margins you get for lead gen and the like, you know, would expect EBITDA margins north of 50%. Is that consistent, or could you just add some color around that?

Chris Hulls (Co-Founder and CEO)

I'll answer qualitatively, and Russell can talk to the margins. I'm not sure what's considered GAAP or not in that, so I wanna make sure I answer that appropriately. Qualitatively, though, it's extremely high margin for us, especially if you look at the net revenue we receive after working with a partner. But we're doing a lot, and you are right, it does overlap with lead gen, it does overlap with our data business. The world has changed a lot as we've moved around how we use our customers' data. Things like Apple, opt-ins with IDFA. We now know which of our customers allow us to target them with ads, both inside and outside Life360. So we're starting...

We actually did our first test internationally, just to get a sense of user behavior, and we were very pleasantly surprised. There was no negative user impact at all showing up in the numbers. We're already running a couple of bespoke tests with some specific partners. I can't talk about them on this call, but we'll be talking more about that soon. We are gonna be doing some testing with the various networks, and we are also exploring new ways to monetize our data in different ways that both will extend the agreement we have, hopefully with Placer, and also do things with advertising around using the data we collect and the opt-in users for cross-app tracking, things like that, but more to come on that in the future.

Russell Burke (CFO)

And just to add in on the margin aspects, Laf, you know, this business is typically quite high margin, as you referred to. And I think once we get past the initial period where we're investing in some setup costs, once we get past that period, the flow-through margins are likely to be very strong. What we've heard quite often in terms of sort of setting up the business is that it does take a little while to tune in, and that's why we're expecting the impact really to start from the second half.

Lafitani Sotiriou (Senior Emerging Analyst)

Got that, and so I'm broadly assuming that it is going to be the U.S. and international markets selectively being rolled out, and will be across, advertising will be across a range of products, but also including, it sounds like some local ability to be, for local businesses to target, people in the area. Will it be that sophisticated or?

Russell Burke (CFO)

It will be that sophisticated in the longer term. So certainly we're gonna take it step by step. So kicking off in the U.S., you're very attuned to both the member experience and the type of advertising that we put through the app. So we will take it step at a time. The U.S. tends to have much higher CPMs for this sort of business as well, so that's where our initial focus will be.

Lafitani Sotiriou (Senior Emerging Analyst)

Got it. And just one final question on some of the international market. You've given us some of the Paying Circles. It looks like revenue for Canada, U.K., Australia. Great to get this level of color. A little bit surprised to see Canada is only a portion of what Australia and U.K. is generating. And can you add a little bit more color? Are we, when we look at the international market from a revenue perspective, do we consider, you know, U.K. number one, Australia number two, and then we're going to some of the other markets? Or if it's not the case, could you just add a bit of color about who the top five international markets should be from a revenue perspective?

Russell Burke (CFO)

Yeah, I think we've often said that our focus is on territories that are sort of culturally similar, have a similar sort of driving mentality, et cetera. So, in that respect, I think, just sort of volume-wise, we would think about the U.K. as being the lead market internationally. And Australia is sort of very strong. Obviously, we're in Canada at the moment. As we've said before, we launched without putting a great deal of marketing emphasis there. So that's something that we'll come back to at some point. Our focus is on these launches at the moment. And then we'll roll out to the next identified territories.

But we're also looking to continue to look at the overall international experience and the product, the standardized product internationally.

Lafitani Sotiriou (Senior Emerging Analyst)

Got it. Thank you.

Melissa Goodell (Director of Investor Relations)

Thanks, Mark. Next up, we have Julian.

Speaker 11

Just a few for me, guys. Just firstly on the conversion rate of subscribers to monthly active users, it's been sort of falling over the last couple of years, but it seems to have stabilized now. When do you think that's gonna start moving up and the sort of benefits of sort of Tile and Jiobit start to sort of feed through?

