Life360 - Q3 2023

Transcript

Jolanta Masojada (Head of Investor Relations)

Recording in progress 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 or as a substitute for or superior to our GAAP results. The agenda for this morning's call will begin with a business update by Co-founder and CEO Chris Hulls. CFO Russell Burke will then provide detail on the Q3 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 (CEO)

Good morning, everyone, and thanks for joining our Q3 results call. Life360 has delivered an exceptional quarter with net subscriber additions of 118,000, a record for Q3 and just shy of our all-time record of 119,000 in Q4 2021, which was prior to our nearly 50% price increase and benefited from the post-COVID reopening. The 17% year-on-year growth was underpinned by all-time record international subscriber additions, up 44% year-on-year. The impressive growth bodes well for the rollout of our triple-tier membership offering, which went live in the U.K. in early October, with Australia now planned for the first half of CY 2024. Early results of the U.K. rollout are in line with expectations and will contribute to CY 2024 revenue growth, as one in ten U.K. families already use Life360.

Overall, we have seen continued outperformance from predominantly English-speaking countries, Canada, U.K., and Australia, which in aggregate, saw Paying Circles increase 52% year-over-year. Along with strong subscriber growth momentum, U.S. Subscription revenue saw the full impact of the April price increase for existing U.S. Android subscribers. U.S. ARPPC increased 40% year-over-year and 4% quarter-over-quarter. Global ARPPC increased 28% year-over-year and 1% quarter-over-quarter. Global monthly active users increased 24% year-over-year to 58.4 million, a very strong result, which built on the record growth delivered in Q3 2022. The U.S. delivered our usual back-to-school seasonal uplift, increasing 21% year-over-year.

We're seeing accelerating growth rates in our most highly penetrated states, underpinning our confidence in the size of our total addressable market, and we believe there is still significant headroom for future growth. International MAU growth of 30% reflects the success of our investment and the international user experience, which is driving encouraging retention results. Tile membership bundling is now at a point that we can be confident of its success. The retention gap between those who redeem a Tile versus those who do not, continues to expand, and by month five, we are seeing a 15% increase in relative retention versus a 10% improvement after months one and two. As this gap is widening over time, we are highly confident that this is a durable change.

Beyond the retention benefit, our value proposition has now truly expanded to people, pets, and things, while we are simultaneously increasing net subscriber additions. This provides significant validation of the Tile acquisition and the move to bundling Hardware with membership. In addition, GAAP Hardware revenues increased 33% year-over-year, inclusive of the bundling allocation along with margin improvements. This equates to 21% growth in standalone non-GAAP Hardware revenue. We are encouraged by this momentum and have raised CY 2023 guidance for non-GAAP Hardware revenue to increase 10%-15% year-over-year, while recognizing that it remains subject to macro uncertainties and the significant seasonality associated with the Q4 U.S. holiday period. As we expected, CY 2023 Subscription performance is skewed to the second half of the year, with a resumption of strong subscriber growth following first half churn impacts from significant U.S. price increases.

We continue to carefully balance expense management with investment in significant long-term growth opportunities available to us. Q3 2023 positive Adjusted EBITDA of $5.5 million delivered a $14.9 million improvement year-over-year on the back of a $21.5 million revenue increase, demonstrating the operating leverage of Life360's business model. Our balance sheet remains strong with cash, restricted cash, and cash equivalents of $63.7 million at the end of Q3 2023. This is after the $3.9 million repayment of convertible notes related to the Jiobit acquisition. We delivered positive operating cash flow of $4.1 million for Q3 2023, in line with guidance.

We continue to expect positive OCF for the remainder of CY 2023, despite planned investment in targeted growth initiatives and expected timing differences in remittances of payments from a platform provider, which will result in eight monthly receipts in CY 2023 rather than 12. Q3 2023 AMR of $259.1 million, up 41% year-over-year, provides a strong trajectory of growth leading into CY 2024. Turning now to greater detail on some of our key operating metrics. Global MAU increased 24% year-over-year to 58.4 million, with Q3 2023 net additions of 4.4 million. U.S. MAU increased 21% year-over-year, with net adds of 1.8 million. International MAU were 30% higher year-over-year, with Q3 2023 net adds of 2.6 million.