Chris Hulls (Co-Founder and CEO)

Well, I think we're already seeing those benefits. Remember, it was a very significant price increase, so we expected decreased conversion. So the fact that that largely held flat with modest decreases despite that is because of that. On the topic of Tile, we're already seeing benefits are gonna be continue to be integrated into the product and services. You heard from Lauren. Jiobit, we put on ice when the market corrected, and we're now reinvesting there. That is one of our longer term bets. We will be doing new things with Jiobit later this year. By 2025 is when I think you'll start seeing a whole bunch of new stuff on the hardware front. But as of now, we're looking at things as a consolidated service.

I do think in the U.S., we have gotten through most of these changes, and I could see things increasing. U.K. will obviously go the opposite direction because we adjusted the price increase, so we will see that the similar trends hold through. So we'll see lower net adds in Europe, but it'll be a good thing because LTV is so much higher. We've gone through that in the U.S., and I hope we start seeing that relative penetration increase.

Speaker 11

So would we start to see it sort of tick up in the U.S. from here on in? Or do you need another year of consolidation?

Chris Hulls (Co-Founder and CEO)

Yeah. It'll start slowly ticking up from now, but it won't be a huge change.

Speaker 11

Right. Okay. And have the existing sort of holders been given free Tiles yet, or that's just a wait and see whether to do that?

Chris Hulls (Co-Founder and CEO)

Yeah, wait and see whether we need to do it. We've given a lot of the emphasis on demonstrating leverage, which we've obviously shown this quarter is something we can do. We've been focusing on things that can bring in some of those numbers a little bit earlier. And if we were to be giving away free Tiles, that would be a significant cash cost, and we think that we'd get a lot from it, but given some of the other areas we want to invest, we thought putting dollars into things like advertising, where you get as much quicker ROI, is the right, you know, balance between showing long, long-term growth and forward investing and behaving in a way that is attuned to the current market environment.

Speaker 11

Right. And we've seen a lot of the ad strategy, and it's a bit of a change from what kind of talking about a couple of years ago. So if it's... I know you said, you know, people you know who's opted in, opted out, that sort of thing, so they're happy to be targeted. But is it kind of gonna be a little bit creepy in that, you know, you're gonna be targeting ads because it's based on where they're moving, like to go past McDonald's, get an ad served up? Is that not gonna have an impact, do you think?

Chris Hulls (Co-Founder and CEO)

No, you can look at what places like Uber have done and part of what... So first off, we've done testing, so we've had multiple months of test data that have given us a ton of comfort. We moved in it slowly, and part of why we have accelerated is the data was better than expected. And we do have these market comps, which are doing highly targeted and highly personalized ads, and they're being very successful. What we have seen, this is going back to some of the conversations you had around the use of data in general. It is a very small sliver of press and regulators who give the very wrong impression about how most people feel about targeted ads. The average person likes targeted ads because it's relevant to them.

This is not a bad thing, this is a good thing. My joke is only half a joke, 'cause I like targeted ads, and I know when my wife has been using my computer, 'cause I get too many yoga pants sent my way. But outside of stuff like that, I don't think anyone thinks it's creepy.

Speaker 11

I noticed that there's other income number of $3.2 million in the profit. What was that related to?

Russell Burke (CFO)

That relates to a combination of adjustments on valuation of convertible note, and a couple of other things. Julian, we can give you the sort of full details of that, but that's the primary piece of it.

Speaker 11

And that's included in your, the EBITDA of $20?

Russell Burke (CFO)

It's not included in the EBITDA, no.

Speaker 11

Right. Okay, cool. And just, finally, has there been much change in the mix of people paying yearly or monthly subscriptions?

Russell Burke (CFO)

No. That's been pretty consistent. We haven't seen much change in that, and frankly, we haven't yet been intentionally changing that either in terms of where we direct people.

Speaker 11

Cool. Thanks, guys.

Melissa Goodell (Director of Investor Relations)

Thanks, Julian. Next up, we have Chris Savage.

Chris Hulls (Co-Founder and CEO)

Hey, Chris, we can't hear you if you're talking.

Chris Savage (Head of Research)

Apologies, Chris Savage, Bell Potter.

Chris Hulls (Co-Founder and CEO)

Morning, Chris.

Chris Savage (Head of Research)

Chris... Good morning. Just, you gave us some quantitative-type figures on the U.K. and the tiered membership launch. Chris, can you just give us some qualitative comments on how you've seen the launch so far?

Chris Hulls (Co-Founder and CEO)

That's been essentially going exactly as expected. No big surprises, either overwhelmingly good or bad. It's, in some ways, that shows the predictability of the business. We got actually a lot of press, which was pleasantly surprising, just in terms of just, like, how much there was interest in a big U.S. app, expanding more broadly. We have seen the expected churn and reduced conversion in new customers. We had a one-time spike of churn because we increased the price for legacy customers. We're working through that, and the shapes of the curves are very, very much like the U.S., so it gives a lot of confidence that we'll see similar overall results.

It validates the international strategy, where this is one of those things where it's relatively low risk, takes some time to build, but does contribute to the bottom line.

Chris Savage (Head of Research)

Do I hear correctly with Lauren's comments, that there's gonna be tiered membership launch in Australia and New Zealand in Q2, was it?

Chris Hulls (Co-Founder and CEO)

That's, that's right.

Chris Savage (Head of Research)

Is that quicker than you anticipated?

Russell Burke (CFO)

Yeah, I think it would be fair to say that the agreements that we've been working on have sort of come together fairly quickly, and without any issues. So in that respect, it is, but we're, you know, the team's been sort of very focused on that Australia launch, and putting in the pieces of that. So, it's all come together well, and we're, you know, we're now confident we can be ready to launch in Q2.

Chris Savage (Head of Research)

Do you think you'll still just do one international launch this year, being Australia and New Zealand?

Russell Burke (CFO)

At this stage, that's the plan.

Chris Savage (Head of Research)

Okay. And just last question on that aspirational billion-dollar target. You didn't obviously put a timeline on it, but can we assume that around a 2030 type target, like five years, several years away?

Russell Burke (CFO)

I think thinking about it in terms of as a five-year plan is the way to view it.

Chris Hulls (Co-Founder and CEO)

Yeah, and, and even more conceptually, one thing we talk a lot about internally is just how big the company can get, and in some ways, we have an even internal aspirations that go far bigger. We are now the fifteenth biggest app in the U.S. by DAU. We can see the cross-border demand. So the idea was, like, what is something that just shows that it is achievable, but not, not easy, but also not the complete upside? 'Cause I, I think there is still a chance that it's significantly bigger, and we were very intentional about saying this is our, our first billion. So, this is by no means a terminal aspiration.

Chris Savage (Head of Research)

Sure. And just to clarify one of your earlier comments, Chris, I think, did I hear you say you think you can see advertising revenue matching subscription revenue at some stage?

Chris Hulls (Co-Founder and CEO)

At some stage, yes.

Chris Savage (Head of Research)

Okay. Great. Thanks very much.

Melissa Goodell (Director of Investor Relations)

Thanks, Chris. Next up, we have Wei-Weng.

Wei-Weng Chen (Head of Small Cap Equity Research)

Hey, guys. Congrats on a good result. Just another question from me on advertising strategy. So I guess you guys list a number of comps and their average monetization of MAU in your presentation. Can you, one, maybe just speak to why you think there's so much differential between the companies? And then two, I guess, you know, given your engagement levels and MAU targets, where do you think you could land on a sort of a dollar-per-MAU basis? Are we closer to Uber, or are we thinking closer to Duolingo?

Russell Burke (CFO)

... I think we laid out the range there just to give you a sense of what that potential opportunity is. And you know, look, we're very early days at this point, so while we are very excited about the opportunity, we've got a bit of work to do to understand the full realization of it. And the range there goes from, to your point, everything from Duolingo, where they haven't really focused on advertising. Advertising is more of a side issue for them, all the way through to some of the other companies that have invested heavily and put a major focus on it. So as I said, we're early days.

We see it as a really significant opportunity, but we want to understand it more as we move along.