Australian MAU increased 37% year-over-year to 1.7 million. Paying Circle growth accelerated in Q3 2023, with a global net subscriber additions of 118,000, the second highest quarterly growth on record. U.S. Paying Circles increased 10% year-over-year, despite the effective price increases implemented between Q3 2022 and Q2 2023. International Paying Circles maintained exceptionally strong momentum, up 44% year-over-year. Global ARPPC increased 28% year-over-year and 1% quarter-over-quarter. The benefit from U.S. price increases implemented from Q3 2022 saw U.S. ARPPC increase 40% year-over-year. Net Hardware unit shipped, excluding bundling, increased 43% year-over-year, reflecting higher gross unit sales and lower returns from improved consumer electronics demand. With that, I'll turn the call over to Russell to run through the financials.

Russell Burke (CFO)

Thanks, Chris, and thanks to everyone for joining the call today. As a reminder, all of the financials I'll be referencing are unaudited and denominated in U.S. dollars. Q3 consolidated revenue increased 38% year-over-year to $78.6 million. Total Subscription revenue for the group increased 45% year-over-year to $56.6 million, and Life360 core Subscription revenue increased 50% year-over-year, supported by the 17% year-over-year uplift in Paying Circles and 28% higher ARPPC. Hardware revenue increased 33% to $15.5 million due to an increase in the number of units shipped. Other revenue of $6.5 million was in line with the prior period as a result of the strategic shift to a single data partnership from January 2022 and the terms associated with that arrangement.

September AMR increased 41% year-on-year, reflecting strong Subscription revenue momentum. Q3 gross profit of $57.9 million increased 48% year-on-year, with the gross profit margin increasing to 74% from 69% in the prior year period. This reflected the uplift in Subscription-only margins to 85% from 80% due to higher pricing, and Hardware gross margins also increased, reflecting cost efficiencies from successful initiatives to reduce fulfillment and logistics costs. Operating expenses increased 7% year-on-year, largely due to the higher general and administrative costs, primarily arising from higher legal expenses and increased accounting costs related to Sarbanes-Oxley compliance and other public company costs. Commissions were higher year-on-year, in line with the growth in Subscription revenue.

Excluding commissions, operating expenses increased just 2% year-on-year, while revenues increased 21.4%—sorry, $21.4 million or 38%, demonstrating the company's operating leverage. Q3 delivered a positive Adjusted EBITDA contribution of $5.5 million versus an Adjusted EBITDA loss of $9.4 million in the prior corresponding period. This was the result of continued strong Subscription revenue growth, higher Hardware revenue, improved margins, and additional cost efficiencies. Turning now to the balance sheet and cash flow. Life360 ended Q3 with cash, cash equivalents and restricted cash of $63.7 million, with unrestricted cash decreasing by $0.6 million from Q2 due to specific non-operating cash flow items. Net cash provided by operating activities was $4.1 million.

The differential to Adjusted EBITDA of $5.5 million was due to the timing of receipts, manufacturing payments, and higher sales due to the back-to-school seasonal uplift. Net cash used in investing activities was $0.4 million, which relates to payments for internally developed software. Net cash used in financing activities of $4.2 million relates primarily to the repayment of the Jiobit convertible note, as well as taxes paid for the net settlement of equity awards, which were largely offset by proceeds from the exercise of options. Before I conclude, I'd like to provide some clarification on the non-GAAP revenue and GAAP to non-GAAP revenue reconciliation included in the media release.

We have noted previously that GAAP would require us to carve out a portion of Subscription revenue and classify it as Hardware revenue once we started the bundling of Tile Hardware with Subscriptions. For clarity, the reconciliation on page 16 sets out these adjustments between GAAP and non-GAAP revenue for each quarter of this year. Thanks for your attention, and I'll hand back to Chris to provide an update to earnings guidance.

Chris Hulls (CEO)

For CY 2023, Life360 expects to deliver core Life360 Subscription revenue growth in excess of 50% year-over-year, Hardware revenue growth of 10%-15%, previously 0%-5%. Other revenue of approximately $26 million. Consolidated revenue of $300 million-$310 million. Positive adjusted EBITDA of $12 million-$16 million, previously $9 million-$14 million. Positive operating cash flow of $0 million-$5 million, revised from $5 million-$10 million. This change is solely due to a timing difference, with no change to the OCF outlook, and positive adjusted EBITDA and operating cash flow for the remaining quarter of CY 2023.

For Q4 2023, it should be noted that it is usual for Life360 to see some pullback in subscriber momentum after strong waves of subscriber growth, especially in Q4, which outside the COVID reopening period of 2021, is generally lower due to seasonality. While we are on track to hit all key guidance metrics, there is likely some pull forward effect in Q3, and along with natural churn and lower expected top of funnel, we expect fewer net adds in Q4 than in Q3, despite strong ongoing momentum across the business. Looking ahead to CY 2024, while we will share guidance as part of our CY 2023 full-year earnings announcement, we remain on track to continue to expand our Adjusted EBITDA and operating cash flow, while also lowering our EBITDA loss, with EBITDA breakeven expected in CY 2025.

We continue to believe the right strategy for the business is to invest in growth, and we are taking a balanced approach that will allow us to deploy excess cash generated to make additional R&D and marketing investments, while simultaneously improving margins. That concludes our prepared remarks, and I'll now turn the call over to Melissa, who will manage the Q&A portion of our call today.

Melissa Goodell (Senior Manager 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 Gawler.

Chris Gawler (Executive Director and Small-Cap Equity Analyst)

Yeah. Good day, guys. It's Chris Gawler from Goldman Sachs. Can you hear me okay?

Russell Burke (CFO)

You're okay, Chris.

Chris Hulls (CEO)

We're good.

Chris Gawler (Executive Director and Small-Cap Equity Analyst)

Great. Firstly, just a quick question just on the outlook commentary. Just note that you mentioned that you are expecting a sequential step down in net adds in the fourth quarter versus the third quarter. Do you mind just fleshing that out a little bit for us? Is there maybe a historical example that we can look to in terms of the quantum of the step down, and also just interested in what you meant by a potential pull forward effect that you saw in the third quarter? Thanks.

Chris Hulls (CEO)

Sure. I will take it qualitatively, and Russell can chime in with specific numbers if it's still relevant. Two things, in general, Q4 is slower than Q3, and we just wanted to flag that, 'cause people might look at a record quarter, which was Q4 2021, which was really a unique period, 'cause it's when we had the COVID reopening. So just pure seasonality, we expect it to come down. We also saw that, it was just a huge Q3 in a very good way, and normally, when we get a bunch of users, there is some level of churn from that. So it's just simple math, because people come in, they try out, the churn's front loaded.

If you get a big set of net adds, you're gonna get some of that natural roll-off, and we had a lot of success with a lot of our campaigns over Q3, and so we don't know definitively if we cannibalize on people who are coming in from Q4. We have just seen that pattern, that big spikes come down. We obviously have some visibility into results in early Q4. Genuinely, we're feeling quite good. We just did want to level set that there's not gonna be a record net add period this quarter. Russell, anything to add?

Russell Burke (CFO)

Yep. No, I think that says it all, Chris. It's... There's nothing unusual there. It's the normal, normal sort of seasonal patterns that we're seeing.

Chris Gawler (Executive Director and Small-Cap Equity Analyst)

Yep, that makes sense. Then just a question on the EBITDA guidance and the cost growth implied in that. Just note that the non-GAAP OpEx did grow in the third quarter versus the second quarter. I mean, your guidance sort of implies that you know, we'll continue to see cost growth into the fourth quarter. Do you mind just giving us a sense for some of the areas of investment? Is it U.K., go-to-market, R&D?

Russell Burke (CFO)

Chris, we did have a bit of an increase in marketing in Q3. That was really the only area of OpEx outside of the G&A that we mentioned that did increase. And, you know, again, I pointed to the very small net increase in total operating expenses in Q3. In Q4, as we look towards the rest of the year, we have made an intentional decision to invest a little bit more in growth. So it will be primarily in marketing and R&D into Q4.

We're looking at the momentum that will give us sort of going into year-end and into 2024.

Chris Gawler (Executive Director and Small-Cap Equity Analyst)

Sure. And maybe just the last question for me. Interested, Chris, and just to get a bit more, a bit more color around the impacts of Tile bundling that you've been seeing. I mean, it's been up and going for a little while now. Interested if you could give us a bit more color around that 15% increase in relative retention that you're seeing. I mean, how significant is that versus the retention of the, the non-redeemed cohorts?

Chris Hulls (CEO)

Sure. Let me answer that at a higher level. It's. We are trying to show specific indicators around this bundling strategy, but if you look at the packages, everything's inextricably linked now. Every single customer subscribing to Life360 gets Tile, and now that it's in all packages, it's very hard for us to say, "Well, what would happen if we didn't have Tile?" So the data we look to is what is happening between the people who take Tile and don't take Tile, and then what is the difference also between holdout groups where it wasn't even an option. So we had one holdout group that's now fading, but net, net, what we are seeing is that the Tile customers, as you saw in the numbers, they're retaining much higher than the people who don't take the Tile.

You might say, "Well, you're just cherry-picking your best customers," and that would be fair, but what we are seeing is that that's actually not the case. If you were gonna take the overall cohort of people who had the Tile option versus that holdout group, it's sort of the midpoint higher. So it demonstrates that if we had no sort of even vision, and the whole, whole reason or the primary reason we did the acquisition was people, pets, things. We want to keep you close to everything you care about. We are seeing that very strong economic ROI, which says, "Okay, by, by including this with our customers, it's working, it's resonating," and we see a good line of sight to just this paying off economically.