Wei-Weng Chen (Head of Small Cap Equity Research)

Yeah. Cool, thanks. And then the comment that advertising is expected to contribute in the second half, just wanted to clarify whether that is within guidance, revenue guidance, or is that kind of not baked in?

Russell Burke (CFO)

Yeah. We've included in our revenue guidance a small element for advertising.

Chris Hulls (Co-Founder and CEO)

We have had to pull back on other product initiatives. There is no free lunch on this one. So we think this is gonna show that leverage very quickly, as mentioned, but we are trying to find that fine balance between demonstrating operating leverage and opening up the new initiatives that will get us to that billion-dollar mark.

Wei-Weng Chen (Head of Small Cap Equity Research)

Yeah. And sorry if I missed this one earlier, but just on the setup costs of the advertising strategy, is that gonna be capitalized? And is that gonna be CapEx, and did you guys say how much that might be?

Russell Burke (CFO)

No, we haven't specified it at this point. We're not looking at capitalized costs. This would be essentially technology and sort of people costs to set it up, so they would be expensed, and again, part of our guidance.

Wei-Weng Chen (Head of Small Cap Equity Research)

Okay, thanks. Thanks so much.

Melissa Goodell (Director of Investor Relations)

Thank you. Next up, we have James.

James Bales (Equity Research Analyst)

Oh, hi, guys. So, a couple of things that I just wanted to run through. Can you, maybe with the monetization of your user base, obviously, you've got a deal in place with Placer.ai. Can you just remind me of the terms there, in terms of expiry, and what the intention is, in terms of renegotiating another deal, which you alluded to on the call?

Chris Hulls (Co-Founder and CEO)

I can't go into too much detail on that, but I am very confident that we will extend that deal. I think it formally expires, I'm not even sure, next year or two.

Russell Burke (CFO)

25.

Chris Hulls (Co-Founder and CEO)

25. But if anything, I see that relationship getting closer, and the value of our data has only increased over time, and that's obviously a hot topic now with everything going on with AI, just how valuable rich proprietary datasets are, and ours is one of them. And it does dovetail nicely into advertising, because it's really about how do you get insights into your customers, and the more you can get insights, the better. And I think the world has normalized, even from a press and regulatory standpoint, where the Wild West of raw data, I don't think there was necessarily ever an issue with that. That's kind of... Everyone's moved beyond that to now ways that are considered more privacy safe to get insights into data and monetize it.

So I think we're very well positioned to have that grow over time.

James Bales (Equity Research Analyst)

Okay, got it. Now, on advertising, another question there: so obviously, if you've got an advertising model that immediately monetizes your active users rather than having to convert them to paying subs, you get a much faster payback on that. So can you help us understand what you're factoring in to sales and marketing, if you get that much quicker feedback loop and stronger unit economics?

Chris Hulls (Co-Founder and CEO)

Sure. So in the short term, we're not really doing much, because year one is not gonna be massive. But over time, of course, that factors into the LTV model, and we calculate return on ad spend across channel, and this will factor into that. And it's a nice linear straight line thing with MAU. So, as we see the faster payback, we'll increase marketing costs, because we'll see the return. Obviously, in this climate, we have to be prudent about that. We could be investing way further out into that curve, and if the market expectations change, we'd be ready to do that. But that said, we should be able to increase per dollar effectiveness, because we're getting that cash recovery quicker, as you're highlighting.

I think 2025 is when I hope we would see much higher leverage, because we have relatively modest contribution from advertising percent of revenue this year, but going up thereafter.

James Bales (Equity Research Analyst)

Is that scalable? Like, if you put more dollars to work, can you acquire more users at the same or similar prices?

Chris Hulls (Co-Founder and CEO)

This usually goes in step functions, where you'd start with the low-hanging fruit channels, then you need to build out the brand as well. You have brand things that are less measurable, which then increase the effect of the performance-based things. So it changes over time, but part of why we hired Mike was that he has bought a number of companies through these transitions. He's done international, and so our hope is, yes, we will start seeing that improvement across channels, but of course, things do get more expensive at the same time.