Chris Gawler (Executive Director and Small-Cap Equity Analyst)

Sure. Thanks, guys. We'll jump back in the queue.

Melissa Goodell (Senior Manager of Investor Relations)

Thanks, Chris. Next up, we have Lafitani.

Lafitani Sotiriou (Senior Analyst)

Hi, everyone. Lafitani Sotiriou from MST Financial. My first question is a follow-up on the bundling. Can you... Can I just try to get a little bit more color on the current penetration of your entire U.S. book that would have subscribed or that have currently got a Tile that is, that is being activated? And, so we can kind of get an idea for when we may see the peak impact from the bundling flow through in the book. So is this more a 2024 story, a 2025 story, as you sort of ramp up the Tile distribution, or how should we think about it?

If you could, if you were to look at potential net sub adds impact from this, if you're looking, you know, in 2024, what would you think that the impact would be from something like bundling being in place?

Chris Hulls (CEO)

Sure. So I don't have exact numbers on the level of activated and redeemed and all that. We can, we can come back with that. It's still very early days, though, in an exciting way, where despite us not really pushing on the linking, despite the brand story or people really understanding devices as part of the Life360 story, like, not being widely out there, because it takes many years, we're seeing all these results. In terms of the peak impact, it's sort of ongoing at this point, and it... And now that it's part of all tiers, it is very hard to say what we would get with bundling, without bundling.

A lot of it is we probably would have a lot lower net adds because of the price increase if we didn't have the bundling already there, and we're planning on doing a whole bunch of testing about what happens if we only give away Tile when there's no free trial period. So I think we're past the point of saying, "Well, what would happen with a Tile, without a Tile?" The early gift with membership tests we did in 2022 were what we did to validate that we wanted to go all in. But once we went all in, we can't really have parallel paths here because it just kind of breaks the entire user experience.

That is why we're trying to show the indicators about what make us confident that this makes sense, because we do obviously incur a cost by giving these away. When you say peak impact, though, I enter that more from a vision standpoint. We wanna have the next-gen pet tracker out there. We're looking forward to being able to reinvest in Jiobit. We really, really unfortunately had to put on the back burner when the market sold off. We continue to be excited about how quickly this category is getting mainstream adoption. We're very excited about ways we can differentiate from Apple. We're very excited about launching different products and features for different life stages, many of which will ultimately be enabled by Hardware.

So, the peak impact might not be till the year 2030, because we're gonna have different Hardware devices for people with little kids and aging parents. So it really is about that long march forward of just bringing membership to life and adding more value. I realize it's a bit of a dodge in terms of questions you can see, but it is a key component of why we feel like we're gonna continue to let more and more drop to the bottom line because we are getting more valuable customers. We believe we're gonna be able to get return churn eventually back to all-time highs, despite this price increase, and it's why we think there's a lot of room to grow.

As the market expands and international becomes more of a thing where iOS doesn't exist as much, we think we even have more potential to leverage bundling in those international regions, but that is gonna be something that is built over time.

Lafitani Sotiriou (Senior Analyst)

Yeah, no, got it, and understood. Can I go into some of the Hardware just as a standalone? And you did call out some stronger consumer electronics demand, but really, I mean, if we're looking globally, some of the economic data would suggest otherwise. So is there an element that maybe Life360's Hardware is going better because there's more prompting in the app about the awareness of Life360? Or can you give us an idea of people that are buying the Hardware? Are there more people linking it to Life360 app than, say, there were previously? Or what do you attribute the success in the Hardware additional sales to?

Chris Hulls (CEO)

Given that the numbers are still relatively low in terms of linking and having people aware of how Tile is part of Life360, and we will be announcing the new lineup as part of full-year earnings, which makes that tie come much, much closer together. On the margins, it's obviously helping, 'cause we've surfaced Tile to over 50 million people around the globe now, at some level. The thing, though, that I get more excited about, is the category is really growing up in the way we expected. All the market research around how quickly the Bluetooth tracking market would grow was wrong. We were right, that it would become this thing that is almost like just what people do.

When people travel now, especially people that are upper income, tech savvy, who's not putting an AirTag or another Bluetooth device in their luggage? And we're drafting off that. And it's not fully mainstream yet, but the category is growing very quickly, and part of what was frustrating about Tile in the year post-acquisition was, Apple had entered the space, but they completely stopped marketing with all the stalking controversy. Now, that has all changed, and the entire category, at 39% year-over-year growth, which is way more than any of the, the retail analysts expected. So I, I think that's a lot of what's going on, but it now provides the opportunity for Life360 to really differentiate in ways that are different than Apple.

And that's part gonna be linking, part the business model of giving these away with membership, part doing things Apple won't do, like anti-theft and other features that are, like, not one size fits all, and more family specific. So that's really what's happening. And I am still very confident that we're in the early days of this. I just go look at when people take out their keys, how many, how many people have keys with a Bluetooth tracker on them? It's still a minority, but I'm very convinced that in, say, five years, it will be the exception when someone's not tracking something as simple as a keychain. So we have a lot of room to grow, and I think Life360 can do a lot to make the future come to life sooner than it would happen if it was just happening organically.

Lafitani Sotiriou (Senior Analyst)

Got it, got it. And just one last question in relation to the international expansion. Sorry, Russell, if you were gonna add some comments to Chris's last answer. But just with the international, like, there's a noticeable spike in the net Subscription adds. Could you add a little bit more color around the geographies that may have come from? So is it, say, developed countries versus some of the developing ones, or is there a particular market that you had more marketing success with? And I know it's only early days, but could you talk us through the U.K. launch and maybe some early data there?

Chris Hulls (CEO)

Russell, do you wanna answer the question about where the users came from, and I can take the early U.K. signals?

Russell Burke (CFO)

Yeah. The users primarily came from the developed markets that we've talked about previously, and particularly the English-speaking markets that we're focusing on for the Triple Tier launch. In fact, I think if you look at Australia, U.K., and Canada just combined, there was something more than sort of 50% growth in paying circles year-on-year in those three countries. And that that's really pleasing because that's really all before Triple Tier launch. Other than Canada. Obviously, Canada, we did some time ago. U.K., we've just launched that got to about 100% launch in October, so still very early days.

But the really pleasing thing about that is just how smooth that launch went. You know, everything went very smoothly from our point of view. Operationally, it's a complete success. Very early days in terms of stats, but definitely seeing that activity, a lot of attention, a lot of PR around it. Overall, very, very pleasing.

Chris Hulls (CEO)

Yeah, just to add a bit, Russell, I think on most of the key points, it's largely as expected, no surprises. I would say it's doing just very slightly better than expected, but we had pretty ambitious goals there, so we're very pleased. Probably one thing that has been surprising, in a good way, is just how much PR demand there's been. We were on the BBC World show that was 100 million live viewers; it was our biggest reach from any story we've had, ever. So the receptivity has been pretty staggering, and I'd say pleasantly surprising in that there was a question of how much are people gonna care?

We thought we might have to take a longer slog of proving our relevance, but I think our thesis of regions that have strong driving cultures, that are not the Asian mega dense cities, will resonate with that key value proposition, is very much proving true, and is influencing our strategy as we expand international next year.

Lafitani Sotiriou (Senior Analyst)

All right. Great. Thank you.

Melissa Goodell (Senior Manager of Investor Relations)

Thanks, La. Next up, we have Wei.

Chris Hulls (CEO)

Wei, I'm not sure if you're speaking, but we cannot hear you.

Melissa Goodell (Senior Manager of Investor Relations)

It's like he may have two-

Speaker 9

Yeah, no. Can you guys hear me now?

Melissa Goodell (Senior Manager of Investor Relations)

Yes.

Chris Hulls (CEO)

Loud and clear.

Speaker 9

Okay, perfect. Thanks, Chris, thanks, Russ. Yeah, very strong results. Just following up on the Hardware side. For our margins, you know, you did note that we did see some gross margin improvement coming through on this. I'd be keen to understand, you know, what's driving this, and just, you know, over time as we do scale, you know, where we think that gross margins for the Hardware business could get to over the medium term?

Russell Burke (CFO)

Yeah, the benefit that we've been receiving is, we did a lot of work in two areas primarily. One was working with the retailers on promotional funds and marketing support that is typically treated as a contra revenue, so it effectively comes off gross revenue to get to net revenue. So we've put a lot of effort into reducing that. And then we had a big factor from looking at logistics costs, and we updated our arrangements there and made pretty substantial savings. So that's both those things have flowed through to Hardware margins this year.

I will note that Hardware margins are sort of somewhat seasonal, so as we come into Q4, in the typical holiday period in the U.S., they're also somewhat seasonal in as much as there is more support for retailer promotions in that period. So they are likely to come down a little bit in Q4. But overall, we're very happy with the way the margins are moving.