Russell Burke (CFO)

To your point, James, it feeds into the same flywheel, essentially. High margin returns, you're able to invest more, build the audience more, and it feeds into that flywheel. The point is it feeds into it quicker, essentially, with a high return.

James Bales (Equity Research Analyst)

Yeah. So I guess that is a positive for the long run. One shorter term question I had on the subscription side was, you guys had previously alluded to a target of 400,000 or net new subscribers per annum or, you know, a 100,000 a quarter, however you sort of expressed that. Is that still the target that you're aiming for in 2024?

Chris Hulls (Co-Founder and CEO)

We've pulled back a little bit because we've shifted a bit to my comment earlier. We have to allocate resources to different initiatives, so the advertising revenue does mean we're gonna do a little bit less on the product side. So we don't have an explicit number, but we are forecasting at least 20% subs revenue growth. But so it'll be a modest pullback because some of the things that would have been adding subs are now going to the investment in the advertising infrastructure.

James Bales (Equity Research Analyst)

Right. Thanks for the help, guys. I appreciate it.

Chris Hulls (Co-Founder and CEO)

Welcome.

Melissa Goodell (Director of Investor Relations)

Thanks, James. On to our final questions. Next up, we have Wei Sim.

Wei Sim (SVP)

Hi, can you hear me?

Russell Burke (CFO)

We can.

Wei Sim (SVP)

Great. Thanks, Russ. Thank you, Chris. My first question is just in relation to the product initiatives. So, beyond the advertising, which we're focusing on at this point in time, can you talk a bit about, you know, just the pecking order of what we see as, you know, the next most pertinent, say, two or three different initiatives? And I guess related to that, when we talked about the SAM, the TAM, and the adjacent markets, what kind of timeline we should be thinking about those, for those? Thank you.

Chris Hulls (Co-Founder and CEO)

So I'll start with the last piece first. So in general, we've tried to pick up one major new vertical a year. Advertising is our, our brand new thing this year. We had hardware the year before that. In terms of exact timelines, what is coming next, you are gonna see the updated hardware stuff coming soon. You are gonna see Jiobit fully integrated into Life360. You'll see the new Tile lineup. We're continuing to do a lot on the free user experience. So it's a lot of what Lauren showed in her slide. In terms of going to something completely new, say, fintech for kids or something like that, it probably will not be till 2025 or 2026. So largely the things we've already discussed.

Russell Burke (CFO)

To state the obvious, it's, you know, so some of that is just an evolution. And the other aspect is those SAM and TAM, your markets, you know, are separate from the advertising, you know, potential that we talked about as well. So, they all feed into each other.

Wei Sim (SVP)

Okay, understood. And my second question is just on how the advertising works. Is this something where we'd be putting ads in for the free users, and then if you were a paid user, there would be no ads? Or, and or, or we have different tierings for ad paid, paid users. And, yeah, just if you can give some color behind, you know, how exactly we're monetizing on the advertising. Thank you.

Chris Hulls (Co-Founder and CEO)

So advertising is very broad. The thing we're launching now is very basic banners, where free users will see them, paid users won't. But when we get into things like doing ID matching and other types of ads or lead gen, or even some of the insurance stuff, which we're convinced will, at some point, come front and center again, those are technically ads, and there's no one-size-fits-all answer for it. But as a thematic, if you're a paid user, we want you to give you full control over your experience. If you're a free user, people are accustomed to saying, "Hey, this thing's free. I'm okay with a little bit shown to me to help fund this business." And so users, though, will have choice, especially if you're paying.

Wei Sim (SVP)

Okay, understood. Those are the only questions from me. Thank you very much.

Melissa Goodell (Director of Investor Relations)

Thanks, Wei. As there are no more questions, I'll hand over the call back to Chris for some closing remarks.

Chris Hulls (Co-Founder and CEO)

My closing remarks are easy. Thanks, everyone. Have a nice day, and I'll see some of you over the course of the coming week.