Speaker 9

Okay, great. And then just my second question is, for the Australia launch targeted for first half 2024. Are you able to give a bit more of a narrow window around, when we might expect, or the expectations as to, yeah, when we might be targeting that launch? And, you know, pre-launch, where we are in terms of, I guess, setting up the infrastructure, you know, partnerships with insurance companies, XYZ.

Russell Burke (CFO)

Yeah, I'll take that, and, and Chris, if you wanna fill in. I don't think we're gonna say anything different other than sort of first half at this point. All those discussions that you talked about are in play at the moment. Really, we're a long way through that process and have completed some of the arrangements. Really just a couple still to be firmed up. But no doubt that we'll get that done, that will be in place.

What's really interesting and, you know, the reason that we've chosen Australia as the next option for launch is when we did the U.K. and put that together, we intentionally adopted a strategy whereby we created what we've called a turnkey approach. And that's enabled us really to make the launch in any country much easier. And it'll be a much easier and shorter process, just mechanically to get that done. As a result of that, and just looking at the opportunity in Australia and the very strong interest and strong growth in Australia, it just made sense to move to Australia as the next launch.

Speaker 9

Okay, that's perfect. Thank you so much, Russ. Thanks, Chris.

Chris Hulls (CEO)

Mm-hmm.

Melissa Goodell (Senior Manager of Investor Relations)

Thanks, Wei. Up next, we have James Bales.

James Bales (Equities Research Analyst)

Okay. Can you hear me, guys?

Chris Hulls (CEO)

Yep.

James Bales (Equities Research Analyst)

Yeah, so firstly, I just wanted to understand the change in operating cash flow guidance, and what exactly has changed in terms of your payment profile or receipt profile to make you shift the guidance there?

Russell Burke (CFO)

Yeah. Yep, James. Purely a timing difference. What happened is, you know, one of our major platform providers, and it won't take too many guesses to, as to who that is, has adopted a payment process where, for the last couple of years we've had two payments in the last month of Q4. Once, when we got the schedule for those payments this year, the way they've done it takes that payment out, that double payment, if you like, out of December, and moves it into the following year. So it's a little bit of an odd situation where we end up with 11 payments in 2023, and back to the regular 12 in 2024.

So it's not, you know, an operational change in any form. It's just purely where that payment falls either side of December 31.

James Bales (Equities Research Analyst)

Okay, got it. So back to 12 payments next year, and no change in the working capital profile year on year from '2024?

Russell Burke (CFO)

That's correct.

James Bales (Equities Research Analyst)

Okay. And then another question on gross margin, but this time on the subs side. The quarter-on-quarter performance went down despite the uplift in ARPPC. Can you maybe talk through that? And then as you have international growth with the rollout in the U.K. and then subsequently Australia, what are your expectations for where Subscription gross margins can get to?

Chris Hulls (CEO)

You wanna take that, Russell?

Russell Burke (CFO)

Yeah, just looking at the Subscription margin movement quarter-on-quarter. I think we did have a slight improvement quarter-on-quarter. But it's also been a little complicated by the inclusion of bundling. And you know, I won't go into all the detail there, but we fully... We did fully expect an additional COGS item with including Tile as part of the Subscription. And we're seeing a small impact of that.

You know, I think to the latter part of your question, James, in terms of, you know, how we envisage margins going forward, I think we definitely have opportunities to continue to, you know, improve the digital side. But frankly, if we're successful with Tile bundling more and more, that would have a slight impact on margins. But we get that back pretty significantly in terms of retention. If we go back to the retention impacts that Chris mentioned, we are seeing for that group that redeems Tiles, a very significant difference between the Tile redeemers and non-redeemers.

We are looking forward to a, you know, an overall pretty significant impact on LTV.

James Bales (Equities Research Analyst)

Okay, got it. I've already been asked the question: Is it fair to assume that the AMR that you guys have reported for the end of September, taking a quarter of that, is that a realistic starting point for Subscription revenue in the fourth quarter?

Russell Burke (CFO)

Sorry, James, could you just repeat the last part of that question?

James Bales (Equities Research Analyst)

Yeah. So I was asking about the AMR that you reported for September, understanding whether there's any nuance to just taking a quarter of that as a starting point for fourth quarter Subscription revenue.

Russell Burke (CFO)

No, I think that's pretty straightforward. As you know, our AMR is based on the recurring revenue, which is primarily Subscription, also includes the direct revenue, which is really going to be flat quarter-over-quarter. Yeah, I think that's a reasonable view.

James Bales (Equities Research Analyst)

Okay. And then I just wanted to reconcile a couple of the comments that you made on reinvesting back into marketing and product costs with some of the other comments you've made on separate questions. Should we take the increase in expected marketing costs as being relevant for your expansion into the U.K. and then Australia? And similarly, should we expect the increase in R&D to be primarily related to Hardware that is re-acceleration of Jiobit product differentiation versus Apple, or are there some other buckets in each of those areas of cost that we should be thinking about as well?

Russell Burke (CFO)

Right.

Chris Hulls (CEO)

Why don't we? Can I invert that, Russell? Why don't I take the second half of that question about the overall theme of we're investing in R&D, and you could take some of the more specific pieces on the number side. So I wanna back up a little bit in terms of our overall posture. We are true believers that Life360 can get to $1 billion of ARR, and a lot of the hiring we're doing, a lot of the planning we have, is of the mindset of: How do we have the team and infrastructure in place to do that? So a lot of what drives things is, yes, it's marketing, but more than that, what are the key hires we need? Where do we need to be world-class? Where are we not?

How do we fill those gaps with that mindset of our ultimate scale? That means we need to have the groundwork to be fully international. It means we need to have the groundwork to invest in the devices business the way we wanted. We need to have the various just back office stuff in place. So a lot of it, we talk about initiatives. It's less than having this initiative or that initiative, although, of course, internally, we do break it down there. But what is that infrastructure needed to get there as a business? If you then look to what we're doing next year, we do wanna make sure we have the international market seated properly.

As everyone recalls, I assume we launched Canada right before the crash, and we did no marketing, none of that there, and obviously did not help the launch just to merely turn it on. We want to be more intentional and lean in more. So yes, we will be making more investments that take a longer time to pay off. We will be hiring in key functions that will come with some levels of clouds of spend as we hire more senior executives. Lauren was the, sort of a first example of that. She's brought multiple companies to that billion-dollar ARR mark.

And we do wanna make sure that the market knows that, you know, we, we could easily be letting a lot more drop to the bottom line, hit statutory EBITDA break even a lot sooner, but we do want to be able to make investments that pay off over a multi-year time horizon. And we, we think we are doing quite well, and we're in a, well, I won't call it unique, but we're in a very healthy position that we have not been one of those companies that's needed to dramatically change their strategies to kinda adapt to this market. We, we can demonstrate financial leverage while we continue to push on the, the longer term forward investment we think is right for the business over that multi-year timeframe, with that lens to being significantly larger than we are today.

Chris Savage (Head of Research and Senior Analyst)

Russell, over to you, if there's anything else you want to add to that?

Russell Burke (CFO)

Yeah. No, the only other specifics, James, are that, you know, the investments that we're contemplating in Q4, you know, really as a consequence of that focus on Subscription, really are primarily related to Subscription, both on the marketing side, and on initiatives that will, really directed towards growth in Subscription, going into 2024. And I did want to just come back to your earlier question on Subscription margins, just to be clear that, you know, year-on-year Subscription margins have increased from 80% to 85%, and that's largely the impact of the price increases.

Chris Hulls (CEO)

Got it. Thanks, guys. Appreciate the help.

Melissa Goodell (Senior Manager of Investor Relations)

Thank you, and next up, we have Wei-Weng Chen. Please repeat your full name and which company you're calling from.

Wei-Weng Chen (Director of Equity Research)

Hi, this is Wei-Weng Chen from RBC Capital Markets. Just a question or a couple of questions from me on the timing and the difference between EBITDA and OCF. So just a comment, I think, Chris, you had during the initial sort of spiel. That you said it was eight monthly remittances instead of 12, but then in the preso, you had 11. So was it eight, or was it 11?

Russell Burke (CFO)

It's 11.

Wei-Weng Chen (Director of Equity Research)

11. Okay. And then, and then if I think about, I guess, you know, in the nine months to September, you've generated about $11 million of EBITDA, $1.4 million of operating cash outflow. So there's kind of a, like a $12 million delta, which is in line with your guidance. Obviously, you know, you said before, the timing issues relate to sort of, you know, an extra payment in December, that's not happening. So why is there a $12 million discrepancy at September already? Like, can you maybe help me bridge where the difference is? Because I can't sort of get there with just, you know, a December payment falling into January.

Russell Burke (CFO)

Sure. You know, if I look at year to date, September, you know, the biggest difference between, or the biggest single difference between, Adjusted EBITDA and OCF is the roughly $4 million of workplace restructuring costs that we incurred in Q1. And you can see when you look at it, most of this difference did happen in Q1, a little bit sort of rolling over to Q2. The rest of it is really sort of working capital items to a large extent. That will vary from quarter to quarter, but that's the single biggest impact.

Wei-Weng Chen (Director of Equity Research)

Yeah. Okay, and is it the expectation that so the difference between 12 and four is eight. Is the expectation that the eight comes back at some point, or kind of how does that work?

Russell Burke (CFO)

Well, you know, a chunk of it is obviously, you know, as you continue to grow, and we have grown very, very significantly in the last 12-18 months, you know, that working capital tie up, if you like, is larger. It will move around a bit, depending on, you know, inventories at any point in time, and obviously, accounts receivable. I think the impact of the provider payment that we talked about earlier means that difference won't come back in Q4, but we'll see it a little bit later on, more of a gradual process.

Wei-Weng Chen (Director of Equity Research)

Okay. All right. Now, yeah, that's all from me. Thanks so much.

Melissa Goodell (Senior Manager of Investor Relations)

Thank you, and finally, we have Chris Savage.

Chris Savage (Head of Research and Senior Analyst)

Hey, it's Chris Savage from Bell Potter. Appreciate this has gone on for a while, so I'll try and be quick. Just around the guidance. You increased the Hardware revenue guidance by about $5 million, but you didn't change the total revenue guidance. Is there any offset there, like slightly lower Subscription revenue, or is it just you being conservative? No, I'd say, look at it on the total year period, 'cause we obviously haven't broken out different. We haven't made updates to the relative split. If you take the year as a whole, I'm gonna start with how we're ending. We're largely ending exactly where we expected on subscriptions, but even more back-half loaded than we might have previously thought.

We were a little bit behind on Q2 numbers, largely not doing anything bad, but just the timing with Android and the price increase, which has that short-term impact. And so we always felt we would hit the overall guidance. Now that we've kind of come towards the end of the year, we look at the split, we're kind of ending exactly where we thought we'd be, but when we look at that full year contribution, Hardware is being a little bit more.

Wei-Weng Chen (Director of Equity Research)

Yeah. Good one.

Russell Burke (CFO)

And Chris, just to be clear, you know, yes, that does mean that, you know, once, once you have that sort of slight dip in Subscription revenue, just the nature of Subscription is that that flows through for the, for the rest of the year.

Chris Savage (Head of Research and Senior Analyst)

Sure.

Russell Burke (CFO)

But the other pleasing thing that we're seeing is the increased mix of international. And yeah, reflecting everything that we've done in international, that's. That is a bigger part of our mix sort of going into this period.

Chris Savage (Head of Research and Senior Analyst)

Sure. Thanks. And just on the Adjusted EBITDA, like, year to date, you're almost at $12 million, and the upgraded guidance is $12 million-$16 million. So are you expecting some step down in EBITDA in Q4, and is, and if so, is that related to the extra investment you called out?

Chris Hulls (CEO)

It's solely related to the extra investment that we called out. We looked at it and intentionally took the opportunity to invest a little more in growth going into year-end, and given that the impact that'll have for next year. Great.

Just as a theme on that, we set our strategy largely based on what we think is right for the business. We do pay attention to the markets, and obviously, a very important part of what we were trying to show is that in this tech downturn, as the wheat is separated from the chaff, that we can hit numbers while we have financial discipline. So this really was a year where we did somewhat pull back more than we thought we should. So as it's become clear that we hit these numbers and some things went better than planned, we resisted the urge to take that short-term boost by upgrading guidance further to say, "Hey, we've shown the leverage.

We really are still trying to be focused on the long term." We've shown the investor community that we, we have the discipline and ability to harvest when we want, but we've also been trying to show the team, saying, "Hey, we, we are believers in this plan of crossing $1 billion of ARR at some point in time. Let's invest like we mean it, because we do.

Understood. Thanks. And just last question: We've had a lot of commentary on retention, which is great. What about on conversion? Are you still around that 2-2.5, or is it inched up a bit from there?

That is a messier question, that as we've added Tile, and increased pricing and then done international, the entire funnel's changed. I'm not dodging the question, but it's... I'd say it's largely doing what we've expected. Conversion went down with the price increase, but it's then gone back up as we've launched things like bundling. As we now are live in the U.K., it's implicitly a very big price increase, so conversion does go down, while ARPPC goes way up. So it's hard to give a one-size-fits-all answer, but how we look at it internally is on an LTV basis. So what is, what is a user, not even a free versus paid user, but what is an average user worth to us, and how is that trending? And that's trending very nicely.

Okay, great. Thanks very much. Cheers.

Thank you.

Melissa Goodell (Senior Manager of Investor Relations)

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

Chris Hulls (CEO)

No remarks for me. Thank you again, everyone, for joining. Have a great day.